Notices. Final rule; agency decision

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BILLING CODE 3510-22-S DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Part 680 RIN 0648-AW37 Fisheries of the Exclusive Economic Zone Off Alaska; Bering Sea and Aleutian Islands King and Tanner Crabs AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce. ACTION: Final rule; agency decision. SUMMARY: NMFS announces the approval of Amendment 24 to the Fishery Management Plan for Bering Sea/Aleutian Islands King and Tanner Crabs (FMP).

Amendment 24 specifies a five-tier system for determining the status of the crab stocks managed under the FMP, establishes a process for annually assigning each crab stock to a tier and for setting the overfishing and overfished levels, and reduces the number of crab stocks managed under the FMP. Amendment 24 is necessary to establish new overfishing definitions that contain objective and measurable criteria for determining whether each managed stock is overfished or whether overfishing is occurring and to remove from the FMP several crab stocks managed by the State of Alaska.

This action is intended to promote the goals and objectives of the Magnuson-Stevens Fishery Conservation and Management Act, the FMP, and other applicable laws. DATES: This agency decision is effective June 6, 2008. ADDRESSES: Copies of Amendment 24 and the Environmental Assessment

(EA)for this action may be obtained from the NMFS Alaska Region at the address above or from the Alaska Region website at *http://www.fakr.noaa.gov/sustainablefisheries.htm* . FOR FURTHER INFORMATION CONTACT: Gretchen Harrington, 907-586-7228. SUPPLEMENTARY INFORMATION: The Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act) requires that each regional fishery management council submit any Fishery Management Plan

(FMP)amendment it prepares to NMFS for review and approval, disapproval, or partial approval by the Secretary of Commerce. The Magnuson-Stevens Act also requires that NMFS, upon receiving an FMP amendment, immediately publish a notice in the **Federal Register** announcing that the amendment is available for public review and comment. The North Pacific Fishery Management Council (Council) submitted Amendment 24 to the FMP to NMFS on March 6, 2008. The notice of availability for Amendment 24 was published in the **Federal Register** on March 19, 2008 (73 FR 14766). The public comment period closed on May 19, 2008. NMFS received 1 public comment and considered this comment in determining whether to approve this FMP amendment. NMFS has summarized and responded to the public comment received in this notice under Public Comments, below. In December 2007, the Council unanimously recommended Amendment 24. Amendment 24 satisfies the Magnuson-Stevens Act requirement that FMPs contain objective and measurable criteria for determining whether a stock is overfished, whether overfishing is occurring, and for rebuilding overfished stocks. Section 301(a) of the Magnuson-Stevens Act establishes national standards for fishery conservation and management, and requires that all FMPs create management measures consistent with those standards. National Standard 1 requires that conservation and management measures shall prevent overfishing while achieving, on a continuing basis, the optimum yield from fisheries in federal waters. The Alaska Fisheries Science Center

(AFSC)reviewed the proposed overfishing definitions in Amendment 24 and supporting environmental assessment for compliance with guidelines provided for National Standards 1 and 2 in 50 CFR part 600. During this review, the AFSC recommended modifications to the amendment text to clarify the Council's intent and comply with the Magnuson-Stevens Act. At its February 2008 meeting, the Council adopted the FMP text for Amendment 24 which included the AFSC's recommendations. On February 14, 2008, the AFSC certified that the proposed definitions

(1)have sufficient scientific merit,

(2)are likely to result in effective Council action to protect a managed stock from closely approaching or reaching an overfished status,

(3)provide a basis for objective measurement of the status of a managed stock against the definition, and

(4)are operationally feasible. Amendment 24

(1)specifies a five-tier system for determining the status of the crab stocks managed under the FMP,

(2)establishes a process for annually assigning each crab stock to a tier and for setting the overfishing and overfished levels, and

(3)reduces the number of crab stocks managed under the FMP. The stock status determination criteria in Amendment 24 reflect current scientific information and accomplish the following: • Provide an FMP framework to annually define overfishing values using the best available scientific information; • Provide a new tier system that accommodates varying levels of uncertainty of information and takes advantage of alternative biological reference points; and • Define the status determination criteria and their application to the appropriate component of the population. Five-Tier System Under Amendment 24, the stock status determination criteria for crab stocks is annually calculated using a five-tier system that accommodates varying levels of uncertainty of information. The five-tier system incorporates new scientific information and provides a mechanism to continually improve the stock status determination criteria as new information becomes available. The five-tier system is used to determine the status of the crab stocks and whether

(1)overfishing is occurring or the rate or level of fishing mortality for a stock or stock complex is approaching overfishing, and

(2)a stock or stock complex is overfished or a stock or stock complex is approaching an overfished condition. Overfishing is determined by comparing the overfishing level, as calculated in the five-tier system for the crab fishing year, with the catch estimates for that crab fishing year. Annually, the overfishing level for each stock is calculated based on the most recent abundance estimates and prior to the State setting the total allowable catch or guideline harvest level for that stock's upcoming crab fishing season. First, a stock is assigned to one of the five tiers based on the availability of information for that stock. Tier assignments are made through the Council's Crab Plan Team process and recommended by the Council's Scientific and Statistical Committee. Tiers 1 through 4 Once a stock is assigned to a tier, the stock status level is determined based on biomass estimates from recent survey data and simulation models, as available. The tier system specifies three levels of stock status: “a,” “b,” and “c.” At stock status level “a,” current stock biomass exceeds the biomass estimated to produce maximum sustainable yield to the fishery (B MSY ). At status level “b,” current stock biomass is less than necessary to produce B MSY , but greater than a level specified as the critical biomass threshold. At stock status level “c,” current stock biomass is below the critical biomass threshold and directed fishing is prohibited. The stock status level determines the equation for calculating the fishing rate

(F)used to determine the overfishing level (F OFL ). For stocks in Tiers 1 through 4, F is reduced as biomass declines by stock status level. For Tiers 1 through 3, reliable estimates of biomass, B MSY , and the fishing rate expected to result in maximum sustainable yield to the fishery (F MSY ), or their respective proxy values, are available. Tier 4 is for stocks where essential life-history, recruitment information, and understanding are lacking. In Tier 4, a default value of natural mortality rate

(M)or an M proxy, and a scalar, gamma (γ), are used in the calculation of the F OFL . Use of the scalar γ is intended to allow adjustments in the overfishing definitions to account for differences in biomass measures. Amendment 24 sets a default value of γ = 1.0, with the understanding that the Council's Scientific and Statistical Committee may recommend a different value for a specific stock or stock complex as merited by the best available scientific information. Tier 5 Tier 5 stocks have no reliable estimates of biomass or natural mortality and only historical data of retained catch is available. For stocks in Tier 5, the overfishing level is specified in terms of an average catch value over an historical time period, unless the Scientific and Statistical Committee recommends an alternative value based on the best available scientific information. After the crab fishing year, NMFS determines whether overfishing occurred by comparing the overfishing level with the catch from the previous crab fishing year. For stocks where non-target fishery removal data are available, catch includes all fishery removals, including retained catch and discard losses. Discard losses will be determined by multiplying the appropriate handling mortality rate by observer estimates of bycatch discards. For stocks where only retained catch information is available, the overfishing level is set for and compared to the retained catch. An overfished condition is determined by comparing annual biomass estimates to the established minimum stock size threshold (MSST), defined as one half the biomass estimated to produce maximum sustainable yield to the fishery. For stocks where MSSTs (or proxies) are defined, if the biomass drops below the MSST (or proxy thereof) then the stock is considered to be overfished. MSST or proxies are set for stocks in Tiers 1 through 4. For Tier 5 stocks, it is not possible to set an MSST because there are no reliable estimates of biomass. Annually, the Council, Scientific and Statistical Committee, and Crab Plan Team will review the stock assessment documents, the OFLs and total allowable catches or guideline harvest levels for the upcoming crab fishing year, NMFS's determination of whether overfishing occurred in the previous crab fishing year, and NMFS's determination of whether any stocks are overfished. Removal of Stocks Amendment 24 removes 12 state-managed stocks from the FMP. NMFS and the Council found that the State of Alaska (State) has a legitimate interest in the conservation and management of these stocks. As explained in the EA, federal management of these stocks is no longer necessary because under the deferred authority of the FMP, the State has either closed the directed fishery, managed a limited incidental or exploratory fishery, or the majority of catch occurs in state waters. The State will continue to manage these stocks as they currently do under the deferred management authority of the FMP. An EA was prepared for Amendment 24 that describes the management background, the purpose and need for action, the management alternatives, and the environmental and socio-economic impacts of the alternatives (see ADDRESSES ). Public Comments *Comment:* Add the following sentence from the draft EA to the Amendment 24 language on Tier 4: “The value for γ is frameworked, depending on the values of F MSY and it's proxy (F35%) and M.” Adding this sentence would clarify that the default γ value is a scalar to adjust M to the proxy F MSY and avoid confusion about the role of γ in the determination of F OFL . The notion that default γ should be set at a value of 1.0 is overly conservative for Bering Sea and Aleutian Islands crab stocks, and simply does not conform to our current understanding of crab population dynamics. NMFS should rely on the simulation modeling estimates of γ generated from the analyses in the EA as best available science and set γ accordingly. *Response:* NMFS has determined that Amendment 24 is sufficiently clear regarding specifying a value for γ for Tier 4 stocks and does not agree that Amendment 24 FMP should be changed to include the sentence suggested in the comment. NMFS cannot add language to an FMP amendment submitted by a regional fishery management council. Furthermore, Amendment 24 is consistent with the Magnuson-Stevens Act and other applicable law without this addition. Amendment 24 provides a default of γ = 1, which applies to all Tier 4 stocks until a stock specific γ can be estimated based on the best available scientific information and reviewed by the Council's Scientific and Statistical Committee. A default γ is necessary until stock specific values can be determined. A γ = 1 allows the F MSY proxy to equal M which is an appropriate default given our current level of scientific information for the group of Tier 4 stocks. In the stock assessment process, a γ can be set more or less conservatively for each stock based on simulation modeling and the best available information during the stock assessment process. Amendment 24 provides the flexibility to set γ at the appropriate value for each Tier 4 stock based on stock assessments that use the best available information. Stock specific γ values depend on the relationship between fishery selectivities (discard and retained catch) and maturity and growth estimates. The Council's Crab Plan Team discussed ways to estimate γ for each Tier 4 stock, including the methods analyzed in the EA. In May 2008, the Crab Plan Team recommended that assessment authors analyze alternative γ values for each Tier 4 stock to assist in determining the appropriate value for that stock. Using the method analyzed in the EA may not be appropriate for a particular stock if fishery selectivities, maturity, growth, and discards relative to retained catch are not the same as the proxy stock. For example, it may be appropriate to use F35% estimated for Bristol Bay red king crab to estimate γ for a stock like Pribilof red king crab; however, it may not be appropriate to use that same value for blue king crab. Dated: June 6, 2008. Samuel D. Rauch III Deputy Assistant Administrator for Regulatory Programs, National Marine Fisheries Service. [FR Doc. E8-13529 Filed 6-13-08; 8:45 am] BILLING CODE 3510-22-S 73 116 Monday, June 16, 2008 Proposed Rules DEPARTMENT OF HOMELAND SECURITY 6 CFR Part 5 [Docket No. DHS-2007-0057] Privacy Act of 1974: Implementation of Exemptions; US-VISIT Technical Reconciliation Analysis Classification System (TRACS) AGENCY: Office of the Secretary, Department of Homeland Security. ACTION: Notice of proposed rulemaking. SUMMARY: The Department of Homeland Security is concurrently establishing a new system of records pursuant to the Privacy Act of 1974 entitled the Technical Reconciliation Analysis Classification System (TRACS). This system of records will serve as an information management tool and be used to perform a range of information management and analytical functions to enhance the integrity of the United States' immigration system by detecting, deterring, and pursuing immigration fraud, and by identifying persons who pose a threat to national security and/or public safety. In this proposed rulemaking, the Department proposes to exempt portions of this system of records from one or more provisions of the Privacy Act because of criminal, civil, and administrative enforcement requirements. DATES: Comments must be received on or before July 16, 2008. ADDRESSES: You may submit comments, identified by docket number DHS-2007-0057, by one of the following methods: • *Federal e-Rulemaking Portal: http://www.regulations.gov.* Follow the instructions for submitting comments. • *Fax:* 1-866-466-5370. • *Mail:* Hugo Teufel III, Chief Privacy Officer, Department of Homeland Security, 601 S. 12th Street, Arlington, VA 22202-4220. *Instructions:* All submissions received must include the agency name and docket number for this notice. All comments received will be posted without change to *http://www.regulations.gov,* including any personal information provided. Docket: For access to the docket to read background documents or comments received, go to *http://www.regulations.gov.* FOR FURTHER INFORMATION CONTACT: TRACS System Manager, US-VISIT Program, U.S. Department of Homeland Security, Washington, DC 20528

(202)298-5200 or by facsimile

(202)298-5201; Hugo Teufel III, Chief Privacy Officer, Privacy Office, Department of Homeland Security, Washington, DC 20528; telephone 703-235-0780. SUPPLEMENTARY INFORMATION: Background In accordance with the Privacy Act of 1974, 5 U.S.C. 552a, the Department of Homeland Security (DHS), National Protection and Program Directorate (NPPD), United States—Visitor and Immigrant Status Indicator Technology (US-VISIT) program, is establishing a Privacy Act system of records known as Technical Reconciliation Analysis Classification System (TRACS). This system of records is an information management tool used for management and analysis of US-VISIT records. TRACS will help enhance the integrity of the United States immigration system by detecting, deterring, and pursuing immigration fraud, and by identifying persons who pose a threat to national security and/or public safety. TRACS will consist of paper files and electronic databases. The Secretary of the Department of Homeland Security has delegated to NPPD and US-VISIT the responsibility for enhancing the security of U.S. citizens and visitors; facilitating safe, efficient, and legitimate travel to the U.S.; promoting border security and the integrity of the immigration system; safeguarding the privacy of visitors to the U.S. NPPD and US-VISIT have also been delegated authority for assisting in the prevention of immigration identity fraud or theft; and serving law enforcement, border officials, and others who make decisions on immigration matters, including decisions on immigration benefits and status, by identifying aliens seeking permission to enter, entering, visiting, residing in, changing status within, or exiting the U.S. Finally, NPPD and US-VISIT have been delegated the responsibility for providing technical assistance and analytic services to other DHS functions and components and other to Federal agencies, as well as to State, local, tribal, and foreign governments, including multinational and international organizations, to better protect the Nation's physical and virtual borders. To discharge the above responsibilities, TRACS will be used to:

(1)Identify individuals who have remained in the United States beyond their authorized period of admission (overstays);

(2)maintain information on why individuals are promoted to or demoted from the Automated Biometric Identification System (IDENT) list of subjects of interest;

(3)provide the means for additional research in regards to individuals whose biometrics are collected by DHS, and subsequently matched to the list of subjects of interest during a routine IDENT query. A query of this nature would take place following a background check or security screening relating to the individual's hiring or retention, performance of a job function, or the issuance of a license or credential, allowing them access to secured facilities to perform mission and non-mission related work. Examples of this include credentialing of Federal, non-Federal, and contractor employees who work within the secured areas of our nation's airports;

(4)to further analyze information about individuals who may be identified as a subject of interest following a routine query against IDENT while applying for visas or other benefits on behalf of domestic partners, such as the U.S. Department of State or foreign partners, as is the case with the United Kingdom Border Agency's

(UKBA)International Group Visa Services program, which supports the DHS mission; and

(5)to provide information in response to queries from law enforcement and intelligence agencies charged with national security, law enforcement, immigration, or other DHS mission-related functions. Specifically, TRACS will be used for the analysis of overstays, for changes to the IDENT subject of interest lists, law enforcement and intelligence research, and to assist in developing and fostering foreign partnerships that enhance the goals and mission of US-VISIT, such as the work being done in association with the UKBA's International Group Visa Services project. To identify possible overstays, US-VISIT reviews and analyzes information in the Arrival and Departure Information System (ADIS), a US-VISIT system used for the storage and use of biographic, biometric indicator, and encounter data on aliens who have applied for entry, entered, or departed the United States. ADIS consolidates information from various systems in order to provide a repository of data held by DHS for pre-entry, entry, status management, and exit tracking of immigrants and non-immigrants. Its primary use is to facilitate the investigation of subjects of interest who may have violated their immigration status by remaining in the United States beyond their authorized stay. To assist in the resolution of overstays, information related to them may be copied to TRACS for review and further analysis against other US-VISIT programs and systems to better determine their status. Regarding changes to the IDENT Subject of Interest List, in order to maintain the integrity of the immigration and customs programs, DHS maintains records within IDENT to identify individuals who may present a terrorist threat to the United States as well as those individuals who may not be allowed to enter the country because of past violations of immigration or customs law. An individual is either promoted to or demoted from the list of subjects of interest within IDENT. As IDENT is not a case management system, it merely records the change, not the justification for the change. TRACS will have the ability to serve as a case management system and not only use the information regarding the changes to the list of subjects of interest that is recorded in IDENT but also to record and store the actual justification for any change. The user will also have the ability to enter data in pre-determined selectable categories or manually by either free text or by cutting and pasting information retrieved from other systems and placing it into a workspace in TRACS so that analysis can be performed. For assistance in background checks and security clearance processes for employment at DHS or receipt of a DHS license or credential, applicants may have their information searched against ADIS or IDENT records. Clearance, employment eligibility, or other license or credential applications that have a match against ADIS or IDENT may require additional research regarding the applicant. Such information would be maintained and tracked in TRACS. Regarding analyzing information on behalf of domestic or foreign partners, US-VISIT will assist its partners in analyzing information held by US-VISIT where such analysis supports the DHS mission. For example, for the UKBA visa services project, US-VISIT will receive biometric information from the UK for UK visa applicants and query their biometric information against the IDENT list of subjects of interest. US-VISIT will then provide the results from the query back to the UK for purposes of visa adjudication. Regarding law enforcement and intelligence research, US-VISIT may also receive requests from law enforcement agencies, such as Immigration and Customs Enforcement (ICE), Customs and Border Protection (CBP), and the Federal Bureau of Investigation (FBI), as well as from other intelligence agencies, to provide further information regarding the immigration status for individuals of interest to those organizations. US-VISIT tracks these requests and the responses in TRACS. Information in TRACS comes primarily from ADIS and IDENT. TRACS may also contain information from other DHS component programs or systems, or publicly available source systems that are manually queried while researching a particular case. Data researched or identified through publicly available source systems, such as the internet, will be identified and referenced in the individual's record in TRACS. If it becomes routine for a specific public source system(s) to be used on a regular basis, the PIA will be updated to reflect this system(s) as a common source of information and data. For research conducted, based on an external request, information may also be provided from the requesting entity, as described in the system of records notice. The data contained in TRACS is primarily from the US-VISIT systems Arrival and Departure Information System

(ADIS)(72 FR 47057, Arrival and Departure Information System (ADIS), System of Records Notice, August 22, 2007); the Automated Biometric Identification System (IDENT) (72 FR 31080, Automated Biometric Identification System (IDENT), System of Records Notice, June 5, 2007); and a Customs and Border Protection

(CBP)system called the Treasury Enforcement Communications System

(TECS)(66 FR 53029, Treasury Enforcement Communication System (TECS), System of Records Notice, October 18, 2001). TRACS also receives data from a Department of State

