The Federal Home Loan Bank System plans to relax its membership rules and add services to help community banks become more competitive, the system's regulator said Monday.

Bruce A. Morrison, chairman of the Federal Housing Finance Board, said new membership rules would be announced next month. One change, he said, would reduce the amount of capital a bank must retain to qualify as a member of a Federal Home Loan bank.

Speaking at the annual meeting of America's Community Bankers, Mr. Morrison told 2,000 thrift executives that the new membership rules would be similar to those proposed as part of HR 10-the financial modernization bill that was left on the table when Congress adjourned last month.

"No one who knows the current system would say it is appropriate," he said in an interview after making his remarks. "It leads to systemic overcapitalization."

Mr. Morrison, whose board oversees the 12 Federal Home Loan banks, was facing a skeptical audience. Many ACB members-the system's original thrift members-are upset that the Finance Board has committed more money to a program that allows Federal Home Loan banks to bundle members' long-term, fixed-rate mortgages and sell them on the secondary market.

The pilot program, which started in Chicago and is dubbed the Mortgage Finance Partnership program, has $1 billion of loans committed.

The Finance Board agreed in September to support an additional $9 billion in loans and to let other Federal Home Loan banks participate.

The program competes with similar services offered by Freddie Mac and Fannie Mae. It gives community banks a chance to offer their customers long-term, fixed-rate mortgages and pass the risk onto capital market investors, Mr. Morrison said.

"This is a viable structure that has a good idea behind it," he said.

David F. Holland, chairman and chief executive of Boston Federal Savings Bank, received a round of applause from the ACB audience when he said the program is too risky.

"We have to be careful with what we're doing," said Mr. Holland, who is on the board of the Federal Home Loan Bank of Boston.

Mr. Morrison acknowledged the opposition, but he said the Finance Board is committed to helping Home Loan bank members remain competitive.

He said that in July, the Federal Home Loan banks made it easier for rural banks to get cash advances from the system. Those banks now may substitute agricultural real estate loans for traditional mortgages when putting up collateral for an advance.

"We're here to maximize benefits for our members," he said. "The Federal Home Loan Bank System is going to be the lifeblood of community banks."

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