FHFA Revises Membership Rules for Home Loan Banks

By Jeff Bater

Jan. 12 — Small banks gave conditional praise to a final rule on Federal Home Loan Bank (FHLB) membership requirements but joined in a chorus of disappointment over a provision barring captive insurers.

The Independent Community Bankers of America (ICBA) said the Federal Housing Finance Agency (FHFA) rule on who can join the network of government-sponsored home loan banks addressed “problematic provisions” that would have needlessly restricted access to mortgage credit. The agency rule becomes effective 30 days from publication in the Federal Register.

The final rule discarded a proposed requirement that FHLB members hold between 1 percent and 10 percent of their assets in home mortgage loans at all times.

“The FHFA wisely heeded community bank concerns and dropped the ongoing asset test for FHLBank members, which would have reduced access to credit and driven many long-term members from the system,” ICBA President Camden R. Fine said in a news release. “The FHLBanks have long stabilized the housing-finance market — particularly in small and rural communities — so this change will avoid negative consequences for many borrowers.”

Captive Insurers Excluded

But the industry group is concerned with a rule provision barring captive insurance companies, which insure the risks of the companies that own them, from membership in the FHLB system. The ICBA urged the FHFA to amend the final rule to rescind the exclusion of captive insurers, saying those firms play an important role in providing mortgage financing.

Under the changes announced Jan. 12, existing captive insurers must exit the system of low-cost, government-backed mortgage financing within five years. The provision is aimed at entities such as mortgage real estate investment trusts (REITs), which are ineligible for FHLB membership, but have created captive-insurer subsidiaries to gain indirect access to the mortgage-financing system.

In a release, the FHFA expressed concern that such a practice will continue to grow 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.”

Overstepping Authority?

The change will affect 40 captive insurers currently in the FHLB system. David H. Stevens, the president of the Mortgage Bankers Association, said the FHFA's decision to disqualify the companies “removes a vital component of the FHLBank membership which provides liquidity for the real estate finance market.”

Rep. Blaine Luetkemeyer (R-Mo.) also expressed disappointment that the rule forces captive insurers out of the FHLB system. He introduced legislation in October (H.R. 3808) requiring further study. “It is Congress, not FHFA, which has the authority to set membership standards for the system,” he said in a statement after the final rule was issued. “Not only is this a blatant violation of the rule of law, but it is a decision based on little evidence or analysis. Before making such rash decisions, FHFA should consider, in conjunction with Congress, the implications of this move on the housing finance system.”

The FHFA said that as regulator of the home loan banks, it is responsible for implementing the statutory provisions governing membership.

“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,” FHFA Director Mel Watt said in a statement. “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.”

Mortgage Holdings

For the final rule, the FHFA dropped provisions in the proposal that would have required FHLB members to maintain ongoing minimum levels of investment in specified residential mortgage assets as a condition of remaining eligible for membership.

The agency said that based on research indicating 98 percent of FHLB members were in compliance with the proposed requirements and on concerns expressed in the comments received about implementation burdens, it concluded the benefit of forcing the remaining 2 percent of current members to comply would be outweighed by the burden the proposal would impose.

“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 contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Mike Ferullo at mferullo@bna.com

For More Information 
The FHFA materials can be found at http://src.bna.com/bZA.