(DOS)system called the Consolidated Consular Database (CCD); the Student and Exchange Visitor Information System (SEVIS) (70 FR 14477, Student and Exchange Visitor Information System (SEVIS), System of Records Notice, March 22, 2005); the Central Index System

(CIS)(72 FR 1755, Central Index System (CIS), System of Records Notice, January 16, 2007); the Computer-linked Application Information Management System (CLAIMS 3 and 4) (64 FR 18052, Computer Linked Application Information Management System (CLAIMS 3 and 4), System of Records Notice, April 13, 1999); the Refugees, Asylum & Parole System (RAPS); the Deportable Alien Control System

(DACS)(67 FR 64136, Deportable Alien Control System (DACS), System of Records Notice, October 17, 2002); and the Enforcement Case Tracking System (ENFORCE). TRACS also contains data from web searches for addresses and phone numbers. The Privacy Act allows Government agencies to exempt certain records from the access and amendment provisions. If an agency claims an exemption, however, it must issue a Notice of Proposed Rulemaking to make clear to the public the reasons why a particular exemption is claimed an issue a Final Rule. In this notice of proposed rulemaking, DHS is now proposing to exempt TRACS, in part, from certain provisions of the Privacy Act. Some information in TRACS relates to official DHS national security, law enforcement, immigration, intelligence, and preparedness and critical infrastructure protection activities. These exemptions are needed to protect information relating to DHS activities from disclosure to subjects or others related to these activities. Specifically, the exemptions are required to preclude subjects of these activities from frustrating these processes; to avoid disclosure of activity techniques; to protect the identities and physical safety of confidential informants and of immigration and border management and law enforcement personnel; to ensure DHS's ability to obtain information from third parties and other sources; to protect the privacy of third parties; and to safeguard classified information. Disclosure of information to the subject of the inquiry could also permit the subject to avoid detection or apprehension. An individual who is the subject of a record in this system may access or correction of those records that are not exempt from disclosure. A determination whether a record may be accessed will be made at the time a request is received. DHS will review and comply appropriately with information requests on a case by case basis. An individual desiring copies of records maintained in this system should direct his or her request to the FOIA Officer ( *HTTP://WWW.DHS.GOV/FOIA,* under “contacts”. See also the system of records notice also in today's **Federal Register** ). Requests for correction of records in this system may be made through the Traveler Redress Inquiry Program

(TRIP)at *http://www.dhs.gov/trip* or via mail, facsimile or e-mail in accordance with instructions available at *http://www.dhs.gov/trip* . The exemptions proposed here are standard law enforcement and national security exemptions exercised by a large number of Federal law enforcement and intelligence agencies. In appropriate circumstances, where compliance would not appear to interfere with or adversely affect the law enforcement purposes of this system and the overall law enforcement process, the applicable exemptions may be waived. Regulatory Requirements A. Regulatory Impact Analyses Changes to Federal regulations must undergo several analyses. In conducting these analyses, DHS has determined: 1. Executive Order 12866 Assessment This rule is not a significant regulatory action under Executive Order 12866, “Regulatory Planning and Review” (as amended). Accordingly, this rule has not been reviewed by the Office of Management and Budget (OMB). Nevertheless, DHS has reviewed this rulemaking, and concluded that there will not be any significant economic impact. 2. Regulatory Flexibility Act Assessment Pursuant to section 605 of the Regulatory Flexibility Act (RFA), 5 U.S.C. 605(b), as amended by the Small Business Regulatory Enforcement and Fairness Act of 1996 (SBREFA), DHS certifies that this rule will not have a significant impact on a substantial number of small entities. The rule would impose no duties or obligations on small entities. Further, the exemptions to the Privacy Act apply to individuals, and individuals are not covered entities under the RFA. 3. International Trade Impact Assessment This rulemaking will not constitute a barrier to international trade. The exemptions relate to criminal investigations and agency documentation and, therefore, do not create any new costs or barriers to trade. 4. Unfunded Mandates Assessment Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), (Pub. L. 104-4, 109 Stat. 48), requires Federal agencies to assess the effects of certain regulatory actions on State, local, and tribal governments, and the private sector. This rulemaking will not impose an unfunded mandate on State, local, or tribal governments, or on the private sector. B. Paperwork Reduction Act The Paperwork Reduction Act of 1995

(PRA)(44 U.S.C. 3501 *et seq.* ) requires that DHS consider the impact of paperwork and other information collection burdens imposed on the public and, under the provisions of PRA section 3507(d), obtain approval from the Office of Management and Budget

(OMB)for each collection of information it conducts, sponsors, or requires through regulations. DHS has determined that there are no current or new information collection requirements associated with this rule. C. Executive Order 13132, Federalism This action will not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government, and therefore will not have federalism implications. D. Environmental Analysis DHS has reviewed this action for purposes of the National Environmental Policy Act of 1969

(NEPA)(42 U.S.C. 4321-4347) and has determined that this action will not have a significant effect on the human environment. E. Energy Impact The energy impact of this action has been assessed in accordance with the Energy Policy and Conservation Act

(EPCA)Public Law 94-163, as amended (42 U.S.C. 6362). This rulemaking is not a major regulatory action under the provisions of the EPCA. List of Subjects in 6 CFR Part 5 Privacy; Freedom of information. For the reasons stated in the preamble, DHS proposes to amend Chapter I of Title 6, Code of Federal Regulations, as follows: PART 5—DISCLOSURE OF RECORDS AND INFORMATION 1. The authority citation for part 5 continues to read as follows: Authority: Pub. L. 107-296, 116 Stat. 2135, 6 U.S.C. 101 *et seq.;* 5 U.S.C. 301. Subpart A also issued under 5 U.S.C. 552. Subpart B also issued under 5 U.S.C. 552a. 2. At the end of appendix C to part 5, Exemption of Record Systems Under the Privacy Act, add the following new section 6 to read as follows: Appendix C to Part 5—DHS Systems of Records Exempt From the Privacy Act 6. The Department of Homeland Security Technical Reconciliation Analysis Classification System (TRACS) consists of a stand alone database and paper files that will be used by DHS and its components. This system of records will be used to perform a range of information management and analytic functions involving collecting, verifying, and resolution tracking of data primarily on individuals who are not United States citizens or legal permanent residents (LPRs). However, it will contain data on:

(1)U.S. citizens or LPRs who have a connection to the DHS mission (e.g., individuals who have submitted a visa application to the UK, or have made requests for a license or credential as part of a background check or security screening in connection with their hiring or retention, performance of a job function or the issuance a license or credential for employment at DHS);

(2)U.S. citizens and LPRs who have an incidental connection to the DHS mission (e.g., individuals living at the same address as individuals who have remained in this country beyond their authorized stays); and

(3)individuals who have, over time, changed their status and became U.S. citizens or LPRs. TRACS is managed and maintained by the United States Visitor and Immigrant Status Indicator Technology (US-VISIT) Program. The data contained in TRACS is primarily derived from the Arrival and Departure Information System

(CBP)system called the Treasury Enforcement Communications System

(TECS)(66 FR 53029, Treasury Enforcement Communication System (TECS), System of Records Notice, October 18, 2001). TRACS also receives data from a Department of State

(DACS)(67 FR 64136, Deportable Alien Control System (DACS), System of Records Notice, October 17, 2002); and the Enforcement Case Tracking System (ENFORCE). TRACS also contains data from web searches for addresses and phone numbers. This data is collected by, on behalf of, in support of, or in cooperation with DHS and its components. The Secretary of Homeland Security has exempted this system from 5 U.S.C. 552a(c)(3) and (4); (d); (e)(1), (e)(2), (e)(3), (e)(4)(G), (e)(4)(H), (e)(4)(I), (e)(5) and (e)(8); (f); and

(g)pursuant to 5 U.S.C. 552a(j)(2). In addition, the Secretary of Homeland Security has exempted this system from 5 U.S.C. 552a(c)(3); (d); (e)(1), (e)(4)(G), (e)(4)(H), (e)(4)(I), and

(f)pursuant to 5 U.S.C. 552a(k)(1), (k)(2), and (k)(5). These exemptions apply only to the extent that records in the system are subject to exemption pursuant to 5 U.S.C. 552a (j)(2), (k)(1), (k)(2), and (k)(5). Exemptions from these particular subsections are justified, on a case-by-case basis to be determined at the time a request is made, for the following reasons:

(a)From subsection (c)(3) and

(4)(Accounting for Disclosures) because release of the accounting of disclosures could alert the subject of an investigation of an actual or potential criminal, civil, or regulatory violation to the existence of the investigation; and reveal investigative interest on the part of DHS as well as the recipient agency. Disclosure of the accounting would therefore present a serious impediment to law enforcement efforts and/or efforts to preserve national security. Disclosure of the accounting would also permit the individual who is the subject of a record to impede the investigation, to tamper with witnesses or evidence, and to avoid detection or apprehension, which would undermine the entire investigative process.

(b)From subsection

(d)(Access to Records) because access to the records contained in this system of records could inform the subject of an investigation of an actual or potential criminal, civil, or regulatory violation, to the existence of the investigation, and reveal investigative interest on the part of DHS or another agency. Access to the records could permit the individual who is the subject of a record to impede the investigation, to tamper with witnesses or evidence, and to avoid detection or apprehension. Amendment of the records could interfere with ongoing investigations and law enforcement activities and would impose an impossible administrative burden by requiring investigations to be continuously reinvestigated. In addition, permitting access and amendment to such information could disclose security-sensitive information that could be detrimental to homeland security.

(c)From subsection (e)(1) (Relevancy and Necessity of Information) because in the course of investigations into potential violations of Federal law, the accuracy of information obtained or introduced occasionally may be unclear or the information may not be strictly relevant or necessary to a specific investigation. In the interests of effective law enforcement, it is appropriate to retain all information that may aid in establishing patterns of unlawful activity.

(d)From subsection (e)(2) (Collection of Information from Individuals) because requiring that information be collected from the subject of an investigation would alert the subject to the nature or existence of an investigation, thereby interfering with the related investigation and law enforcement activities.

(e)From subsection (e)(3) (Notice to Subjects) because providing such detailed information would impede law enforcement in that it could compromise the existence of a confidential investigation or reveal the identity of witnesses or confidential informants.

(f)From subsections (e)(4)(G) and (e)(4)(H) (Agency Requirements) because portions of this system are exempt from the individual access provisions of subsection

(d)which exempts providing access because it could alert a subject to the nature or existence of an investigation, and thus there could be no procedures for that particular data. Procedures do exist for access for those portions of the system that are not exempted.

(g)From subsection (e)(4)(I) (Agency Requirements) because providing such source information would impede law enforcement or intelligence by compromising the nature or existence of a confidential investigation.

(h)From subsection (e)(5) (Collection of Information) because in the collection of information for law enforcement purposes it is impossible to determine in advance what information is accurate, relevant, timely, and complete. Compliance with (e)(5) would preclude DHS agents from using their investigative training and exercise of good judgment to both conduct and report on investigations.

(i)From subsection (e)(8) (Notice on Individuals) because compliance would interfere with DHS' ability to obtain, serve, and issue subpoenas, warrants, and other law enforcement mechanisms that may be filed under seal, and could result in disclosure of investigative techniques, procedures, and evidence.

(j)From subsection

(f)(Agency Rules) because portions of this system are exempt from the access and amendment provisions of subsection (d).

(k)From subsection

(g)to the extent that the system is exempt from other specific subsections of the Privacy Act. Hugo Teufel III, Chief Privacy Officer, Department of Homeland Security. [FR Doc. E8-13386 Filed 6-13-08; 8:45 am] BILLING CODE 4410-10-P FARM CREDIT ADMINISTRATION 12 CFR Part 615 RIN 3052-AC42 Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Mission-Related Investments, Rural Community Investments AGENCY: Farm Credit Administration. ACTION: Proposed rule. SUMMARY: The Farm Credit Administration

(FCA)proposes a new rule that would authorize each Farm Credit System (Farm Credit, System, or FCS) bank, association, and service corporation (institution) to invest in rural communities across America under certain conditions. The proposed rule would allow each System institution to make investments in rural communities that are outside of an urbanized area only for specific purposes. Several provisions in the proposed rule would ensure that System investments in rural America are safe and sound and comply with the Farm Credit Act of 1971, as amended (Act), and other applicable statutes. DATES: Comments should be received on or before August 15, 2008. ADDRESSES: We offer a variety of methods for you to submit your comments. For accuracy and efficiency reasons, commenters are encouraged to submit comments by e-mail or through the FCA's Web site or the Federal eRulemaking Portal. As faxes are difficult for us to process and achieve compliance with section 508 of the Rehabilitation Act, please consider another means to submit your comment if possible. Regardless of the method you use, please do not submit your comment multiple times via different methods. You may submit comments by any of the following methods: • *E-mail:* Send us an e-mail at *reg-comm@fca.gov* . • *FCA Web Site: http://www.fca.gov* . Select “Public Commenters,” then “Public Comments,” and follow the directions for “Submitting a Comment.” • *Federal eRulemaking Portal: http://www.regulations.gov* . Follow the instructions for submitting comments. • *Mail:* Gary K. Van Meter, Deputy Director, Office of Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090. • *Fax:*

(703)883-4477. Posting and processing of faxes may be delayed. Please consider another means to comment, if possible. You may review copies of comments we receive at our office in McLean, Virginia, or from our Web site at *http://www.fca.gov* . Once you are in the Web site, select “Public Commenters,” then “Public Comments,” and follow the directions for “Reading Submitted Public Comments.” We will show your comments as submitted, but for technical reasons we may omit items such as logos and special characters. Identifying information that you provide, such as phone numbers and addresses, will be publicly available. However, we will attempt to remove e-mail addresses to help reduce Internet spam. FOR FURTHER INFORMATION CONTACT: Laurie Rea, Associate Director, Office of Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA,

(703)883-4414, TTY

(703)883-4434; or Dawn Johnson, Policy Analyst, Office of Regulatory Policy, Farm Credit Administration, Denver, CO,

(303)696-9737, TTY

(303)696-9259; or Richard A. Katz, Senior Counsel, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090,

(703)883-4020, TTY

(703)883-4020. SUPPLEMENTARY INFORMATION: I. Background The FCA proposes a new rule, § 615.5176, which would enable System institutions to more effectively serve the needs of rural communities by exercising investment powers under the Act. The proposed rule focuses on specific needs in rural communities. Essentially, the proposed rule would authorize two separate types of investments that System institutions could make in America's rural communities. First, System institutions could invest in debt securities that would involve projects or programs that benefit the public in rural communities. Equity investments in venture capital funds are the second type of investment that the proposed rule would authorize. Venture capital funds create new economic opportunities and jobs in rural communities by providing capital to small or start-up businesses. The proposed rule would authorize each System institution to make investments in rural areas that according to the terms of the latest United States decennial census have fewer than 50,000 residents and are outside of an urbanized area. The proposed rule would allow System institutions to invest in:

(1)Essential community facilities;

(2)basic transportation infrastructure;

(3)rural communities recovering from disasters;

(4)debt securities for rural development projects that the United States, its agencies, any state, Puerto Rico, or a local municipal government sponsors or guarantees;

(5)debt securities that support the rural development activities of non-System financial institutions;

(6)rural business investment companies; and

(7)venture capital funds that invest in rural businesses that create jobs and economic growth under specific conditions. The proposed rule also would allow System institutions to make other investments that are not expressly covered by this regulation with FCA approval. Under the proposed rule, an institution may hold rural community investments in an amount that does not exceed 150 percent of its total surplus. As discussed in greater detail below, other provisions of the proposed rule address safety and soundness and compliance with the Act. A. The Statutory Basis for the Proposed Rule System institutions derive their investment authorities from several provisions of the Act. Sections 1.5(15) and 3.1(13)(A) of the Act 1 authorize System banks to invest in securities of the United States and its agencies, and make “other investments as may be authorized under regulations issued by the Farm Credit Administration.” Sections 2.2(10) and 2.12(18) of the Act 2 authorize System associations to invest their funds as approved by their district banks in accordance with FCA regulations. A System service corporation is authorized by section 4.25 of the Act 3 to engage in investment activities to the same extent as its System parents. 4 1 12 U.S.C. 2013

(15)and 2122 (13)(A). 2 12 U.S.C. 2073

(10)and 2093 (18). 3 12 U.S.C. 2211. Section 4.25 authorizes System banks to organize service corporations. Section 4.28A of the Act, 12 U.S.C. 2214a, confers this authority on System associations. 4 Section 4.25 of the Act prohibits service corporations from extending credit or providing insurance services to System borrowers. Otherwise, the Act authorizes service corporations to perform any other function or service that its FCS parents may perform. Service corporations currently have authority to purchase and hold other investments under FCA regulations in subpart E of part 615. Investments in rural communities are compatible with the System's statutory mandate. The preamble to the Act clearly states that Congress enacted the law “to provide for an adequate and flexible flow of money into rural areas, and to modernize * * * existing farm credit law to meet current and future rural credit needs, and for other purposes.” The preamble and investment provisions of the Act form a broad statutory framework that confers considerable discretion on the FCA to decide the purposes, conditions, and limits for all investment activities at System institutions. In exercising this discretion, the FCA has authorized System institutions to invest their funds in obligations that are suitable for liquidity, risk management, and activities that are closely related to the System's statutory mandate. In implementing the investment provisions of the Act, the FCA has taken a cautious and incremental approach in approving System investments for mission-related purposes. Since Congress enacted the Act in 1971, the FCA has approved new regulations and programs that authorize the System to make specified investments in agriculture and rural communities, subject to certain conditions and limits. The factors that the FCA considers whenever it decides to approve new mission-related investments are:

(1)The financial needs of agriculture and rural communities;

(2)new investment products offered in the marketplace;

(3)the System's status as a Government-sponsored enterprise (GSE); and

(4)compliance with the Act and other applicable statutes. Under FCA regulations and programs, System investments in agriculture and rural communities have remained small because lending to farmers, ranchers, cooperatives, and other eligible borrowers is the primary activity of System institutions under the Act. Additionally, most mission-related investments that the FCA has approved are related to the System's expertise in financing agriculture, rural housing, and infrastructure in rural areas. Historically, the FCA has authorized System institutions to invest in debt securities, but not in equity securities of non-System entities. In 2002, Congress granted System institutions express authority to invest in rural business investment companies (RBICs), which are venture capital funds that the United States Department of Agriculture

(USDA)funds and oversees. The FCA believes that allowing the System to invest in venture capital funds that hold small equity positions in start-up rural enterprises is consistent with congressional intent. As discussed in greater detail below, the proposed rule would implement the provisions of title VI of the Farm Security and Rural Investment Act of the 2002 5 and the Act by allowing System institutions to invest in RBICs and other venture capital funds that provide start-up money to rural entrepreneurs. 5 Pub. L. No. 107-171, § 384J, 116 Stat. 134, 397 (May 13, 2002). In accordance with the Act, the FCA has enacted several regulations since 1971 that authorize System investments in agriculture and America's rural communities. The first mission-related investments that the FCA approved were farmers' notes. 6 Since 1972, FCA regulations have authorized System banks and associations to invest in obligations of States, municipalities, and local governments. In 1993, a new regulation authorized System institutions to purchase and hold mortgage securities issued or guaranteed by the Federal Agricultural Mortgage Corporation (Farmer Mac). In 1999, the FCA amended another regulation to permit investment in asset securities backed by agricultural equipment. An existing regulation, § 615.5140(e), allows Farm Credit institutions to hold other investments that the FCA approves on a case-by-case basis. This regulatory framework guides investment practices at Farm Credit institutions and ensures that System investments comply with law and are safe and sound. 6 The farmers' note program authorizes production credit associations and agricultural credit associations to invest in notes, contracts, and other obligations farmers and ranchers enter into with cooperatives and dealers that sell farm equipment, inputs, and supplies. Farmers' notes are investments that provide liquidity to small rural agribusinesses. Since 2005, the FCA has approved requests by System banks and associations, on a case-by-case basis, to initiate pilot programs for investing in America's rural communities under specified conditions. Under these FCA-approved pilot programs, System institutions acquired expertise and became active in making investments that provided funding for essential projects in rural communities. Based on the positive experience of these pilot programs, the FCA is proposing a rule that will allow all System banks, associations, and service corporations to make certain investments in rural communities under prescribed conditions without prior FCA approval. This proposed rule would permit the rural-based System to use its expertise and a portion of its financial resources to support rural economic growth and development by investing in those projects and programs in America's rural communities that often have difficulty attracting financing at affordable rates. The proposed rule implements the investment provisions of the Act by ensuring that:

