Banking and Finance Law Daily FHFA finalizes rule on Federal Home Loan Bank membership
Wednesday, January 13, 2016

FHFA finalizes rule on Federal Home Loan Bank membership

By Thomas G. Wolfe, J.D.

After considering more than 1,300 comment letters, the Federal Housing Finance Agency has adopted a final rule revising its regulations governing Federal Home Loan Bank membership. Based on the public input and its own research, the FHFA decided to diverge from its 2014 proposed rule in two notable ways. First, the 2016 final rule does not include provisions that would have required FHLBank members to maintain ongoing minimum levels of investment in specified residential mortgage assets as a condition of remaining eligible for membership. Second, while the proposed rule would have required FHLBanks to terminate the membership of any captive insurance company immediately, the final rule provides for a transition period before the required termination. The final FHLBank membership rule (12 CFR Part 1263) takes effect 30 days after its publication in the Federal Register.

Watt elaborates. Since the FHFA determined that approximately 98 percent of FHLBank members already complied with the formerly-proposed minimum levels of investment in certain residential mortgage assets, the FHFA concluded that the benefit of compelling the remaining 2 percent of FHLBank members to comply was outweighed by the burden imposed. Accentuating this point in a Jan. 12, 2016, release, FHFA Director Melvin Watt stated, “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.”

The FHFA notes that its final rule defines “insurance company” to exclude “captive insurers” because the FHFA seeks to “prevent entities that do not otherwise meet the statutory requirements from becoming FHLBank members by establishing and using captives as conduits to circumvent the membership eligibility requirements and gain access to low-cost FHLBank funding and other benefits of FHLBank membership.” At the same time, Watt remarked that the FHFA wants to make sure that financial institutions do not 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,” Watt asserted.

Additional highlights. The final FHLBank membership rule permits any FHLBank that has admitted captive insurers to membership a transition period within which to wind down its affairs with those entities. Accordingly, captive insurers that became FHLBank members after publication of the 2014 proposed rule must terminate their memberships within one year following the effective date of the 2016 final rule. However, captive insurers that became FHLBank membersbefore publication of the 2014 proposed rule are allowed to remain FHLBank members for up to five years after the effective date of the 2016 final rule.

Also, the FHFA’s final rule requires FHLBanks to obtain and review an insurance company’s audited financial statements when considering its application for membership. Further, the rule clarifies the standards by which FHLBanks are to determine the “principal place of business” for its members—including specific standards for insurance companies and community development financial institutions.

To facilitate an understanding of the core components of its 168-page final rule, the FHFA has presented answers to “Frequently Asked Questions.”

Reaction to rule. Both the American Bankers Association and the Independent Community Bankers of America have expressed their contentment that the FHFA did not include a mortgage-asset test in its final FHLBank membership rule. Rob Nichols, ABA president and CEO, commented that there was “no demonstrable need for the proposed changes, which contradicted congressional intent and would have harmed the FHLBs, their member banks and the communities they serve.” Similarly, ICBA President and CEO Camden Fine stated, “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.”

Still, the ICBA contends that the “exit of captive insurance companies from the system could increase the cost of certain FHLBank advances, raising the cost of funding for mortgage lending in those markets.” Consequently, the ICBA is urging the FHFA to amend its final rule to rescind the exclusion for captive insurers.

Likewise, Rep. Blaine Leutkemeyer (R-Mo) voiced his disappointment about the rule provisions governing captive insurers, maintaining that Congress, not the FHFA, holds the authority “to set membership standards for the system.” Leutkemeyer referenced bipartisan legislation (H.R. 3808) that he has introduced in the House to block implementation of the FHFA’s rule and to require a study on the “implications of this drastic step.”

Companies: American Bankers Association; Independent Community Bankers of America

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