DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Government National Mortgage Association 24 CFR Parts 300, 310, 390 [Docket No. RÄ93Ä1673; FRÄ2908ÄPÄ01] RIN 2503ÄAA07 GNMA Issuer Eligibility and Integrity Reforms AGENCY: Government National Mortgage Association, HUD. ACTION: Proposed rule. SUMMARY: GNMA proposes to reform its rules to help ensure the strength and integrity of the issuer community and reduce the risk associated with GNMA's $420 billion in outstanding guarantees. This proposed rule would revise GNMA's standards for issuer approval by amending the net worth and financial reporting requirements, and implementing new integrity requirements that would more accurately reflect an issuer's ability to participate in the GNMA mortgage-backed securities program. This proposed rule would also allow the acceptance of FHLMC or FNMA approval in GNMA's issuer application process, and remove the requirement that an issuer both issue and service GNMA pools. Finally, this proposed rule would make minor revisions to administrative matters. DATES: Comment due date: February 7, 1994. ADDRESSES: Interested persons are invited to submit comments regarding this proposed rule to the Office of General Counsel, Rules Docket Clerk, room 10276, Department of Housing and Urban Development, Washington, DC 20410Ä0500. Communications should refer to the above docket number and title. A copy of each communication submitted will be available for public inspection and copying on weekdays between 7:30 a.m. and 5:30 p.m. at the above address. Facsimile (FAX) comments are not acceptable. FOR FURTHER INFORMATION CONTACT: Guy S. Wilson, Vice President, Office of Mortgage-Backed Securities, Government National Mortgage Association, room 6224, 451 Seventh Street SW., Washington, DC 20410Ä9000, telephone (202) 708Ä2772. Hearing or speech-impaired individuals may call HUD's TDD number (202) 708Ä3649. (These telephone numbers are not toll-free.) SUPPLEMENTARY INFORMATION: I. Paperwork Reduction Act The information collection requirements contained in this proposed rule have been submitted to the Office of Management and Budget (OMB) for review under the Paperwork Reduction Act of 1980 (44 U.S.C. 3501Ä3520). No person may be subjected to a penalty for failure to comply with these information collection requirements until they have been approved and assigned an OMB control number. The OMB control number, when assigned, will be announced by separate notice in the Federal Register. Public reporting burden for the collection of information requirements contained in this proposed rule are estimated to include the time for reviewing the instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Information on the estimated public reporting burden is provided under the Preamble heading, Other Matters. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to the Department of Housing and Urban Development, Rules Docket Clerk, 451 Seventh Street SW., room 10276, Washington, DC 20410Ä0500; and to the Office of Information and Regulatory Affairs, Office of Management and Budget, Attention: Desk Officer for HUD, Washington, DC 20503. II. Background Through the mortgage-backed securities (MBS) program, GNMA guarantees the timely payment of principal and interest on privately issued pass-through securities which are backed by mortgages insured or guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Farmers Home Administration (FmHA). The private issuers are responsible for passing through to security holders the monthly collection of principal and interest less a servicing fee which is retained as compensation for administering the mortgage pools. A portion of the servicing fee is paid to GNMA as its fee for guaranteeing the securities. As a condition of issuing securities, the private issuers agree to advance mortgage delinquencies and other shortfalls from the scheduled payments with their own funds. These advances are largely reimbursed by eventual claim payments from FHA, VA and FmHA as delinquent loans are foreclosed. If an issuer exhausts its ability to fund mortgage shortfalls and cannot make the full pass-throughs due to GNMA security holders, GNMA must default the issuer and assume the issuer responsibilities itself. In order for GNMA adequately to protect its interests, GNMA must ensure that its issuers operate in a safe and sound manner. This proposed rule would strengthen the existing GNMA requirements to require that issuers exhibit the financial strength and operate with the level of integrity that is commensurate with the responsibilities of being a GNMA issuer. This proposed rule would make changes in the following key areas: (A) Net worth, (B) financial reporting, (C) integrity, and (D) FNMA approval. This proposed rule would also remove the requirement that an issuer both issue and service GNMA pools, and would make minor revisions to administrative matters. A. Net Worth GNMA issuers must meet GNMA's minimum net worth requirements for continued