(1)System institutions invest in rural communities only for specific purposes; and

(2)all instruments purchased and held by Farm Credit institutions are investment securities in accordance with market practices and securities laws. Investments in rural communities also would be subject to a portfolio limit and other controls to ensure that FCS rural community investment activities comply with the Act and are safe and sound. The FCA emphasizes that lending to farmers, ranchers, aquatic producers and harvesters, farm-related businesses, rural homeowners, cooperatives, and rural utilities remains the primary purpose of the System. However, within the parameters prescribed by the proposed rule, System investments, which help strengthen the economic viability of rural communities, are compatible with the preamble and several provisions of the Act. Investing in rural communities enables Farm Credit to fulfill its mission by helping sustain rural communities on which the System's borrowers and owners are dependent for their livelihoods. B. Why Investments in Rural Communities Are Important The FCA proposes this rule to allow the System to make investments in rural communities and to support and supplement investments by government, commercial banks, investment banks, and venture capital funds. The FCA believes that this new rule will enable the System to more fully assist rural communities in financing projects that are designed to provide essential facilities, infrastructure, and services to residents. As discussed in greater detail below, System institutions made investments under FCA authorized pilot programs, which demonstrated that the FCS is both locally and regionally positioned to effectively participate and assist rural development networks that strive to address rural needs. The proposed rule is designed to enable FCS institutions to collaborate and partner in rural development initiatives that advance the System's mission and its capacity to serve as a financial intermediary promoting the flow of money into rural areas. Many rural communities are struggling to retain economic viability and vitality that can provide economic opportunities and a better quality of life for their residents. Rural communities face numerous demographic, social, and economic challenges in meeting the needs of their residents. As a result, rural communities often find it difficult to provide the essential facilities, infrastructure, and services that their residents need. For example, an aging population in rural areas requires medical and assisted health care facilities. However, rural communities often have fewer health care providers and facilities to meet the increasing medical needs of its growing elderly population. 7 7 Carol A. Jones, *et al* ., “Population Dynamics Are Changing the Profile of Rural Areas,” *Amber Waves* , Economic Research Service, United States Department of Agriculture, April 2007, p. 5. Also, a large gap persists between rural and metropolitan residents who have earned college degrees. This gap is reinforced by a lower demand for workers with post-secondary degrees in rural areas, which in turn, contributes to the out-migration of skilled workers. 8 These factors place rural communities at a disadvantage in attracting businesses that offer higher wages and better job benefits to employees. Essential facilities, infrastructure, and services in rural areas often lag behind those in metropolitan areas. This is another factor that limits the ability of rural communities to attract and retain businesses that provide employment and economic opportunities. These obstacles to rural economic development and revitalization are further compounded by funding challenges for projects that are designed to assist rural communities in resolving these problems. 8 “Rural Education At A Glance,” *Rural Development Research Report Number 98* , Economic Research Service, United States Department of Agriculture, November 2003, p. 4. Funding for economic growth and development projects in rural communities is available from a variety of sources, most notably the Federal and State governments, and private-sector financiers, including commercial and investment banks. Each of these entities faces challenges in providing rural communities with the funding needed for these projects. Efforts by Federal or State governments to help rural communities are often curtailed by budget constraints. Also, many rural community banks are willing to provide short-term funding, but find it difficult to provide the additional long-term capital investment needed for facilities in rural areas. 9 Essential facilities and large capital improvements, such as critical care access hospitals, require a large capital investment that is repaid over an extended period of time. In many cases, no single investor is willing and able to supply all of the capital necessary for such projects, and rural communities must depend on a combination of government and private-sector financial sources and local donations. 10 Another obstacle is that rural development projects in remote rural locations typically involve higher costs and greater risks, which deter investors. For these reasons, government and private-sector financial resources often are insufficient to fully fund many necessary and worthwhile projects that rural residents need. 9 Walter Gregg, *The Availability and Use of Capital by Critical Access Hospitals* , Flex Monitoring Team Briefing Paper No. 4, Flex Monitoring Team—University of Minnesota, University of North Carolina at Chapel Hill, and the University of Southern Maine, March 2005, p. 10. 10 Ibid., p. 25 and 26. System institutions are an integral part of rural America. The farmers and ranchers who borrow from and own the FCS live and work in rural communities. These System stockholders and their families depend on local rural communities for essential services, employment, and other economic opportunities. Today, the majority of farm household income is derived from off-farm sources. 11 As a result, farm families depend on local rural communities for employment that supplements farm income. Further, agricultural production is one of the most hazardous industrial sectors. 12 Farmers and ranchers confront the same problems as other residents of America's rural communities in obtaining access to quality hospitals, medical facilities, schools and essential services. 11 Ted Covey, *et al* ., “Agricultural Income and Finance Outlook,” *Outlook* , AIS-85, Economic Research Service, United States Department of Agriculture, December 2007, p. 49. 12 “Chapter 3-Focus on Agriculture,” *Worker Health Chartbook 2004* , National Institute for Occupational Safety and Health, NIOSH Publication No. 2004-146, p. 1. System institutions are active in financial markets that serve regional and local rural areas across the United States. For this reason, the System is familiar with the challenges that rural communities face in meeting the needs of both farm and nonfarm rural residents. The System has the financial capacity to invest in rural development, and this proposed rule would advance the System's contributions to rural development efforts. C. Investments in Rural Communities Made Under Pilot Programs Over the past 3 years, a number of System institutions have developed programs to make investments in rural communities through FCA-approved pilot programs. As a result of the investments made under these pilot programs, rural communities were able to address specific regional needs because these investments provided greater access to capital for community facilities, revitalization projects, and other economic development initiatives. These investments also provided additional liquidity into rural financial markets. In several cases, these investments helped provide capital at more affordable terms and rates, which in turn made these projects more feasible. The pilot programs have demonstrated that Farm Credit institutions have the capacity and willingness to work collaboratively with rural communities and financial institutions to address local and regional rural economic development needs. As previously discussed, many rural development projects are reliant on multiple partners for success. In making rural community investments under the pilot programs, System institutions partnered with: Federal, State, and regional rural development authorities; non-System financial institutions including rural community banks; nonprofit organizations; and venture capital funds. For example, System investments under the pilot programs have provided capital for rural hospitals designated as critical access facilities, which were sponsored, in part, by the USDA's Rural Development Community Facilities Program. Other examples of specific System investments that have made a positive difference in rural communities include investments in: Medical and mental clinics; treatment facilities for adolescents and adults; living and nursing centers for the elderly; schools; and community facilities. Several projects, which were sponsored by regional or State development authorities, modernized obsolete facilities for value-added agricultural products, or created new facilities to promote local economic growth. These projects were designed to promote economic growth in rural areas by attracting and promoting businesses that create or retain jobs in these rural communities. Non-System financial institutions and venture capital funds have also benefited from investments that System institutions made under the pilot programs. For example, System institutions have helped to increase liquidity at several rural community banks by buying bonds that support the rural development efforts of these banks. These investments enabled these banks to reduce the long-term financing costs for specific rural development projects. Additionally, investments in regional investment networks provided venture capital to rural entrepreneurs for start-up businesses that contributed to the vitality of rural communities. System institutions were prudent in undertaking investment activities in rural communities and assumed reasonable risks within pilot program conditions. In addition to the pilot programs, grant programs and charitable contributions at many System institutions complement their commitments to the citizens of local rural communities. Although the proposed rule does not specifically address grants, System institutions have authority under the incidental power provisions of the Act to make charitable grants and donations. 13 The FCA continues to encourage FCS institutions to consider making charitable donations and contributions to worthwhile causes in the communities they serve. System institutions have contributed to a wide variety of community organizations and entities, including emergency and medical services, agricultural and rural community development educational programs, and value-added agricultural product initiatives. Charitable grants by System institutions complement rural community investment programs and are an additional way for Farm Credit institutions to further the System's mission and help enhance the quality of life for residents in rural communities. 13 Sections 1.5 (21), 2.2 (20), 2.12

(20)and 3.1

(16)of the Farm Credit Act (12 U.S.C. 2013 (21), 2073 (20), 2093 (20), 2122 (16)). II. Section-by-Section Analysis A. Rural Communities Proposed § 615.5176(a) would authorize Farm Credit banks, associations, and service corporations to make rural community investments. Proposed § 615.5176(a) also provides that FCS institutions may make these investments only in areas *outside* of an “urbanized area” 14 as defined by the latest decennial census of the United States. For the purposes of this proposed rule, areas outside of an urbanized area are “rural.” The proposed rule would authorize the FCS to make rural community investments in areas that the United States Census Bureau determined in the latest decennial census to have a population of less than 50,000 residents. For the purposes under this proposed rule, the geographic area includes any State within the United States and the Commonwealth of Puerto Rico. 14 The United States Census Bureau defines an urbanized area as an urban area of 50,000 or more people that have core census block groups or blocks that have a population density of at least 1,000 people per square mile and surrounding census blocks that have an overall density of at least 500 people per square mile. The FCA considered numerous definitions of “rural,” recognizing there is no single, universally preferred definition of “rural” that policymakers commonly use. 15 In fact, more than 15 definitions of “rural” are currently used by different Federal agencies for various programs. 16 In developing the proposed rule, the FCA relied on Census Bureau terminology to ensure that the geographic areas in which investments are permitted are readily identifiable and easily distinguished. In determining which geographic areas should qualify under the proposed rule, the FCA seeks to include those areas with sufficient population densities to support health care and other essential facilities serving rural residents, while prohibiting investments in urbanized areas. For example, hospitals and other health care facilities that primarily serve rural geographic areas are typically located in areas that have less than 50,000 residents. Also, whenever Congress has expressly authorized FCS institutions to lend or invest in rural development projects, it has allowed these activities in communities with populations of 50,000 or fewer residents. 17 Additionally, most Federal agencies and demographic experts have determined that densely populated areas with 50,000 or more inhabitants are urbanized areas. For this reason, investments authorized under the proposed rule would allow System institutions to invest in areas with populations of less than 50,000 residents based on the latest decennial census of the United States. 15 Andrew F. Coburn *et al.* , “Choosing Rural Definitions: Implications for Health Policy,” Rural Policy Research Institute Health Panel, March 2007, p. 1. 16 Ibid. 17 According to section 3.7(f) of the Act, 12 U.S.C. 2128(f), banks for cooperatives and agricultural credit banks may extend credit to water and waste disposal facilities in communities where the population does not exceed 20,000 inhabitants based on the latest decennial census of the United States. A provision of the Farm Security and Rural Investment Act of 2002, 7 U.S.C. 2009cc, *et seq.* , authorizes System institutions to establish and invest in rural business investment companies in communities in non-metropolitan counties that have populations of 50,000 or less inhabitants under the last decennial census of the Unites States. By allowing the System to invest in rural communities that have fewer than 50,000 residents, the proposed rule provides “an adequate and flexible flow of funds into rural areas” in accordance with the Act, while precluding System institutions from investing in urbanized areas. Information is publicly available on the Census Bureau's Web site, including census population statistics and maps. As a result, System institutions and other interested parties are able to determine if a particular location is within a “rural” community for the purposes of § 615.5176(a). B. Debt Securities Proposed § 615.5176(b) would authorize System institutions to invest in rural communities by purchasing and holding debt securities for purposes specified in § 615.5176(b)(1) through (5). The proposed rule defines debt securities as obligations that are commonly recognized in capital markets as a medium for investment, including government obligations, corporate bonds, revenue bonds, asset-backed securities and mortgage securities. Proposed § 615.5176(b) expressly excludes commercial loans and instruments or transactions that are more similar to commercial loans than to traditional investment instruments in order to clarify the statutory distinction between loans and investments. Under the proposed rule, System institutions could not use their authority to invest in rural communities to make loans to otherwise ineligible borrowers. 1. Essential Community Facilities Proposed § 615.5176(b)(1) would authorize System institutions to invest in debt securities that finance essential community facilities, such as hospitals, health care facilities, emergency services, and schools. Many essential community facilities are owned and operated by State, local, or municipal governments. In other cases, quasi-governmental or highly regulated private and nonprofit entities own and operate essential community facilities. Government obligations and revenue bonds often fund the construction and renovation of these facilities. Rural communities are currently facing increasing difficulty in funding these facilities because of deteriorating liquidity in financial markets. System institutions can help alleviate this problem by purchasing and holding debt securities as investments in community facilities that provide essential services to rural residents. 2. Basic Transportation Infrastructure Financing basic transportation infrastructure, such as roads, bridges, and other public transportation systems, is another authorized investment purpose under the proposed rule. The public sector owns, maintains, and operates most basic transportation infrastructure in the United States. Most rural transportation facilities are operated by public agencies or nonprofit groups, with a small percentage operated by private entities. Transportation projects are another area where the System could significantly help rural communities build and improve infrastructure, which would strengthen their economic viability. Rural communities and particularly agricultural industries, depend on quality transportation systems, which are critical in supplying inputs, shipping and distributing outputs and products, and supporting economic development. Proposed § 615.5176(b)(2) would authorize System institutions to purchase government obligations, revenue bonds, and other debt obligations that support basic transportation infrastructure. 3. Revitalization of Rural Communities After a Disaster Proposed § 615.5176(b)(3) would permit System institutions to purchase debt securities in revitalization projects that help rebuild rural areas devastated by disasters where an emergency has been declared pursuant to law. These investments must support local efforts and residents by contributing to the economic recovery of the affected rural community. 4. Rural Development Projects With Government Sponsorship or Guarantees Under proposed § 615.5176(b)(4), System institutions could invest in debt securities that a government issues, sponsors, or guarantees under programs to fund rural community development projects. Without crucial financial support from Federal, State, or local governments, rural communities would face greater difficulty in funding vital development projects. By investing in debt securities for rural economic development under government programs, the System assists rural communities across America in accordance with its statutory mandate. By proposing § 615.5176(b)(4), the FCA is encouraging System institutions to work with Federal, State, and local governments and their partners to invest in projects that bring jobs, infrastructure, community facilities, and vital services to rural areas and their residents. Proposed § 615.5176(b)(4)(i) covers debt securities that the United States and its agencies issue, sponsor, or guarantee under programs that have the specific purpose of directly financing economic development in rural communities. The FCA emphasizes that the proposed rule does not require the full faith and credit of the United States for bonds issued or guaranteed by agencies of the United States. However, these investments are authorized only if the Federal agency issues or guarantees these bonds or obligations in accordance with a program that has the specific purpose of promoting economic development in rural areas. For example, the Tennessee Valley Authority, the Small Business Administration, and various agencies in the USDA and the Department of Housing and Urban Development issue and guarantee bonds under specific programs for infrastructure, facilities, and other development projects in rural areas, and System investment in these obligations would be authorized by the proposed rule. Other Federal agencies operate programs in both metropolitan and rural areas which are not part of any specific rural development mission. Bonds and other obligations issued or guaranteed under such programs would not qualify as investments under the proposed rule. For example, the proposed rule would not authorize the FCS to invest in mortgage securities issued or guaranteed by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation because the purpose of these securities is to enhance the liquidity of residential home loans throughout the United States, rather than to promote rural development. Another regulation, § 615.5140, permits System institutions to make investments for liquidity and risk-management purposes in bonds and obligations, including residential mortgage securities, that Federal agencies issue or guarantee under programs that are unrelated to rural development. The proposed rule focuses on investments in rural communities and would not authorize System institutions to hold residential mortgage securities issued by other GSEs, but the FCA continues to study this issue. Proposed § 615.5176(b)(4)(ii) would allow System institutions to invest in debt securities that any State, the Commonwealth of Puerto Rico, a local or municipal government, or other political subdivision of a State, issues, sponsors, or guarantees that are specifically related to development in rural communities. Many local or municipal governments and other political subdivisions, such as special districts, often sponsor particular rural development projects by providing tax incentives or other benefits to private-sector obligors who issue revenue bonds. These revenue bonds, which help finance rural development projects, would qualify as investments that FCS institutions could purchase and hold under proposed § 615.5176(b)(4)(ii). This provision would also allow System institutions to invest in mortgage securities that are issued or guaranteed by State or local agencies that specialize in rural development. 5. Rural Development Projects Financed by Non-System Financial Institutions Proposed § 615.5176(b)(5) would allow System institutions to invest in debt securities issued by non-System financial institutions. The proposed rule would authorize System institutions to purchase these debt securities to increase financial assistance to rural communities and improve the liquidity of rural financial markets. This provision would enhance cooperation between System and non-System financial institutions and ultimately benefit rural communities. System institutions may purchase asset-backed securities, covered bonds, or similar types of bonds issued by non-System financial institutions directly or through trusts that supply funds to non-System financial institutions for rural development. Investments made under the pilot programs evidence that securities, including commercial bank bonds issued by rural community banks and purchased by System institutions, can effectively increase bank liquidity. These investments benefit rural communities and residents, while establishing partnerships between non-System and System institutions. C. Equity Investments Equity investments in venture capital funds are another type of investment that the proposed rule would authorize FCS institutions to purchase and hold. Under this provision of the proposed rule, System institutions could invest in venture capital funds that provide capital to start-up and small private-sector enterprises that bring jobs and economic opportunities to rural communities. Venture capital funds that operate in the United States invest only 1.6 percent of their funds in rural community enterprises, although these enterprises represent 19.2 percent of all businesses. 18 System institutions could make a small, but meaningful, contribution to rural economic development by investing in venture capital funds that provide capital into rural enterprises. As discussed in greater detail below, System institutions would hold only small, passive investment positions in venture capital funds because of statutory and regulatory restrictions. 18 Kendall McDaniel, “Venturing into Rural America,” *The Main Street Economist* , Center for the Study of Rural America—Federal Reserve Bank of Kansas City, p. 2. Proposed § 615.5176(c) would authorize System institutions to make equity investments in two types of entities, RBICs and venture capital funds, for the purpose of providing equity capital to rural business enterprises. Rural entrepreneurs often lack sufficient equity capital to establish and expand businesses that are the mainstay of prosperous rural economies. Venture capital funds provide equity capital in rural business enterprises, which promote economic development and job opportunities in rural communities. 1. Rural Business Investment Companies Proposed § 615.5176(c)(1) would authorize System institutions to purchase and hold equity investments in RBICs that are established and operate in accordance with 7 U.S.C. 2009cc *et seq.* As discussed earlier, the Farm Security and Rural Investment Act of 2002 created the Rural Business Investment Program and expressly authorized any Farm Credit System institution to establish and invest in RBICs. Congress intended to promote economic development, create wealth, and expand job opportunities in rural areas through RBIC equity investments. The System's statutory authority to establish and invest in RBICs is incorporated into proposed § 615.5176(c)(1). The proposed rule would enable System institutions to invest in RBICs to the fullest extent allowed by 7 U.S.C. 2009cc *et seq.* The FCA emphasizes that proposed § 615.5176(c)(1) would authorize System institutions to invest in both leveraged and non-leveraged RBICs. 2. Venture Capital Funds Proposed § 615.5176(c)(2) would authorize System institutions to invest in venture capital funds which, in turn, invest in rural businesses that provide job opportunities. Under this provision, System institutions would be able to indirectly provide rural entrepreneurs needed equity capital through venture capital funds, such as regional investor networks, which have investment objectives similar to RBICs. The Center for the Study of Rural America of the Federal Reserve Bank of Kansas identified a significant need for equity capital for rural entrepreneurs because entrepreneurial activity is strongly linked to economic growth. 19 For this reason, experts conclude that additional focus on rural entrepreneurship can be an effective strategy in combating the decline of traditional resource-based businesses in rural areas. 20 However, rural economies have difficulty attracting venture capital because metropolitan areas usually offer better profits. Policy officials and experts agree that entrepreneurship in remote and sparsely populated rural areas can be challenging because access to skilled labor, technology, and capital is more limited. Investments in venture capital funds that focus on rural entrepreneurs can effectively begin to overcome these barriers to rural businesses. 19 Mark Drabenstott, *et al.* , “Main Streets of Tomorrow: Growing and Financing Rural Entrepreneurs—A Conference Summary,” *Economic Review* , *Third Quarter 2003* , Federal Reserve Bank of Kansas City, pp. 73 and 74. 20 Ibid. Proposed § 615.5176(c)(2) would place specific restrictions on System investment in venture capital funds to ensure that these investments remain small and passive. Additionally, these controls would minimize potential financial risk to the System institutions, while providing the System with flexibility to invest in rural development under the Act. Proposed § 615.5176(c)(2)(i) would control financial risk by prohibiting any System institution from investing more than 5 percent of its total surplus in venture capital funds and more than 2 percent of its total surplus in any one venture capital fund. The FCA emphasizes that this limit on venture capital funds in proposed § 615.5176(c)(2)(i) is in addition to the overall limit in proposed § 615.5176(e)(i), which prevents total rural community investments at any FCS institution from exceeding 150 percent of its total surplus. The restrictions in proposed § 615.5176(c)(2)(ii) and

