The Federal Housing Finance Agency has released a final rule amending its regulation on Federal Home Loan Bank membership.
The proposed rule changes were originally announced back in September 2014 in order to revise FHFA’s existing membership regulation to require that members maintain a commitment to housing finance and that only eligible entities can gain access to bank advances and the benefits of membership.
Back in October 2014, the FHFA extended the proposed rule comment period until Jan. 12, 2015, receiving more than 1,300 comment letters.
The final rule for the Federal Home Loan Bank Act governs eligibility for membership and establishes requirements for an institution to become and remain a member of an FHLB.
As regulator of the FHLBs, FHFA is responsible for implementing the statutory provisions governing membership and for ensuring that only institutions legally eligible to do so obtain the benefits of membership.
The final rule will become effective 30 days from publication in the Federal Register. It also requires FHLBs 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 FHLB district for membership.
When the rule was first announced, it garnered a lot of opposition. The most obvious effect would be dialing out REITs, which use captive insurers, but it goes further than that, said David Jeffers, executive vice president of policy and public affairs at the Council of Federal Home Loan Banks.
The proposal originally tried to establish a new quantitative test requiring all members to hold 1% of their assets in home mortgage loans and to do so on an ongoing basis.
Under the previous rules, applicants for membership need only demonstrate a nominal amount of HML on their balance sheet at the time of their application, but not thereafter.
The proposal also required certain members that are subject to the 10% residential mortgage loans requirement to adhere to this requirement on an ongoing basis.
Under the previous rules, these members are subject to the 10% RML requirement only when they initially apply for membership in a bank, but not thereafter.
Jeffers said the ownership requirement in the FHFA’s proposed changes would be especially onerous for community banks, credit unions and community development financial institutions and similar organizations, as many wouldn’t be able to meet the requirements of an ongoing test.
But the new final rule does not include these two provisions.
“Based on research indicating that 98% of FHLBank members are currently in compliance with the proposed requirements and on concerns expressed in the comments received about implementation burdens, FHFA concluded that the benefit of forcing the remaining 2% of current members to comply with these proposals would be outweighed by the burden the proposal would impose,” the FHFA said in a statement on the final rule.
“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,” said FHFA Director Mel Watt.
“NAFCU is pleased the agency heeded our suggestion by not imposing the 10% standard on an ongoing basis,” said NAFCU Executive Vice President of Government Affairs and General Counsel Carrie Hunt. “NAFCU firmly believes that credit unions should have the flexibility to manage their mortgage portfolios with the best interest of their members in mind, rather having to manage to meet an arbitrary standard. Extending the 10% standard on an ongoing basis would have unnecessarily restricted a credit union’s ability to provide the mortgage financing needed by their members and the communities that they serve.”
Here is a link to the full final rule.