The credit union lobby joined the banking trade groups last week in opposition to a proposed rule that could limit dividends paid by the Federal Home Loan Banks, one of the best investments available for credit unions.
In a joint letter to the Federal Housing Finance Board, the regulator of the 12 FHLBs, CUNA and NAFCU said the proposal is "so significant, and possibly detrimental to the FHLB members," and urged the regulator to withdraw it.
The letter is unusual because it not only is signed by both trade groups-a rarity-but also matches the position adopted by the thrifts and bankers, which dominate the FHLBs, and the insurance groups, which were admitted into the FHLB system in 1989 along with the credit unions.
The rule would require a minimum amount of retained earnings for each FHLB and limit the amount of excess stock each could have outstanding, while also prohibiting an FHLB from selling excess stock to pay dividends. It would also restrict an FHLB's ability to pay dividends when its retained earnings are below the required minimum.
Healthy dividends paid by the regional banks, totaling in the millions of dollars each year, have proven to be one of the best-paying investments for credit unions. That, and the low-cost advances to help finance mortgage lending are the two main attractions of FHLB membership for almost 1,000 credit unions.
The FHLBs, which are government-sponsored enterprises, have been caught up in the recent controversy over regulation of GSE giants Fannie Mae and Freddie Mac, which has entailed questions of the adequacy of the FHLBs' capital. The FHLB system, created during the Great Depression to help savings and loans finance home loans, has been, until recently, focused on providing low-interest loans for member institutions to finance mortgage lending. But in recent years, the regional banks have expanded into buying and holding mortgages, creating their own secondary mortgage market. As rates have risen over the past two years, some of those efforts have created financial problems, prompting several of the FHLBs to drop their secondary market programs.
Congress is widely expected to bring the FHLBs, also considered GSEs, under the same regulator as Fannie Mae and Freddie Mac as part of the ongoing GSE legislation.
CUNA and NAFCU urged the Finance Board to hold a series of public meetings to discuss the issue with interested parties, including credit unions. "We recognize that the proposal is intended to enhance the safety and soundness of the FHLBs, and we support such efforts," said the rare joint comment letter. "We also recognize that the proposal may result in reduced dividends for members if an FHLB cannot meet the retained earnings requirement, although this would be mitigated, at least to some degree, if the par value of the members' stock can be preserved.
"The FHLB dividends are an important issue, and we support the ability of the FHLBs to pay dividends, to the extent such action is consistent with maintaining the safety and soundness of the FHLB system."
The vast majority of the more than 8,000 FHLB members are thrifts and banks.
