Five Key Questions Every CU Should Ask Its Corporate And Regional FHLB
Most credit unions are members of a corporate credit union, and many also belong to a regional Federal Home Loan Bank (FHLB). These credit union partners provide access to wholesale funds for general liquidity and to manage loan or investment portfolios.
Understanding the benefits provided by your corporate credit union or regional FHLB should be an integral part of your planning process, since choices in products and services offered by these alternatives will determine whether you are maximizing your financial performance and effectively meeting your risk management objectives. You should ask questions and challenge your corporate credit union and FHLB partners, since this is the only way to ensure that they maximize the value of membership to you. Here are five key questions that you should put to your corporate credit union or regional FHLB.
What are the costs of borrowing from different wholesale funding providers?
Borrowing rates differ among corporate credit unions and regional FHLBs, even for similar wholesale funding products. For example, rates charged for a simple, fixed- rate loan with a term of one year can differ by 0.25% or more among various corporate credit unions and FHLBs. In addition, some of your funding providers may differentiate in price between large and small loan transactions. Are you paying too much for your wholesale borrowings? Before determining which source of funding you will access, make sure you comparison shop to ensure you are getting the best possible deal.
What kind of collateral are we able to pledge to secure wholesale funding?
Managing your collateral is important since it directly correlates to your ability to access secured funding. All credit unions should understand the types of collateral accepted by their wholesale funding sources, the associated haircuts, and the funding sources' flexibility in considering new collateral types. Managing your collateral effectively will enable you to maximize your institution's overall liquidity position.
How are prepayment fees calculated, and how does the methodology compare to our other credit alternatives?
If you choose to pay off a loan or advance early, you may be charged a prepayment fee. Before borrowing from a particular wholesale funding source, you should understand how any prepayment fees will be calculated if you ever need to prepay the borrowing before its scheduled maturity date. The prepayment methodologies used by different funding sources, which are generally explicitly spelled out in the loan contracts, may differ considerably. Those differences could lead to significantly higher or lower prepayment fees depending on the borrowing source you choose.
In addition, some funding sources offer products with prepayment fee symmetry. Prepayment fee symmetry means that a borrower may have the ability to realize some of the economic benefit of a below-market rate loan if the borrower needs to prepay the loan. Prepayment fee symmetry is a less visible, yet very valuable, feature of certain wholesale funding products.
What types of products are offered by my corporate credit union or regional FHLB to manage mortgage portfolios effectively?
Credit unions are increasingly entering the mortgage lending business. Understanding the product offerings of your regional corporate credit union or FHLB can help you choose the product that best fits your funding objectives while helping you manage the risk of holding mortgage loans. While products and services vary, corporate credit unions and FHLBanks offer a variety of credit products that can be used to hedge the risks of managing mortgage portfolios, such as fixed-rate loans and adjustable-rate loans with embedded interest rate caps. In addition, all FHLBanks have programs that enable credit unions to sell their mortgage loans while maintaining the relationship with their members.
What is my expected dividend rate?
Like loan rates, dividends paid on capital stock investments vary widely among corporate credit unions and regional FHLBanks. The dividend rate paid by your corporate credit union and regional FHLBank is a fundamental component of the all-in value of membership provided by that organization. You should understand how the dividend rate is determined, whether the all-in value of membership is skewed towards passive capital stock investors or capital stock investors with a lot of activity with the corporate credit union or regional FHLB, and how much of this dividend is at risk given their business model.
Remember, ask questions and challenge your corporate credit union and your regional FHLB partner!
As your credit union grows, maximizing the benefits and services provided by these important partners will be a key ingredient in determining your ultimate financial success.
John Davis is Vice President, Financing & Sales, for the Federal Home Loan Bank of San Francisco. Mr. Davis can be contacted at www.fhlbsf.com