good standing in the MBS program. The net worth requirement is the sum of a base net worth requirement and an incremental net worth requirement. The base requirement is dependent upon the type of securities an issuer is approved to issue. The incremental requirement is based on the amount of securities that an issuer has outstanding. GNMA is proposing to increase the base requirement for single family issuers, index the base requirement for all issuer types to inflation, standardize the incremental requirement for all issuer types, and eliminate the special incremental net worth treatment for internal reserve pools. While this proposed rule would strengthen GNMA's net worth requirements, the adverse impact on the issuer community would be minimal. Ninety-nine percent of the GNMA issuers currently in good standing meet the proposed net worth levels. The base net worth requirement for single family issuers would increase by $150,000, from $100,000 to $250,000. This increase is designed to restore the value that has been lost through inflation since the $100,000 base requirement was established by GNMA in January, 1979. The $250,000 proposed level would also match the minimum net worth requirements of FHA (for non-supervised mortgagees in the Direct Endorsement program non-supervised mortgagees originate 93% of all the loans in the FHA program) and the Federal National Mortgage Association (FNMA). GNMA issuers are currently required to be an FHA mortgagee and FNMA seller/servicer in good standing to maintain their approved GNMA status. The base net worth requirement for all issuer types would be indexed to inflation and adjusted on an annual basis. The change in price levels would be measured by using the Consumer Price Index (CPI). The reference period from which changes in price levels are measured would be December 1992. The revised net worth requirement would become effective on April 1 of each year for every issuer. The first adjustment, in April 1994, would reflect the rate of inflation experienced in the 12-month period ending in December 1993. The incremental net worth requirement would be standardized under the proposed rule for all issuer types at 0.2% ($2,000 per million) of all of an issuer's outstanding securities. For single family issuers, the current incremental requirement is 0.0% of the first $5 million of securities, 1.0% of the next $15 million, and 0.2% of any additional securities. The new requirement would be 0.2% of all securities. This has the impact of increasing the incremental requirement for single family issuers by as much as $10,000, or reducing the incremental requirement by as much as $110,000, depending on an issuer's size. While the incremental net worth requirement would decrease for most single family issuers, the total required net worth (base plus incremental) for these issuers would still increase by at least $40,000. For manufactured home and multifamily issuers, the current incremental requirement is 0.0% of the first $35 million of securities and 0.2% of any additional amount. By expanding the incremental requirement to the first $35 million, the incremental requirement would increase for these issuers by as much as $70,000. Finally, GNMA is proposing to eliminate the special net worth treatment for internal reserve (IR) pools. Currently, the amount of IR securities that an issuer has outstanding is divided in half before applying the incremental net worth percentage. This proposal would have the impact of doubling the incremental net worth requirement for manufactured home issuers. The lower risk that GNMA expected from the IR structure has not materialized, given the higher delinquency and partial insurance characteristics of manufactured home loans. Therefore, GNMA is proposing to discontinue the special treatment. B. Financial Reporting Under the heading of financial reporting, GNMA is proposing to require that each issuer submit to GNMA a classified balance sheet with the issuer's annual audited financial statement. Currently, classified balance sheets are collected on a voluntary basis. A classified balance sheet for all issuers is essential so that GNMA may perform a more detailed financial analysis of each issuer, and measure more accurately the level of risk associated with each issuer. This requirement would become effective for the issuer's fiscal year that begins after the effective date of the rule. C. Integrity Under the heading of integrity, GNMA is proposing four new requirements. This proposed rule would require: (1) More extensive disclosure for key issuer personnel, (2) disclosure of changes in issuer status with other federal agencies, (3) approval of changes in issuer ownership, and (4) approval of cross-default agreements for affiliated issuers. GNMA would require more extensive disclosures for all Board members and authorized signatories of issuers. GNMA would require resumes and disclosure of prior criminal convictions, fines and other disciplinary