Rule2022-27942
Prior Approval for Enterprise Products
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 27, 2022
Effective
February 27, 2023
Issuing agencies
Federal Housing Finance Agency
Abstract
The Federal Housing Finance Agency (FHFA or Agency) is adopting a final rule that establishes a process for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) to provide advance notice to the FHFA Director before offering a new activity to the market and to obtain prior approval from the Director before offering a new product to the market.
Full Text
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[Federal Register Volume 87, Number 247 (Tuesday, December 27, 2022)]
[Rules and Regulations]
[Pages 79217-79232]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-27942]
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1253
RIN 2590-AA17
Prior Approval for Enterprise Products
AGENCY: Federal Housing Finance Agency.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Agency (FHFA or Agency) is
adopting a final rule that establishes a process for the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) to
provide advance notice to the FHFA Director before offering a new
activity to the market and to obtain prior approval from the Director
before offering a new product to the market.
DATES: This final rule is effective February 27, 2023.
FOR FURTHER INFORMATION CONTACT: Susan Cooper, Senior Policy Analyst,
Office of Housing and Regulatory Policy, (202) 649-3121,
<a href="/cdn-cgi/l/email-protection#b7c4c2c4d6d999d4d8d8c7d2c5f7d1dfd1d699d0d8c1"><span class="__cf_email__" data-cfemail="71020402101f5f121e1e01140331171917105f161e07">[email protected]</span></a>; or Dinah Knight, Assistant General Counsel,
Office of General Counsel, (202) 748-7801, <a href="/cdn-cgi/l/email-protection#e4808d8a858cca8f8a8d838c90a4828c8285ca838b92"><span class="__cf_email__" data-cfemail="57333e39363f793c393e303f2317313f313679303821">[email protected]</span></a>,
Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC
20219. These are not toll-free numbers. For TTY/TRS users with hearing
and speech disabilities, dial 711 and ask to be connected to any of the
contact numbers above.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Statutory Background
In recognition of the significant impact that the activities of the
Enterprises have on the U.S. housing finance system, market
participants, and the broader economy, section 1321 of the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992, as
amended (12 U.S.C. 4501 et seq.) (the Safety and Soundness Act or Act)
requires the FHFA Director to review new Enterprise activities and to
approve new Enterprise products before these activities and products
can be offered to the market.
Specifically, the Act requires an Enterprise to provide ``written
notice'' to the Director for a determination of whether a new activity
is a new product subject to prior approval under section 1321. See
section 1321(e)(2) of the Safety and Soundness Act (12 U.S.C.
4541(e)(2)). If the Director determines that the new activity is a new
product,
[[Page 79218]]
the Enterprise shall ``obtain the approval of the Director . . . before
initially offering the product.'' See section 1321(a) of the Safety and
Soundness Act (12 U.S.C. 4541(a)). In considering any request for
approval of a new product, the Director shall determine whether the
proposed new product is authorized pursuant to certain sections of the
Enterprises' authorizing statutes,\1\ in the public interest, and
consistent with the safety and soundness of the Enterprise or the
mortgage finance system. See section 1321(b) of the Safety and
Soundness Act (12 U.S.C. 4541(b)).
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\1\ Fannie Mae's authorizing statute is the Federal National
Mortgage Association Charter Act (12 U.S.C. 1716 et seq.). Freddie
Mac's authorizing statute is the Federal Home Loan Mortgage
Corporation Act (12 U.S.C. 1451 et seq.).
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Certain activities are excluded from the review and approval
requirements under the Act, including: (1) the Enterprises' automated
loan underwriting systems as in existence on July 30, 2008 (AUS), and
any upgrades to the technology, operating systems, or software to
operate the underwriting systems; (2) any modifications to mortgage
terms and conditions or underwriting criteria relating to mortgages
that are purchased or guaranteed by an Enterprise but that do not alter
the nature of the underlying transaction as residential mortgage
financing; and (3) activities that are substantially similar to the
activities in (1) and (2) and to new products that have been approved
by the Director (substantially similar activities). See section 1321(e)
of the Safety and Soundness Act (12 U.S.C. 4541(e)). The Act prescribes
timeframes for FHFA to complete its review and to provide the public
with notice and an opportunity to comment on a proposed new product.
See sections 1321(c) and (e) of the Safety and Soundness Act (12 U.S.C.
4541(c) and (e)).
B. The Interim Final Rule and Notice of Proposed Rulemaking
FHFA adopted an interim final rule for Prior Approval for
Enterprise Products which became effective on July 2, 2009, and which
remains in effect until the effective date of this final rule. See
interim final rule, 12 CFR part 1253.\2\ On November 9, 2020, FHFA
published in the Federal Register a Notice of Proposed Rulemaking on
Prior Approval for Enterprise Products (Proposed Rule) that, if
finalized, would replace the interim final rule. See Proposed Rule, 85
FR 71276. FHFA requested public comment on all aspects of the Proposed
Rule. The final rule reflects adoption, clarifications, or changes
based on the comments received, as well as other technical and
conforming changes. A full discussion of the comments received, the
Agency's responses, and a section-by-section analysis of the final rule
are included in the subsequent sections.
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\2\ 74 FR 31602 (July 2, 2009).
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II. Discussion of Comments and Agency Response
A. Overview of Comments Received
FHFA received 17 comments on the Proposed Rule. Commenters included
the Enterprises, National Association of Home Builders, National
Taxpayer Union, American Enterprise Institute, Community Home Lenders
Association, National Association of Federal Credit Unions, American
Bankers Association, Mortgage Bankers Association, Center for
Responsible Lending, Independent Community Bankers of America, Housing
Policy Council, U.S. Mortgage Insurers, National Association of
Realtors, Manufactured Housing Institute, Consumer Federation of
America, and one lender. Most commenters were generally supportive of
the Proposed Rule and many suggested areas where it could be improved
or clarified.
Comments received and FHFA's responses are summarized by topic
below. In general, commenters raised concerns with the proposed
submission process for a new activity, one aspect of which provided
that the determination of whether a new activity was a new product
would be subject to Agency discretion. Some commenters praised the
explicit inclusion of pilots in the scope of a new activity while also
sharing their concerns about how pilots are conducted by the
Enterprises. Other commenters preferred that pilots be excluded from
the requirements of the final rule. Several commenters suggested
further changes to the descriptions of a new activity and a new
product, including an expansion of the exclusions to reference
technology that assists the Enterprises in performing their core
functions. Commenters also suggested additional public interest factors
that should be considered when evaluating a new product, particularly
within the context of the impact of a proposed new product on
competition. Many commenters also noted that the Proposed Rule, unlike
the interim final rule, did not include a provision for requesting
confidential treatment of information submitted to FHFA. Lastly,
commenters recommended that the final rule impose on FHFA a requirement
to report on the Enterprises' new activity submissions and FHFA's
decisions on those submissions.
B. FHFA Determination and Approval of a New Product
Submission Process. FHFA proposed a notice process that would have
required an Enterprise to make a single submission for a new activity
and a new product (notice of new activity). FHFA would evaluate the
notice and determine whether the new activity was subject to prior
approval as a new product. The Director would make the new product
determination based on whether the new activity merited public notice
and comment on matters of compliance with the Enterprise's authorizing
statute, safety and soundness of the Enterprise or the mortgage finance
system, or serving the public interest. FHFA also proposed streamlined
and simplified content for the notice of new activity that consolidated
interrelated content from the sets of instructions in the interim final
rule but would still be sufficient to conduct a complete assessment of
associated risks and to weigh those risks against the benefits to
public interest.
Commenters had varying views on the submission process. Two
commenters supported the proposed submission process, with one noting
that the scope of information was sufficient and guidelines for
submission were appropriate ``and should help FHFA develop public
notices that provide potential commenters with relevant information
about future Enterprise activities.'' However, other commenters
expressed concerns with and/or provided recommendations for the
submission process. First, many found the breadth of information
requested for a new activity disproportionately burdensome since only
advance notice to FHFA is required by statute. These commenters instead
viewed the scope of information as more appropriate for a request for
prior approval of a new product. One commenter observed that the
Proposed Rule requires the same information, at the same level of
detail, for a new activity and for a new product. Another commenter
urged FHFA to develop a streamlined process to permit the Enterprises
to submit new activities to FHFA without the extensive detail required
for new products. Commenters also believed that the valuable time and
resources used to prepare detailed notices for new activities would
inhibit the Enterprises' ability to pursue initiatives. In addition,
the Enterprises believed that requiring an executive officer to certify
that the notice of new activity did not contain material
misrepresentations or
[[Page 79219]]
omissions was unduly burdensome for a new activity (but not a new
product) because it would entail establishing processes and dedicating
resources to support such a certification. One Enterprise asserted that
``robust internal controls are sufficient to ensure quality submissions
[for a new activity] without the need for an accuracy and completeness
certification to FHFA.''
Next, commenters recommended that the Enterprises, not FHFA, should
make the initial determination on whether a new activity is a new
product. Under that approach, the Enterprise would need to determine
whether to submit either a notice of new activity or a request for
prior approval of a new product. One commenter believed that the ``. .
. enhanced definitions of a new activity and a new product in the
proposed rule are sufficient for an Enterprise to make that
determination.'' The commenter recommended that FHFA re-introduce from
the interim final rule the concept of an Enterprise consulting with
FHFA prior to submitting a notice of new activity to determine whether
a new activity is a new product. Another commenter stated that ``. . .
whether FHFA ultimately adopts a one- or two-step submission process,
the final rule should make clear that an Enterprise may withdraw a
submission at any time.''
Lastly, some commenters expressed concerns about the level of
discretion that the Director would have in determining whether a new
activity was a new product. One commenter argued that the discretionary
authority granted to the Director in the Proposed Rule appeared to
circumvent Congress's requirement that all Enterprise offerings
classified as new products be subject to public notice and comment.
Other commenters were concerned that the discretion granted under the
final rule could result in opaque decision-making.
After careful consideration, FHFA is modifying the submission
process to address commenters' concerns about burden. FHFA agrees with
commenters that the information required for FHFA to review a new
activity (versus a new product) can be distinguished without
compromising FHFA's ability to complete its assessment. FHFA also
agrees that even for the review of a new product the information
requirements could be further streamlined. The final rule reflects
changes accordingly. These changes should alleviate some of the burden
associated with the submission process and conserve valuable resources
at the Enterprises, as well as FHFA. However, FHFA disagrees with the
Enterprises' assertion that requiring an executive officer to certify
to the accuracy of a new activity submission is unduly burdensome and
will retain that requirement in the final rule. As stated by one
Enterprise, it already has robust internal controls and governance
processes for developing and offering a new activity, and these
controls and processes invariably involve an executive officer's
judgement, expertise, and approval. Therefore, FHFA does not believe it
is an undue burden to require an executive officer to certify to the
accuracy of the information contained in a notice of new activity.
