WASHINGTON — The Federal Housing Finance Agency, reviving a controversial proposal, is again eyeing a plan to force the 12 Federal Home Loan banks to raise capital by retaining more of their earnings, sources said Thursday.

No decision to proceed has been made, but sources said the plan being kicked around internally could have a significant impact, with some Home Loan banks being required to hold three times as much in retained earnings as they do currently. That in turn could make it harder for some of the banks to pay dividends to member financial institutions.

Asked for comment, a spokeswoman for the Federal Housing Finance Agency would say only, "Director Lockhart said that he has received no proposals or even alternatives on this subject."

That's James Lockhart, who recently became director of the Finance Agency after leading the Office of Federal Housing Enterprise Oversight, the agency that oversaw Fannie Mae and Freddie Mac. The housing reform law enacted July 31 consolidated supervision of all government-sponsored enterprises into one agency.

Sources agreed that the proposal has not yet reached Mr. Lockhart's desk, and his views on the issue are unknown. He could ultimately reject plans to raise retained earnings.

Still, the mere consideration of the idea resurrects one of the most contentious debates in recent memory for the Federal Home Loan Bank System.

The Federal Housing Finance Board, which regulated the Home Loan banks before new housing legislation was enacted this summer, proposed a rule in March 2006 that would have required the banks to slash dividends in half until the retained earnings portfolio totaled at least $50 million plus 1% of nonadvance assets.

It is unclear whether the Federal Housing Finance Agency has decided on a new formula, but it is likely that it is considering the issue with history in mind. The Finance Board's proposal drew the ire of the industry, particularly among community banks. The leaders of the House Financial Services Committee at the time — Chairman Michael Oxley and Rep. Barney Frank, the lead Democrat — also raised concerns.

After receiving 1,066 mostly angry letters from bankers, the Finance Board ultimately decided in December 2006 to table the plan. At that time Finance Board Chairman Ronald Rosenfeld, who now oversees the Home Loan banks at the Federal Housing Finance Agency, acknowledged that the proposal was flawed.

But its ghost lingered into last year, when Finance Board officials continued to work on a capital rule that would have been tied more directly to risky assets. Well before the housing crisis exploded, the now-defunct agency considered requiring increased holdings against mortgages and mortgage-backed securities.

"In relation to advances, clearly" mortgages and mortgage-backed securities "have a higher degree of risk and should have more capital," Mr. Rosenfeld said in a January 2007 interview. "The goal is that the banks in the system have adequate retained earnings."

Those holdings made up 20% of the system's assets at the time and now make up 14%.

But fighting a retained earnings proposal now may be a tougher battle for the industry.

In 2006 the industry swayed Geoff Bacino, a Finance Board director, to oppose the proposal. "It looks like we have a flawed regulation," he told American Banker in September of that year. "Based on the comments of the stakeholders, I think we may need to pull back."

As time went on, others on the five-member board grew hesitant, and whether there would be enough votes to support the plan became unclear.

Industry representatives cheered at the plan's demise. Camden Fine, the president of the Independent Community Bankers of America, said at the time that he was "thrilled that retained earnings was taken off the table."

But any upcoming debate will occur in a different climate, because the industry will be unable to encourage board members to vote against the idea. The Federal Housing Finance Agency's structure puts the decision solely in Mr. Lockhart's hands.

The question of retained earnings was a pet issue for Steve Cross, the Finance Board's director of supervision, who now handles that role at the new agency.

The debate is part of a larger discussion over the best time to require more capital. Banks have struggled to raise money during the current turmoil, prompting regulators to argue they should build capital during good times, so they have a cushion during rocky periods.

This could be an example of such thinking, since the Home Loan banks' combined second-quarter net income grew 14.3% from a year earlier, to $718 million.

The Finance Board never completed a capital rule before it was dissolved, but the system's retained earnings grew 17.3% last year, to $3.7 billion, and were at $3.8 billion on June 30.

However, that's still shy of the level the Finance Board sought in its 2006 proposal when the Home Loan banks would have had to hold $4.4 billion.

The housing legislation enacted in July required the new agency to review core capital requirements at the Home Loan banks. The agency has until the end of January to propose changes.

Though retained earnings make up a big part of capital at the Home Loan banks, the agency could address capital adequacy through other means, such as imposing concentration limits or capital surcharges.

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.