actions for all of these individuals. Currently, GNMA requires resumes for only some of these individuals, and does not require disclosure of prior disciplinary actions. The expanded disclosures are intended to prevent individuals with questionable backgrounds from participating in the MBS Program. The disclosures would be required when an application for new issuer approval is submitted, and when any new Resolution by the Board of Directors and Certificate of Authorized Signatures is submitted. The second integrity item deals with the status that issuers maintain with other federally-related mortgage agencies and regulatory agencies. Issuers would be required to disclose terminations, defaults, fines, and material non-compliance with program requirements of FHA, VA, FmHA, FNMA, and Federal Home Loan Mortgage Corporation (FHLMC) within 5 business days of their occurrence. In addition, issuers would be required to disclose similar actions with regard to their respective regulators, including the Office of Thrift Supervision, Federal Deposit Insurance Corporation, Office of Comptroller of the Currency, Federal Reserve, and National Credit Union Administration within 5 business days of their occurrence. These disclosures would aid GNMA in determining compliance with the ongoing FHA and FNMA/FHLMC approval requirements, and would allow GNMA to increase its monitoring efforts where these and other disclosures warrant further action. The third integrity requirement concerns changes in issuer control. For mergers where the surviving entity is not the GNMA-approved issuer, the issuer would be required to apply formally for approval as a new issuer. For other issuer control changes, including but not limited to stock purchases and acquisitions, the issuer would be required to demonstrate that it continues to meet all eligibility requirements. A change in issuer control would occur whenever a new party obtains `significant influence' over an issuer, as defined by Generally Accepted Accounting Principles (GAAP). The final integrity proposal addresses related issuers. GNMA would require cross default agreements for all issuers with one or more related GNMA issuers. Under the cross default agreement, if any of the related issuers was in default, all related issuers would be in default. The cross default agreements are necessary to prevent a parent company from concentrating poorly performing pools in one issuer and allowing that issuer to default, while continuing to do business through other related non-defaulting issuers. This final integrity requirement is a current GNMA policy; however, GNMA considers this policy so important that GNMA is proposing to make this a regulatory requirement. D. FNMA Approval GNMA is also proposing to amend the regulations to accept FHLMC approval or FNMA approval for program entry. Currently, FNMA approval is acceptable for program entry, but FHLMC approval is not acceptable. This proposed rule change would open the mortgage-backed securities program to the growing number of FHLMC lenders, while providing GNMA with an equivalent level of risk aversion. Loss of either FNMA approval or FHLMC approval would be grounds for default. E. Other Changes As a final change, this proposed rule would revise GNMA's fiscal year and address, and remove the requirement that GNMA issuers both issue and service pools. III. Other Matters A. Regulatory Impact Executive Order 12866 This proposed rule was approved as submitted by the Office of Management and Budget (OMB) under Executive Order 12866. B. Environmental Impact A finding of no significant impact with respect to the environment has been made in accordance with HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of the National Environmental Policy Act of 1969. The finding of No Significant Impact is available for public inspection during regular business hours in the Office of General Counsel, the Rules Docket Clerk, room 10276, 451 Seventh Street SW., Washington, DC 20410.B. C. Regulatory Flexibility Act The Secretary, in accordance with the Regulatory Flexibility Act (5 U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so doing certifies that this rule does not have a significant economic impact on a substantial number of small entities. The proposed rule only has an economic impact on one percent of the approximate 800 issuers currently participating in the program. D. Executive Order 12612, Federalism The General Counsel, as the Designated Official under section 6(a) of Executive order 12612, Federalism, has determined that the policies contained in this proposed rule will not have substantial direct effects on states or their political subdivisions, or the relationship between the Federal government and the states, or on the distribution of power and responsibilities among the various levels of government. Specifically, the proposed rule is directed to issuers of GNMA securities, and will not impinge upon the relationship between the Federal Government