In terms of allowing an Enterprise to make the initial
determination whether to provide prior notice of a new activity or
request prior approval for a new product, FHFA still believes that it
is not practical to require an Enterprise to identify in advance a new
product--as distinct from a new activity that is not a new product--for
purposes of determining which type of submission to make to the Agency.
The Act does not provide definitions for a product or an activity. As a
result, the Proposed Rule provided distinguishing characteristics to
implement the statutory mandate for the Director to approve a new
product prior to an Enterprise offering that product. The statutory
standard for approving a new product includes determinations that the
product complies with an Enterprise's authorizing statute, is in the
public interest, and is consistent with the safety and soundness of the
Enterprise or the mortgage finance system. See section 1321(b) of the
Safety and Soundness Act (12 U.S.C. 4541(b)). Because of the lack of
statutory definitions, and the breadth of the statutory considerations
relevant to approval, FHFA concludes that a more precise definition of
a new product is not feasible, and that the Director must be able to
consider each new activity, and whether that new activity should be
deemed a new product, based on a broad consideration of all the facts
and circumstances it presents.\3\
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\3\ When adopting the interim final rule, FHFA concluded that
``the determination whether a new activity is a new product in
specific instances is committed to agency discretion by law,'' 74 FR
31602, 31603 (July 2, 2009). See Samuels v. FHFA, 54 F. Supp. 3d
1328 (S.D. Fla. 2014).
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However, FHFA agrees that the final rule should have an explicit
provision that allows an Enterprise to consult with FHFA prior to
submitting a notice of new activity. If, based on that consultation,
the Director determines that a new activity is a new product, then the
review process could be expedited. FHFA believes that including a
consultation provision and pairing it with abbreviated submission
requirements for new activities and more detailed information
requirements for new products (that still reflect streamlining of the
information requirements from the Proposed Rule) should facilitate the
Enterprises' compliance with the final rule. Further, even though the
Proposed Rule implicitly permitted an Enterprise to withdraw a
submission at any time, FHFA has also included language in the final
rule that explicitly permits an Enterprise to discontinue its efforts
to pursue a new activity once the Director has determined it to be a
new product.
Timeframes for FHFA Review and Public Comment Period. FHFA proposed
that before commencing any new activity, an Enterprise must submit a
notice of new activity, which would not be considered complete and
received for processing until the information required by the Proposed
Rule had been submitted, including any follow-up information requested
by FHFA. After FHFA deemed the submission complete and received, the
Director would have 15 days to determine whether the new activity was a
new product. If the Director determined that the new activity was a new
product, FHFA would publish a public notice soliciting comments on the
new product for a 30-day period. The Director would approve or
disapprove the proposed new product no later than 30 days after the
close of the public comment period. The Proposed Rule defined ``days''
as calendar days. The 15 days for FHFA to review a new activity and
make a new product determination, the 30-day public comment period, and
the 30 days for FHFA to complete its review of a proposed new product
following the close of the public comment period are established by
statute. The Act also provides that the Enterprise may offer the new
activity or new product to the market if FHFA does not render a
decision within the statutory timeframes for review.
Several commenters noted that the Proposed Rule did not provide
specific timeframes for FHFA to deem a submission complete or publish a
notice for public comment once the Director determined that a new
activity was a new product and recommended that the final rule include
such timeframes. One commenter stated that ``[a]llowing FHFA unlimited
time to notify the Enterprises that a submission is complete and
received practically renders moot the expedited 15-day review,'' and
that this unlimited time period should be reconsidered. Another
commenter argued that the 15-day period for a new activity review
should
[[Page 79220]]
start the day that FHFA receives the notice and that ``the period
should be tolled . . . any time FHFA determines a submission to be
incomplete . . . resuming only when the Enterprise delivers the
information requested.'' Another commenter believed that the final rule
should establish a specific timeframe for FHFA to prepare a public
notice, stating that ``at most, a five business-day deadline for FHFA
to publish the public notice should provide FHFA with a reasonable
period to prepare the notice based on the information provided by the
Enterprise.'' A few commenters also recommended that the final rule
have a comment period longer than 30 days. One commenter recommended
that FHFA ``provide, within the statutory constraints, the public with
more time to provide comments on new products'' by excluding ``all
weekends and holidays (as is the current practice under the interim
final rule).''
After considering these comments, FHFA is not including in the
final rule specific timeframes for deeming a submission complete and
received or for publishing a public notice. However, FHFA will act
expeditiously in its review of a submission, and the final rule states
that FHFA will publish a public notice ``without delay.'' FHFA
recognizes that the Act is designed to ensure that FHFA moves quickly
in its review. However, the Agency also recognizes that it has a
responsibility to conduct due diligence and review a submission to
ensure that the Enterprise has provided the required information for
the Director to make the determination of whether a new activity is a
new product. Similarly, FHFA believes that it has a responsibility to
carefully prepare a notice for public comment that accurately reflects
the Enterprise's proposed new product and provides the public with
enough information to provide meaningful comments. Regarding comments
to extend the public notice and comment period, FHFA will apply the
practice it uses when publishing proposed and final regulations, which
is to publish the public notice on the Agency's website the same day
that it submits it to the Federal Register. Given that the Federal
Register is unlikely to publish the public notice for a new product
immediately, the public will have the opportunity to preview the notice
on FHFA's website before the comment period officially begins.
Standards for Approval. In line with the Act, FHFA proposed that
the Director may approve a new product if the Director determined that
it was authorized under the relevant sections of the Enterprise's
charter, in the public interest, and consistent with the safety and
soundness of the Enterprise or the mortgage finance system. Two
commenters recommended enhancements to the final rule that would also
create explicit review standards for a new activity. One commenter
suggested that a new activity should be subject to review under four
standards: (1) any applicable law; (2) the Director's safety and
soundness authority; (3) an Enterprise's authorizing statute; and (4)
the public interest, and that the final rule should give equal weight
to safety and soundness and the public interest. Another commenter
recommended that FHFA establish ``a list of questions to evaluate the
product or activity[, which] would provide a baseline that would ensure
more consistent and objective evaluation of the public interest . . .''
After considering these comments, FHFA is not changing the
standards for approval. The standards for approval of a new product are
established by statute. These standards are not weighted, as suggested
by one commenter, and are considered comprehensively. The Act does not
establish standards for approval for a new activity because unlike a
new product, a new activity need not be approved by the Director but
instead is reviewed to determine whether it is a new product. As noted
by commenters, FHFA has the authority to review new activities and new
products under any applicable regulation or statute, as part of FHFA's
authority to review for safety and soundness and for consistency with
an Enterprise's statutory mission. Also, FHFA believes that
establishing a list of questions to review a new activity or approve a
new product is duplicative of the public interest factors that are to
be considered by the Director in determining whether a new activity is
a new product and in determining whether to approve a proposed new
product. The public interest factors are discussed in more detail in
Section D below.
C. New Activity and New Product
Scope of New Activity. FHFA proposed that an ``activity'' is a
business line, business practice, offering or service, including a
guarantee, a financial instrument, consulting, or marketing, that the
Enterprise provides to the market, and defined it as a ``new'' activity
if the Enterprise is not engaged in the activity as of the effective
date of the final rule or if the Enterprise enhances, alters, or
modifies an existing activity. In addition, the Proposed Rule required
that a new activity must be described by one or more of the following
criteria: (1) requires a new type of resource, type of data, policy, or
modification to an existing policy, process, or infrastructure; (2)
expands the scope or increases the level of credit risk, market risk,
or operational risk to the Enterprise; (3) involves a new category of
borrowers, investors, counterparties, or collateral; (4) substantially
impacts the mortgage finance system, the Enterprise's safety and
soundness, compliance with the Enterprise's authorizing statute, or the
public interest; (5) is a pilot; or (6) results from a pilot. FHFA
specifically requested comment on whether the criteria were
unambiguous, transparent, and sufficient for identifying a new
activity, and if not, how they could be improved.
When responding to FHFA's questions, commenters fell into two
distinct groups. Some commenters believed the criteria to be
unambiguous and sufficient for identifying a new activity, while other
commenters did not. Among the former, one commenter viewed the criteria
as ``inclusive of most scenarios that [an Enterprise] could possibly
face when adding a new activity or product.'' Another commenter
supported the more objective approach to identifying new activities as
contained in the Proposed Rule rather than relying solely on exclusions
as had been done in the interim final rule. However, other commenters
viewed the criteria as overly broad and in need of clarification. One
commenter stated that the ``definition of new activity should not be so
broad that it includes every minor deviation of an existing program or
small process/policy changes.'' Other commenters, including the
Enterprises, were concerned that the criteria could capture a large
volume of routine activities, including revisions and updates to
internal risk management policies and selling and servicing guides.
Some commenters recommended that FHFA clarify the criteria by including
a materiality standard or re-introducing qualifiers from the interim
final rule, such as ``significantly,'' ``de minimis,'' or numerical
thresholds, to ensure that immaterial increases in risk do not trigger
notification under the final rule.
FHFA purposely designed the criteria to be broad because, as
recognized by a few commenters, the Agency's review of new activities
functions as a screening process for identifying new products. While
FHFA is not changing the criteria to narrow their scope, FHFA agrees
that certain changes to improve clarity are appropriate and would
enhance
[[Page 79221]]
Enterprise compliance with the final rule.
FHFA is not adopting the commenters' suggestions to add qualifying
language or numerical thresholds to the criteria because the
suggestions do not resolve the issues that FHFA identified with the
interim final rule. In the Proposed Rule, FHFA sought not only to
describe what is a new activity (rather than what is not a new activity
as was the case in the interim final rule) but also to establish
objective criteria that distinguish a new activity from an on-going
activity. Furthermore, FHFA believes that it is difficult to measure
and consistently apply numerical thresholds or other qualifiers such as
``de minimis,'' across all Enterprise business lines, business
practices, offerings, and services.
Exclusions. In conjunction with the proposed criteria for
identifying a new activity, the Proposed Rule incorporated the
statutory exclusions from the review and approval requirements of the
Act. The Proposed Rule described the statutory exclusions, which are
either the specific activities or substantially similar activities as
described in Section I.A above. The specific activities excluded from
the scope of the Proposed Rule were: (1) the Enterprises' AUS (Fannie
Mae's Desktop Underwriter and Freddie Mac's Loan Product Advisor) and
upgrades to the technology, operating system or software to operate an
AUS; and (2) any modifications to mortgage terms and conditions or
underwriting criteria relating to mortgages that are purchased or
guaranteed by an Enterprise but that do not alter the nature of the
underlying transaction as residential mortgage financing. The Proposed
Rule also made explicit that business practices, transactions, or
services performed or conducted solely to facilitate the administration
of an Enterprise's internal affairs would be excluded as well. FHFA
requested comment on how the exclusion for the AUS should apply to
existing technology systems that are related but independent from the
AUS, as well as to future technology systems, and whether the
exclusions overall should be narrowed or expanded. Comments and
questions related to the exclusions for substantially similar
activities are addressed in a separate discussion below under the
heading ``Exclusions for Substantially Similar Activities.''
