Banking and Finance Law Daily FHFA allows FHLBanks to accept PPP loans as collateral for member advances
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Thursday, April 23, 2020

FHFA allows FHLBanks to accept PPP loans as collateral for member advances

By Charles A. Menke, J.D.

The agency’s action aims to assist small and community banks by providing additional liquidity that allows them to pledge SBA guaranteed PPP loans as collateral for FHLBank advances, subject to certain prudential requirements.

The Federal Housing Finance Agency has issued a supervisory letter advising that the Federal Home Loan Banks (FHLBanks) can accept Paycheck Protection Program (PPP) loans as collateral when making loans, also referred to as advances, to their members. According to the guidance, the FHLBanks can accept loans guaranteed by the Small Business Administration under PPP provided that the FHLBanks comply with specified safety and soundness requirements. "Accepting PPP loans will provide additional liquidity for small and community banks to borrow from their FHLBank to support the small businesses in their communities," the FHFA said.

Prudential requirements. The FHFA has established a series of conditions under which the FHLBanks may accept PPP loans as collateral. These conditions are focused both on the financial condition of the members, as well as on discounts, caps, and dollar limits.

Member-related conditions. Members must have a CAMELS rating of "3" or better, or a member credit rating in the top 60 percent, or top three quintiles, of the FHLBank’s member rating system. If a member is subsequently downgraded after pledging PPP collateral to the FHLBank, the member is not required to replace the PPP collateral, but the collateral will be subject to other limitations. In the event the member does not immediately replace the PPP collateral with other eligible collateral, the FHLBank must take possession of the PPP collateral and implement higher haircuts based on the rating of the member.

If the member is downgraded to a CAMELS rating of "4" or a rating under the FHLBank’s rating system in the fourth quintile—greater than 60 percent to 80 percent—the FHLBank must implement a 60 percent reduction to the pledged collateral, commonly known as a "haircut." If the member is downgraded to a CAMELS rating of "5" or a rating under the FHLBank’s rating system in the lowest quintile—greater than 80 percent to 100 percent—the FHLBank must implement a 90 percent haircut.

Discounts, caps, and limits. The FHLBanks must minimally have a collateral discount of at least 10 percent that is applied to no more than 100 percent of the unpaid principal balance. The FHLBank must also establish a 20 percent cap on the amount that PPP loans can constitute of a member’s lendable pledged collateral, after haircuts and market valuations. The FHLBank must further limit the dollar amount of PPP loans that a single member may pledge to no more than $5 billion in lendable collateral.

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