and State and local governments. As a result, the proposed rule is not subject to review under the order. E. Executive Order 12606, The Family The General Counsel, as the Designated Official under Executive Order 12606, The Family, has determined that this proposed rule does not have potential for significant impact on family formation, maintenance, and general well-being, and, thus, is not subject to review under the order. No significant change in existing HUD policies or programs will result from promulgation of this proposed rule, as those policies and programs relate to family concerns. F. Regulatory Agenda This proposed rule was listed as sequence number 1607 in the Department's Semiannual Agenda of Regulations published on October 25, 1993 (58 FR 56402, 56442) under Executive Order 12866 and the Regulatory Flexibility Act, and was requested by and submitted to the Committee on Banking, Housing and Urban Affairs of the Senate and the Committee on Banking, Finance and Urban Affairs of the House of Representatives under section 7(o) of the Department of Housing and Urban Development Act. G. Collection of Information The collection of information requirements contained in this proposed rule have been submitted to the Office of Management and Budget for review under section 3504(h) of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501). Those sections of the proposed rule determined by the Department to contain collection of information requirements are  390.10 and 390.12 of 24 CFR part 390. c5,L2,i1,s100,10,10,10,10 GNMA Issuer Eligibility and Integrity Reforms, FRÄ2908 [col head 1] Description [col head 1] Number of respondents [col head 1] Hours per response [col head 1] Total hours [col head 1] Total annual cost Cross default agreement 20 1 20 $500 Personnel disclosure 90 1 90 2,250 Classified balance sheet 750 8 6,000 150,000 Changes in issuer control 40 1 40 1,000 Changes in issuer status 40 1 40 1,000 ===== Total hours and costs 6,190 154,750 *Responses per respondent=1. *Wage rate=$25/hour. List of Subjects 24 CFR Part 300 Lawyers, Organization and functions (Government agencies). 24 CFR Part 310 Organization and functions (Government agencies). 24 CFR Part 390 Mortgages, Securities. Accordingly, 24 CFR parts 300, 310 and 390 would be amended as follows: PART 300 GENERAL 1. The authority citation for 24 CFR part 300 would be revised to read as follows: Authority: 12 U.S.C. 1723a; 42 U.S.C. 3535(d). 2. Section 300.9 would be amended by revising the first sentence of the introductory paragraph to read as follows:  300.9 Offices. The Association directs its operations from its office located at 451 Seventh Street SW., room 6100, Washington, DC 20410Ä9000. * * * * * * * * PART 310 BYLAWS OF THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 3. The authority citation for 24 CFR part 310 would be revised to read as follows: Authority: 12 U.S.C. 1723. 4. The Appendix to  310.1 would be amended by revising Article 1 General Provisions, Sec. 1.05, to read as follows:  310.1 Bylaws of the Association. * * * * * Appendix ARTICLE 1 GENERAL PROVISIONS * * * * * Sec. 1.05. Fiscal Year. The fiscal year of the Association shall end on the thirtieth day of September of each year. * * * * * PART 390 GUARANTY OF MORTGAGE-BACKED SECURITIES 5. The authority citation for 24 CFR part 390 would be revised to read as follows: Authority: 12 U.S.C. 1721(g) and 1723a(a); 42 U.S.C. 3535(d). 6. Section 390.3 would be amended by revising the introductory text of paragraph (a) and paragraphs (a) (2) and (3), (c) and (d) to read as follows:  390.3 Eligible issuers of securities. (a) A mortgage lender, including an instrumentality of a State or local government, to be eligible to issue or service mortgage-backed securities guaranteed by GNMA must * * * * * (2) In the case of single family issuers, be in good standing as a mortgage seller or servicer approved by the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). Loss of either FNMA approval or FHLMC approval may cause the issuer to become ineligible to issue and service mortgage-backed securities guaranteed by the Association and constitute a default under the applicable contractual agreement; (3) Have adequate experience, management capability, and facilities to issue or service mortgage-backed securities, as determined by the Association; * * * * * (c) Each eligible issuer shall maintain at all times a net worth in assets acceptable to the Association of not less than the applicable minimum amount. The applicable minimum amount is the sum of the applicable adjusted base net worth requirement and the applicable incremental net worth requirement. (1) The applicable adjusted base net worth requirement shall equal the unadjusted base requirement, indexed yearly for inflation. The applicable adjusted base net worth requirement is calculated as follows: (i) The unadjusted base requirement shall equal: (A) $250,000 for issuers of modified pass-through securities based on and