Federal Home Loan bank advances could be used to make small-business, agricultural, rural development, and low-income community development loans under legislation introduced by Sen. Chuck Hagel.

"This bill would allow smaller banking institutions to more easily access the Federal Home Loan Bank as a source of liquidity," the Nebraska Republican said in a statement released Friday.

The bill mirrors a draft circulated for several months by Sen. Hagel, who is a freshman on the Senate Banking Committee. Currently, advances may only be used to fund housing finance and limited community development.

The bill also would loosen membership restrictions on rural banks that do not hold enough housing-related assets to join the Federal Home Loan Bank System under current law.

"At a time when community banks are finding it harder to attract core deposits, this will give them an alternative source of funding," said Ron Ence, director of legislative affairs for the Independent Bankers Association of America.

Among several other changes, the bill would also make system membership voluntary, even for thrifts.

Attempts in the House to revamp the system have failed in each of the last several years. However, at least Sen. Hagel's bill puts the issue before the Senate. His aides said the senator would push for hearings on the measure early next year, because Congress is on the verge of adjourning for this year.

Sen. Hagel's bill would remove several restrictions included in the financial modernization package approved by the House Commerce Committee Oct. 30. For example, Sen. Hagel would not force the 12 Home Loan banks to limit investments to those necessary for liquidity, safety and soundness, and housing finance.

Separately, the Federal Housing Finance Board Wednesday ap-proved a pilot program by the Federal Home Loan Bank of Seattle to buy mortgages from member institutions.

Under the plan, member banks and thrifts will originate Federal Housing Administration-insured loans that benefit low- and moderate-income families. The institutions will sell the mortgages to the Seattle bank, which initially would be allowed to buy up to $25 million of the loans.

The pilot program is an "innovative way for the FHLBank of Seattle to carry out its housing finance mission at minimal risk," Finance Board Chairman Bruce A. Morrison said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.