(iii)would prevent System institutions from controlling and managing venture capital funds. Proposed § 615.5176(c)(2)(ii) would prohibit any FCS institution from holding more than 20 percent of the voting equity of any venture capital fund. The purpose of this provision is to allow System institutions to invest in venture capital funds that focus on rural areas, while imposing a reasonable limit that prevents any System institution from gaining a controlling interest in any fund. Proposed § 615.5176(c)(2)(iii) would prohibit any FCS institution from participating in the routine management or operation of a venture capital fund. Finally, proposed § 615.5176(c)(2)(iv) and

(v)would establish controls to avoid potential conflicts of interest. Proposed § 615.5176(c)(2)(iv) would prohibit any director, officer, or employee of a System institution from serving as a director, officer, employee, principal shareholder, or trustee of any venture capital fund or of any entity funded by, or affiliated with, the venture capital fund. Proposed § 615.5176(c)(2)(v) would prohibit any System institution from participating in any decision or action of a venture capital fund involving or affecting any customer of the institution. Although proposed § 615.5176(c)(2)(v) would permit a System institution to invest in venture capital funds that hold equity in one of its borrowers, the institution could not participate in decisions or actions that affect such customers. Additionally, the proposed rule does not prohibit System institution directors, officers, or employees from serving in an investment screening or other advisory capacity to a venture capital fund, subject to the restrictions discussed above. System institution representatives serving in an advisory capacity to a venture capital fund also remain subject to FCA conflict of interest regulations and institution policies. D. Other Investments Approved by the Farm Credit Administration The FCA's experience with the pilot programs reveals that the types of System investments may change as the needs of rural communities evolve. For this reason, the FCA believes that the new regulation should contain a mechanism for approving investments that currently do not exist, but may emerge in the future. Currently, § 615.5140(e) provides the FCA with the authority to approve new investments that are not specifically authorized by regulation. Proposed § 615.5176(d) establishes specific criteria for System institutions to apply to the FCA for permission to hold investments that are not expressly authorized by this regulation. Under this proposal, written requests by System institutions would:

(1)Describe the proposed project or program in detail;

(2)explain its risk characteristics; and

(3)demonstrate how such investments are consistent with the System's statutory mandate to serve agriculture and rural communities. In approving such requests, the FCA may impose additional or more stringent conditions than the requirements of this regulation to ensure safety and soundness or compliance with law. E. Restrictions on Rural Community Investments Other requirements governing System investments in rural communities are covered by proposed § 615.5176(e). These requirements either pertain to safety and soundness or implement statutory requirements. 1. Portfolio Limit Proposed § 615.5176(e)(1) would authorize each System bank, association, or service corporation to make rural community investments in an amount not to exceed 150 percent of the institution's total surplus. The proposed portfolio limit on rural community investments ensures that lending to farmers, ranchers, aquatic producers, cooperatives, and other borrowers that own the FCS remains the primary activity of System institutions. At the same time, the proposed limit provides the FCS with the flexibility to make investments in an amount that offers meaningful assistance to rural communities and their residents. This limit on rural community investments is compatible with limits that the Act and other FCA regulations impose on System activities that are related to the System's mission. Based on financial information reported as of December 31, 2007, the proposed limit would authorize the System to invest up to a total of $35.8 billion in rural community investments. 21 For example, this would permit an FCS association with $1.0 billion in assets and $150.0 million in total surplus to invest up to $225.0 million in rural communities. 21 This amount is comparable to the regulatory limits established for the System's rural home lending and investments in farmers' notes activities, which are limited to amounts totaling $35.9 billion for each program as of year-end, although actual amounts outstanding under these programs represented 1.3 percent and less than 1 percent of total outstanding loans, respectively. The FCA considered the following factors when it decided to propose 150 percent of total surplus as the portfolio limit:

(1)The safety and soundness of FCS institutions;

(2)the significant needs of rural communities;

(3)the FCS's ability and capacity to assist rural communities, and

(4)the ability of FCS institutions to fulfill mission objectives. Total surplus provides a basis for each institution's risk tolerance level, and the FCA has historically used this standard to limit System investments in unrated obligations that are less liquid. System institutions also use limits based on similar capital measures to ensure that asset and portfolio concentrations are safely and soundly managed. This proposed limit also is based on the limits established for the pilot programs. The FCA established individual institution limits equal to 100 percent of total surplus (or in some cases 10 percent of total loans) for investments held under specific pilot programs, and 150 percent of total surplus for an institution's portfolio of all rural community investments. The pilot programs evidence that System institutions exercised caution when making investments in rural communities. Institutions have not approached the portfolio limit. Although the proposed rule establishes an upper regulatory portfolio limit, the FCA expects that each System institution would determine an appropriate internal portfolio limit based on the individual institution's objectives, capital position, risk tolerance, and other factors that it considers appropriate, in accordance with § 615.5133(c). The FCA also considered the System's need to establish a program of sufficient size that could adequately deliver benefits to rural communities while balancing operational efficiency needs. In establishing the portfolio limit, the FCA sought to ensure that each System institution, large or small, could effectively partner with government agencies and non-System financial institutions in projects that may positively affect their local rural communities. The current credit crisis emphasizes the importance of funding for rural development projects and enhancing the liquidity of rural credit markets. The portfolio limit curtails the maximum risk exposure of System institutions, and it also encourages partnerships with non-System financial institutions and government agencies that are active in rural development. Collaboration between System institutions and larger, more established financial investors is a way to help rural communities access financing for vital projects, especially during times of economic uncertainty. 2. Obligor Limit Proposed § 615.5176(e)(2) would establish an obligor limit for investments in rural communities. This provision would not allow any System institution to invest more than 15 percent of its total surplus in investments issued by a single entity, issuer, or obligor. However, the obligor limit would not apply to obligations issued or guaranteed on the full faith and credit of the United States, its agencies, instrumentalities, or corporations. In the event only a portion of the obligation is guaranteed, the non-guaranteed portion of the obligation would remain subject to the obligor limit. This obligor limit is designed to control undue credit risk from a single counterparty on the capital of any System institution and provide sufficient diversification of an institution's rural community investment portfolio. For safety and soundness reasons, the FCA decided that the obligor limit for rural community investments should be lower than the 20 percent of total capital obligor limit established for investments held by System institutions to maintain liquidity and manage market risks in § 615.5140(d). In contrast to the liquid and marketable securities held under § 615.5140, rural community investments are often unrated and, therefore, capital markets would consider them less liquid. The FCA anticipates that most rural community investments would be held to maturity and would not trade. For these reasons, the FCA proposes an obligor limit for rural community investments that does not exceed 15 percent of the total surplus of each System institution. This regulatory provision would also require a System institution to count securities that it holds through an investment company towards this 15-percent obligor limit to prevent undue risk concentrations. This provision provides an exception when the investment company's holding of the security of any one issuer does not exceed 5 percent of the investment company's total portfolio. The FCA patterned this provision after § 615.5140(d)(2), which applies to investments that FCS institutions hold through investment companies for the purposes of maintaining liquidity or managing market risks. The FCA emphasizes that proposed § 615.5176(e)(2) establishes a maximum obligor limit for rural community investments. The FCA expects every Farm Credit institution to establish internal obligor limits based on its financial condition and the size and complexity of securities that it contemplates buying and holding. The obligor limit that each System institution sets should be based on both identified risks and its own risk-bearing capacity. 3. Maturities for Debt Securities in Rural Communities Proposed § 615.5176(e)(3) would require most rural community investments to mature in no more than 20 years. However, debt securities may mature in not more than 40 years if the United States or its agencies provide a guarantee or a conditional commitment of guarantee for 50 percent or more of the total issuance or obligation. Proposed § 615.5176(e)(3) establishes terms to maturity that are flexible enough to accommodate typical rural development projects that this rule would authorize. This regulatory approach would enable System institutions to participate in USDA and other State rural development programs that provide a supplemental or partial guarantee, which contributes to, or enhances, whole-project financing. Also, investments that fund essential rural community facilities, such as hospitals, police and fire stations, and other emergency service facilities, typically require project financing over longer terms to maturity. 4. Exclusion From the Liquidity Reserve Proposed § 615.5176(e)(4) would require System banks to exclude rural community investments from their liquidity reserve under § 615.5134 of this part. System banks may purchase and hold the eligible investments listed in § 615.5140 to maintain liquidity reserves, manage interest rate risk, and invest surplus short-term funds in accordance with § 615.5132. Only investments that can be promptly converted into cash without significant loss are suitable for achieving these objectives. Rural community investments are not suitable for liquidity purposes or market risk management because these investments do not typically carry ratings assigned by a Nationally Recognized Statistical Rating Organization and are not actively traded in the established secondary markets. 5. Association Investments Proposed § 615.5176(e)(5) would implement sections 2.2(10) and 2.12(18) 22 of the Act, which require each funding bank to supervise and approve the investment activities of its affiliated associations. System banks may discharge their statutory and regulatory responsibility to approve and supervise an association's rural community investments through covenants in the general financing agreement, policies, or other appropriate formats. System banks may also provide advisory, analytical, and research services that help their affiliated associations to devise strategies for investing in rural communities and managing these assets. 22 12 U.S.C. 2073

(10)and 2093 (18). 6. Attribution of Service Corporation Investments Proposed § 615.5176(e)(6) would require System service corporations to attribute all rural community investments to their System institution parents based on the ownership percentage of each bank or association. This provision would prevent FCS institutions from utilizing service corporations to exceed the regulatory limits on rural community investments. F. Management of Rural Community Investments Proposed § 615.5176(f) addresses rural community investment management practices at FCS institutions and ensures that System institutions invest in rural communities in a safe and sound manner. If a Farm Credit System institution chooses to invest in rural communities, proposed § 615.5176(f) would require its board of directors to first adopt written policies for managing the institution's investments. These investment management policies must be appropriate for the levels, types, and complexities of each institution's rural community investments. Proposed § 615.5176(f) would also require the board of directors ensure the institution's implementation of procedures and internal controls that ensure compliance with the board's policies and the regulation. Additionally, proposed § 615.5176(f) would require these written policies to comply with § 615.5133, which governs management practices for investments held for liquidity and risk management. Although rural community investments differ from liquid investments, strong and disciplined investment management practices are essential to the safety and soundness of all investment activities within System institutions. As a result, sound investment management practices prescribed by § 615.5133 are also applicable to rural community investments and, for this reason, the FCA is extending § 615.5133 to rural community investments. Existing § 615.5133 requires a System institution's investment management policies to address risk tolerance, delegations of authority, internal controls, securities valuation, and reporting to the board. Also, § 615.5133 requires that investment policies be appropriate for the size, type, and risk characteristics of the institution's investments. The FCA expects each System institution to fully and carefully evaluate its risk tolerance in accordance with § 615.5133(c) when it considers purchasing any rural community investments. Finally, proposed § 615.5176(f) expressly exempts those rural community investments that System institutions classify and account for as held-to-maturity under generally accepted accounting principles from the securities valuation requirement in § 615.5133(f). This exemption is based on the different accounting classifications for these securities. G. Regulatory Flexibility Act Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 *et seq.* ), the FCA hereby certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. Each of the banks in the System, considered together with its affiliated associations, has assets and annual income in excess of the amounts that qualify them as small entities. Therefore, System institutions are not “small entities” as defined in the Regulatory Flexibility Act. List of Subjects in 12 CFR Part 615 Accounting, Agriculture, Banks, banking, Government securities, Investments, Rural areas. For the reasons stated in the preamble, part 615 of chapter VI, title 12 of the Code of Federal Regulations is proposed to be amended as follows: PART 615—FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, AND FUNDING OPERATIONS 1. The authority citation for part 615 is revised to read as follows: Authority: Secs. 1.1, 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12 U.S.C. 2001, 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); 7 U.S.C 2009cc *et. seq.* ; sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608. Subpart F—Property, Transfers of Capital and Other Investments 2. A new § 615.5176 is added to subpart F to read as follows: § 615.5176 Rural community investments.

(a)*Rural communities.* As authorized by this section, each Farm Credit System (System) bank, association, or service corporation (hereafter “institution”) may make rural community investments. All investments that any System institution makes under this section in rural communities must be outside an urbanized area as determined by the latest decennial census of the United States.

(b)*Debt securities.* Each institution may make investments in rural communities by purchasing and holding debt securities. For the purposes of this section, debt securities are obligations that are commonly recognized in the established capital markets as a medium for investment. Debt securities exclude commercial loans and any instrument or transaction that is more similar to a commercial loan than to a traditional investment instrument or transaction. Debt securities include government obligations, corporate debt obligations, revenue bonds, asset-backed securities, as defined by § 615.5131(a), and mortgage securities, as defined by § 615.5131(h). Debt securities that institutions purchase and hold under this section must provide funding in rural communities for:

(1)Essential community facilities such as hospitals, clinics, emergency services, and schools;

(2)Basic transportation infrastructure, such as roads, bridges, and other public transportation systems;

(3)Revitalization projects that rebuild rural areas recovering from disasters where an emergency has been declared pursuant to law;

(4)Rural development projects for which the issuer, sponsor, or provider of a guarantee is:

(i)The United States or any of its agencies, instrumentalities, or corporations, under programs that have the specific purpose of directly financing economic development in rural areas; or

(ii)Any State, the Commonwealth of Puerto Rico, local or municipal governments, or other political subdivisions.

(5)Non-System financial institutions for their activities that support rural development.

(c)*Equity investments.* System institutions may also make investments in:

(1)*Rural Business Investment Companies* that are established and operate in accordance with 7 U.S.C. 2009cc *et seq.;* or

(2)*Venture capital funds* that are established to promote economic development and job opportunities in businesses located in rural communities, so long as an institution does not:

(i)Invest more than 5 percent of its total surplus in venture capital funds and more than 2 percent of its total surplus in any one venture capital fund;

(ii)Hold more than 20 percent of the voting equity of any one venture capital fund;

(iii)Participate in the routine management or operation of any venture capital fund;

(iv)Allow any institution director, officer, or employee to serve as director, officer, employee, principal shareholder, or trustee of any venture capital fund, or of any entity funded by, or affiliated with any venture capital fund; or

(v)Participate in any decision or action of any venture capital fund involving or affecting any customer of the institution.

(d)*Other investments approved by the Farm Credit Administration.* System institutions may make other investments in rural communities that are not expressly authorized by this section if they are approved by the Farm Credit Administration. Written requests for Farm Credit Administration approval must describe the proposed project or program in detail, explain its risk characteristics, and demonstrate how such investments are consistent with the statutory mandate of the Farm Credit System.

(e)*Restrictions on rural community investments* —(1) *Portfolio limit* . An institution must not invest more than 150 percent of its total surplus in rural community investments.

(2)*Obligor limit* . An institution must not invest more than 15 percent of its total surplus in rural community investments issued by any single entity, issuer, or obligor. This obligor limit does not apply to obligations of the United States or its agencies, instrumentalities, or corporations. An institution must count securities that it holds through an investment company towards the obligor limit of this section unless the investment company's holding of the securities of any one issuer does not exceed 5 percent of the investment company's total portfolio.

(3)*Maturities for debt securities* . Debt securities purchased by institutions under this section must mature in not more than 20 years, except that debt securities may mature in not more than 40 years if the United States or its agencies provide a guarantee or a conditional commitment of guarantee for 50 percent or more of the total issuance or obligation.

(4)*Exclusion from the liquidity reserve.* No Farm Credit bank shall include any investment made in accordance with this section in its liquidity reserve under § 615.5134 of this part.

(5)*Association investments* . A System association may hold rural community investments only with the approval of its funding bank. Each district Farm Credit bank must annually review all rural community investments held by its affiliated associations.

(6)*Attribution of service corporation investments* . All investments in rural communities that service corporations hold under this section must be attributed to their System institution parents based on the ownership percentage of each bank or association.