In responding to the questions about the AUS exclusion and whether
the exclusions overall should be expanded, one commenter was supportive
of the proposed exclusions, believing them to be appropriate and
consistent with the ``need for a rigorous review process that is not
unduly time-consuming or stifling.'' Another commenter stated that the
exclusion for activities involving the AUS should be narrowed and apply
only to the capabilities of the AUS as of the effective date of the
final rule. The commenter further argued that ``any new benefit,
protection, right, relief, or change to the origination process--as
well as activities traditionally associated with the primary mortgage
market--should be considered new activities and outside the scope of
the proposed exclusion.'' However, several commenters recommended that
the exclusions be expanded to include technology systems that are
related but independent from an AUS, such as the models and
applications that assist an AUS in assessing the risk of a mortgage.
One Enterprise asserted that an AUS is not a single technology system
but is a collection of interrelated and integrated technology systems
that embody the mortgage terms and conditions or underwriting criteria
that are published in the Enterprises' respective selling and servicing
guides, and therefore should be excluded, as was intended by the
statute. The commenters who favored expanding the exclusion believe
that subjecting these technology systems to the requirements of this
final rule could unduly delay updates that incorporate new types of
data or resources, potentially rendering the AUS obsolete over time
because the market is moving or shifting faster than an Enterprise can
update it through the new activity or new product process, and
consequently exposing the Enterprise to increased risk. Two commenters
and the Enterprises requested that the exclusions be expanded to name
the actual integrated or interrelated technologies, such as Collateral
Underwriter and Loan Collateral Advisor, among others. One commenter
also suggested that technology innovations that merely enhance ease of
access to housing data should also be excluded from the requirements of
the final rule.
FHFA has carefully considered the commenters' suggestions for
expanding the exclusion related to the AUS and believes it should
remain as proposed. In retaining the exclusion as proposed, FHFA is
striking a balance between excluding an activity that is part of an
Enterprise's core business from prior notice requirements and including
an activity that introduces new technology to the mortgage industry
that may serve a primary market function. However, FHFA recognizes that
some technologies perform functions similar to the AUS because they
assist in applying the Enterprise's underwriting criteria and assessing
the credit risk of the mortgage and that other technologies mirror the
mortgage terms and conditions and underwriting criteria that are
reflected in an Enterprise's selling and servicing guide. As a result,
FHFA is revising the exclusion for substantially similar activities to
include the technologies (other than the AUS) that apply underwriting
criteria or mortgage terms and conditions to residential mortgages
purchased or guaranteed by the Enterprises so that changes to systems
such as Fannie Mae's Collateral Underwriter or Loan Delivery and
Freddie Mac's Loan Collateral Advisor or Loan Selling Advisor do not
require a notice of new activity. By revising the exclusions for
substantially similar activities rather than the exclusions for an
Enterprise AUS, FHFA achieves the balance it is seeking. In contrast to
activities that fall under the AUS exclusion, an Enterprise must submit
advance notice to FHFA before engaging in a substantially similar
activity (notice of substantially similar activity). By reviewing a
notice of substantially similar activity, the Agency can assess
technological enhancements to ensure that they are substantially
similar to the AUS or mortgage terms and conditions or underwriting
criteria and are not a new activity or a new product.
As discussed previously, some commenters feared that the final rule
could capture a large volume of routine activities, including revisions
and updates to the Enterprises' internal risk management policies and
selling and servicing guides. Conversely, another commenter felt that
the public and FHFA should have the opportunity to assess potential
changes to an Enterprise's underwriting criteria that would materially
impact its credit box or consumer access to credit because the
Enterprises ``essentially set the rules for the market.'' Commenters
were also concerned that the underwriting and servicing policy changes
put in place in response to the COVID-19 pandemic could have been
treated as new activities under the Proposed Rule even though the
changes did not result in a new product offering to the market. In a
related comment, both Enterprises mentioned the significant number of
lender letters and bulletins issued that addressed housing issues
related to the pandemic, which kept borrowers and renters in their
homes and made closings possible under social distancing requirements
and shutdowns. Other commenters mentioned new loss mitigation
activities
[[Page 79222]]
made available during the pandemic that should be explicitly excluded,
such as the introduction of the Enterprises' new home retention
repayment option that allows borrowers to defer unpaid mortgage
payments and turn them into a noninterest-bearing balance due when the
mortgage is paid off.
FHFA disagrees that routine activities, updates to the Enterprises'
respective selling and servicing guides, or changes to underwriting
criteria or mortgage terms and conditions are captured or should be
captured under the final rule. In reviewing the comments, FHFA noted
that many commenters did not seem to understand the scope of the
exclusions, which, in keeping with the Act, are designed to exclude
changes to mortgage terms and conditions or underwriting criteria
relating to residential mortgages purchased or guaranteed by an
Enterprise, such as an Enterprise's core activities involving its
Single-Family and Multifamily business lines. For example, changes to
an Enterprise's underwriting criteria or servicing and loss mitigation
policies in response to the COVID-19 pandemic would not require an
Enterprise to submit a notice of new activity to FHFA. However, several
commenters seemed to believe that such changes, though specifically
excluded by the Act, could and would be considered a new activity and
require the Enterprise to submit a notice of new activity. FHFA
believes the Act and the Proposed Rule clearly exclude activities that
involve any modification to the mortgage terms and conditions or
underwriting criteria for residential mortgage financing, such as those
activities that resulted in temporary loss mitigation policies or
underwriting flexibilities or restrictions in response to the pandemic.
However, given that commenters had difficulty understanding the
exclusions, FHFA is making changes to enhance clarity but retain the
scope of the exclusions as proposed.
The Enterprises requested that the exclusions in the final rule be
expanded to exclude activities under the Duty to Serve Regulation (12
CFR part 1282, subpart C). The Enterprises argued that those activities
have already undergone a review by FHFA and were made available for
public notice and comment, and therefore it would be a duplicative
regulatory burden to make them subject to the final rule. The
Enterprises also requested that the exclusion for any Enterprise
business practice performed solely to facilitate the administration of
an Enterprise's internal affairs be revised to make clear that the
activities performed to mitigate their risk on mortgages that they
purchase or guarantee are also excluded from the definition of a new
activity.
FHFA is not adopting the Enterprises' requested changes to the
exclusions in the final rule. An FHFA non-objection to an Enterprise's
Duty to Serve plan--or an Equitable Housing Finance Plan, for that
matter--applies only to the plan itself and not to the underlying
activities. Therefore, it is not a duplicative regulatory burden but
rather completely appropriate for such activities to be subject to the
final rule if they meet one or more of the new activity criteria.
Regarding the exclusion for business practices internal to the
Enterprises, FHFA is not revising this exclusion because, as proposed,
the exclusion already captures those risk mitigation activities that
are internal to an Enterprise such as those mentioned by Freddie Mac in
its comment letter (``establishing internal controls, updating obsolete
systems and technologies, and improving efficiencies related to
analyzing, processing, and documenting internal information'').
However, if an Enterprise's risk mitigation activities are ultimately
provided to the market in the form of an offering or service, they are
no longer exclusively internal to the Enterprise and will be subject to
the final rule if the activity meets one or more of the new activity
criteria and is otherwise not excluded.
Exclusions for Substantially Similar Activities. As mentioned
previously, FHFA proposed an exclusion for substantially similar
activities as described in Section I.A. above. Several commenters found
this exclusion confusing, with one stating that the Proposed Rule
``provides no clarity or definition as to what `substantially similar'
means for purposes of [the] exclusion.'' Another commenter recommended
the removal of the provision in the final rule that stated that if an
activity met one or more of the new activity criteria, it could not be
considered substantially similar. A few commenters requested that the
final rule clarify that the exclusion for an activity that is
substantially similar to an approved new product is available to
``either'' Enterprise and not only to the Enterprise that did not
obtain the original new product approval. Lastly, one Enterprise
suggested that existing and future technology systems that are integral
to an Enterprise's mortgage terms, conditions, and underwriting and
have functions similar to the AUS could be considered ``substantially
similar'' to the AUS system or to modifications to mortgage terms,
conditions and underwriting criteria.
In response to these comments, FHFA is changing this section in the
final rule to make it clear that this exclusion applies to ``either''
Enterprise. FHFA is also revising the final rule to adjust and clarify
the scope of the exclusion in two principal ways. First, the final rule
distinguishes the criteria used for determining whether an activity is
substantially similar to activities that are otherwise excluded from
the review and approval requirements under the Safety and Soundness Act
(i.e., changes to the AUS, mortgage terms and conditions, and
underwriting criteria) from the criteria used for determining whether
an activity is substantially similar to a new product that an
Enterprise is authorized to offer to the market. The criteria for
determining whether an activity is substantially similar to a new
product are more rigorous than for determining whether an activity is
substantially similar to an excluded activity. For example, activities
like modifying the Enterprises' loan delivery systems or other
technology systems to apply updated Qualified Mortgage criteria are not
likely to merit public notice and comment because--like updates to the
statutorily excluded AUS--they tend to be routine activities. However,
under the Proposed Rule, this type of update to a technology system
would require a notice of new activity. Similarly, simple changes to
the risk scores provided by Collateral Underwriter or Loan Collateral
Advisor may not satisfy the criteria for substantially similar and
could require a notice of new activity each time a modification is
made. Treating these types of modifications as new activities would be
unduly burdensome on the Agency and on the Enterprises. To mitigate
this burden, FHFA is revising the final rule so that the Director may
determine that any technology that applies mortgage terms and
conditions or underwriting criteria relating to residential mortgages
that are purchased or guaranteed by an Enterprise or any modifications
to those technologies (e.g., modifications to Collateral Underwriter
and Loan Collateral Advisor) are substantially similar to the
statutorily excluded AUS, mortgage terms and conditions, or
underwriting criteria.
Second, with respect to activities that are substantially similar
to new products, FHFA recognizes that describing what are not
substantially similar activities for purposes of the exclusion is
potentially confusing and is revising this section to affirmatively
describe what are substantially similar activities. Additionally, FHFA
is
[[Page 79223]]
slightly expanding the scope of the exclusion in the final rule in a
manner that is consistent with the goal of screening to confirm that
the activity is not a new activity. For example, where the Proposed
Rule provided that an activity would not be substantially similar to an
approved new product if the activity required a new resource, type of
data, policy, process, or infrastructure, the final rule provides that
the Director may determine that an activity is substantially similar to
an approved new product if the activity requires the same or similar
resource, type of data, policy, process, or infrastructure as the
approved new product. These changes should provide the clarity that
commenters and the Enterprises are seeking for this exclusion.
