WASHINGTON — Credit unions and community banks are pushing back against a plan unveiled by the Federal Housing Finance Agency this week to restrict membership in the Home Loan Bank System.
Under the proposal, many smaller financial institutions would have to maintain at least 10% of their assets in the form of home loans or mortgage-backed securities. Smaller institutions with less than $1 billion of assets would have to maintain at least 1% of their assets in mortgages.
CUs and banks that joined the system after 1998 have faced such a test to obtain membership with a Home Loan Bank, but have not had to maintain those asset levels on an ongoing basis.
The FHFA's plan has sparked controversy, with some industry insiders arguing it unnecessarily penalizes some long-time members that can't or won't meet an ongoing test.
In a letter to FHFA Director Melvin Watt, NAFCU President and CEO Dan Berger asked for additional time for credit unions to comment on the agency's proposed rule so they can assess the full impact of the proposal and provide meaningful feedback.
"[C]redit union membership in FHLBs has increased in recent years, in 2007 11.4% of credit unions were members of an FHLB representing 61.7% of total credit union assets," Berger wrote. "While membership of credit unions in FHLBs has grown, this growth, and the maintenance of membership in FHLBs, only underscores the need to ensure that the eligibility requirements for membership in FHLBs are set appropriately. Given the importance of this rulemaking, and the impact that it could have on credit unions, we feel that an extension of the comment period of an additional 60 days for this proposal would be appropriate.
The FHFA issued the plan on Sept. 2 in an effort to refocus the Home Loan Bank System on its mission. The proposal would also shut the door on allowing captive insurance companies to become new members, and sunset existing captive insurers after five years.
The agency first floated a similar a similar plan in 2010, which was opposed by the industry at the time. But the new version is already under fire.
"We are not sure what is driving this," said Ron Haynie, an executive vice president with the Independent Community Bankers of America. "I can't imagine that community banks that have been members for years, for decades, now all of a sudden pose some outsized risk."
Stephen Cross, a former top examiner of the Home Loan Banks, said the FHFA is trying to crack down on FIs that aren't really interested in mortgages, but are simply using membership for access to advances.
He said some institutions meet the 10% test when they are first approved for membership, but then quickly sell off their mortgage holdings.
"Without a regulation like this, the agency does not have the power to attack this issue," said Cross, who is now a senior director at Wolters Kluwer Financial Services consulting firm.
But Haynie said many small banks rely on Home Loan Bank advances as a stable low-cost source of funding.
"This proposal could take that source of funding away from some banks for no apparent reason," he said.
The Council of Federal Home Loan Banks warns that CUs and banks could be significantly hurt by the plan.
"Hundreds of current members would be negatively impacted by the proposed anti-liquidity regulation and perhaps even forced out of the Home Loan Banks," said David Jeffers, executive vice president of the trade group, which represents the 12 Home Loan Banks.
