FHFA to take closer look at FHLB membership rules

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WASHINGTON — The Federal Housing Finance Agency is taking a closer look at its membership guidelines for the Federal Home Loan banks in light of "conduit arrangements" between Home Loan bank members and entities that are not allowed to belong to the system.

In a request for information issued Monday, the FHFA said it would be conducting an overview of how it regulates the 11 Home Loan banks to ensure that they are complying with the mission of the Home Loan Bank System to advance community development, and that they can withstand an economic downturn.

The review comes amid concerns that some companies are inappropriately seeking a back door to gain access to the low-cost loans and liquidity that the Home Loan banks provide.

The FHFA said it would be conducting an overview of how it regulates the 11 Home Loan banks to ensure that they are complying with the mission of the FHLB system to advance community development, and that they can withstand an economic downturn.
The FHFA said it would be conducting an overview of how it regulates the 11 Home Loan banks to ensure that they are complying with the mission of the FHLB system to advance community development, and that they can withstand an economic downturn.

Currently, only federally insured banks and credit unions, nondepository community development financial institutions and non-federally insured credit unions are eligible to be Home Loan bank members.

Up until 2016, real estate investment trusts and similar funds were able to become members by establishing captive insurance companies that could in turn become FHLB members, but the FHFA issued a rule prohibiting captive insurers from becoming members.

But since that rule was finalized, REITs and other companies have been using other avenues to obtain the benefits of FHLB membership, in particular through CDFIs and special-purpose banks.

“To date, FHFA has addressed such situations on a case-by-case basis and has not initiated a rulemaking to prevent the use of these other types conduit arrangements, in part because most of the newly established conduit entities did not satisfy all of the applicable requirements for membership … and therefore were not able to become members,” the agency said in its request for information.

FHFA Director Mark Calabria suggested that the limited cases of firms trying to take advantage of conduit deals was enough for the agency to get more deeply involved.

“We've only heard of a handful of instances where people were trying this, but if you could imagine, it is one of those things where if you get a handful that have figured out a way to do that … you're opening the door,” Calabria told reporters after speaking at a Credit Union National Association conference Monday.

But that may soon change. The agency asked for the public to respond to a number of questions, including whether or not the FHFA should ban “otherwise-eligible entities that are most susceptible to being used as conduit vehicles.”

That could include about 60 CDFIs that are currently Home Loan bank members.

The FHFA also asked if it should crack down on conduit activity in other ways, such as limiting the amount of advances a Home Loan bank should have outstanding to a single member.

“We look forward to hearing from all interested parties about how FHFA’s membership regulations affect the safety and soundness and mission" of the Home Loan banks, Calabria said in a statement. “There is no predetermined outcome for this RFI, other than to ensure that membership rules are clear, consistently applied to all applicants, and that access to the Banks’ low cost advances do not jeopardize the System’s role as a key source of liquidity to support housing finance.”

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Federal Home Loan Banks FHFA Mark Calabria CDFIs REITs
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