DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Government National Mortgage Association

24 CFR Parts 300, 310, 390

[Docket No. R931673; FR2908P01]

RIN 2503AA07

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 204100500.
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 204109000, telephone (202)
7082772. Hearing or speech-impaired individuals may call HUD's TDD number
(202) 7083649. (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. 35013520). 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 204100500; 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, FR2908 [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 204109000. * * *

                                  * * * * *

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 (CPIU),
U.S. City Average, All Items, Unadjusted for Seasonal Variation, 198284=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. 9330059 Filed 12893; 8:45 am]

BILLING CODE 421001P