(f)*Management of rural community investments* . Before a System institution invests in rural communities, its board of directors must first adopt written policies for managing the institution's rural community investments. Investment management policies must be appropriate for the levels, types, and complexities of each institution's rural community investments. These written policies must comply with requirements of § 615.5133. Investments made under this section that System institutions classify and account for as held-to-maturity securities in accordance with generally accepted accounting principles are exempt from the requirements of paragraph

(f)of § 615.5133. The board of directors must ensure that the institution implements procedures and internal controls to ensure compliance with the board's policies and the regulation. Dated: June 10, 2008. Roland Smith, Secretary, Farm Credit Administration Board. [FR Doc. E8-13382 Filed 6-13-08; 8:45 am] BILLING CODE 6705-01-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 71 [Docket No. FAA-2008-0366; Airspace Docket No. 08-ANM-5] Proposed Establishment of Class E Airspace; Weiser, ID AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed rulemaking. SUMMARY: This action proposes to establish Class E airspace at Weiser Municipal Airport, Weiser, ID. Additional controlled airspace is necessary to accommodate aircraft using a new Area Navigation

(RNAV)Global Positioning System

(GPS)Standard Instrument Approach Procedure

(SIAP)at Weiser Municipal Airport, Weiser, ID. The FAA is proposing this action to enhance the safety and management of aircraft operations at Weiser Municipal Airport, Weiser, ID. DATES: Comments must be received on or before July 31, 2008. ADDRESSES: Send comments on this proposal to the U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue, SE., Washington, DC 20590. Telephone

(202)366-9826. You must identify FAA Docket No. FAA-2008-0366; Airspace Docket No. 08-ANM-5, at the beginning of your comments. You may also submit comments through the Internet at *http://www.regulations.gov* . FOR FURTHER INFORMATION CONTACT: Eldon Taylor, Federal Aviation Administration, Operations Support Group, Western Service Area, 1601 Lind Avenue, SW., Renton, WA 98057; telephone

(425)203-4537. SUPPLEMENTARY INFORMATION: Comments Invited Interested parties are invited to participate in this proposed rulemaking by submitting such written data, views, or arguments, as they may desire. Comments that provide the factual basis supporting the views and suggestions presented are particularly helpful in developing reasoned regulatory decisions on the proposal. Comments are specifically invited on the overall regulatory, aeronautical, economic, environmental, and energy-related aspects of the proposal. Communications should identify both docket numbers (FAA Docket No. FAA 2008-0366 and Airspace Docket No. 08-ANM-5) and be submitted in triplicate to the Docket Management System (see ADDRESSES section for address and phone number). You may also submit comments through the Internet at *http://www.regulations.gov* . Commenters wishing the FAA to acknowledge receipt of their comments on this action must submit with those comments a self-addressed stamped postcard on which the following statement is made: “Comments to FAA Docket No. FAA-2008-0366 and Airspace Docket No. 08-ANM-5”. The postcard will be date/time stamped and returned to the commenter. All communications received on or before the specified closing date for comments will be considered before taking action on the proposed rule. The proposal contained in this action may be changed in light of comments received. All comments submitted will be available for examination in the public docket both before and after the closing date for comments. A report summarizing each substantive public contact with FAA personnel concerned with this rulemaking will be filed in the docket. Availability of NPRM's An electronic copy of this document may be downloaded through the Internet at *http://www.regulations.gov* . Recently published rulemaking documents can also be accessed through the FAA's Web page at *http://www.faa.gov* or the **Federal Register** 's Web page at *http://www.gpoaccess.gov/fr/index.html* . You may review the public docket containing the proposal, any comments received, and any final disposition in person in the Dockets Office (see the ADDRESSES section for the address and phone number) between 9 a.m. and 5 p.m., Monday through Friday, except federal holidays. An informal docket may also be examined during normal business hours at the Northwest Mountain Regional Office of the Federal Aviation Administration, Air Traffic Organization, Western Service Area, Operations Support Group, 1601 Lind Avenue, SW., Renton, WA 98057. Persons interested in being placed on a mailing list for future NPRM's should contact the FAA's Office of Rulemaking,

(202)267-9677, for a copy of Advisory Circular No. 11-2A, Notice of Proposed Rulemaking Distribution System, which describes the application procedure. The Proposal The FAA is proposing an amendment to title 14 Code of Federal Regulations (14 CFR) part 71 by establishing Class E airspace at Weiser Municipal Airport, Weiser, ID. Controlled airspace is necessary to accommodate aircraft using the new RNAV

(GPS)SIAP at Weiser Municipal Airport, Weiser, ID. This action would enhance the safety and management of aircraft operations at Weiser Municipal Airport, Weiser, ID. Class E airspace designations are published in paragraph 6005 of FAA Order 7400.9R, signed August 15, 2007, and effective September 15, 2007, which is incorporated by reference in 14 CFR 71.1. The Class E airspace designation listed in this document will be published subsequently in this Order. The FAA has determined that this proposed regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. Therefore, this proposed regulation:

(1)Is not a “significant regulatory action” under Executive Order 12866;

(2)is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and

(3)does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. Since this is a routine matter that will only affect air traffic procedures and air navigation, it is certified that this proposed rule, when promulgated, would not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. The FAA's authority to issue rules regarding aviation safety is found in title 49 of the U.S. Code subtitle 1, section 106, describes the authority for the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This rulemaking is promulgated under the authority described in subtitle VII, part A, subpart I, section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of the airspace necessary to ensure the safety of aircraft and the efficient use of airspace. This regulation is within the scope of that authority as it establishes additional controlled airspace at Weiser Municipal Airport, Weiser, ID. List of Subjects in 14 CFR Part 71 Airspace, Incorporation by reference, Navigation (air). The Proposed Amendment Accordingly, pursuant to the authority delegated to me, the Federal Aviation Administration proposes to amend 14 CFR part 71 as follows: PART 71—DESIGNATION OF CLASS A, B, C, D, AND E AIRSPACE AREAS; AIR TRAFFIC SERVICE ROUTES; AND REPORTING POINTS 1. The authority citation for 14 CFR part 71 continues to read as follows: Authority: 49 U.S.C. 106(g), 40103, 40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959-1963 Comp., p. 389. § 71.1 [Amended] 2. The incorporation by reference in 14 CFR 71.1 of the FAA Order 7400.9R, Airspace Designations and Reporting Points, signed August 15, 2007, and effective September 15, 2007 is amended as follows: Paragraph 6005 Class E airspace areas extending upward from 700 feet or more above the surface of the earth. ANM ID, E5 Weiser, ID [New] Weiser, Municipal Airport, ID (Lat. 44°12′17″ N, long. 116°57′38″ W) That airspace extending upward from 700 feet above the surface within a 6-mile radius of Weiser Municipal Airport. Issued in Seattle, Washington, on June 9, 2008. Clark Desing, Manager, Operations Support Group, Western Service Area. [FR Doc. E8-13514 Filed 6-13-08; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Part 203 [Docket No. FR-5087-N-04] RIN 2502-AI52 Standards for Mortgagor's Investment in Mortgaged Property: Additional Public Comment Period AGENCY: Office of the Assistant Secretary for Housing—Federal Housing Commissioner, HUD. ACTION: Proposed rule; reopening of comment period. SUMMARY: This document provides additional background information and requests additional public comment for HUD's rulemaking on Standards for Mortgagor's Investment in Mortgaged Property. DATES: *Comment Due Date:* August 15, 2008. ADDRESSES: Interested persons are invited to submit comments regarding this rule to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 Seventh Street, SW., Room 10276, Washington, DC 20410-0500. Communications should refer to the above docket number and title. *Comment by Mail.* Please note that due to security measures at all Federal agencies, submission of comments by mail often results in delayed delivery. *Electronic Submission of Comments.* HUD now accepts comments electronically. Interested persons may now submit comments electronically through the Federal eRulemaking Portal at *http://www.regulations.gov.* HUD *strongly encourages* commenters to submit comments electronically. Electronic submission allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available for public viewing. Commenters should follow the instructions provided at *http://www.regulations.gov* to submit comments electronically. *No Facsimile Comments.* Facsimile

(FAX)comments are not acceptable. In all cases, communications must refer to the docket number and title. *Public Inspection of Public Comments.* All comments and communications submitted will be available, without revision, for inspection and downloading at *http://www.regulations.gov.* Comments are also available for public inspection and copying between 8 a.m. and 5 p.m. weekdays at the Regulations Division. Due to security measures at the HUD Headquarters building, please schedule an appointment to review the comments by calling the Regulations Division at

(202)708-3055 (this is not a toll-free number). FOR FURTHER INFORMATION CONTACT: Margaret Burns, Director, Office of Single Family Program Development, Department of Housing and Urban Development, 451 Seventh Street, SW., Washington, DC 20410; telephone number 202-708-2121 (this is not a toll-free number). Persons with hearing or speech impairments may access this number through TTY by calling the toll-free Federal Information Relay Service at 800-877-8339. SUPPLEMENTARY INFORMATION: With this notice, HUD is republishing, for public comment, a proposed rule that would amend HUD policy concerning downpayment assistance for Federal Housing Administration

(FHA)borrowers. HUD's current policies in connection with downpayment assistance have given rise to a practice known informally as seller-funded downpayment assistance that has resulted in disproportionately high borrower default and claim rates among FHA borrowers. Over time, the rate of defaults, foreclosures, and claims has increased so dramatically that the practice has significantly jeopardized FHA's ability to maintain the solvency, as discussed herein, of its insurance fund and to facilitate the provision of affordable home financing to millions of American families. HUD's proposal, if implemented, will without question exact a major change in its downpayment assistance policy. It would eliminate a practice that has heretofore been allowable and that has been actively engaged in for many years. Even so, the conceptual basis for the change is consistent with a downpayment assistance policy that has been in existence from the inception of the FHA single family insurance program. HUD's current policy disallows downpayment assistance directly from an entity, such as a seller of a home, that would derive a financial benefit from the sale. The basis for this policy is that such an entity, standing to derive a financial benefit from the sales transaction, may promote its own interest in the transaction to the detriment of the buyer. The current policy is aimed at ensuring that downpayment assistance is indeed a gift to the borrower and that it will not ultimately distort the economics of the transaction to the detriment of the borrower and HUD. HUD's proposal to amend its regulation is based on this same premise, and seeks to disallow downpayment assistance from any entity that stands to derive a financial benefit from the sales transaction. The major proposed change to HUD's downpayment assistance policy is that it would apply this prohibition irrespective of whether that assistance is made directly or indirectly to the homebuyer. The data displayed in this notice clearly demonstrates the adverse impact of allowing the current policy to continue. HUD is concerned not only about the practice itself, but also about the consequences of the practice on homebuyers participating in FHA insurance programs and on the FHA insurance fund that is there to serve those homebuyers. A practice simply cannot be tolerated when default rates and claim rates for more than a third of home purchase loans it insures range between 2 and 3 times those applicable to the norm. The counterargument that many people have been helped into homeownership by this practice, even if accepted at face value, pales in light of the damage done to homebuyers who have not been able to retain their homes and to FHA's ability to meet its mission of increasing access to *sustainable* homeownership. Understanding that the current situation is untenable, HUD has grappled with the issue of how to best address the problem over a period of years. This is evidenced in actions, discussed in the text below, that include exploring rulemaking and legislative solutions that did not come to fruition. While HUD will consider alternative measures to eliminating the practice, piecemeal solutions do not cure but only postpone a viable solution, while extending the damage. In essence, borrowers are being harmed and the solution does not lie in spreading the damaging consequences among an even broader universe of borrowers. The FHA insurance fund is teetering on credit insolvency. Such a circumstance is never welcomed, but especially not when the FHA is trying to be a stabilizing force during the worst housing crisis in generations. Therefore, HUD is proposing an action that would advance the interests of the public and is a reasonable exercise of agency discretion. HUD's decision to publish this notice is responsive to court orders issued by the U.S. District Courts for the Eastern District of California, on February 29, 2008, and the District of Columbia, on March 5, 2008. On October 1, 2007, HUD published a final rule entitled “Standards for Mortgagor's Investment in Mortgaged Property” (72 FR 56002). Like the rule reproposed for comment here, that rule sought to eliminate the use of downpayment assistance from financially interested parties in FHA-insured single-family mortgages. The October 1, 2007, final rule was challenged in the U.S. District Court for the District of Columbia and in the U.S. District Court for the Eastern District of California by organizations that provide seller-funded downpayment assistance, as defined herein. On February 29, 2008, the U.S. District Court for the Eastern District of California set aside the final rule and remanded the matter to HUD for further action consistent with its order. *Nehemiah Corporation of America* v. *Jackson, et al.* , No. S-07-2056 (E.D. Cal.). The court found, among other things, that HUD failed forthrightly to explain that the rule reversed its prior practice of allowing seller-funded downpayment assistance ( *Id.* at 19-20) and that HUD failed to respond adequately to certain categories of comments ( *Id.* at 21-24). The court also disqualified then-HUD Secretary Alphonso Jackson from participating in the remanded proceedings. After issuing an order on October 31, 2007, preliminarily enjoining HUD's enforcement of the final rule, on March 5, 2008, the U.S. District Court for the District of Columbia vacated the final rule and also remanded it to HUD for further proceedings consistent with that court's opinion. *Ameridream Inc., et. al.* , v. *Jackson* , No. 07-1752 (D.D.C. March 5, 2008) and *Penobscot Indian Nation, et. al.* , v. *HUD* , No. 07-1282-PLF (D.D.C. March 5, 2008). The court found, among other things, that HUD violated the Administrative Procedure Act by failing to allow comment on critical factual material and by failing to offer a rational explanation for the final rule. *Id.* at 6. The court held that an internal analysis of HUD's loan portfolio referenced only in the final rule constituted critical factual information that, with at least a summary of the specific data and methodology on which the analysis relied, should have been disclosed during the rulemaking proceeding. *Id.* at 11-12. The court also held that HUD's explanation for the rule relied on sources that did not support its conclusions. *Id.* at 18. Pursuant to the courts' orders, this publication provides notice that now former Secretary Jackson, who resigned effective April 18, 2008, has not participated in the further promulgation of the rule proposed on May 11, 2007, entitled “Standards for Mortgagor's Investment in Mortgaged Property” (72 FR 27048). HUD will separately publish a notice vacating the October 1, 2007, final rule. This publication also addresses the courts' concerns by acknowledging that the proposed rule marks a clear departure from HUD's prior practice. With respect to the concern that HUD previously had failed to provide critical factual information and otherwise provided an insufficient rationale for the rule, this notice provides additional explanation and data, including analyses of HUD's loan portfolio and access to the data on which those analyses rely. The Regulatory Flexibility Act section has been revised to address only the impact on entities that would be directly affected by the rule. This notice also reopens the comment period for 60 days for the submission of comments on that additional information and on the May 11, 2007, proposed rule, as revised by the October 1, 2007, rule. At the end of the comment period, HUD will review the comments and determine whether to issue a final rule, and will publish a response to significant comments as appropriate. To address the courts' concern with HUD's response to prior public comments, if HUD decides to issue a final rule, HUD will also provide additional responses to those significant comments submitted in response to the May 11, 2007, Notice of Proposed Rulemaking. If, after reviewing the comments, HUD issues a final rule, it would be effective 180 days from the date of publication with regard to all insured mortgages involving properties for which contracts of sale are dated on or after the effective date. I. The Proposed Rule Section 203(b)(9) of the National Housing Act (12 U.S.C. 1709(b)(9)) requires, for a mortgage to be eligible for insurance by FHA, the mortgagor (with narrow exceptions) to pay on account of the property at least 3 percent of the cost of acquisition. The current implementing regulations at 24 CFR 203.19 are silent about permissible or impermissible sources of the mortgagor's investment, although some sources are specifically permitted under the statute. 1 1 For example, section 203(b)(9) of the National Housing Act permits family members to provide loans to other family members, and permits the mortgagor's downpayment to be paid by a corporation or person other than the mortgagor in certain circumstances, such as when the mortgagor is 60 years of age or older, or when the mortgage covers a housing unit in a homeownership program under the Homeownership and Opportunity Through HOPE Act (Title IV of Pub. L. 101-625, 104 Stat. 4148, approved November 28, 1990). Paragraph 2-10.C. of FHA's underwriting guidelines, HUD Handbook 4155.1, has long provided that the 3 percent cost of acquisition, i.e., the downpayment, may include an “outright gift” to the borrower from relatives, charitable organizations, government entities, and certain others. (HUD Handbook 4155.1 is available at *http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/index.cfm.* ) It further provides, however, that gifts may not be made by any person or entity with an interest in the sale of the property. Such payments are considered self-interested inducements to purchase a particular property rather than true gifts for the borrower's personal investment. In other words, downpayment assistance from those who receive a financial benefit from the sale may promote the sale on any terms, even terms that may be adverse to the sustainability of the borrower's mortgage and homeownership. A disinterested gift of downpayment funds, on the other hand, does not distort the fundamental economics of the transaction and so does not conflict with the borrower's interest in achieving sustainable homeownership. On May 11, 2007, HUD published a proposed rule to do two things: codify standards governing a mortgagor's investment in property with a mortgage insured by FHA, and specify prohibited sources for a mortgagor's investment. Specifically, the proposed rule would have codified HUD's longstanding practice of allowing a mortgagor's investment to be derived from gifts by family members and certain organizations, but not from gifts by sellers or other persons that financially benefit from the transaction. It had also been HUD's practice to permit a mortgagor's investment to be derived from funds provided by charitable organizations that were ultimately reimbursed directly or indirectly by sellers of the properties involved in the transactions. The May 11, 2007, proposed rule marked a clear departure from this last-noted practice. The rule would have established that a prohibited source of downpayment assistance is a payment that consists, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:

(1)The seller, or any other person or entity that financially benefits from the transaction; or

(2)any third party or entity that is reimbursed directly or indirectly by any of the parties listed in clause (1). Throughout this preamble, such a third-party payment as described in clause

(2)is referred to as “seller-funded downpayment assistance” (SFDPA). HUD concluded that this practice permits the seller or other party that financially benefits from the transaction to accomplish indirectly what could not be done directly. For example, when funds are advanced to the buyer by a downpayment assistance provider that is reimbursed by the seller, there is a *quid pro quo* between the homebuyer's purchase of the property and the seller's “contribution” to the downpayment assistance provider. This scheme facilitates the sale at terms potentially more favorable to the seller and, because funds are fungible, it is reasonable to conclude that the donor's funds are the equivalent of the seller's funds. Viewed in this way, it becomes apparent that a prohibited inducement to purchase is present in these transactions, and HUD has concluded that such payments amount to an impermissible gift provided by a person or entity that financially benefits from the transaction. In a transaction involving SFDPA, both the seller, who is the ultimate source of the payment, and the entity that funnels or advances the payment for the seller to the homebuyer (and receives reimbursement and a fee from the seller for its role in the transaction) have an interest in the sale of the property that makes their payments an impermissible source of the buyer's equity investment. HUD's conclusion is reinforced by a report of the Government Accountability Office (GAO), Report No. 06-24, Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance (November 2005) (hereinafter, November 2005 GAO Report). At the request of Congress, GAO examined the trends in the use of downpayment assistance with FHA-insured loans, its impact on purchase transactions and house prices, and how it influenced the performance of FHA-insured loans. GAO found that downpayment assistance from seller-funded entities alters the structure of the purchase transaction in important ways. First, it creates an indirect funding stream from property sellers to homebuyers that does not exist in other transactions, even those involving some other type of downpayment assistance. Second, property sellers who provided downpayment assistance through nonprofit organizations often raised the sales price of the homes involved in order to recover the required payments that went to the organizations. GAO's analyses of empirical data showed that FHA-insured homes bought with seller-funded downpayment assistance appraised at and sold for higher prices than comparable homes bought without such assistance, resulting in larger loans for the same collateral and higher effective loan-to-value

(LTV)ratios. That is, homebuyers had less equity in the transaction than would otherwise be the case. 2 2 November 2005 GAO Report, pp. 3-4. This report can be found at *http://www.gao.gov/new.items/d0624.pdf* . The original 60-day comment period provided in the May 11, 2007, proposed rule was extended by notice (72 FR 37500; July 10, 2007) for an additional 30 days. When the public comment period ended on August 10, 2007, HUD had received approximately 15,000 public comments on the proposed rule, mostly brief statements in similar format and wording that opposed the rule and urged HUD not to eliminate downpayment assistance in connection with FHA-insured mortgages. On October 1, 2007, HUD promulgated the rule, with a few clarifying revisions, as a final rule to be effective October 31, 2007. The October 1, 2007, rule clarified that a tribal government or a tribally designated housing entity (TDHE), as defined at 25 U.S.C. 4103(21), is a permissible source of downpayment assistance if prerequisites in the rule were satisfied, and also more closely aligned the description of tax-exempt charitable organizations with the description used by the Internal Revenue Service

