Last week the Federal Home Finance Administration issued an Advanced Notice of Proposed Rulemaking (ANPR) which outlines proposed changes in membership requirements for Federal Home Loan Banks (Banks).  The 12 Banks, regionally dispersed throughout the United States, were originally organized in 1932 under the Federal Home Loan Bank Act to provide a reserve banking system for thrift institutions to support their residential mortgage lending activities. 

The Banks are established as cooperatives. Membership allows institutions access to secured loans or advances to fund mortgage lending.  Community Financial Institutions (CFI, defined below) and Community Development Financial Institutions (CDFI) can use advances for loans to small businesses, farms, and agribusiness and for community development activities.

In addition to depository institutions generally thought of as thrifts or banks, membership is available to homestead associations, insurance companies and credit unions.  The key determinants for membership are the institution is duly organized under state law, subject to inspection and regulation by a state or the Federal government, and make long-term home mortgage loans.  In addition, members must have at least 10 percent of their assets in mortgage loans (a requirement which is waived for insurance companies and CFI, (depository institutions which are FDIC insured and have had less than $1 billion in average total assets over the preceding three years.)

FHFA is proposing revisions to the membership provisions to "reinforce the connection between membership and support for residential housing finance" and soliciting public comment on how well the existing regulations implement the underlying requirements, whether they need revisions, and whether the proposed changes are appropriate to the Banks' housing finance mission.

The 10 Percent Requirement

Under present rules, an applicant is required to demonstrate that it has 10 percent of its total assets in residential mortgage loans at the time of its initial application, but there is no on-going requirement for compliance.  While FHFA has no evidence that members have reduced or eliminated such lending after becoming members, it believes that it is a sound regulatory policy to ensure that does not happen and is investigating regulations to ensure enforcement. 

In addition, FHFA is considering whether to apply the 10 percent rule to institutions not currently subject to it (i.e. insurance companies, and credit union applicants.)  Extending the requirement to CFIs is not under consideration as they appear to be excluded from that requirement by the Bank Act.

FHFA is seeking comments on the following three questions.

  • Should it revise its regulations so that an institution that is subject to the 10 percent rule for admission to membership also be required to comply with that requirement for the duration of its membership?
  • Should regulations be amended to subject insurance companies and CDFI applicants to the 10 percent residential loan requirement?
  • If the requirement is not extended to CDFI and insurance companies, should FHFA amend the section of its regulations which requires those applicants to have mortgage related assets that reflect a commitment to housing finance establish benchmarks of compliance?

The "Makes Long-Term Home Mortgage Loans" Requirement

The Bank Act requires applicants for membership to make long-term mortgage loans, but again there is no requirement to maintain that activity.  If FHFA were to make long-term home loans an ongoing requirement it would need to develop a new test to measure compliance.  The statutory language does not include a quantifiable benchmark such as the 10 percent rule; the only standard is that an applicant's financial reports show that it originates or purchases such loans which, in theory, could be satisfied by a single loan in the reporting period immediately preceding application for membership.  FHFA is requesting comment on five questions related to changes in this requirement.

  • Should regulations be changed to require "makes long-term mortgage loans" from an applicant both before and during the term of membership?
  • Should the existing requirement be replaced with a quantifiable standard such as a specified portion of a member's assets or a minimum dollar volume invested in such loans?
  • If such a standard is adopted, what would be the appropriate level of loans required by depository institutions, insurance companies, or CDFIs?
  • Should FHFA apply one standard to all eligible members or separate standards for the three distinct categories of institutions eligible for membership?
  • Should it also establish separate sub-categories for different types of institutions within such category such as for life insurance companies versus casualty insurance companies?

The Home Financing Policy Requirement

The Bank Act requires applicant depository institutions to demonstrate the character of its management and home financing policy to be consistent with sound and economical home financing.  Subsequent regulations have applied this standard to all applicants but through a "presumptive compliance" approach rather than written documentation.  This has been satisfied by a Community Reinvestment Act (CRA) rating of "Satisfactory," or a written justification of an appropriate home financing policy where CRA does not apply.

FHFA is requesting comment on whether:

  • The agency should revise its regulations to require members comply with the "home financing policy" requirement on an on-going basis.
  • Should it define the term "home financing policy" and, if so, how should that term be defined?
  • Should regulations allow the specifics of such a policy to vary based on the type of institution?
  • Should FHFA continue to use a CRA rating as a proxy for compliance with this policy or develop an alternative approach such as one based on a minimum level of housing related assets?

Other Provisions

FHFA is also seeking comment on the following miscellaneous changes to its membership regulations:

  • Should "shell" or "captive" insurance companies be allowed to become member Banks or should membership be limited to insurance companies actively engaged in underwriting insurance for third parties and activity supervised by their state insurance regulators? Should such members be required to remain so engaged and regulated during the duration of membership?
  • If new regulations are adopted, should FHFA require Banks to terminate a non-compliant member either with or without a grace period or should it consider lesser sanctions such as prohibiting further access to Bank services for a specified grace period before terminating membership?
  • Should FHFA retain the existing structure of membership regulations which relies on certain standards of "presumptive compliance" and allows an opportunity for institutions to rebut a presumption of non-compliance or should it devise an alternative structure such as one that incorporates "bright line" tests?
  • Should FHFA play a role in resolving close membership issues or leave them to the discretion of the Banks?

Comments on the proposed changes will be accepted until March 28, 2011.