Treatment of Pilots. As part of the new activity description and
exclusions, FHFA proposed to include activities that are pilots or that
result from a pilot as among the criteria that would identify a new
activity. Under the Proposed Rule, a pilot was defined as an activity
that had a defined term and scope for the purposes of understanding the
viability of a new offering, and FHFA recognized that pilots are
referred to in different ways, such as a testing initiative, test and
learn, or temporary authorization.
FHFA received a wide range of comments about including pilots as
one of the criteria for identifying a new activity. Several commenters
supported their explicit inclusion in the scope of a new activity to
help minimize ``pilot creep.'' Some commenters suggested that the final
rule should have formal constraints on the duration and volume for
pilots that would require the Enterprise to submit a new notice when
the pilot reached those limits. Other commenters and the Enterprises
took the opposite position and stated that including pilots in the
scope of a new activity is too broad and would stifle innovation. One
commenter argued that the word ``pilot'' should be removed from the
definition of a new activity ``. . . as the word has never been clearly
defined or consistently applied throughout the industry.'' The same
commenter also suggested that pilots should be excluded from the new
activity description. Finally, several commenters stressed that there
is a lack of transparency and inclusivity for pilots, giving some
market participants an advantage over others, which they believe FHFA
should address through the final rule.
FHFA disagrees with the commenters who suggested that pilots should
be excluded from the scope of a new activity. As noted by several other
commenters, a pilot is how an Enterprise typically determines the
viability of a future offering. In general, Enterprise products and
activities have significant effects on the market and market
participants. Regardless of the size of a pilot, it could have a
significant effect on the public interest. Therefore, it is critical
for FHFA to review pilots as new activities to determine whether they
are indeed new products that merit public notice and comment.
FHFA agrees with commenters that there should be process
requirements for reviewing pilots beyond what was proposed, and has
added language to the final rule that requires an Enterprise to submit
a notice of new activity both when a pilot is initiated and when
modifications to the volume and duration of the pilot are made after it
commences. FHFA recognizes that pilots can extend for lengthy periods
of time or change form as a natural consequence of conducting
exploratory business, which is why the notice of new activity, as
proposed, required the Enterprise to establish the parameters, such as
the duration and volume of the pilot. FHFA also believes that requiring
a subsequent notice of new activity for a pilot when there are changes
to the duration and volume would help manage ``pilot creep'' and
facilitate a determination of whether the activity is a new product
that merits public notice and comment.
While several commenters recommended that the final rule should
require an Enterprise to be inclusive when selecting participants for a
pilot, FHFA believes that such requirements are not within the scope of
this final rule and are already in place in the broader regulatory
framework governing an Enterprise's activities. FHFA's Minority and
Women Inclusion and Diversity Regulation at 12 CFR 1223.2 requires the
Enterprises ``to promote diversity and ensure . . . the inclusion and
utilization of minorities, women, individuals with disabilities, and
minority--, women--, and disabled-owned businesses at all levels, in
management and employment, in all business and activities, and in all
contracts for services of any kind.'' That Regulation governs not just
an Enterprise's new activities as described in the final rule, but all
Enterprise activities.
D. Public Interest Factors
FHFA proposed eight factors that the Director may consider when
determining whether a new product is in the public interest. These are
the same factors on which the Director would seek public comment to
inform the decision as to whether to approve or disapprove a new
product. The public interest factors fall into three broad categories:
(1) the impact of the new product on the Enterprise's public mission;
(2) the impact of the new product in terms of risk to the mortgage
finance or financial system; and (3) the impact of the new product on
the competitiveness of the market. In addition, the Director retained
the discretion to seek public comment on and consider any other public
interest factors determined to be appropriate to consider during the
approval process.
More than half of the commenters, including both Enterprises,
provided comments on factors that FHFA should or should not include in
the consideration of whether a new product is in the public interest.
Several commenters suggested additional factors that, if incorporated,
would inform the degree to which the new product would promote
competition in the marketplace, or to the contrary would result in less
competition. One commenter suggested that FHFA include a factor focused
on the degree to which a new product would enable the Enterprise to
``compete against market participants that they effectively regulate.''
Several commenters requested that the public interest factors make
explicit reference to the degree to which the new product would have a
disruptive or inequitable impact on different types or sizes of
lenders. While most commenters sought the inclusion of factors that
would contribute to an evaluation of whether the new product would harm
competition, other commenters (including the Enterprises) viewed the
public interest factors as overly protective of competition, with one
Enterprise arguing that the public interest analysis ``should focus on
protecting competition, not competitors.'' These commenters requested
the removal of the public interest factor that prompts an evaluation of
the degree to which the new product is being or could be supplied by
other market participants.
FHFA has considered the feedback from commenters and has determined
that the public interest factors, as proposed, enable FHFA to conduct a
holistic evaluation of the impact of a new product on competition.
There are numerous ways that a new product could help or hinder
competition. The Proposed Rule specifically enumerated two such factors
for evaluation--the degree to which the new product would overcome
natural market barriers or inefficiencies and the degree to which the
new product could be supplied by
[[Page 79224]]
other market participants. These factors are in addition to a catchall
provision that prompts the evaluation of the degree to which the new
product would promote competition in the marketplace, or to the
contrary would result in less competition. Together, these factors will
enable FHFA to seek public comment and form a holistic and balanced
view of the impact of the new product on competition.
In addition to the comments related to competition, commenters
suggested a variety of public interest factors that should be included
in FHFA's evaluation. For example, one commenter wanted the public
interest factors to prompt an evaluation of the impact of the new
product on housing costs for low- and moderate-income borrowers, while
another commenter indicated that the public interest factors should
include the degree to which the new product would aid in addressing
natural disasters. FHFA has considered these comments and determined
that the concerns are adequately addressed by specific public interest
factors (such as the degree to which the new product serves underserved
markets and housing goals) or through the discretion retained by the
Director to seek public comment and evaluate any other appropriate
factor. The discretion retained by the Director provides an avenue to
address considerations that may not be relevant for all new products at
all times, such as the degree to which the new product would aid in
addressing natural disasters.
E. Enterprise Confidentiality
Confidential Treatment of Enterprise Submissions; Public notices.
FHFA did not propose explicit protections for confidential information
provided to FHFA by an Enterprise in connection with a notice of new
activity. Several commenters, including both Enterprises, recommended
that the final rule include such protections. Reasons cited included
the need to avoid discouraging innovation, the need to protect an
Enterprise's ability to comply with contractual obligations to third
parties, and the need to protect an Enterprise from competitive harm.
One commenter noted that ``this is one of the trickiest elements of the
entire Proposed Rule,'' acknowledging that it is ``challenging to
provide sufficient details to elicit meaningful public commentary
without requiring an Enterprise to disclose key business details''
which might ``discourage future innovations.'' The Enterprises also
commented that the treatment of confidential information in the
Proposed Rule was inconsistent with FHFA's treatment of confidential
information in other contexts, such as its rules on application of the
Freedom of Information Act (FOIA) (5 U.S.C. 552; 12 CFR part 1202) and
Enterprise Duty to Serve (12 CFR 1282.32(g)(2)). The Enterprises noted
that, at a minimum, FHFA should provide the same protections for
information contained in a new activity or new product submission that
FHFA provides for many other communications between FHFA and its
regulated entities.
FHFA has considered the comments and determined that no changes to
the treatment of confidential information are warranted for the final
rule. FHFA's treatment of confidential information in the final rule is
appropriate to the context and in line with the intent of the
underlying statute.
An Enterprise may request that information provided to FHFA in any
context, including as part of a new activity or new product submission,
be afforded protection from public disclosure under FOIA and FHFA's
implementing regulation, 12 CFR part 1202. The fact that the final rule
does not mention FOIA does not mean protections provided to an
Enterprise under FOIA are unavailable. However, FOIA protections are
triggered only when a member of the public requests that FHFA disclose
information that an Enterprise has requested be kept confidential. As a
general matter, FOIA does not limit or preclude FHFA from disclosing
confidential, proprietary, or other non-public information at its own
initiative. FHFA's independent decision to disclose non-public
information in connection with the publication of a notice soliciting
public comments on a proposed Enterprise new product is governed by
FHFA's Availability of Non-public Information Regulation (12 CFR part
1214).
FHFA's Availability of Non-public Information Regulation grants the
Director broad discretion to authorize the disclosure of non-public
information. The Director's discretion is informed by statutory duties
under the Safety and Soundness Act, including duties to ensure that the
Enterprises operate in a safe and sound manner, that the operations and
activities of the Enterprises foster liquid, efficient, competitive,
and resilient housing finance markets, and that the activities of the
Enterprises and the manner in which they operate are consistent with
the public interest. The Director's exercise of discretion is also
subject to privacy and other laws and regulations that may limit
certain disclosures. Within this complex framework, FHFA must always be
mindful of the need to protect sensitive information from public
disclosure. Where the Director exercises discretion to authorize
disclosure of non-public information, the Director, in view of the
statutory and regulatory framework that governs such disclosure,
balances the need for disclosure against other statutory
responsibilities that may be facilitated by protecting sensitive
information.
Striking the appropriate balance is context specific. Where the
statutory or regulatory framework requires or encourages FHFA to
publish the regulatory submissions prepared by an Enterprise or a
Federal Home Loan Bank, FHFA's practice has been to omit confidential
information from those publications (e.g., Duty to Serve Underserved
Markets Plans). In some cases--for example, under the Enterprise
Resolution Planning Regulation (12 CFR part 1242) and the Federal Home
Loan Bank Housing Goals Regulation (12 CFR part 1281)--this practice is
facilitated by requesting that the regulated entity segregate
confidential and non-confidential information into separate documents
so that the non-confidential submissions can be published in their
entirety.
The final rule strikes the appropriate balance between the need for
disclosure and protecting sensitive information. In recognition of the
fact that a substantial portion of an Enterprise's new product
submission is likely to contain information that an Enterprise would
prefer to remain confidential, FHFA does not expect to publish the
submission or supporting documentation in whole. Instead, FHFA will
review the submissions and, based on the information it contains,
prepare a notice that provides the public with enough information to
comment on the extent to which the proposed new product would serve the
public interest. The public notice may include information that an
Enterprise would prefer to be kept confidential. However, this approach
is consistent with the statutory intent that FHFA disclose information
to the public about a potential Enterprise new product prior to it
being offered to the market. But for the statute, this information
customarily would not be made public. The Director would make any such
disclosures in view of the regulatory framework that governs FHFA's
disclosure of non-public information, the statutory intent underpinning
the final rule, and the Director's other statutory duties.