(IRS)for such organizations. This rule never went into effect, however, since it was enjoined and then vacated by the courts. II. Historical Policy Regarding Seller-Funded Downpayment Assistance The issue of SFDPA came to HUD's attention in the late 1990s. When this funding scheme first came into being, some local HUD offices approved mortgages with SFDPA for FHA insurance, and other HUD offices did not. As a result, in 1997, a provider of this type of assistance brought a lawsuit against HUD ( *Nehemiah Progressive Housing Development Corporation* v. *Cuomo, et al.* , No. S-97-2311-GEB/PAN (E.D. Cal.)) seeking consistent treatment. That suit was settled when the plaintiff's status was confirmed as a tax-exempt charitable organization under Internal Revenue Code

(IRC)section 501(c)(3), a permissible source of assistance. HUD also acknowledged that based upon the program-specific information accompanying the plaintiff's submission to the IRS, the program complied with HUD's regulations and guidance pertaining to the source of funds for the borrowers' downpayments. Although downpayment assistance from charitable organizations is permitted, HUD continued to have concerns where the funds provided by an organization to the homebuyer were reimbursed by the seller in the transaction when the seller made a contribution of funds to the charitable organization, often after loan closing. HUD addressed the subject of prohibited sources of downpayment assistance in a 1999 proposed rule. (See HUD's proposed rule published on September 14, 1999, 64 FR 49956.) In 2001, HUD withdrew the 1999 proposed rule, which had received a large number of public comments critical of the proposal. (See January 12, 2001, notice of withdrawal of proposed rule at 66 FR 2851.) At the time, the volume of loans with such assistance and their potential impact were small. Also, because the payment to the buyers did not come directly from the sellers, it was not clear that inducements to purchase were present in the transactions. Moreover, while FHA had serious concerns about SFDPA, it lacked the historical data to substantiate its adverse effects. By 2003, with the seller-funded downpayment assistance business growing exponentially, FHA had data tending to show that the performance of the loans made to borrowers relying on SFDPA was poor and that the program flaws could not be addressed with underwriting changes. FHA determined that the most feasible and appropriate solution was to create a new FHA insurance product to serve consumers who were unable to save funds for a downpayment, which would obviate the need for seller-funded downpayment assistance. In early 2004, a bill was introduced in Congress that would provide FHA with authority to insure a 100 percent financing product. 3 At the same time, FHA commissioned an independent research firm, Concentrance Consulting Group, Inc., to conduct a comprehensive examination of downpayment gift programs administered by nonprofit organizations. The report was the culmination of a 10-month effort, beginning in January 2004, to understand the influence of seller-funded nonprofit downpayment assistance on FHA-insured home loans. The study involved travel to 10 cities and interviews of more than 400 persons involved in mortgage transactions—from homebuyers and sellers to realtors, appraisers, underwriters, loan officers, builders, and downpayment assistance providers. Published on March 1, 2005, the report focused on the operational aspects of the programs in an effort to understand the financial relationships between the various parties involved. It highlighted the harmful features of the programs and concluded that the programs create unsustainable homeownership arrangements. 4 The report served as the basis for FHA's strong push for new legislative authority to offer a 100 percent financing option to borrowers who might otherwise rely on a risky SFDPA program. 3 See H.R. 3755, Zero Downpayment Act of 2004, at *http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_bills&docid=f:h3755ih.txt.pdf.* 4 *An Examination of Downpayment Gift Programs Administered by Non-Profit Organizations,* Final Report, HUD Contract C-OPC-22550/M0001, March 1, 2005. Available at: *http://www.hud.gov/offices/hsg/comp/rpts/dpassist/conmenu.cfm.* In June 2005, when Congress introduced another piece of Zero Down legislation, H.R. 3043, 5 a reformulation of the previous bill, HUD supported the bill because an FHA Zero Down product would be a more affordable, yet still financially sound, alternative for families without savings for a downpayment. 6 5 See H.R. 3043, Zero Downpayment Pilot Program Act of 2005, at *http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:h3043ih.txt.pdf.* 6 An FHA zero downpayment product would not pose the credit risks associated with SFDPA, for a number of reasons. First, homebuyers would understand upfront that they are buying a home with no initial equity and would have a realistic view of their options for resale. Also, underwriting requirements and insurance pricing are more easily developed and enforced when tied to a loan product than when tied to variable downpayment sources. In addition, the zero downpayment option is not tied to a particular property whose seller participates in an SFDPA program so that homebuyers can shop and negotiate with any number of sellers with the same bargaining power as a buyer with a true equity investment, which would also help prevent the concentration of 100 percent LTV loans in weak housing markets. Also in 2005, the research arm of Congress, GAO, produced two reports concerning the risks associated with various proposed and existing FHA insurance products, including loans with zero downpayment and those with SFDPA. 7 HUD agrees with the court, in *Ameridream, Inc.* , v. *Jackson* and *Penobscot Indian Nation* v. *HUD* , that the first of these two reports (the February 2005 report discussing proposed FHA insurance products) provides little meaningful support for the current rule, which addresses the risks associated with SFDPA. However, the November 2005 GAO Report directly addressed the risks associated with loans with SFDPA and represents independent corroboration of the findings of HUD's internal data analyses and the Concentrance study. 7 See Report No. 05-194, Mortgage Financing: Actions Needed to Help FHA Manage Risks from New Mortgage Loan Products (February 2005); and November 2005 GAO Report. The November 2005 GAO Report found that the problems associated with SFDPA loans (e.g., home price inflation and risk of defaults) are grave enough to merit an outright ban on SFDPA. The FHA Commissioner responded to the GAO's draft report in a letter dated October 25, 2005, which is incorporated in the final published report. The Commissioner acknowledged that GAO's findings confirmed FHA's own analysis and those of the Concentrance study, but expressed the agency's reasons for not pursuing GAO's recommended ban on SFDPA. The Commissioner expressed the agency's desire to provide safer financing without having to exclude traditional FHA borrowers, who are often in need of downpayment funds, and pointed to FHA's pursuit of a zero downpayment insurance product and higher insurance premiums as better alternatives to achieve those goals than banning SFDPA would be. The response to GAO also reiterated a legal opinion of HUD's Office of General Counsel that the structure and the timing of payments in SFDPA transactions did not violate the letter of HUD's underwriting guidelines. 8 8 See November 2005 GAO Report, pp. 89-91. For the reasons noted in the October 25, 2005, response letter to GAO, HUD continued to tolerate SFDPA programs, even though HUD had an ongoing concern about the risks inherent in SFDPA-generated loans, especially given the ever-increasing proportion of these loans in FHA's portfolio. In May 2006, the IRS issued Revenue Ruling 2006-27, which analyzed a model transaction typical of SFDPA programs and explained that organizations participating in such programs do not qualify as organizations described in IRC section 501(c)(3), because the assistance involved not a downpayment gift, but rather, “represents a rebate or purchase price reduction.” The Revenue Ruling stated that in these transactions, the so-called downpayment gifts “do not proceed from detached and disinterested generosity, but are in response to an anticipated economic benefit, namely facilitating the sale of a seller's home.” HUD acknowledges the court's finding in *Ameridream, Inc.,* v. *Jackson* and *Penobscot Indian Nation* v. *HUD* that IRS Revenue Ruling 2006-27 on its face does not prove that seller-funded downpayment assistance loans are inherently and unacceptably risky. Nevertheless, the Revenue Ruling reinforced HUD's concerns with these transactions through its determination that they do not involve a gift, but a *quid pro quo* . The Revenue Ruling also highlighted an inconsistency in HUD's prior interpretation of these transactions with those of other Executive Branch agencies. HUD did not take regulatory action at any point in time from 1999 through 2006, because the agency was anticipating a legislative solution to the problem. During that time frame, the portion of borrowers relying on SFDPA grew to represent over a third of all home purchase loans insured by FHA. As a result of the growth in the business and the poor performance, these loans have increased risk to FHA's fiscal soundness, a risk that threatens the opportunities of all (not just homeowners in need of downpayment assistance) to obtain single family FHA-insured financing. Because no legislative solution has yet materialized, HUD determined that the most prudent option was, and remains, to prohibit SFDPA through the rule that HUD initially proposed on May 11, 2007. III. HUD's Analysis of Its Loan Portfolio Data A. HUD's Database HUD, using information submitted by lenders, regularly monitors the performance of FHA-insured loans. Since the mid-1990s, FHA has maintained a Single Family Data Warehouse (SFDW), where data from its various program systems are uploaded on a monthly basis. At the present time, the SFDW contains 34,000,000 records, each capturing the characteristics and performance of a loan insured by FHA. Because each FHA program system uses the same case number for each insured loan, the SFDW is able to link more than 400 fields containing borrower demographic and loan application, origination, termination, and recovery data in one database. These data are used by an independent contractor to assess the performance of insured loans for the annual actuarial review of the Mutual Mortgage Insurance Fund (MMIF or Fund), FHA's largest insurance fund. These data are also used by HUD staff to calculate FHA's mortgage insurance liability for FHA's annual financial statements and to estimate credit subsidy for HUD's budget. For this reason, the data are audited by the independent auditor hired by HUD's Office of Inspector General and are closely reviewed by the Office of Management and Budget (OMB). For the single-family portfolio, HUD's monitoring includes tracking performance by source of downpayment funds, such as the borrower's own funds, or funds provided by family members, government agencies, or nonprofit organizations, as reported to HUD by lenders. The “nonprofit” category source of downpayment funds consists of entities that hold the status of charitable organizations. Analysis of the data, however, indicates, by identifying the entities that provide the downpayment assistance, that more than 95 percent of the downpayment assistance provided under the “nonprofit” category is seller-funded. 9 Therefore, the term “nonprofit,” as used in this preamble discussion and tables, refers to organizations that hold the status of charitable organizations and provided SFDPA. Though HUD does not publish information on performance by downpayment source in formal reports, the data are regularly reviewed internally by HUD, and they have been made available at various times to GAO, OMB, and Congress. As demonstrated by the discussion in this preamble and the related tables included in the Appendix to this publication, loan performance data maintained by HUD on FHA-insured mortgages has provided a consistent story over time: Loans with nonprofit downpayment assistance, i.e., SFDPA, perform much worse than do other single family loans insured by FHA. 9 This comports with the November 2005 GAO Report indicating that about 93 percent of assistance from nonprofit organizations was funded by sellers. See November 2005 GAO Report, p. 14. To give the public the opportunity to examine and comment fully on HUD's data analyses, HUD is making the underlying data available online during this additional comment period. The data files provide loan-level records that will enable interested parties to explore issues regarding downpayment assistance provided to homebuyers utilizing FHA insured mortgage financing. The files are compressed using standard protocols that should be readable by a wide variety of software. The particular software product used to create these files is WinZip 9.0 (SR-1). The URL for the FHA Purchase Loan Endorsement Data Web page is: *http://www.hud.gov/offices/hsg/comp/rpts/pled/pledmenu.cfm.* B. Increase of Seller-Funded Downpayment Assistance Loans The substantial increase over time of loans with downpayment assistance from nonprofit groups (nonprofit-assisted loans) in the FHA-insured single-family portfolio has dramatically changed the fundamental insurance risk of that portfolio. As can be seen in Table 1 in the Appendix to this rule, these loans in Fiscal Year

(FY)2007 made up more than 35 percent of all home purchase loans insured by FHA. In FY 2000, they were less than 2 percent of FHA's single family purchase loan activity. As the discussion and data presented below demonstrate, the substantial increase over time of nonprofit-assisted loans has created a financially unsustainable situation for the FHA insurance fund. Table 1, as noted, and all the other Tables referenced in this preamble discussion appear in the Appendix at the end of this document. C. Default and Claim Rate Comparisons for Loans With Nonprofit Downpayment Assistance 1. Default Rates Tables 2, 3, and 4 provide a summary of default rates on home purchase loans insured by FHA. Default is measured here as a loan that is at least 90 days in arrears. Since the 1980s, loan servicers have reported to HUD all 90-day default events for FHA-insured loans. Activity on each default episode is reported to HUD until there is a final resolution, be that a cure of the default, a foreclosure, or some other outcome. 10 Three summary statistics are used here—the early default rate, the ever-defaulted rate, and the current default rate. Each one is calculated separately by source of downpayment funds used to purchase the home, and shown by year of insurance endorsement (i.e., an “insurance cohort”). The left half of each table lists the calculated default rates, and the right half provides a direct comparison of the performance of loans receiving each type of downpayment assistance with the performance of loans in which borrowers use their own funds for the downpayment. The comparisons in each table show that nonprofit downpayment-assisted loans have the highest default rates among all FHA-insured home-purchase loans. 10 Since October 2006, HUD has collected information on all loan defaults, starting at 30-days delinquency. Ninety-day delinquencies, however, are an industry standard for defining the point at which foreclosure (and insurance claim payment) become a significant concern. Therefore, HUD analysis of the potential risk of insurance claim payments continues to use 90-day delinquency as the defining metric of default. The first default statistic, shown in Table 2, is the early default rate. It measures the share of loans that experience a (90-day) default within the first 24 months of scheduled mortgage payments, and is calculated by dividing the number of such loans by the total number of insured loans in an insurance cohort. HUD uses this statistic as a first indication of the level of claim payments that might be expected from any given insurance cohort. The ratios found on the right-hand side of Table 2 are calculated by dividing the early-default rate for each type of downpayment assistance by the default rate for loans with borrower-funded downpayments, within each insurance cohort. The early default rate of loans with nonprofit downpayment assistance has consistently been more than twice the rate found on loans with borrower-funded downpayments, with the average multiple across the FY 2000-2005 period being 2.43. The early default rate for loans with nonprofit downpayment assistance is also nearly twice that of loans with downpayments provided by a family member. These early default rate comparisons are a leading indicator of eventual foreclosure and claim rate patterns, as will be seen in Tables 5 and 6. Loans with nonprofit downpayment assistance have elevated foreclosure and claim rates commensurate with their elevated early default rates. The second default statistic, found in Table 3, is the ever-defaulted rate. This measures the share of borrowers who have ever had a delinquency that extended beyond 90 days. It is calculated by dividing the number of borrowers with at least one (90-day) default since loan origination by the number of insured loans in an insurance cohort. The ratios on the right-hand side of Table 3 are calculated like those in Table 2. The ratio of the ever-defaulted rate for nonprofit downpayment-assisted homebuyers, to that of homebuyers with FHA-insured loans using their own downpayment funds, is at or above 2.00 for all insurance cohorts since FY 2003 and close to that mark for FY 2002. The FY 2007 insurance cohort shows the same pattern as have earlier insurance cohorts. The second default statistic shows that, for loans endorsed from 2000 to 2005, between approximately 24 and 29 percent of loans with seller-funded assistance had experienced a 90-day delinquency, compared to approximately 11 to 16 percent of loans without downpayment assistance. This default statistic is consistent with GAO's findings in 2005 that loans with downpayment assistance from seller-funded nonprofit organizations do not perform as well as loans with downpayment assistance from other sources. GAO used samples of FHA-insured, single family purchase money loans endorsed in 2000, 2001, and 2002 and concluded that between 22 and 28 percent of loans with seller-funded assistance had experienced a 90-day delinquency, compared to 11 to 16 percent of loans with downpayment assistance from other sources and 8 to 12 percent of loans without downpayment assistance. 11 11 November 2005 GAO Report, pp. 26-27. The last default statistic shown in the Appendix is the current default rate (Table 4). That measure is a snapshot at a point in time that focuses on all loans still active on a given date. The date used for this snapshot is February 29, 2008. The current default rate is computed by dividing the number of loans in default on that date by the number of loans active on the same date in an insurance cohort. The “Nonprofit” column in the right-hand side (“Ratios* * *”) of Table 4 shows that the share of loans with nonprofit downpayment assistance that were in default on the snapshot date was near or above two times that of home-purchase loans with borrower-funded downpayments for all insurance cohorts since FY 2001. One will notice that the current-default-rate ratios for older insurance cohorts are somewhat smaller than those for new insurance cohorts. This difference is primarily due to the fact that the weakest loans in those older insurance cohorts have already gone to foreclosure and claim, leaving fewer weak loans to default in the present. When the entire nonprofit downpayment assistance portfolio is compared to the entire borrower-funded downpayment assistance portfolio, across all insurance cohort years, the default-rate ratio on February 29, 2008, was 1.80. The actual default rate for loans with nonprofit downpayment assistance shown on the left-hand side of Table 4 was 11.19 percent and that for borrower-funded purchase loans was 6.22 percent. 2. Historical Claim Rates Table 5 focuses on the insurance claim-payment experience of FHA, comparing home purchase loans by source of downpayment funds and by year of insurance cohort. Claims generally are paid by FHA to lenders after a lender acquires title to a property, generally through a foreclosure process. 12 The metric used in the left-hand panel of Table 5 is the to-date claim rate, which measures the number of insurance claims paid as a percentage of all loans insured by FHA, as of a given date. The date used here is February 29, 2008. Insurance cohorts that are older will have had more time for borrowers whose defaults result in foreclosure and an FHA insurance claim. Consequently, to-date claim rates for the FY 2000 and FY 2001 insurance cohorts are greater than those for more recent insurance cohorts. 12 The lender/servicer bids at the foreclosure auction. Once the foreclosure has been completed, the lender/servicer, as the winning bidder, usually transfers title of the property to HUD. FHA then pays an insurance claim to the lender upon conveyance of acceptable title to HUD. The data in Table 5 indicate that when nonprofit downpayment assistance is provided, borrowers, as a group, are less likely to sustain the financial responsibilities of a home mortgage than are borrowers receiving downpayment funds from other sources. With to-date claim rates that exceed three times those of borrower-funded purchase loans, the insurance risk is higher than FHA has ever considered acceptable. Such high claim rates cause significant harm to families who are displaced by foreclosures, and they also have the potential of destabilizing neighborhoods. 3. Projected Lifetime Claim Rates Each year, HUD hires an independent contractor to perform a full actuarial study of its single family insured portfolio. That study, which is required by law, covers all insurance programs under the umbrella of the MMIF. The Fund encompasses around 90 percent of all FHA single family insurance activity. Loans not included are those for condominiums and section 203(k) purchase-and-rehabilitation loans, along with some minor targeted programs. 13 The formal Actuarial Review published from the actuarial study measures to-date performance of each insurance cohort, and provides projections of ultimate claim rates over the 30-year life of each insurance cohort. That Actuarial Review is forwarded to Congress each year. The work of the independent contractor is also scrutinized each year by independent auditors hired by the Office of the Inspector General at HUD. 13 These other loans are insured under the General and the Special Risk Insurance Funds. For the last 3 years, the actuarial study contractor has identified nonprofit downpayment assistance as adding an especially high risk factor to the FHA portfolio. First, in the FY 2005 Actuarial Review (available at *http://www.hud.gov/offices/hsg/comp/rpts/actr/2005actr.cfm* ), statistical results were presented that showed the additional risk of claim in any given calendar quarter arising from various forms of downpayment assistance. The additional risk posed by nonprofit downpayment assistance was measured as three times that from family downpayment assistance, and 1.5 times that from government assistance. 14 The FY 2006 Actuarial Review (available at *http://www.hud.gov/offices/hsg/comp/rpts/actr/2006actr.cfm* ) alerted HUD that continued high concentrations of business coming from loans with nonprofit downpayment assistance would cause FHA to suffer net losses. 15 14 See Exhibit A-2 on p. A-19 of the FY 2005 Actuarial Review. 15 See discussion on p. 49 of the FY 2006 Actuarial Review, and Exhibit V-5 on p. 50. The FY 2007 actuarial study and Actuarial Review provide a new level of analysis on expected claim rates over the life of FHA-insured loans. Since the statistical model that predicts claims now includes a factor for borrower credit scores, the actuarial study contractor was able to provide HUD with projections of lifetime claim rates by cross-sections of credit-score and loan-to-value

