October 31, 2008

In order to protect the quality of Federal Home Loan Bank consolidated obligations and members' investment in the Bank, advances of funds, letters of credit, and other extensions of credit or credit services (collectively, "advances") are provided only on a secured basis.

The Bank's Agreement for Advances, Collateral Pledge, and Security Agreement establishes a blanket lien to secure all advances made to the member by the Bank.

Members are required to maintain at all times an amount of qualified collateral that satisfies the collateral-maintenance level established by the Bank. (See Appendix A and Appendix B.)

All borrowing members in blanket-lien and listing status must submit to the Bank, on at least an annual basis, an audit opinion that confirms the member is maintaining sufficient amounts of qualified collateral in accordance with this policy.

The opinion may be provided by either the member's outside auditor or the member's internal auditor. A member will be allowed to use its internal auditor provided that the collateral verification process is conducted in accordance with collateral review procedures specified and approved by the Bank.

Members that have delivered sufficient qualified collateral to the Bank to satisfy their collateral maintenance level are typically not required to provide a collateral audit opinion.

If you have any questions regarding the Bank's collateral audit requirement, please contact the Collateral Department at collateral@fhlbboston.com or 617-292-9729.

Qualified Collateral is limited to collateral that is listed in Appendix A and that:

1. Unless otherwise approved by the Bank, is owned by the member free and clear of all other liens and encumbrances, including UCC filings and other pledge and security agreements;
   
   (Note that a member's assets that have been transferred to a Real Estate Investment Trust [REIT], Passive Investment Company [PIC], or separately incorporated subsidiary typically do not qualify as collateral for the Bank's purposes. However, the Bank may allow a member to include as collateral qualified assets transferred to a REIT or PIC subsidiary provided that:
   
   
   • with respect to a REIT or PIC, the subsidiary pledges assets that constitute qualified collateral on behalf of the member; and
     
     
   • with respect to a security corporation, the member pledges the stock certificate(s) that evidences its ownership of the security corporation; and the assets in the security corporation are comprised solely of qualified collateral as described in Appendix A of this policy.)
     
     To pledge assets held in a subsidiary or for additional information, contact the Collateral Department at collateral@fhlbboston.com or 617-292-9729.
     
2. Has not been in default within the most recent 12-month period, except that whole first-mortgage collateral on one- to four-family residential property is acceptable provided no payment is overdue by more than 45 days. In addition, mortgages and other loans are considered qualified collateral, regardless of delinquency status, to the extent that the mortgages or loans are insured or guaranteed by the United States or any agency thereof and subject to the limitations noted in Appendix A;
   
   
3. Has not been classified as substandard, doubtful, or a loss by a member's regulatory authority or its management; and
   
   
4. In the case of residential mortgage loans† on owner-occupied property, whether pledged individually or as part of a private label (non-agency) mortgage-backed security, a loan will not be accepted as collateral if it meets one or more of the following criteria:
   
   
• The annual percentage rate and/or points and fees charged for the loan exceed the thresholds of the Home Equity Ownership Protection Act of 1994 (HOEPA)††.
  
  
• The loan has been identified by a member's primary federal regulator as possessing predatory characteristics;
  
  
• The loan includes prepaid, single-premium credit insurance;
  
  
• The loan is subject to state and/or local laws where one or more of the major credit-rating agencies (Standard and Poor's, Moody's Investors Service, and/or Fitch Ratings) will not rate a security (or securities) in which the underlying collateral pool contains such a loan.
  
  
• The loan is defined as a High Cost Loan, Covered Loan, or Home Loan in Appendix C. Generally, High Cost Loans, Covered Loans, and Home Loans are loans categorized under one or more federal, state, or local predatory lending laws as having certain potentially predatory characteristics.
  
  
• The loan includes penalties in connection with the prepayment of the mortgage beyond the early years of the loan.
  
  
• The loan requires mandatory arbitration to settle disputes.
  
  
5. In the case of mortgage collateral, does not secure indebtedness on which any director, officer, employee, attorney, or agent of the member or of any Federal Home Loan Bank is personally liable.
   
   All Members and Third-Party Pledgors are required to execute a Representations and Warranties document with respect to any mortgage loans and mortgage-backed securities pledged as collateral to the Bank. This document requires the Member or Pledgor to certify to knowledge of the foregoing policies, and compliance with those policies. In the event that any loan in a collateral pool or mortgage backed security is (i) found not to comply in all material respects with applicable local, state and federal laws, or (ii) not accepted as Qualified Collateral as defined herein, the Member or Pledgor agrees to immediately remove said loan or mortgage-backed security and replace it with Qualified Collateral of equivalent value. The Member or Pledgor agree to indemnify and hold the Bank harmless for any and all claims of any kind relating to the pledged loans.
   
   
6. Complies with the Subprime and Non-Traditional Loan Policy attached herein as Appendix E.
   

The Bank will take such steps as it deems necessary to protect its security position as to outstanding advances. These steps may include, but are not limited to, requiring the delivery of additional collateral, whether or not such additional collateral would be eligible to originate an advance.

Unless otherwise specified by the Bank to a member in writing, the collateral-maintenance level for a member is the aggregate amount of qualified collateral that, based on the percentages of book value, market value, or unpaid principal (as applicable) indicated in Appendix A hereto, has a value equal to the aggregate amount of the Bank's extensions of credit to the member, including the member’s outstanding advances (excluding IDEAL Way line of credit advances), IDEAL Way line of credit, letters of credit, and the credit enhancement that secures assets purchased by the Bank.

In computing a member's collateral-maintenance level, market values will be determined on the basis of market bid-price quotations for the same or comparable securities as determined by, or in a manner satisfactory to, the Bank. The types of property and the valuations that the Bank will generally accept are contained in Appendix A.