F. FHFA Transparency and Reporting
While some commenters expressed the need to protect the
confidentiality of Enterprise submissions, most commenters sought
greater transparency
[[Page 79225]]
into Enterprise new activities. Commenters expressed various
perspectives on how transparency could be enhanced. Several commenters
suggested that FHFA should report on Enterprise new activities on a
monthly, quarterly, or annual basis. Commenters' suggestions on the
content of that reporting can be grouped into two categories--
transparency about the new activities themselves and transparency into
FHFA's decision-making.
With respect to the new activities, one commenter noted that the
reporting should identify the Enterprise that submitted the notice and
describe the basic parameters of a proposed activity, but not be so
specific as to disclose operational details that might reveal
confidential aspects of the work under development ``that are not ready
for public consumption.'' In contrast, another commenter seemed to
suggest that reporting on a new activity should be ongoing and include
a list of all new activities and the market participants involved.
Along the same lines, another commenter recommended that FHFA conduct
an ex post evaluation of each new product after six months and that the
resulting analysis should be made publicly available.
Several commenters also requested that FHFA publish a summary of
its determinations on Enterprise new activity submissions. One
commenter noted that this disclosure could provide some insight into
Enterprise reaction to market trends and would give stakeholders a more
informed ``view of the dedication of Enterprise time and resources to
innovation and a clearer picture of the types of activities that FHFA
will and will not deem to be permissible for an Enterprise[ ] to
pursue.'' Another commenter remarked that in the absence of insight
into why a proposed product was denied approval, the Enterprises and
other market participants might refrain from investing human and
financial resources into developing Enterprise new products.
FHFA agrees with the commenters suggestions that the final rule
should have a provision that requires Agency reporting on the
Enterprises' new activity and new product submissions and FHFA's
decisions. FHFA anticipates leveraging existing reports, such as the
Annual Report to Congress or annual Performance and Accountability
Report, to include a section that identifies new activity and new
product submissions by Enterprise, describes the basic parameters of
proposed activities or products, and summarizes FHFA's new product
determinations, approvals, and disapprovals and the basis for those
decisions. Reporting under this new provision would omit confidential
and proprietary information not already published in connection with
the public notice for a new product since the report is for information
only and the public would not be asked to comment.
III. Section-by-Section Analysis of the Final Rule
A. Purpose and Authority; Definitions--Sec. Sec. 1253.1 and 1253.2
Section 1253.1 of the final rule sets out the purpose and authority
of the rule, which is to implement the Director's authority under
section 1321 of the Safety and Soundness Act to review and approve new
Enterprise products before they are offered to the market. Section
1253.2 of the final rule defines key terms used in the regulation. Of
particular significance, the final rule defines ``activity'' as a
business line, business practice, offering, or service, including a
guarantee, a financial instrument, consulting or marketing, that the
Enterprise provides to the market either on a standalone basis or as
part of a business line, business practice, offering, or service. While
this definition was implied by the Proposed Rule, it was not stated
explicitly. In line with the Proposed Rule, Sec. 1253.2 of the final
rule also defines ``pilot'' as an activity that has a limited term and
scope for purposes of evaluating the viability of the activity,
regardless of the name assigned to the activity. The word ``limited''
has been added to enhance clarity. ``New activity'' and ``new product''
have the meanings assigned to them under Sec. Sec. 1253.3 and 1253.4
of the final rule, respectively.
B. New Activity Description and Exclusions--Sec. 1253.3
New Activities. Section 1253.3 of the final rule describes the
criteria for identifying a new activity and describes the activities
which are excluded from the review and approval requirements by
statute. Because the final rule includes an explicit definition for
``activity,'' the structure of this section has changed from the
Proposed Rule to reflect that addition and to improve clarity. A
threshold criterion for distinguishing an ongoing activity from a new
activity is timing. Under Sec. 1253.3(a)(1) of the final rule, an
activity is a ``new activity'' if it is not engaged in by the
Enterprise on or before the effective date of the regulation. However,
Sec. 1253.3(a)(2) of the final rule provides that if an Enterprise
does engage in an activity on or before the effective date of the
regulation, but the Enterprise enhances, alters, or modifies the
activity after the effective date of the regulation so as to: (1)
require a new resource, type of data, policy (or modification to an
existing policy), process, or infrastructure; (2) expand the scope or
increase the level of credit risk, market risk, or operational risk to
the Enterprise; or (3) involve a new category of borrower, investor,
counterparty, or collateral, then the resultant activity would be
considered a ``new activity.'' This approach simplifies the criteria
for determining whether an activity is a new activity that was
presented in the Proposed Rule without altering the scope of activities
captured.
Section 1253.3(a)(3) and (4) of the final rule include two
additional categories of new activities that are intended to
comprehensively capture an Enterprise's activities related to pilots.
Section 1253.3(a)(3) of the final rule classifies as a new activity:
(1) any pilot engaged in by an Enterprise after the effective date of
the regulation; and (2) any modification to the volume or duration of a
pilot that occurs after the effective date of the regulation,
regardless of whether the Enterprise initially engaged in the pilot
before or after the effective date of the regulation. Section
1253.3(a)(4) of the final rule captures the transition from a pilot
into an ongoing activity, regardless of whether the Enterprise
initially engaged in the pilot before or after the effective date of
the regulation. While an Enterprise's activities related to pilots are
likely to also fall within the scope of Sec. 1253.3(a)(1) or (2) of
the final rule, including targeted provisions on pilots in the final
rule emphasizes FHFA's commitment to closely scrutinize them. For this
reason, the final rule expands the scope of pilots captured as new
activities to include modifications to the volume or duration of a
pilot. Unless a pilot or an activity resulting from a pilot falls into
one of the exclusions set forth at Sec. 1253.3(b) of the final rule,
an Enterprise must submit a notice of new activity or a request for
prior approval as a new product, as appropriate.
The final rule does not reflect one element of the new activity
description from the Proposed Rule. Section 1253.3(a)(3)(iv) of the
Proposed Rule provided that an activity could be a new activity if it
would substantially impact the mortgage finance system, the
Enterprise's safety and soundness, compliance with the Enterprise's
authorizing statute, or the public interest. On further reflection,
FHFA has determined that it would be unreasonable to hold the
Enterprises to account for failing to file a notice of new
[[Page 79226]]
activity based on the subjective determinations required by this
provision.
Exclusions. As noted above, the following activities are excluded
from the review and approval requirements under the Safety and
Soundness Act: (1) the Enterprises' AUS, and any upgrades to the
technology, operating system, or software to operate the underwriting
system; (2) any modifications to mortgage terms and conditions or
underwriting criteria relating to mortgages that are purchased or
guaranteed by an Enterprise but that do not alter the nature of the
underlying transaction as residential mortgage financing; and (3)
substantially similar activities, as defined in Section I.A above. See
section 1321(e) of the Safety and Soundness Act (12 U.S.C. 4541(e)).
Section 1253.3(b) of the final rule incorporates these statutory
exclusions and makes clear that activities conducted to facilitate the
administration of an Enterprise's internal affairs but which are not
provided to the market are also excluded from the review and approval
requirements of section 1321 of the Safety and Soundness Act.
The final rule clarifies the scope of the exclusions related to the
AUS and mortgage terms and conditions or underwriting criteria but does
not modify the scope of the exclusions, which remain as proposed. To
further enhance clarity of the exclusions, the final rule interprets
``upgrades'' to an Enterprises' AUS and ``modifications'' to mortgage
terms and conditions or underwriting criteria in a way that ensures
that these types of changes are not inadvertently captured by the new
activity description. Accordingly, a new activity does not include any
enhancement, alteration, or modification to the technology, operating
system, or software to operate the AUS or to mortgage terms and
conditions or underwriting criteria that does not alter the nature of
the underlying transaction as residential mortgage financing is
excluded from the new activity description, even if that change: (1)
requires a new resource, type of data, policy (or modification to an
existing policy), process, or infrastructure; (2) expands the scope or
increases the level of credit risk, market risk, or operational risk to
the Enterprise; or (3) involves a new category of borrower, investor,
counterparty, or collateral.
The final rule also revises the description of substantially
similar activities in a manner that makes the exclusion easier to
understand and more closely aligned with the statute, including with
respect to the treatment of technology systems that apply or mirror the
Enterprises' mortgage terms and conditions or underwriting criteria. A
more detailed discussion of these revisions is found in Section G
below.
C. New Product Determination--Sec. 1253.4
Under Sec. 1253.4(a) of the final rule, a new activity is a new
product if the Director determines that the new activity merits public
notice and comment about whether the proposed activity serves the
public interest. This reflects a simplified approach from the Proposed
Rule under which the Director would make the determination whether the
new activity is a new product based on whether the new activity merits
public notice and comment on three criteria: (1) compliance with
specific provisions of the Enterprises' respective authorizing
statutes; (2) the safety and soundness of the Enterprise or the
mortgage finance system; and (3) the public interest.
The revisions to the new product determination criteria have been
made for two reasons. First, FHFA is unlikely to seek public comment on
redundant topics. FHFA proposed eight factors that the Director may
consider when determining whether a new product is in the public
interest. These are the same factors on which the Director would seek
public comment to inform the decision as to whether approval of a new
product would be in the public interest. To a large extent, the
determination criteria in Sec. 1253.4(a) of the Proposed Rule
overlapped with the public interest factors in proposed Sec.
1253.4(b). For example, one of the public interest factors examines the
degree to which the proposed new product would advance the purposes of
the Enterprise under its authorizing statute, which is similar to the
determination criterion in Sec. 1253.4(a) of the Proposed Rule about
the new activity's compliance with specific provisions of the
Enterprise's authorizing statute. Another public interest factor
examines the degree to which the proposed new product might raise or
mitigate risks to the mortgage finance or financial system, which is
similar to the criterion in Sec. 1253.4(a) of the Proposed Rule about
the safety and soundness of the Enterprise or the mortgage finance
system. While two of determination criteria have been deleted, the
public interest factors remain unchanged from the Proposed Rule, and
the Director retains the discretion to include other factors deemed
appropriate to consider during the approval process. Second, one
Enterprise raised a concern that seeking public input on the
determination criteria in the Proposed Rule would likely require the
public disclosure of confidential or privileged information. FHFA
believes that it can adequately assess compliance with specific
provisions of the Enterprises' respective authorizing statutes, as well
as the safety and soundness of the Enterprise or the mortgage finance
system, without seeking public input beyond what would be sought
through the public interest factors.