(LTV)classes. Table 6 shows such cross-sections for loans insured in 3 recent years, FY 2005, FY 2006, and FY 2007. High-LTV loans are separated into those with nonprofit downpayment assistance, and those without. Only the high-LTV group (above 95% LTV) needs this separation because property sellers that participate in, and contribute to the nonprofit programs, generally provide only the minimum required 3 percent downpayment. The ratio of projected claim rates on nonprofit assisted loans to other above-95%-LTV loans is presented in the last column of Table 6. Comparisons found in Table 6 show smaller differences in lifetime claim rates than might be inferred from differences in the to-date claim rates presented in Table 5. One reason for the difference is the comparison in Table 6 is made only on high-LTV loans, which have higher claim rates than do lower-LTV loans. Comparisons in Tables 2, 3, 4, and 5, however, are across all LTV ranges. Nevertheless, for all three insurance cohorts shown in Table 6, loans with nonprofit downpayment assistance are more than twice as likely to go to foreclosure and FHA insurance claim over their lifetime as all other high-LTV loans. As claim rates rise for all loans insured during housing market downturns, such as FY 2007, the high insurance claim ratio for loans with nonprofit downpayment assistance and the large share of loans utilizing those downpayment assistance programs present a severe financial challenge to FHA. The expected lifetime claim rate on loans with nonprofit downpayment assistance in the FY 2005 insurance cohort is close to 17 percent, and for FY 2007 is above 28 percent. The 16.79 percent for FY 2005 contrasts with a 6.94 percent expected lifetime claim rate for other high-LTV loans insured during the same period. FY 2007 is a particularly challenging year as it starts with a decline in home prices across much of the nation. The 28.49 percent expected claim rate on loans with nonprofit downpayment assistance insured in FY 2007 contrasts with a 12.25 percent expected claim rate on all other high-LTV loans. It is not possible under current law to charge insurance premiums in an amount sufficient to cover this increased insurance claim risk, even if the maximum allowable insurance premiums were charged to all FHA-insured homebuyers. 16 16 See mortgage insurance premium rates at 12 U.S.C. 1709(c)(2). The claim rates shown in Table 6 are under the base case economic scenario of August 2007, which relied upon forecasts of house prices and interest rates provided by Global Insight Inc. Since that time, housing market conditions have deteriorated more than was expected, and the projected claim rates on the FY 2005 to FY 2007 insurance cohorts are now even higher than those shown in Table 6. Because the expected claim rates on loans with nonprofit downpayment assistance are well above the rate that can be supported by reasonable premium charges in normal economic conditions, the financial problems caused by these loans are only compounded during housing market downturns. 4. Higher Losses on Claims An additional problem with loans with nonprofit downpayment assistance is that homes purchased using this form of assistance are often purchased at inflated prices. The price increase is made, or the seller refrains from accepting a lower price that would have been acceptable in an arms-length transaction, so that the seller can receive the same net proceeds from selling to the homebuyer needing downpayment assistance, as the seller would receive from a buyer without downpayment assistance. This business practice was confirmed in a field study performed for HUD by an independent contractor, and statistically validated in research performed by the GAO. 17 17 The contractor study is that of Concentrance Consulting Group, Inc., *An Examination of Downpayment Gift Programs Administered by Non-Profit Organizations* , ibid. The GAO study is in the November 2005 GAO Report. In the November 2005 GAO Report, the GAO analyzed “a sample of FHA-insured loans settled in March 2005,” and found that “for loans with seller-funded down payment assistance, the appraised value and sales price were higher as compared with loans without such assistance.” 18 The March 2005 study by Concentrance Consulting Group, commissioned by HUD, interviewed more than 400 persons involved in the mortgage industry and corroborates GAO's assessment. The Concentrance study “found overwhelming evidence that the cost of the seller-funded down payment assistance is added to the sales price, which then increases the allowable FHA loan amount and eliminates any borrower equity in the property.” 19 Such an inflated sale price does not represent the true value of the property and leads to a higher mortgage amount. 18 November 2005 GAO Report, pp. 22-23. 19 Concentrance Consulting Group Report, p 6. The effect on FHA, in addition to an increase in the amount of insurance claim payments, is increased net losses after disposing of foreclosed properties. Not only do loans with nonprofit assistance have significantly elevated insurance claim rates, 76 percent greater according to the same GAO study, 20 but FHA ultimately suffers greater losses on those claims. The FY 2006 Actuarial Review documents differentiate net loss rates—as a percentage of the unpaid loan balance at the time of default and claim by loans having or not having nonprofit downpayment assistance (see Appendix B of the FY 2006 Actuarial Review). 20 November 2005 GAO Report, p. 32. D. FHA Insurance Fund Solvency FHA program data is used by an independent contractor to conduct the annual actuarial review of the MMIF, FHA's largest insurance fund. MMIF programs are required to be self-supporting and to generate sufficient receipts to fund a Capital Reserve Account in an amount equal to at least 2 percent of its outstanding insurance-in-force. (See 12 U.S.C. 1711(f).) This Account provides a vehicle for recording the balance of payments between MMIF programs and the federal budget over time. Growth of the Reserve Account occurs as MMIF programs generate budget receipts and as Account balances earn interest over time. Reserve Account balances fall when HUD needs to fund unexpected claims on outstanding loan guarantees. In its 74-year history, the MMIF has always been self-supporting and never required additional appropriations beyond its initial capitalization in 1934, which was paid back by FHA decades ago. All funds associated with MMIF insurance program operations—including premium collections, claim payments, and proceeds from the sale of foreclosed properties—flow through a separate MMIF Financing Account. In accordance with the Federal Credit Reform Act of 1990, 2 U.S.C. 661, *et seq.* , which requires agencies to estimate the long-term cost to the government of guaranteeing credit (referred to as “the subsidy cost”), FHA must maintain a balance in the MMIF Financing Account for each insurance cohort (i.e., the loans endorsed in a single fiscal year) sufficient to cover the net cash outflows projected for the insurance cohort over its lifetime. Each year, in the course of preparing the President's Budget, FHA estimates the subsidy cost for the upcoming insurance cohort. As long as expected premium revenues outweigh expected claim costs, HUD can fund the required Financing Account balance and provide net budget receipts that help build Capital Reserve Account balances. Were a situation to arise in which expected premium revenues could not cover expected claim costs, then FHA programs would require a budget appropriation from Congress to help fund the required Financing Account balance. In order for FHA MMIF programs to both maintain required capital reserves and avoid budgetary appropriations, they must be managed in such a way that generates what is called a “negative credit subsidy rate.” The credit subsidy rate

(CSR)is the ratio of expected budget outlays or receipts to expected loan volumes. The CSR also is the government's estimated long-term cost, excluding administrative costs, as a percentage of the amount of loans guaranteed. The rate is calculated on a net present value basis over the life of the loans guaranteed in a given fiscal year. The CSR is thus a helpful summary measure of actuarial soundness. HUD currently has an internal target for a normal-economy CSR of around −1.00 percent for MMIF programs in an insurance cohort. The negative sign means negative outlays, which translates into positive budget receipts. Having such a target provides a cushion for economic downturns, minimizing the chance that the CSR could actually turn positive. Such a target, however, is impossible to achieve today with the resource drain caused by SFDPA. Taken as a whole, loans with SFDPA have a CSR of over +6.00 percent, which means that supporting them costs the FHA program 6 cents for every dollar of these insured loans. Current premium rates cannot cover the cost of such a large CSR for these downpayment-assisted loans. HUD is at the point where continuing to support loans with SFDPA will require budget appropriations for all of the FHA MMIF loans. On the basis of the FY 2007 independent Actuarial Review, FHA has estimated its credit subsidy requirements for FY 2009. FHA has concluded that if it continued to charge the same 1.5 percent up-front and 50 basis point annual insurance premiums, and continued to serve the same mix of borrowers it served in FY 2007, including the same share using SFDPA, the MMIF program would have a positive credit subsidy rate of 1.12 percent. Assuming estimated loan-guarantee obligations of $110 billion, the MMIF program would require a credit subsidy appropriation of $1.4 billion in order to begin operations in FY 2009. To ward off this eventuality, HUD is proposing to eliminate SFDPA. E. Sustainable Cross-Subsidization The data presented above in HUD's analysis of its loan portfolio shows the poor performance of loans with SFDPA relative to loans without such assistance. Due to this poor performance, borrowers with SFDPA require an unsustainable level of premium cross-subsidies from other borrowers. Any attempt to raise premiums to help to cover part of that cost could result in other borrowers being discouraged from using financing with FHA mortgage insurance by the high relative cost to them of providing cross-subsidies to the seller-funded portfolio. This phenomenon is known as “adverse selection” and results in the need to continually raise premiums when the pool of cross-subsidizing borrowers declines with each round of price/premium increases. By proposing to eliminate FHA insurance on loans with SFDPA, FHA is endeavoring to reestablish a sustainable level of cross-subsidization in its portfolio so that it can serve more homebuyers, including first-time and minority homebuyers, without the continual need for appropriations. Avoiding a general premium-rate increase is all the more important because lower-income borrowers, who benefit most from FHA's MMIF program, are concentrated in its *less* risky credit score and loan-to-value categories of borrowers, i.e., the categories that would be discouraged from using the program by higher premium rates. See Table 7. Table 8 shows the distribution of FHA-insured purchase loans in FY 2007, over FICO 21 and loan-to-value ratio categories. Purchase loans with SFDPA appear in the SFDPA row. In FY 2007, such homebuyers constituted over 33 percent of FHA-insured homebuyers (see Table 8). 21 FICO is a credit score developed by the Fair Isaac Corporation and is an acronym for it. Table 9 shows the expected lifetime claim rates for purchase loans in each of the FICO and LTV categories defined in Table 8. Expected claim rates increase with increases in LTV and with decreases in FICO scores. That is, they rise as one moves from the upper left to the lower right of the table. Some of these groups of borrowers have excessively high claim rates—above 25 percent. HUD has determined that such high rates are incompatible with homeownership sustainability. In the worst case, borrowers with SFDPA who have FICO scores below 500 have expected claim rates of 61.4 percent. While these borrowers constituted only 0.6 percent of all purchase loans endorsed in FY 2007 (see Table 8), for all homebuyers with SFDPA, the weighted average expected claim rate was over 28 percent. Even a small number of borrowers with very high expected claim rates places a substantial burden on the remaining borrowers who must provide premium revenues sufficient to cover losses incurred on the high claim-rate group. Table 10 shows credit subsidy rates calculated for loans in each FICO and LTV grouping. It shows that credit subsidy rates for different categories of borrowers vary between −2.95 percent and +20.41 percent. A credit subsidy rate of −2.0 percent generates $2,000 in receipts on a $100,000 loan and $4,000 on a $200,000 loan. On the other hand, a credit subsidy rate of +20.4 percent requires $20,400 in subsidies—from some combination of higher premiums on all borrowers and direct budget appropriations—for a $100,000 loan and $40,800 in subsidies for a $200,000 loan. With such high positive credit subsidy requirements, too many borrowers with good credit are needed to offset the cost of higher-risk, and frequently higher-income, borrowers. Under current law, FHA is prevented from raising up-front premiums above 2.25 percent or annual premiums above 55 basis points. (See 12 U.S.C. 1709(c)(2).) Nevertheless, one might ask whether it would be possible to charge sufficient premiums for loans with SFDPA so that they would not require cross-subsidization. Table 11 shows break-even up-front and annual premiums for SFDPA loans by FICO score category. Except for borrowers with FICO scores greater than 680, up-front and annual premiums would have to be raised to very high levels for example, 5.56 percent upfront and 0.55 percent annually for borrowers with FICO scores between 640 and 680, and 12.09 percent up-front and 2.0 percent annually for borrowers with FICO scores between 500 and 560. Therefore, under the current law, it is not possible to fully offset the risk of SFDPA simply by raising premiums. Even if there were no statutory cap on premium rates charged by FHA, however, it is unlikely that borrowers would opt for an FHA-insured mortgage if the insurance premiums were raised as high as needed to ensure the sustainability of the insurance fund in a scenario where SFDPA is allowed to continue. The large up-front premiums alone, when added to the initial loan balance, would increase expected claim rates even more, as borrowers could have to wait many years before they could sell their properties free-and-clear. Therefore, raising premium rates to extraordinary levels would not be a viable solution, even if the Congress were to authorize such. IV. Downpayment Assistance From Nonprofits or Any Other Sources—Financial Benefit Prohibited Although the data and discussion above demonstrating the negative default, claim, and other adverse effects of SFDPA are focused on nonprofit organizations, the rule, if implemented, would have broader application. It would prohibit a mortgagor's required cash investment from consisting, in whole or part, of funds provided by the seller, or any other person or entity that financially benefits from the transaction, or any third party or entity reimbursed by the seller or other person or entity that financially benefits from the transaction. HUD has determined that this broader prohibition is appropriate and justified, as discussed below. HUD is not singling out nonprofit organizations in proposing to prohibit SFDPA because the same scheme of funneling or advancing funds for the seller, through an intermediary, to the homebuyer can be accomplished using any person or entity as the intermediary or using any number or layers of intermediaries. HUD's rule would apply to all such transactions. Whenever the funds for the homebuyer's required investment in the property are provided by a party that financially benefits from the sale of the property, the transaction is distorted by the provider's interest in inducing a purchase on any terms, in conflict with the borrower's and FHA's interest in achieving sustainable homeownership through a sustainable mortgage. This conflict is not abated when such funds are provided by an intermediary reimbursed by the party that financially benefits. It is present whether the seller provides the funds directly to the homebuyer or indirectly through an intermediary to the homebuyer. Further, when the source of downpayment funds financially benefits from the transaction, the downpayment amount is likely to be added to the sales price to ensure that the funder's net benefit is not diminished. Any cost to the buyer added to the transaction adds to the long-term financial burden to the mortgagor and increases the loan amount insured by HUD, thereby increasing HUD's risk exposure in the event of an insurance claim. While it is not certain that the downpayment funder's cost will be added dollar for dollar to the transaction in every instance, it would be an extreme administrative burden to HUD, if not an outright impossibility, to ensure that the addition of cost has not occurred. Even if the cost is not added to the sales price, and the property is sold for its appraised value, it may be deduced that the seller has refrained from accepting a lower price that would have otherwise been acceptable in an arms-length transaction. Therefore, the rule would prohibit downpayment assistance from any sources that financially benefit from the transaction in order to eliminate, not only the conflict of interest, but the potential for additional financial burden imposed upon the mortgagor and added insurance risk to HUD. HUD considers it reasonable to conclude that the problems associated with SFDPA from nonprofit organizations would appear in connection with seller- (or other financial beneficiary-) funded downpayment assistance from any other sources. The potential for problems to arise is not related to the nature of the intermediary that serves as the conduit for the assistance but to the *quid pro quo* relationship between the funding of a downpayment and the funder's receipt of a financial benefit. Thus, for example, although the rule generally permits a gift from a family member to be used by the mortgagor to meet the minimum investment requirement, a payment from a family member who is reimbursed by the seller, or by another party that financially benefits from the transaction, would not be permitted by the rule. The same outcome would result if the payment to the mortgagor came from a nonprofit organization, a government agency, a tribal government, or any other intermediary; if the intermediary that serves as the conduit for the payment is reimbursed by the seller or other party that financially benefits, the payment would not be permitted. A transaction-distorting conflict of interest with the potential for adding an above-market burden on the borrower and increased risk to the FHA fund is present in each such instance. This rule would not disturb the programs of direct homeownership assistance that are administered by private, charitable organizations or state, local, and tribal governments that are not dependent upon payment or reimbursement of the assistance by a seller or other party that benefits financially from a transaction. Programs acceptable to HUD do not contain the conflict of interest inherent in programs and transactions in which downpayment assistance is linked to a payment or reimbursement by the seller or other entity that financially benefits from the transaction. For these reasons, HUD would continue to allow programs in which the downpayment assistance is not linked to a payment or reimbursement by the seller or other entity that benefits financially from the transaction. V. Findings and Certifications Regulatory Planning and Review The Office of Management and Budget

(OMB)reviewed the rule under Executive Order 12866, Regulatory Planning and Review. OMB determined that the rule is a “significant regulatory action,” as defined in section 3(f) of the Order (although not an economically significant regulatory action under the Order). The docket file is available for public inspection in the Regulations Division, Office of General Counsel, 451 Seventh Street, SW., Room 10276, Washington, DC 20410-0500. Environmental Review A Finding of No Significant Impact was not required for the proposed rule. Under 24 CFR 50.19(b)(6), the rule is categorically excluded from the requirements of the National Environmental Policy Act (42 U.S.C. 4332 *et seq* .) and that categorical exclusion continues to apply. Regulatory Flexibility Act The Regulatory Flexibility Act

(RFA)(5 U.S.C. 601 *et seq* .) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. The entities directly affected by this rule are FHA-approved “direct endorsement”

(DE)lenders, i.e., mortgage lenders that are approved to underwrite and endorse their loans for FHA insurance, that must follow FHA requirements to have a loan insured by the FHA, and that are the party “insured” by FHA. While other types of entities may be indirectly affected by this rule, the RFA does not cover such indirect effects. As a result of this rule, DE lenders would no longer be able to obtain FHA insurance for loans with seller-funded downpayment assistance. Therefore, the economic impact, if any, of the rule on regulated entities may be estimated by attempting to determine what proportion of DE lenders' loan volume will be affected by the rule (i.e., what proportion consists of FHA-insured loans with seller-funded downpayment assistance) and how much, if any, revenue and profit DE lenders would forgo as a result of FHA no longer being able to insure that particular category of loans. A. Estimating the Number of Small Entities Potentially Affected To determine if the rule would have a significant economic impact on a substantial number of small entities, HUD first identified the total number of DE lenders, large or small, with current FHA loan activity. According to HUD's records, there were 1,487 DE lenders that were actively underwriting FHA-insured loans in 2007. The next step in the analysis was to estimate how many of these 1,487 DE lenders would be considered “small entities.” Under the applicable industry classifications, banks and other depository institutions are considered “small entities” if they have $165 million or less in assets; non-bank mortgage lenders are considered “small” if they have $6.5 million or less in annual revenues. 22 To begin narrowing the field, HUD attempted to identify the subset of DE lenders whose annual revenue from FHA-insured loans was $6.5 million or less. This was done by multiplying the total dollar volume of FHA-insured loans made by a lender, information that HUD collects on an annual basis, by a factor of four percent, which represents a per-loan revenue estimate typically quoted by FHA lenders. Out of the original universe of 1,487, HUD identified 74 DE lenders whose estimated annual revenue from FHA-insured loans was $6.5 million or less. This number still overstates the number of DE lenders who actually meet the “small entity test,” because FHA-insured loans typically are not the only line of business or income stream for a DE lender. However, it serves the useful purpose of flagging the subset of DE lenders that potentially fall within the “small entity” definition and thus require further analysis. 22 U.S. Small Business Administration, Table of Small Business Size Standards Matched to North American Industry Classification System Codes; avialable at *http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.* The next step in the analysis was to ascertain how many of the 74 flagged DE lenders actually meet the applicable test for “small entity.” As noted above, the test is different depending on whether the entity is a bank or other depository institution, on the one hand, or a non-bank mortgage lender on the other. Sixty-two of the 74 flagged DE lenders were non-bank mortgage lenders; 12 were banks or other depository institutions. With respect to non-bank mortgage lenders, HUD has access to their annual audited financial statements, which they must submit to HUD on-line via the Lender Assessment Sub-System

