The Federal Housing Finance Board made it easier Thursday for small banks to qualify for membership in the Federal Home Loan Bank System.

Under a new rule, banks with assets of less than $500 million may count loans secured by farm or business properties toward the system's mortgage lending requirement, if the properties include a permanent residence.

To join the Home Loan system, members are required to have at least 10% of their assets in mortgage loans. Previously, loans secured by farm or business properties could be used to meet the test only if the residence accounted for at least 50% of a property's value.

Federal Housing Finance Board Chairman Bruce A. Morrison said the change is needed because few rural banks have enough traditional mortgage loans to meet the system's requirements.

"As system members, these institutions can be more effective funding sources for housing and community development in areas that have been virtually cut off from the supply of credit."

The finance board had originally suggested that the new rule apply to all banks, but the Treasury Department objected, and the $500 million-asset cap was added.

"This is very important to community banks, particularly in rural areas where banks need new sources of liquidity," said Ann Grochala, director of banking operations for the Independent Bankers Association of America. "In rural areas the house is often on a large piece of land and doesn't account for half the property's value."

The rule will take effect 30 days after publication in the Federal Register, which should occur sometime this week.

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.