D. Notice of New Activity--Sec. 1253.5
Section 1253.5 of the final rule establishes the procedural
framework for Enterprise submission and FHFA review of a notice of new
activity. Before commencing any new activity, an Enterprise must submit
to FHFA a written notice, the content of which is described in Sec.
1253.9 of the final rule. Consistent with the Proposed Rule, an
Enterprise includes any of its affiliates (see 12 U.S.C. 4502; 12 CFR
1201.1) and if the new activity is to be offered by an affiliate,
either the Enterprise or its affiliate may submit the required notice.
In contrast to the Proposed Rule and in response to comments, the final
rule explicitly states that an Enterprise may request prior
consultation with FHFA about whether a notice of new activity is
required. Circumstances which may merit a consultation could include
when the Enterprise is uncertain about whether a notice of new activity
is required.
A notice of new activity will not be considered complete and
received for processing until the information required by Sec. 1253.9
of the final rule has been submitted, including any follow-up
information required by FHFA. Section 1253.5(c) of the final rule
provides that nothing in the rule limits or restricts FHFA from
reviewing the notice of new activity under any other applicable
regulation or statute, as part of FHFA's authority to review for safety
and soundness and for consistency with an Enterprise's statutory
mission. For example, if a proposed new activity necessitated a review
for compliance with the Uniform Mortgage-Backed Securities Regulation
(12 CFR part 1248), FHFA's receipt of information necessary for that
review may be part of FHFA's determination that the notice of new
activity is complete and has been received.
The final rule provides that an Enterprise may not commence a new
activity unless the Director makes a written determination that the new
activity is not a new product within 15 days, or the 15 days pass and
no
[[Page 79227]]
determination is made. If the Director determines that the new activity
is a new product, the Enterprise must elect to submit a request for
prior approval of a new product and await approval of the new product
under Sec. 1253.6 of the final rule or it must discontinue its plan to
offer the new product to the market. Providing this optionality for the
Enterprises reflects a change from the Proposed Rule in response to the
Enterprises' request to be permitted to decide whether to continue to
pursue the offering following a new product determination. If FHFA
issues a determination that the new activity is not a new product, or
the 15 days pass without any determination, the Enterprise may begin
the new activity, subject to such terms, conditions, or limitations as
the Director may establish.
E. Request for Prior Approval of a New Product; Public Notice;
Standards for Approval--Sec. 1253.6
The final rule introduces the concept of a request for prior
approval of a new product that is distinct from a notice of new
activity. This change responds to commenters' concerns that the
Proposed Rule did not provide this distinction and accommodates the
changes made to Sec. 1253.5 of the final rule that permit an
Enterprise to decide whether it still wants to pursue an offering
following a new product determination. Section 1253.6 of the final rule
establishes the procedural framework for Enterprise submission and FHFA
review of a request for prior approval of a new product. An Enterprise
must submit a request for prior approval of a new product to FHFA
before offering a new product to the market. However, since a
determination by the Director under Sec. 1253.4 of the final rule is
required for a new activity to be classified as a new product, an
Enterprise may only submit a request for prior approval of a new
product if the Director has made such a determination. The Director may
make a determination that a new activity is a new product at the
conclusion of the Agency's review of a new activity or at the
conclusion of an Enterprise's voluntary consultation with FHFA.
A request for prior approval of a new product will not be
considered complete and received for processing until the information
required by Sec. 1253.9 of the final rule has been submitted,
including any additional information requested by FHFA. In response to
commenters' concerns that FHFA has an unlimited amount of time to
prepare a public notice, the final rule makes clear that once FHFA
makes the determination that the request for prior approval is
``received,'' FHFA will publish a public notice soliciting comments on
the proposed new product without delay. FHFA will include in that
public notice enough information from the request for prior approval of
a new product to sufficiently describe the new product so that the
public can provide meaningful comment. The final rule clarifies that
the public notice will be published on FHFA's website and in the
Federal Register. In response to public comments that requested FHFA to
maximize time for public comment, the statutory 30-day comment period
will commence on the date that the notice is published in the Federal
Register, which is expected to be later than the date on which the
notice is published on FHFA's website. The public notice will provide
instructions for submission of public comments. As is the practice with
other requests for information and proposed rules, comments submitted
by the public on a new product will be made public and posted on FHFA's
website.
In determining whether to approve a new product, the Director will
consider all public comments received by the closing date of the
comment period. The final rule incorporates the Safety and Soundness
Act's approval requirements by providing that the Director may approve
the new product if the Director determines that the new product: (1) in
the case of Fannie Mae, is authorized under 12 U.S.C. 1717(b)(2), (3),
(4), or (5) or 12 U.S.C. 1719; or (2) in the case of Freddie Mac, is
authorized under 12 U.S.C. 1454(a)(1), (4), or (5); (3) is in the
public interest; and (4) is consistent with the safety and soundness of
the Enterprise or the mortgage finance system.
In accordance with the statutory timelines, the Director will make
a determination on the new product no later than 30 days after the
close of the public comment period. If no determination is made within
that timeframe, the Enterprise may offer the new product. As with a new
activity, a new product may be subject to any terms, conditions, or
limitations as the Director may establish. Also, as with a new
activity, the Director may review for safety and soundness or
consistency with the Enterprise's statutory mission at any time;
exercise of that authority is not constrained by any time limit
provided for in the Act or reflected in the final rule.
F. Temporary Approval of a New Product--Sec. 1253.7
Section 1253.7 of the final rule incorporates the statutory
provision empowering the Director to make a new product temporarily
available to the market without first seeking public comment. Section
1321(c) of the Safety and Soundness Act (12 U.S.C. 4541(c)) authorizes
the Director to grant temporary approval of a new product if the
Director finds ``that the existence of exigent circumstances makes [the
delay associated with seeking public comment] contrary to the public
interest.'' Section 1321(c)(4)(C) of the Act (12 U.S.C. 4541(c)(4)(C)).
Under the final rule, an Enterprise may request temporary approval of a
new product, or FHFA may act on its own initiative. The Director may
impose terms, conditions, or limitations on the temporary approval, and
upon the granting of a temporary approval for a new product, FHFA will
begin the process for permanent decision on the proposed new product in
accordance with Sec. 1253.6 of the final rule, including issuing a
notice for public comment without delay. This section remains unchanged
from the Proposed Rule, except for conforming paragraph numbering.
G. Substantially Similar Activities--Sec. 1253.8
As noted above, ``substantially similar activities'' are excluded
from the review and approval requirements of the Safety and Soundness
Act. Section 1253.8 of the final rule establishes the procedural
framework for an Enterprise to offer a substantially similar activity.
An Enterprise must provide written notice to FHFA of its intent to
offer the substantially similar activity at least 15 days prior to
offering the activity to the market. In contrast to the other statutory
exclusions which do not require notice (e.g., the AUS and enhancements,
alterations, or modifications to mortgage terms and conditions or
underwriting criteria), advance notice to FHFA is required for any
substantially similar activity so that FHFA may exercise its regulatory
and supervisory responsibilities to ensure that the activity qualifies
for the exclusion.
The notice of substantially similar activity required under Sec.
1253.8 of the final rule is distinct from a notice of new activity.
Section 1253.8(d) of the final rule provides that a notice of
substantially similar activity must include the name and a complete and
specific description of the activity, as well as an explanation of why
the Enterprise believes the activity qualifies as a substantially
similar activity under Sec. 1253.8(b) of the final rule. However, if
the Director determines that the activity is not a substantially
similar activity, the Enterprise must submit a notice of new activity
under Sec. 1253.5 of the final
[[Page 79228]]
rule or a request for prior approval of a new product under Sec.
1253.6 of the final rule and may not proceed with the activity until
the requirements of those sections, as applicable, have been satisfied.
The final rule revises the description of substantially similar
activities in a manner that makes the exclusion easier to understand
and aligns more closely with the statute, including with respect to the
treatment of technology systems that are related but independent of an
Enterprise's AUS. The final rule distinguishes the criteria used for
determining whether an activity is substantially similar to activities
that are otherwise excluded from the review and approval requirements
under the Safety and Soundness Act (e.g., the AUS) from the criteria
used for determining whether an activity is substantially similar to a
new product that an Enterprise is authorized to offer to the market.
The final rule also clarifies the criteria related to the latter
category of substantially similar activities. Accordingly, under Sec.
1253.8(b) of the final rule, the Director may determine that an
activity is substantially similar to: (1) the AUS, including any
enhancement, alteration, or modification to the technology, operating
system, or software to operate the AUS; or (2) any enhancement,
alteration, or modification to mortgage terms and conditions or
underwriting criteria relating to residential mortgages that are
purchased or guaranteed by an Enterprise if the activity is a
technological implementation of mortgage terms and conditions or
underwriting criteria relating to residential mortgages that are
purchased or guaranteed by an Enterprise. Under Sec. 1253.8(c) of the
final rule, the Director may determine that an activity is
substantially similar to a new product that the Director has approved
for either Enterprise or that is permissible for either Enterprise to
offer because the statutory timeframe lapsed without the Director
rendering a decision on a request for prior approval of a new product,
if the activity: (1) requires the same or a similar resource, type of
data, policy, process, and infrastructure; (2) entails the same or
similar levels of credit risk, market risk, and operational risk to the
Enterprise; and (3) involves the same or a similar category of
borrower, investor, counterparty, and collateral. In contrast, the
Proposed Rule used a single set of negative criteria to identify which
(if any) activities would qualify as substantially similar. The
Proposed Rule also indicated that the exclusion for activities that
were substantially similar to approved new products was available only
to the Enterprise that did not receive approval for the original
product, a result which is inconsistent with the provisions of the Act.
H. New Activity and New Product Submission Requirements--Sec. 1253.9
In response to comments regarding the burdensome submission
process, Sec. 1253.9 of the final rule introduces a two-step process
for an Enterprise to submit information to FHFA with respect to a
potential new product and makes minor adjustments to the required
content. The scope of the information required for a notice of new
activity is set out in Sec. 1253.9(a) of the final rule. These
streamlined information requirements include the five requirements from
the Proposed Rule that are most critical to enable FHFA to assess the
impact, risks, and benefits of a new activity and determine whether the
new activity is a new product. If the Director determines that the new
activity is a new product (following the review of a notice of new
activity or following an Enterprise's voluntary consultation with
FHFA), and the Enterprise elects to proceed with a request for prior
approval of a new product, then the Enterprise must provide the
additional information set out in Sec. 1253.9(b) of the final rule.
Those information requirements are substantially more detailed than
what is required in connection with a notice of new activity, to ensure
that FHFA can provide the public with sufficient information to review
and meaningfully comment on the proposed new product and that the
Director has the information required to inform any determination under
the statutory standards for approval of a new product. The final rule
removes one element of required content from the Proposed Rule--an
Enterprise would not be required to indicate its view as to whether a
new activity is a new product since the request for prior approval of a
new product would only occur after the Director made such a
determination.
