Federal Home Loan Bank Proposals Aim to Reinforce Housing Finance System

by devteam December 29th, 2010 | Share

Last week thernFederal Home Finance Administration issued an Advanced Notice of ProposedrnRulemaking (ANPR) which outlines proposed changes in membership requirements forrnFederal Home Loan Banks (Banks).  The 12rnBanks, regionally dispersed throughout the United States, were originallyrnorganized in 1932 under the Federal Home Loan Bank Act to provide a reservernbanking system for thrift institutions to support their residential mortgagernlending activities.  </p

The Banks arernestablished as cooperatives. Membership allows institutions access to securedrnloans or advances to fund mortgage lending. rnCommunity Financial Institutions (CFI, defined below) and Community DevelopmentrnFinancial Institutions (CDFI) can use advances for loans to small businesses,rnfarms, and agribusiness and for community development activities.</p

In addition to depositoryrninstitutions generally thought of as thrifts or banks, membership is availablernto homestead associations, insurance companies and credit unions.  The key determinants for membership are therninstitution is duly organized under state law, subject to inspection andrnregulation by a state or the Federal government, and make long-term homernmortgage loans.  In addition, membersrnmust have at least 10 percent of their assets in mortgage loans (a requirementrnwhich is waived for insurance companies and CFI, (depository institutions whichrnare FDIC insured and have had less than $1 billion in average total assets overrnthe preceding three years.) </p

FHFA is proposingrnrevisions to the membership provisions to “reinforce the connectionrnbetween membership and support for residential housing finance” andrnsoliciting public comment on how well the existing regulations implement thernunderlying requirements, whether they need revisions, and whether the proposedrnchanges are appropriate to the Banks’ housing finance mission.</p

The 10 PercentrnRequirement</p

Under present rules,rnan applicant is required to demonstrate that it has 10 percent of its totalrnassets in residential mortgage loans at the time of its initial application, butrnthere is no on-going requirement for compliance.  While FHFA has no evidence that members havernreduced or eliminated such lending after becoming members, it believes that itrnis a sound regulatory policy to ensure that does not happen and isrninvestigating regulations to ensure enforcement.  </p

In addition, FHFA isrnconsidering whether to apply the 10 percent rule to institutions not currentlyrnsubject to it (i.e. insurance companies, and credit union applicants.)  Extending the requirement to CFIs is notrnunder consideration as they appear to be excluded from that requirement by thernBank Act.</p

FHFA is seekingrncomments on the following three questions.</p<ul class="unIndentedList"<liShould it revise its regulations so that an institutionrnthat is subject to the 10 percent rule for admission to membership also bernrequired to comply with that requirement for the duration of its membership?</li<liShould regulations be amended to subjectrninsurance companies and CDFI applicants to the 10 percent residential loanrnrequirement?</li<liIf the requirement is not extended to CDFI andrninsurance companies, should FHFA amend the section of its regulations whichrnrequires those applicants to have mortgage related assets that reflect arncommitment to housing finance establish benchmarks of compliance?</li</ul

The “Makes Long-Term HomernMortgage Loans” Requirement</p

The Bank Actrnrequires applicants for membership to make long-term mortgage loans, but againrnthere is no requirement to maintain that activity.  If FHFA were to make long-term home loans anrnongoing requirement it would need to develop a new test to measurerncompliance.  The statutory language doesrnnot include a quantifiable benchmark such as the 10 percent rule; the onlyrnstandard is that an applicant’s financial reports show that it originates orrnpurchases such loans which, in theory, could be satisfied by a single loan inrnthe reporting period immediately preceding application for membership.  FHFA is requesting comment on five questionsrnrelated to changes in this requirement.</p<ul class="unIndentedList"<liShould regulations be changed to requirern"makes long-term mortgage loans" from an applicant both before andrnduring the term of membership?</li<liShould the existing requirement be replaced withrna quantifiable standard such as a specified portion of a member's assets or arnminimum dollar volume invested in such loans?</li<liIf such a standard is adopted, what would be thernappropriate level of loans required by depository institutions, insurancerncompanies, or CDFIs?</li<liShould FHFA apply one standard to all eligiblernmembers or separate standards for the three distinct categories of institutionsrneligible for membership?</li<liShould it also establish separate sub-categoriesrnfor different types of institutions within such category such as for liferninsurance companies versus casualty insurance companies?</li</ul

The Home Financing PolicyrnRequirement</p

The Bank Act requiresrnapplicant depository institutions to demonstrate the character of itsrnmanagement and home financing policy to be consistent with sound and economicalrnhome financing.  Subsequent regulationsrnhave applied this standard to all applicants but through a “presumptiverncompliance” approach rather than written documentation.  This has been satisfied by a CommunityrnReinvestment Act (CRA) rating of “Satisfactory,” or a writtenrnjustification of an appropriate home financing policy where CRA does not apply.</p

FHFA is requesting comment onrnwhether:</p<ul class="unIndentedList"<liThe agency should revise its regulations tornrequire members comply with the "home financing policy" requirementrnon an on-going basis.</li<liShould it define the term "home financing policy"rnand, if so, how should that term be defined?</li<liShould regulations allow the specifics of such arnpolicy to vary based on the type of institution?</li<liShould FHFA continue to use a CRA rating as arnproxy for compliance with this policy or develop an alternative approach suchrnas one based on a minimum level of housing related assets?</li</ul

Other Provisions</p

FHFA is also seeking comment on the following miscellaneous changesrnto its membership regulations:</p<ul class="unIndentedList"<liShould "shell" or "captive"rninsurance companies be allowed to become member Banks or should membership bernlimited to insurance companies actively engaged in underwriting insurance forrnthird parties and activity supervised by their state insurance regulators? Should such members be required to remain sornengaged and regulated during the duration of membership?</li<liIf new regulations are adopted, should FHFArnrequire Banks to terminate a non-compliant member either with or without arngrace period or should it consider lesser sanctions such as prohibiting furtherrnaccess to Bank services for a specified grace period before terminatingrnmembership?</li<liShould FHFA retain the existing structure ofrnmembership regulations which relies on certain standards of "presumptiverncompliance" and allows an opportunity for institutions to rebut arnpresumption of non-compliance or should it devise an alternative structure suchrnas one that incorporates "bright line" tests?</li<liShould FHFA play a role in resolving closernmembership issues or leave them to the discretion of the Banks?</li</ul

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

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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