The U.S. District Court in Austin, Tex., has ruled the Federal Home Loan Bank of Chicago may continue a controversial pilot program.

Judge Sam Sparks on June 25 dismissed a case brought by the Texas Savings and Community Bankers Association and the Western League of Savings Institutions in May 1997. The trade groups had argued that the Federal Housing Finance Board had overstepped its authority by permitting the Chicago Home Loan bank to fund and hold mortgages made by member banks and thrifts.

But Judge Sparks said the Home Loan banks may hold mortgages as investments. Holding mortgages, he said, does not make the Chicago bank a retail mortgage lender because the member institutions create and service the loans. The Home Loan bank "still functions as a wholesale credit provider under this arrangement," Judge Sparks said.

Finance Board Chairman Bruce A. Morrison said the ruling will give community banks an alternative to selling loans in the secondary market, and reduce costs to homebuyers. Trade group officials said they have not decided whether to appeal.

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