(LASS)in order to renew their FHA lender approval. Of the 62 flagged non-bank mortgage lenders, 36 reported annual revenue that would qualify them as “small entities” under the applicable less-than-$6.5 million-annual-revenue test. As noted above, banks and other depository institutions are considered “small entities” if they have $165 million or less in assets. DE lenders that are banking institutions are not required to supply financial statements through HUD's LASS. From publicly available annual reports, however, HUD was able to ascertain that none of the 12 flagged banking institutions met this test. Thus, 36 of the 74 flagged DE lenders are small entities subject to this regulation. B. Estimating the Number of Small Entities That Would Be Significantly Impacted by the Rule The foregoing discussion demonstrated that there are 36 DE lenders that qualify as “small entities” under the applicable tests. The next step in the analysis is to determine whether the rule is likely to have a significant economic impact on a substantial number of these 36 small entities. In the RFA context, a 10 percent loss of profits is commonly used as a measure of significant impact. HUD does not have access to sufficient data to perform a 10 percent loss-of-profits analysis directly. However, HUD can approximate a 10 percent loss-of-profits analysis by determining whether a DE lender's total portfolio of FHA-insured loans consists of 10 percent or more loans with seller-funded downpayment assistance. This methodology is more conservative than a straightforward 10 percent loss-of-profits approach, since a 10 percent loss of FHA-insured loan business likely represents a lesser percent of an entity's overall business. HUD is not aware of any FHA-approved lender whose business consists exclusively of FHA-insured loans; thus, even if a lender's FHA-insured loan volume fell by a margin of 10 percent or more, its overall profits from all segments of its business would not necessarily be affected by the same margin. Although HUD is unaware of any other institution, public or private, that will insure loans with seller-funded downpayment assistance, the regulation's impact could be further mitigated to the extent that other SFDPA-loan insurers exist. Only five of the 36 identified small DE lenders had FY 2007 FHA-insured loan portfolios consisting of at least 10 percent loans with nonprofit downpayment assistance. 23 Therefore, the maximum number of small entities that might be significantly affected by the regulation is 5 out of a field of 36 small DE lenders. Most likely, not even all of these 5 will be significantly affected, because to the extent they have any revenue-generating activities other than FHA-insured loans, SFDPA FHA-insured loans may well comprise under 10 percent of the entity's total business even if they comprise more than 10 percent of the entity's FHA-insured loan business. In any event, even 5 economically impacted small entities is not in itself a substantial number; nor is it a substantial portion of the total number of small entities in the field. 24 23 Ninety-two percent of all loans with nonprofit downpayment assistance were made by 5 lenders that are not small entities. 24 Moreover, when the total number of small entities in the whole relevant industry is considered, including mortgage lenders that are not approved to underwrite FHA loans and are therefore not affected by the regulation, the figure of five small entities that may be significantly impacted becomes even more insubstantial. Based on data provided in the preamble to a rule proposed earlier this year by the Board of Governors of the Federal Reserve System, of the 17,618 depository institutions reporting data to the Board, more than 10,000 were small mortgage lenders. See Truth in Lending: Proposed Rule, 73 FR 1671, 1719 (January 9, 2008). Including small, non-depository mortgage lenders would only increase that universe beyond 10,000. Accordingly, the undersigned certifies that this rule will not have a significant economic impact on a substantial number of small entities. Executive Order 12612, Federalism Executive Order 12612 (entitled “Federalism”) prohibits, to the extent practicable and permitted by law, an agency from promulgating a regulation that has federalism implications and either imposes substantial direct compliance costs on state and local governments and is not required by statute, or preempts state law, unless the relevant requirements of section 6 of the Executive Order are met. This rule does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. This rule solely addresses requirements under HUD's FHA mortgage insurance programs. Unfunded Mandates Reform Act Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4, approved March 22, 1995) established requirements for federal agencies to assess the effects of their regulatory actions on state, local, and tribal governments, and the private sector. This rule does not impose any federal mandates on any state, local, or tribal governments or the private sector within the meaning of the Unfunded Mandates Reform Act of 1995. Catalog of Federal Domestic Assistance The Catalog of Federal Domestic Assistance Number for the principal FHA single family mortgage insurance program is 14.117. This rule also applies through cross-referencing to FHA mortgage insurance for condominium units (14.133), and other smaller single family programs. List of Subjects in 24 CFR Part 203 Loan programs—housing and community development, Mortgage insurance, Reporting and recordkeeping requirements. Accordingly, the Department proposes to amend 24 CFR part 203, as follows: PART 203—SINGLE FAMILY MORTGAGE INSURANCE 1. The authority citation for part 203 continues to read as follows: Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42 U.S.C. 3535(d). 2. Section 203.19 is revised to read as follows: § 203.19 Mortgagor's investment in the property.

(a)*Required funds* . The mortgagor must have available funds equal to the difference between:

(1)The cost of acquisition, which is the sum of the purchase price of the home and settlement costs acceptable to the Secretary; and

(2)The amount of the insured mortgage.

(b)*Mortgagor's minimum cash investment.* The required funds under paragraph

(a)of this section must include an investment in the property by the mortgagor, in cash or cash equivalent, equal to at least 3 percent of the cost of acquisition, as determined by the Secretary, unless the mortgagor is:

(1)A veteran meeting the requirements of § 203.18(b); or

(2)A disaster victim meeting the requirements of § 203.18(e).

(c)*Restrictions on seller funding.* Notwithstanding paragraphs

(e)and

(f)of this section, the funds required by paragraph

(a)of this section shall not consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:

(1)The seller or any other person or entity that financially benefits from the transaction; or

(2)Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in paragraph (c)(1) of this section.

(d)*Gifts and loans usually prohibited for minimum cash investment.* A mortgagor may not use funds for any part of the minimum cash investment under paragraph

(b)of this section if the funds were obtained through a loan or a gift from any person, except as provided in paragraphs

(e)and

(f)of this section, respectively.

(e)*Permissible sources of loans* —(1) *Statutory authorization needed* . A statute must authorize a loan as a source of the mortgagor's minimum cash investment under paragraph

(b)of this section.

(2)*Examples.* The following loans are authorized by statute as a source for the minimum investment:

(i)A loan from a family member, a loan to a mortgagor who is at least 60 years old when the mortgage is accepted for insurance, or a loan that is otherwise expressly authorized by section 203(b)(9) of the National Housing Act;

(ii)A loan made or held by, or insured by, a federal, state, or local government agency or instrumentality under terms and conditions approved by the Secretary;

(iii)A loan made or held by, or insured by, a tribal government or an agency or instrumentality thereof, including a tribally designated housing entity as defined at 25 U.S.C. 4103(21), which is treated as a state or local government under applicable state or local law, under terms and conditions approved by the Secretary; and

(iv)A federal disaster relief loan.

(f)*Permissible sources of gifts.* The following are permissible sources of gifts or grants used for the mortgagor's minimum investment under paragraph

(b)of this section:

(1)Family members and governmental agencies and instrumentalities eligible under paragraphs (e)(2)(i) and

(ii)of this section;

(2)A tribal government or an agency or instrumentality thereof, including a tribally designated housing entity, as defined at 25 U.S.C. 4103(21);

(3)An employer or labor union of the mortgagor;

(4)Organizations described in section 501(c)(3) and exempt from taxation under section 501(a) of the Internal Revenue Code of 1986;

(5)Disaster relief grants; and

(6)Other sources as may be approved by the Secretary on a case-by-case basis. Dated: June 10, 2008. Brian D. Montgomery, Assistant Secretary for Housing, Federal Housing Commissioner. Appendix—Tables Note: This Appendix will not be codified in the Code of Federal Regulations. Table 1.—FHA Single-Family Purchase Loan Endorsements, Shares by Downpayment Source Type and Fiscal Year Fiscal year Source of downpayment funds in percent Borrower Family Nonprofit Govt agency Employer 2000 75.75 20.28 1.74 2.14 0.09 2001 77.52 15.64 4.92 1.83 0.10 2002 74.95 13.75 9.18 2.04 0.09 2003 63.53 15.25 18.40 2.70 0.12 2004 53.97 15.59 27.19 3.12 0.12 2005 48.44 14.18 33.09 4.17 0.12 2006 48.73 12.93 32.78 5.43 0.13 2007 47.52 12.02 35.09 5.25 0.12 2008 a 46.05 12.25 37.30 4.32 0.09 a Data for five months, October through February. Source: U.S. Department of Housing and Urban Development. Table 2.—Early Default Rate Comparisons on FHA-Insured Home Purchase Loans by Source of Downpayment Funds and Fiscal Year of Insurance Endorsement Fiscal year of insurance endorsement Early default rates in percent Borrower Family Nonprofit Govt agency Employer Ratios to “borrower” early default rates Family Nonprofit Govt agency Employer 2000 3.89 5.26 7.98 6.76 4.37 1.36 2.05 1.74 1.12 2001 7.43 9.10 16.32 13.17 8.51 1.22 2.20 1.77 1.15 2002 6.99 8.56 15.22 12.62 11.93 1.23 2.18 1.81 1.71 2003 5.79 7.34 13.90 12.17 9.28 1.27 2.40 2.10 1.60 2004 5.84 7.79 14.33 12.36 10.42 1.33 2.46 2.12 1.78 2005 7.08 9.24 16.43 12.81 9.95 1.30 2.32 1.81 1.41 2000-2005 6.08 7.57 14.80 11.56 9.00 1.24 2.43 1.90 1.48 Source: HUD. Notes: FHA-insured home-purchase loans; early default is defined as a 90-day (3 month) delinquency within the first 2 years of scheduled payments on the mortgage. Table 3.—Ever-Defaulted Rate Comparisons on FHA-Insured Home Purchase Loans by Source of Downpayment Funds and Fiscal Year of Insurance Endorsement Fiscal year of insurance endorsement Ever-defaulted rates in percent Borrower Family Nonprofit Govt agency Employer Ratios to “borrower” ever-defaulted rates Family Nonprofit Govt agency Employer 2000 16.40 21.39 28.69 27.79 21.83 1.30 1.75 1.69 1.33 2001 15.28 18.36 28.38 28.40 19.70 1.20 1.86 1.86 1.29 2002 13.24 15.30 25.30 24.47 17.30 1.16 1.91 1.85 1.31 2003 11.86 14.26 25.05 23.68 17.53 1.20 2.11 2.00 1.48 2004 10.60 13.57 23.94 20.88 17.92 1.28 2.26 1.97 1.69 2005 10.75 13.80 23.28 18.46 15.40 1.28 2.16 1.72 1.43 2006 8.16 10.59 17.67 12.31 16.22 1.30 2.16 1.51 1.99 2007 4.13 5.26 9.90 5.70 4.22 1.27 2.40 1.38 1.02 Source: HUD; FHA-insured home-purchase loans; data as of February 29, 2008. Notes: Default is defined as a 90-day (3 month) delinquency; ever-defaulted represents having had at least one default episode. Table 4.—Current Default Rate Comparisons on FHA-Insured Home Purchase Loans by Source of Downpayment Funds and Fiscal Year of Insurance Endorsement Fiscal year of insurance endorsement Current default rates in percent Borrower Family Nonprofit Govt agency Employer Ratios to “borrower” current default rates Family Nonprofit Govt agency Employer 2000 11.83 14.80 17.33 13.50 19.12 1.25 1.46 1.14 1.62 2001 10.69 12.75 19.51 13.65 21.69 1.19 1.82 1.28 2.03 2002 8.23 10.01 15.97 11.83 4.20 1.22 1.94 1.44 0.51 2003 5.63 6.92 11.64 9.26 8.18 1.23 2.07 1.65 1.45 2004 5.36 7.41 12.33 8.64 10.92 1.38 2.30 1.61 2.04 2005 5.55 7.43 12.64 8.76 9.43 1.34 2.28 1.58 1.70 2006 4.94 6.46 10.97 6.98 9.81 1.31 2.22 1.41 1.99 2007 2.86 3.78 7.47 3.92 3.05 1.32 2.61 1.37 1.07 All Years 6.22 7.68 11.19 8.07 9.02 1.24 1.80 1.30 1.45 Source: HUD. Note: Data are as of February 29, 2008. Table 5.—Date Claim Rate Comparisons on FHA-Insured Home Purchase Loans by Source of Downpayment Funds and Fiscal Year of Insurance Endorsement Fiscal year of insurance endorsement To-date claim rates in percent Borrower Family Nonprofit Govt agency Employer Ratios to “borrower” to-date claim rates Family Nonprofit Govt agency Employer 2000 6.29 8.38 16.07 13.58 9.52 1.33 2.56 2.16 1.51 2001 5.67 6.68 16.23 13.34 7.24 1.18 2.86 2.35 1.28 2002 4.45 4.58 13.27 10.72 6.16 1.03 2.98 2.41 1.38 2003 3.31 3.58 11.22 8.84 4.57 1.08 3.39 2.67 1.38 2004 2.21 2.77 8.89 5.80 3.75 1.25 4.02 2.62 1.69 2005 1.61 1.88 6.29 3.81 2.61 1.17 3.91 2.36 1.62 2006 0.73 0.85 2.91 1.60 2.21 1.17 3.99 2.19 3.03 2007 0.08 0.09 0.41 0.17 0.00 1.12 5.07 2.14 0.00 Source: HUD; claims paid as of February 29, 2008. Table 6.—Expected Lifetime Claim Rates on Recent FHA Insurance Endorsements, by Credit Score, LTV, and Nonprofit Downpayment Assistance Fixed-Rate, 30-Year Mortgages Credit score ranges Loan-to-value ranges Up to 90 percent 90.1-95 percent Above 95 percent Other downpayment funds Nonprofit assisted Ratio of nonprofit to other above-95 percent claim rates FY 2005 Insurance Endorsements 680-850 2.74 3.19 3.37 6.69 1.99 640-679 4.32 5.56 6.23 13.02 2.09 620-639 4.54 5.89 6.59 13.36 2.03 580-619 6.44 9.17 10.57 21.58 2.04 540-579 7.74 12.80 13.52 26.20 1.94 500-539 10.56 17.53 17.49 32.92 1.88 300-499 13.56 12.21 21.33 46.63 2.19 None 6.81 9.66 11.04 23.80 2.16 All 5.60 6.90 6.94 16.79 2.42 FY 2006 Insurance Endorsements 680-850 2.05 3.07 3.80 9.13 2.40 640-679 4.04 6.92 8.73 19.25 2.21 620-639 3.93 7.22 9.20 20.00 2.17 580-619 6.14 12.24 15.21 31.81 2.09 540-579 7.41 15.53 19.00 37.34 1.97 500-539 10.56 19.54 25.03 46.67 1.86 300-499 16.11 27.04 34.47 59.09 1.71 None 7.91 12.89 16.21 37.02 2.28 All 5.22 8.21 9.24 23.21 2.51 FY 2007 Insurance Endorsements 680-850 2.14 3.75 4.9 11.54 2.36 640-679 4.45 8.10 11.15 23.78 2.13 620-639 4.43 8.68 11.54 24.57 2.13 580-619 7.43 14.28 19.47 38.49 1.98 540-579 8.71 18.71 24.01 45.03 1.88 500-539 10.51 22.73 30.86 53.80 1.74 300-499 16.09 33.68 40.82 68.31 1.67 None 9.21 15.73 21.14 42.85 2.03 All 6.05 10.01 12.25 28.49 2.33 Source: Special aggregations performed by Integrated Financial Engineering, Inc., from the FY 2007 actuarial study of the FHA Mutual Mortgage Insurance Fund (available at *http://www.hud.gov/offices/hsg/comp/rpts/actr/2007actr.cfm* ). Lifetime claim rate predictions use base case economic forecasts provided by Global Insight, Inc. Table 7.—Median Incomes of FHA Purchase Borrowers in FY 2007 Loan-to-value ratio FICO score range 850-680 679-640 639-620 619-600 599-560 559-500 499-300 None Row LE 90 $43,404 $42,906 $43,290 $44,550 $48,180 $52,068 $49,200 $32,232 $44,688 91-95 47,388 49,338 49,800 51,420 53,724 54,984 55,170 37,440 49,920 96-97 49,512 52,506 53,208 54,996 55,068 55,500 52,824 39,000 51,996 SFDPA* 48,432 50,754 51,024 51,672 51,618 51,732 52,008 36,900 50,136 Column 48,756 51,372 51,936 52,752 53,004 53,388 51,996 37,440 50,760 * Loans with seller-funded downpayment assistance. Table 8.—Purchase Loan Composition in FY 2007, by LTV and FICO Score [In percent] Loan-to-value ratio FICO score range 850-680 679-640 639-620 619-600 599-560 559-500 499-300 None LTV sum LE 90 1.7 1.4 1.0 1.0 1.9 1.3 0.2 0.6 9.1 91-95 1.7 1.6 1.0 1.0 1.3 0.7 0.1 0.3 7.8 96-97 14.3 10.1 5.6 5.6 7.8 3.8 0.4 2.4 49.9 SFDPA* 5.0 5.5 4.1 4.1 7.4 4.8 0.6 1.6 33.2 FICO Sum 22.8 18.7 11.7 11.7 18.5 10.6 1.2 5.0 100.0 * Loans with seller-funded downpayment assistance. Table 9.—Expected Claim Rates for All FY 2009 Loans Based on FY 2007 Actuarial Review and Recent Economic Assumptions [In percent] Loan-to-value ratio FICO score range 850-680 679-640 639-620 619-600 599-560 559-500 499-300 None LE 90 2.2 4.7 4.5 7.7 8.7 10.2 15.3 9.6 91-95 3.1 6.7 7.0 11.6 14.6 18.3 26.0 13.4 96-97 3.9 8.9 9.3 15.5 19.0 25.3 36.2 17.7 SFDPA* 8.9 18.6 19.4 31.7 36.8 47.0 61.4 34.7 * Loans with seller-funded downpayment assistance. Table 10.—Credit Subsidy Rates by LTV and FICO Score [In percent] Loan-to-value ratio FICO score range 850-680 679-640 639-620 619-600 599-560 559-500 499-300 None LE 90 −2.95 −1.89 −2.00 −0.69 −0.54 −0.01 2.41 0.10 90-95 −2.56 −1.08 −0.94 0.90 1.26 2.62 6.70 1.65 95-97 −2.22 −0.18 −0.04 2.49 2.88 4.80 10.74 3.37 SFDPA* −0.20 3.73 4.07 8.97 9.57 12.63 20.41 10.12 * Loans with seller-funded downpayment assistance. Table 11.—Breakeven Up-Front and Annual Insurance Premiums for Seller-Funded Downpayment Assistance Loans [In percent] FICO score range 850-680 679-640 639-620 619-600 599-560 559-500 499-300 None Up-front Premium 0.95 5.56 5.99 5.92 6.88 12.09 28.95 7.77 Annual Premium 0.55 0.55 0.55 2.00 2.00 2.00 2.00 2.00 [FR Doc. 08-1356 Filed 6-11-08; 2:56 pm]

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