The final rule for membership in the Federal Home Loan
Banking System (FHLBank) was announced on Tuesday by its regulator the Federal
Home Finance Agency (FHFA). The new rule
will eliminate one class of membership while deleting another requirement from the
proposed rules announced in 2014.
The rule allowing insurers membership has been rewritten to
define out those that meet the definition of "captive insurance companies." A captive insurer is one for which the primary
business is underwriting insurance for its parent company or for other
affiliates rather than for the public at large. FHFA said that such companies are generally
easier and less expensive to charter, capitalize and operate and this type of
entity is increasingly being used as a way to qualify otherwise ineligible
companies from becoming FHLBank members.
The captive insurance in effect become conduits to get low-cost FHLBank
funding for the ineligible parent company. Since mid-2012 there have been 27
new captive insurers admitted to FHLBank membership, 25 of which are owned by otherwise
FHFA is concerned that this practice will continue to increase
and there is no reason to believe it will not grow to include entities other
than REITs, such as hedge funds, investment banks and finance companies, some
of which have already inquired about establishing captives to gain access to
the FHLBank System.
Institutions that do not give rise to such concerns and that
would be regarded as carrying out the business of insurance as traditionally
understood will continue to be considered insurance companies for purposes of
determining eligibility for FHLBank membership.
FHFA Director Melvin Watt said about the redefinition, "FHFA
has the authority and the duty to implement the statutory membership provisions
of the Federal Home Loan Bank Act and by adopting the proposal to exclude
captives from the definition of insurance company we are making sure that
institutions can't frustrate the intent of Congress. Congress has amended
the Federal Home Loan Bank Act in the past to allow additional entities to
become members of a Federal Home Loan Bank and it can certainly do so again if
it wants some of these entities to be eligible for membership."
The final rule changed the proposed version to exclude a
provision that would have required bank members to maintain ongoing minimum
levels of investment in specified residential mortgage assets. Research found that 98 percent of members are
currently in compliance with the requirement and FHFA concluded that enforcing
the rule on the remaining 2 percent would be unduly burdensome. "The
statutory requirements for members to continue their commitment to housing
finance can be addressed by monitoring the levels of residential mortgage
assets they hold and we, therefore, decided not to include the ongoing
investment requirements in the final rule," Watt said.
To minimize disruption captive insurer members that joined
prior to FHFA's proposed rule will be given up to five years to terminate their
membership and those that joined after issuance of the proposed rule in 2014
will have one year to do so.
FHFA said it received more than 1,300 comment letters after
publishing the 2014 proposed rule. The final rule will become effective 30 days
from publication in the Federal Register.
It also requires FHLBanks to obtain and review audited financial
statements for insurance company applicants when considering them for membership
and clarifies the standards for determining the location of an institution's
"principal place of business" for purposes of identifying the
appropriate FHLBank district for membership.
In a press release David H. Stevens, President and CEO of
the Mortgage Bankers Association, expressed disappointment in the new
rule. He said Congress, in establishing
the membership framework of the FHLBanks, didn't limit membership to only
certain insurance companies. "Today,
without direction from Congress, FHFA decided to narrow membership and exclude
important members of the system. In
particular, FHFA's decision to disqualify captive insurance companies removes a
vital component of the FHLBank membership which provides liquidity for the real
estate finance market."
Stevens said that the market needs a system that serves the
wide variety of lending institution active in housing finance " including captive
insurance companies, REITs, independent mortgage bankers, and other entities,
all of which provide major sources of liquidity and are core components in the
21st century FHLBank system."
In a FAQ sheet linked to the final rule FHFA said it agreed
that mortgage real estate investment trusts (REITs) have an important role in
mortgage markets. "However, concluding
that channeling of low-cost FHLBank funding to REITs and other ineligible
entities through captive members is not authorized by or consistent with the
Bank Act, FHFA is compelled to put an end to that practice until such time as
Congress authorizes that access."