Depending on its ratio of tangible capital to assets and other appropriate factors, each member is assigned by the Bank to one of three collateral status groups: blanket-lien, listing, or delivery. Factors reviewed by the Bank in determining a member's collateral status include asset quality, earnings, and liquidity. In addition, the Bank closely reviews each member's "adjusted" tangible-capital ratio, which is calculated based on the member's tangible capital plus loan loss reserves minus a percentage of the member's nonperforming assets. For insurance company members, the Bank also reviews third-party credit ratings from Standard and Poor's, Moody's Investors Service, and Fitch to determine the appropriate collateral status group.

Members that are depository financial institutions may, depending upon their overall financial condition, be assigned by the Bank to a different collateral status than would be indicated by the following:

• Blanket-lien status: tangible capital of 4.5 percent or more of assets
  
  
• Listing status: tangible capital below 4.5 percent of assets
  
  
• Delivery status: tangible capital below 3.5 percent of assets
  

Members that are insurance companies may, depending on their overall financial condition, be assigned by the Bank to a different collateral status than would be indicated by the following:

• Blanket-lien status: long-term issuer credit rating (or equivalent Nationally Recognized Statistical Rating Organization rating) of A or above.
  
  
• Listing status: long-term issuer credit rating of BBB
  
  
• Delivery status: long-term issuer credit rating of BB or lower. Insurance companies that do not have long-term issuer credit ratings or an equivalent debt rating also will typically be placed in delivery status.

Because of the potential contingent liability of affiliated institutions within a holding company structure, the Bank will closely review the financial condition of a member's parent holding company and/or affiliated institutions. If a member's parent holding company or an affiliated institution has a low tangible-capital ratio or is experiencing substantial financial problems, the member may be assigned to listing or delivery collateral status.

If a competing creditor has filed a UCC filing on all of the member's assets or a significant percentage of a member's qualified collateral, the Bank may place the member in delivery status.

In order to ensure that the Bank has the first-priority unsubordinated security interest in securities that members use to satisfy their minimum collateral-maintenance level at the Bank, all members must deliver these securities to the Bank or to a Bank-approved third-party custodian.

The Bank, in its sole discretion, may approve or decline any third-party custodian used by a member for securities collateral. In addition, in its sole discretion, the Bank may require members that deliver securities collateral to a third-party custodian to deliver these securities to the Bank at any time.

If a member uses an approved third-party custodian, it must give the Bank the first-priority security interest by entering into a control agreement with the custodian and the Bank.

Members in blanket-lien status:

1. Are at liberty to use, commingle, encumber, or dispose of any portion of their collateral as long as:
   
   
   1. there has been no event of default under the member's "Agreement for Advances, Collateral Pledge, and Security Agreement," and
      
      
   2. the remaining qualified collateral is sufficient to satisfy the collateral maintenance level.
      
      (Note that upon request by a member and subject to the provision of satisfactory evidence of compliance with the Bank's qualified collateral requirements, the Bank will execute appropriate releases to facilitate dispositions of collateral by the member.)
      
      
2. May be required to submit a qualified collateral report, in the form specified by the Bank, on at least a quarterly basis, when advances equal or exceed 15 percent of assets, or when total indebtedness equals or exceeds the lesser of i) 75 percent of qualified collateral on a discounted valuation basis or ii) 20 percent of assets, or at any time the Bank deems such report necessary.
   
   An example of the qualified collateral report is included as Appendix B of this policy. To have a copy of the qualified collateral report sent to you by regular mail, please contact the Collateral Department at collateral@fhlbboston.com or 617-292-9729.
   
   
3. Agree to permit Bank personnel to make periodic on-site verification of collateral pledged.

Members in listing status:

1. Are required to segregate, label as "Collateral for the Federal Home Loan Bank of Boston," and provide a listing to the Bank identifying specific qualified collateral sufficient to satisfy the collateral-maintenance level. Such listing must be updated at least semi-annually, or more often as the Bank may require.
   
   
2. May not use, commingle, encumber, or dispose of collateral that has been segregated, labeled, and listed without the express written consent of the Bank.
   
   
3. Agree to permit Bank personnel to make periodic on-site verification of collateral pledged.

1. Are required to deliver to the Bank (or its bailee), along with any required assignment of such collateral to the Bank, qualified collateral sufficient to satisfy the collateral-maintenance level.
   
   
2. May not use, commingle, encumber, or dispose of collateral that has been assigned and delivered without the express written consent of the Bank.
   
   
3. Are required to segregate on-site and mark as property of the Bank all ancillary documents that pertain to collateral that has been delivered to the Bank.
   
   
4. Are required to notify the Bank prior to the acceptance of proceeds from the repayment of notes pledged to the Bank as collateral. The Bank may, in its sole discretion, require the delivery of an amount equal to the proceeds of the repayment of the notes into a collateral account to secure the member's indebtedness to the Bank.
   

If the value of a member's collateral declines because of market depreciation, loan amortization, or loan payoffs, the Bank may, at its discretion, require the member to substitute qualified collateral that is acceptable to the Bank to offset the decline in the value of the collateral held by the Bank.

The Bank may require, in its sole discretion, further steps by a member in order to perfect the Bank's security interest in collateral provided by the member.

All fees and costs incurred by the Bank in connection with its collateral requirements will be charged to the member.

† A "residential mortgage loan" is a mortgage loan secured by one- to four-family residential property. For the Bank's purposes, this definition includes mortgage loans and home equity loans and open-ended home equity lines of credit, including those secured by junior liens.

†† The applicable thresholds are noted in Truth in Lending — Regulation Z-12 CFR 226.32.