backed by mortgages on one-to-four family residences; (B) $500,000 for issuers of modified pass-through securities based on and backed by mortgages on manufactured homes; (C) $500,000 for issuers of modified pass-through securities based on and backed by mortgages on multifamily projects (both construction and permanent mortgages); or (D) $500,000 for issuers of more than one type of security. (ii) Index means the Consumer Price Index for All Urban Consumers (CPIÄU), U.S. City Average, All Items, Unadjusted for Seasonal Variation, 1982Ä84=100 Base Period. (iii) The reference period shall be December 1992. (iv) The adjusted base net worth requirement shall equal the index for the most recent December period, divided by the index for the reference period, multiplied by the unadjusted base requirement, and rounded up to the next thousandth. If this calculation yields an amount that is less than the previous adjusted base net worth requirement, the adjusted base net worth requirement shall remain unchanged. (v) The adjusted base net worth requirement shall be recalculated on an annual basis, on the first day of April each year. (2) The applicable incremental net worth requirement shall equal 0.2% of all securities outstanding. (d) In computing the required amount of net worth for purposes of this section, the term "securities outstanding'' means the sum of: (1) The unpaid principal balances of securities currently in the name of the issuer; plus (2) The amount of any outstanding commitments for guaranty issued by the Association, excluding the amount of project security commitments outstanding in cases where a construction security or a commitment for guaranty of a construction security is outstanding for the same project; plus (3) The amount of any commitments to guarantee currently being requested from the Association, excluding the amount of project security commitments requested in cases where construction security commitments are being requested for the same project. * * * * * 7. Section 390.10 would be added to read as follows:  390.10 Financial reporting. All approved issuers of pass-through securities shall submit to the Association an audited annual financial statement within 90 days of the issuer's fiscal year end. All financial statements with a fiscal year end date on or after [one year after the effective date of this rule] shall include a classified balance sheet, prepared in accordance with the standards for financial audits of the U.S. General Accounting Office's (GAO) Government Auditing Standards, issued by the Comptroller General of the United States. The balance sheet shall show the division of total assets into current, noncurrent and fixed assets and the division of total liabilities into current and long-term liabilities. 8. Section 390.12 would be added to read as follows:  390.12 Integrity. (a) An issuer shall disclose the background of all individuals serving on its Board of Directors and all individuals acting as authorized signatories. The disclosures shall include any prior convictions, fines or other adverse actions against these individuals by a Federal or state agency, or a government-related entity where the action is related to the responsibilities that are commensurate with those of banking, lending, securities or servicing. The term government-related entity includes, but is not limited to, the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. (b) An issuer shall provide disclosures of material changes in its status with other federally-related mortgage agencies and regulatory agencies, including the Federal Housing Administration, Department of Veterans Affairs, Farmers Home Administration, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Office of Comptroller of the Currency, Federal Reserve, and National Credit Union Administration within 5 business days of their occurrence. The disclosures shall include voluntary and non-voluntary terminations, defaults, fines, and material non-compliance with agency rules and policies. (c) An approved issuer shall notify the Association of any change in issuer control within 30 days of the change. A change in issuer control occurs whenever a new party obtains significant influence over the issuer, as defined by GAAP. In a merger where the surviving party is not the approved GNMA issuer and in a consolidation, an issuer must apply formally for approval as a new GNMA issuer. In other business combinations which result in a change in issuer control, the issuer shall demonstrate to the Association that it continues to meet issuer eligibility requirements for participation in the GNMA program. (d) Related GNMA issuers, as defined by GAAP, shall execute a cross-default agreement, in a form prescribed by GNMA, that provides for the default of all related issuers in the event of a default by any one of the related issuers. Dated: November 29, 1993. Dwight P. Robinson, President, GNMA. [FR Doc. 93Ä30059 Filed 12Ä8Ä93; 8:45 am] BILLING CODE 4210Ä01ÄP