WASHINGTON - To implement the new financial reform law, the government issued a rule Wednesday making it easier for small banks to borrow money from a Federal Home Loan bank.

Previously, to join the Home Loan Bank System, a bank had to have at least 10% of its assets in residential mortgage loans. The Gramm-Leach-Bliley Act of 1999 eliminated that requirement for banks with less than $500 million of assets. This is expected to prompt as many as 1,000 small banks to join the system and begin borrowing as a way to increase their funding options.

"These community banks will now be able to utilize their Federal Home Loan bank as their 'central bank' for their liquidity needs," said Federal Housing Finance Board Chairman Bruce A. Morrison, the system's regulator.

Since the Home Loan Bank System began accepting banks as members in 1989, more than 5,300 have joined, including 4,820 with assets of less than $500 million. Commercial banks hold 37.6% of the system's $392.2 billion of advances.

The finance board's rule also ends the 1932 requirement that all federal thrifts belong to the system. From now on, membership is voluntary for thrifts, as it is for banks. However, any institution that quits the system must wait five years to rejoin. The wait was 10 years under the old rules.

The financial reform law also dropped restrictions on borrowing by members that do not meet the "qualified thrift lender" test, which requires a certain percentage of assets be related to mortgages. Previously, such institutions had to buy more stock in their district Home Loan bank. Lending to these institutions also was capped at 30% of the system's total, though 92.4% of advances now go to lenders that meet the test.

The rule, technically an "interim final rule," takes effect immediately, but the finance board is accepting comments for 30 days.

- Barbara A. Rehm

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