I. Public Disclosure--Sec. 1253.10
Section 1253.10 of the final rule provides a mechanism for FHFA to
enhance the transparency of its decision-making on new product
determinations, approvals, and disapprovals. The provision commits FHFA
to publish information related to the Director's determinations on new
activity and new product submissions within a reasonable time period
after the end of the calendar year during which the Enterprises filed
such submissions. Any reporting by FHFA under this provision would not
disclose confidential or proprietary information provided to FHFA by an
Enterprise.
J. Preservation of Authority--Sec. 1253.11
The content of section 1253.11of the final rule is unchanged from
Sec. 1253.10(a) of the Proposed Rule, but has been reformatted in the
final rule. Section 1253.11 of the final rule confirms that the
Director's exercise of authority to review new Enterprise activities
and products under section 1321 of the Safety and Soundness Act in no
way restricts any other authority of the Director over new and existing
Enterprise activities or products, including the authority of the
Director to review new and existing activities or products for safety
and soundness or consistency with the statutory mission of the
Enterprise. See section 1321(f) of the Safety and Soundness Act (12
U.S.C. 4541(f)). Under this authority, for example, the Director could
find that an ongoing activity should be subject to certain conditions
or terms.
Section 1253.10 (b) of the Proposed Rule, which as proposed set
forth the actions that FHFA may take if an Enterprise fails to comply
with the provisions of the rule, has been deleted from the final rule.
FHFA has determined that it would be redundant to restate authorities
contained elsewhere in the applicable legal and regulatory framework.
IV. Regulatory Analyses
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities must include an initial regulatory flexibility
analysis describing the regulation's impact on small entities. FHFA
need not undertake such an analysis if the Agency has certified that
the regulation will not have a significant economic impact on a
substantial number of small entities (5 U.S.C. 605(b)). FHFA has
considered the impact of the final rule under the Regulatory
Flexibility Act, and FHFA certifies that the final rule will not have a
significant economic impact on a substantial number of small entities
because the regulation only applies to Fannie Mae and Freddie Mac,
which are not small entities for purposes of the Regulatory Flexibility
Act.
B. Paperwork Reduction Act
The final rule does not contain any information collection
requirement that requires the approval of the Office of
[[Page 79229]]
Management and Budget (OMB) under the Paperwork Reduction Act (44
U.S.C. 3501 et seq.). Therefore, FHFA has not submitted any information
to OMB for Paperwork Reduction Act review.
C. Congressional Review Act
In accordance with the Congressional Review Act (5 U.S.C. 801 et
seq.), FHFA has determined that this final rule is a major rule and has
verified this determination with the Office of Information and
Regulatory Affairs of OMB.
List of Subjects in 12 CFR Part 1253
Government-sponsored enterprises, Mortgages, New activities, New
products.
Authority and Issuance
0
For the reasons stated in the preamble, under the authority of 12
U.S.C. 4526 and 12 U.S.C. 4541, FHFA amends Chapter XII of Title 12 of
the Code of Federal Regulations by revising part 1253 to read as
follows:
PART 1253--PRIOR APPROVAL FOR ENTERPRISE PRODUCTS
Sec.
1253.1 Purpose and authority.
1253.2 Definitions.
1253.3 New activity description and exclusions.
1253.4 New product determination.
1253.5 Notice of new activity.
1253.6 Request for prior approval of a new product; public notice;
standards for approval.
1253.7 Temporary approval of a new product.
1253.8 Substantially similar activities.
1253.9 New activity and new product submission requirements.
1253.10 Public disclosure.
1253.11 Preservation of authority.
Authority: 12 U.S.C. 4511; 12 U.S.C. 4513; 12 U.S.C. 4526; 12
U.S.C. 4541.
Sec. 1253.1 Purpose and authority.
The purpose of this part is to establish policies and procedures
implementing the prior approval authority for Enterprise products, in
accordance with section 1321 of the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4541), as amended
(Safety and Soundness Act).
Sec. 1253.2 Definitions.
For purposes of this part:
Activity means a business line, business practice, offering, or
service, including a guarantee, a financial instrument, consulting or
marketing, that the Enterprise provides to the market either on a
standalone basis or as part of a business line, business practice,
offering, or service.
Authorizing statute means the Federal National Mortgage Association
Charter Act and the Federal Home Loan Mortgage Corporation Act, as
applicable.
Credit risk is the potential that a borrower or counterparty will
fail to meet its obligations in accordance with agreed terms. Credit
risk includes the decline in measured quality of a credit exposure that
might result in increased capital costs, provisioning expenses, or a
reduction in economic return.
Days means calendar days.
Market risk means the risk that the market value, or estimated fair
value if the market value is not available, of an Enterprise's
portfolio will decline as a result of changes in interest rates,
foreign exchange rates, or equity or commodity prices.
New activity has the meaning provided in Sec. 1253.3.
New product has the meaning provided in Sec. 1253.4.
Operational risk means the risk of loss resulting from inadequate
or failed internal processes, people, or systems, or from external
events, including all direct and indirect economic losses related to
legal liability. Operational risk includes reputational risk, which is
the potential for substantial negative publicity regarding an
Enterprise's business practices.
Pilot means an activity that has a limited term and scope for
purposes of evaluating the viability of the activity. A pilot may also
be referred to as a testing initiative, test and learn, temporary
authorization, or by other names.
Sec. 1253.3 New activity description and exclusions.
(a) A new activity is any of the following if not engaged in by the
Enterprise on or before February 27, 2023:
(1) An activity;
(2) An enhancement, alteration, or modification to an activity
that--
(i) Requires a new resource, type of data, policy, modification to
an existing policy, process, or infrastructure;
(ii) Expands the scope or increases the level of credit risk,
market risk, or operational risk to the Enterprise; or
(iii) Involves a new category of borrower, investor, counterparty,
or collateral;
(3) A pilot or a modification to the volume or duration of a pilot,
including a modification to a pilot that commenced before February 27,
2023; or
(4) An activity that results from a pilot (including from a pilot
that commenced before February 27, 2023) or an enhancement, alteration,
or modification (as described by paragraphs (a)(2)(i) through (iii) of
this section) to an activity that results from a pilot (including from
a pilot that commenced before February 27, 2023).
(b) A new activity excludes:
(1) An enhancement, alteration, or modification (as described by
paragraphs (a)(2)(i) through (iii) of this section) to the technology,
operating system, or software to operate the automated loan
underwriting system of an Enterprise that was in existence as of July
30, 2008.
(2) An enhancement, alteration, or modification (as described by
paragraphs (a)(2)(i) through (iii) of this section) to the mortgage
terms and conditions or mortgage underwriting criteria relating to the
mortgages that are purchased or guaranteed by an Enterprise, provided
that such enhancement, alteration, or modification does not alter the
underlying transaction so as to include services or financing, other
than residential mortgage financing.
(3) Pursuant to the requirements of Sec. 1253.8, any activity
undertaken by an Enterprise that is substantially similar to--
(i) The automated loan underwriting system of an Enterprise that
was in existence as of July 30, 2008, including or any enhancement,
alteration, or modification to the technology, operating system, or
software to operate the automated loan underwriting system;
(ii) Any enhancement, alteration, or modification to mortgage terms
and conditions or mortgage underwriting criteria relating to the
mortgages that are purchased or guaranteed by an Enterprise, provided
that such activity does not alter the underlying transaction so as to
include services or financing, other than residential mortgage
financing; and
(iii) A new product that the Director has approved for either
Enterprise under Sec. 1253.6(a) through (f) or Sec. 1253.7 or a new
product that is otherwise available to either Enterprise under Sec.
1253.6(h).
(4) Any Enterprise business practice, transaction, or conduct
performed solely to facilitate the administration of an Enterprise's
internal affairs.
Sec. 1253.4 New product determination.
(a) A new product is any new activity that the Director determines
merits public notice and comment about whether it is in the public
interest.
(b) The factors that the Director may consider when determining
whether a new product is in the public interest are:
[[Page 79230]]
(1) The degree to which the new product might advance any of the
purposes of the Enterprise under its authorizing statute;
(2) The degree to which the new product serves underserved markets
and housing goals as set forth in sections 1332-1335 of the Safety and
Soundness Act (12 U.S.C. 4562-4565);
(3) The degree to which the new product is being or could be
supplied by other market participants;
(4) The degree to which the new product promotes competition in the
marketplace or, to the contrary, would result in less competition;
(5) The degree to which the new product overcomes natural market
barriers or inefficiencies;
(6) The degree to which the new product might raise or mitigate
risks to the mortgage finance or financial system;
(7) The degree to which the new product furthers fair housing and
fair lending; and
(8) Such other factors as determined appropriate by the Director.
Sec. 1253.5 Notice of new activity.
(a) Before commencing a new activity, an Enterprise must submit a
notice of new activity to FHFA. An Enterprise may request prior
consultation with FHFA about whether a notice of new activity is
required.
(b) In support of its notice of new activity, the Enterprise shall
submit thorough, complete, and specific information as described under
Sec. 1253.9(a). FHFA will evaluate the notice of new activity to
determine if the submission contains sufficient information to enable
the Director to determine whether the new activity is a new product
subject to prior approval. Once FHFA makes the determination that the
submission is complete, FHFA will notify the Enterprise that the
submission is ``received'' for purposes of 12 U.S.C. 4541(e)(2)(B).
(c) Nothing in this regulation limits or restricts FHFA from
reviewing a notice of new activity under any other applicable law,
under the Director's authority to review for safety and soundness, or
to determine whether the activity complies with the Enterprise's
authorizing statute. FHFA may conduct such a review as part of its
determination that the notice of new activity submission is complete.
(d) No later than 15 days after FHFA notifies the Enterprise that
the submission is received, the Director will make a determination on
the notice of new activity and will notify the Enterprise accordingly.
If the Director determines that the new activity is a new product, the
Enterprise must elect to either submit a request for prior approval of
the new product under Sec. 1253.6 or discontinue its plan to offer the
new product to the market.
(e) If the Director determines that the new activity is not a new
product, or if after the passage of 15 days the Director does not make
a determination whether the new activity is a new product, the
Enterprise may commence the new activity. The Director may establish
terms, conditions, or limitations on the Enterprise's engagement in the
new activity as the Director determines to be appropriate and with
which the Enterprise must comply in order to engage in the new
activity.
(f) If the Director does not make a determination within the 15-day
period, the absence of such determination does not limit or restrict
the Director's safety and soundness authority or the Director's
authority to review the new activity to confirm that the activity is
consistent with the Enterprise's authorizing statute.
Sec. 1253.6 Request for prior approval of a new product; public
notice; standards for approval.
(a) An Enterprise must submit a request for prior approval of a new
product to FHFA before offering a new product to the market.
(1) An Enterprise may submit a request for prior approval of a new
product if the Director determines that a new activity is a new product
under Sec. 1253.5(d) or, following consultation with FHFA, if the
Director authorizes the Enterprise to submit such a request without
first submitting a notice of new activity. An Enterprise must submit a
request for prior approval of a new product to FHFA before offering a
new product to the market.
(2) In support of its request for prior approval of a new product,
the Enterprise shall submit thorough, complete, and specific
information as described under Sec. 1253.9(b).
(3) FHFA will evaluate the request to determine if the submission
contains sufficient information for FHFA to prepare a public notice
such that the public will be able to provide fully informed comments on
the new product. Once FHFA makes the determination that the submission
is complete, FHFA will notify the Enterprise that the submission is
``received'' for purposes of 12 U.S.C. 4541(c)(2).
(b) Following FHFA's determination that a submission is complete,
FHFA will publish a public notice soliciting comments on the new
product on FHFA's website and in the Federal Register without delay.
(1) The public notice will describe the new product and will
include such information from the request for prior approval of a new
product as necessary to provide the public with sufficient notice and
opportunity to comment on the new product. The public notice will
provide instructions for the submission of public comments.
(2) The public will have 30 days from the date that the public
notice is published in the Federal Register to provide comments on the
new product.
(3) The Director will consider all public comments received by the
closing date of the comment period.
(c) No later than 30 days after the end of the public comment
period, the Director will provide the Enterprise with a written
determination on whether it may proceed with the new product. The
written determination will specify the grounds for the Director's
determination.
(d) The Director may approve the new product if the Director
determines that the new product:
(1) In the case of Fannie Mae, is authorized under 12 U.S.C.
1717(b)(2), (3), (4), or (5) or 12 U.S.C. 1719; or
(2) In the case of Freddie Mac, is authorized under 12 U.S.C.
1454(a)(1), (4), or (5); and
(3) Is in the public interest; and
(4) Is consistent with the safety and soundness of the Enterprise
or the mortgage finance system.
(e) The Director may consider the factors provided in Sec.
1253.4(b) when determining whether a new product is in the public
interest.
(f) The Director may establish terms, conditions, or limitations on
the Enterprise's offering of the new product with which the Enterprise
must comply in order to offer the new product.
(g) If the Director disapproves the new product, the Enterprise may
not offer the new product.
(h) If the Director does not make a determination within 30 days
after the end of the public comment period, the Enterprise may offer
the new product. The absence of such a determination within 30 days
does not limit or restrict the Director's safety and soundness
authority or the Director's authority to review the new product to
confirm that the product is consistent with the Enterprise's
authorizing statute.
(i) The Director may request any information in addition to that
supplied in the completed request for prior approval of a new product
if, as a result of public comment or otherwise in the course of
considering the request, the Director believes that the information is
[[Page 79231]]
necessary for the Director's decision. The Director may disapprove a
new product if the Director does not receive the information requested
from the Enterprise in sufficient time to permit adequate evaluation of
the information within the time periods set forth in this section.
Sec. 1253.7 Temporary approval of a new product.
(a) The Director may approve a new product without first seeking
public comment as described in Sec. 1253.6 if:
(1) In addition to the information required by Sec. 1253.9(b), the
Enterprise submits a specific request for temporary approval that
describes the exigent circumstances that make the delay associated with
a 30-day public comment period contrary to the public interest and the
Director determines that exigent circumstances exist and that delay
associated with first seeking public comment would be contrary to the
public interest; or
(2) Notwithstanding the absence of a request by the Enterprise for
temporary approval, the Director determines on the Director's own
initiative that there are exigent circumstances that make the delay
associated with first seeking public comment contrary to the public
interest.
(b) The Director may impose terms, conditions, or limitations on
the temporary approval to ensure that the new product offering is
consistent with the factors in Sec. 1253.6(d).
(c) If the Director grants temporary approval, the Director will
notify the Enterprise in writing of the Director's decision and include
the period for which it is effective and any terms, conditions or
limitations. Upon granting of temporary approval, FHFA will also
publish the request for public comment to begin the process for
permanent approval in accordance with Sec. 1253.6.
(d) If the Director denies a request for temporary approval, the
Director will notify the Enterprise in writing of the Director's
decision and will evaluate the new product in accordance with this
section.
Sec. 1253.8 Substantially similar activities.
(a) An Enterprise shall notify FHFA of its intent to commence an
activity that is substantially similar to any of the following
activities at least 15 days prior to offering the activity:
(1) The automated loan underwriting system of an Enterprise that
was in existence as of July 30, 2008, including any enhancement,
alteration, or modification to the technology, operating system, or
software to operate the automated loan underwriting system;
(2) Any enhancement, alteration, or modification to mortgage terms
and conditions or underwriting criteria relating to mortgages that are
purchased or guaranteed by an Enterprise, provided that such activity
does not alter the underlying transaction so as to include services or
financing, other than residential mortgage financing; or
(3) A new product that the Director has approved for either
Enterprise under Sec. 1253.6(a) through (f) or Sec. 1253.7 or a new
product that is otherwise available to either Enterprise under Sec.
1253.6(h).
(b) The Director may determine that an activity is substantially
similar to an activity described in paragraph (a)(1) or (2) of this
section, if the activity is:
(1) A technology system that applies mortgage terms and conditions
or underwriting criteria to residential mortgages that are purchased or
guaranteed by an Enterprise; or
(2) An enhancement, alteration, or modification to the technology,
operating system, or software to operate a technology system described
in paragraph (b)(1) of this section.
(c) The Director may determine that an activity is substantially
similar to an activity described in paragraph (a)(3) of this section,
if the activity:
(1) Requires the same or a similar resource, type of data, policy,
process, and infrastructure;
(2) Entails the same or similar levels of credit risk, market risk,
and operational risk to the Enterprise; and
(3) Involves the same or a similar category of borrower, investor,
counterparty, and collateral.
(d) The notification is not required to be a notice of new
activity. The notification shall include the name and a complete and
specific description of the activity, as well as an explanation of why
the Enterprise believes the activity qualifies as a substantially
similar activity under paragraph (a) of this section.
(e) Public notice and comment is not required in connection with
offering substantially similar activities.
(f) If the Director determines an activity is not a substantially
similar activity, the Enterprise must submit a notice of new activity
under Sec. 1253.5 or a request for prior approval of a new product
under Sec. 1253.6 and may not proceed or continue with the activity
except pursuant to the requirements in this part.
Sec. 1253.9 New activity and new product submission requirements.
(a) A notice of new activity must provide the following items of
information and appropriate supporting documentation. The corresponding
paragraph number should be listed with the relevant information
provided:
(1) Provide the name of the new activity and a complete and
specific description of the new activity that identifies under which
paragraph(s) of Sec. 1253.3(a) the activity is described.
(2) Describe the business rationale, the intended market, the
business line, and what products are currently being offered or are
proposed to be offered under such business line. Also, include a
description of any market research performed relating to the new
activity.
(3) State the anticipated commencement date for the new activity.
Provide analysis, including assumptions, development expenses, any
applicable fees, expectations for the impact of and projections for the
quarterly size (for example, in terms of cost, personnel, volume of
activity, or risk metrics) of the new activity for at least the first
12 months of deployment, as well as the impact of the new activity on
the risk profile of the Enterprise and the key controls for the
following risks: credit, market, and operational.
(4) If the new activity is a pilot, include the parameters, such as
duration, volume of activity, and performance. If the new activity is
the result of a pilot, include an analysis on the effectiveness of the
pilot that describes the pilot objectives and success criteria; volume
of activity; performance; risk metrics and controls; and the
modifications made for a broader offering and rationale.
(5) Provide a fair housing and fair lending self-evaluation of the
new activity. The self-evaluation should, at a minimum, include data on
the predicted impact of the new activity for protected class
categories; a summary of reasonable alternatives considered; if
disparities are identified, the business justification for the new
activity; and the extent to which the activity furthers fair housing
and fair lending.
(b) A request for prior approval of a new product must provide the
following items of information with appropriate supporting
documentation. The corresponding paragraph number should be listed with
the relevant information provided:
(1) Provide the information required for a notice of new activity
as identified in paragraph (a) of this section.
(2) Describe the business requirements for the new product
including technology requirements. Describe the Enterprise business
units involved in conducting the new product, including any affiliation
or subsidiary relationships, any third-party
[[Page 79232]]
relationships, and the roles of each. Describe the reporting lines and
planned oversight of the new product.
(3) Provide a legal analysis as to whether the new product is--
(i) In the case of Fannie Mae, authorized under 12 U.S.C.
1717(b)(2), (3), (4), or (5) or 12 U.S.C. 1719; or
(ii) In the case of Freddie Mac, authorized under 12 U.S.C.
1454(a)(1), (4), or (5).
(4) Provide copies of all notice and application documents,
including any application for patents or trademarks, the Enterprise has
submitted to other Federal, State or local government regulators
relating to the new product.
(5) Describe the impact of the new product on the public interest
and provide information to address the factors listed in Sec.
1253.4(b).
(6) Describe how the new product is consistent with the safety and
soundness of the Enterprise or the mortgage finance system.
(7) Explain any accounting treatment proposed for the new product.
(c) FHFA may require an Enterprise to submit such further
information as the Director deems necessary to make a determination on
a notice of new activity or a request for prior approval of a new
product, at the time of the original submission or any time thereafter.
(d) An Enterprise shall certify, through an executive officer, that
a notice of new activity or a request for prior approval of a new
product and any supporting material submitted to FHFA pursuant to this
part contain no material misrepresentations or omissions. FHFA may
review and verify any information filed in connection with a notice of
new activity or request for prior approval of a new product.
Sec. 1253.10 Public disclosure.
In addition to information disclosed in the public notice on a new
product, FHFA will make public information related to the Director's
determinations on new activity and new product submissions within a
reasonable time period after the end of the calendar year during which
either Enterprise filed such a submission. Any disclosure under this
paragraph will omit any confidential and proprietary information not
previously disclosed as part of a public notice on a new product.
Sec. 1253.11 Preservation of authority.
The Director's exercise of the Director's authority pursuant to the
prior approval authority for products under 12 U.S.C. 4541, and this
regulation, in no way restricts:
(a) The safety and soundness authority of the Director over all new
and existing products or activities; or
(b) The authority of the Director to review all new and existing
products or activities to determine that such products or activities
are consistent with the authorizing statute of an Enterprise.
Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2022-27942 Filed 12-23-22; 8:45 am]
BILLING CODE 8070-01-P
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</html>Indexed from Federal Register on December 27, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.