Credit Unions Urged to Share Concerns Over FHLB Membership Proposal

The Federal Home Loan Banks were organized under the Federal Home Loan Bank Act (Bank Act) in 1932 to support residential mortgage lending activities. Each bank is structured as a cooperative, which allows member financial institutions to obtain access to secured loans, known as advances, for the purpose of funding residential housing finance and, in some cases, for funding small business and community development activities.

The statutory mission remains the same, but the FHLB system has evolved and modernized.  The Federal Housing Finance Agency (FHFA) argues in a recent proposal that some members do not support the FHLB’s housing goals and potentially add risk to the housing market. In the proposal commentary, the agency points out that several real estate investment trusts (REITs) have established captive insurers that can join the bank accessing below market rates to fund speculative real estate investments. However the membership proposal goes much further than eliminating the ability for captive insurers to maintain membership.

During the advanced notice of proposed rulemaking, the FHFA received 137 letters, nearly all critical of the proposal, yet decided to move forward with the rule regardless. The criticism comes from every direction — captive insurance companies, banks, credit unions, trade associations, lawmakers, financial regulators and the Federal Home Loan Banks themselves have all expressed concerns.

The proposal would require that members have 1 percent of assets in long term home mortgages and 10 percent of assets in mortgage related assets. However, due to a statutory exemption FDIC-insured financial institutions under $1 billion would only have to comply with the 1 percent requirement, and not the 10 percent.

“The Association’s primary concern is that credit unions under $1 billion were not extended a similar exemption in the proposed rule, thus creating an even more uneven playing field favoring banks,” said John Trull, director of regulatory advocacy for the Association. “Changing the membership requirements has the potential to cause some credit unions serious disruptions in access to liquidity, interest rate risk management, and balance sheet management at a time when regulatory agencies are putting significant downward pressure on financial institutions’ long term assets.”

As proposed, 14 U.S. credit unions will need to increase their long term mortgage holdings in order to maintain membership at a time where doing so has significant downside risk. Approximately 15 additional credit unions hold between 1 and 2 percent in long term home mortgages and will need to carefully monitor their holdings in order to maintain FHLB membership, a critical source of liquidity.

According to Trull, there is not a shortage of credit available for home financing. Financial institutions generally have excess lending capacity and are fiercely competing with each other to attract mortgage-related borrowers. For financial institutions, the incentive to lend is inherent.

“The proposed rule creates risk and would negatively impact the ability of credit unions that don’t meet the 10/1 rule to provide housing finance,” said Trull.

The proposal’s comment period is open until January 12, and credit unions are encouraged to submit comments asking the FHFA to, at a minimum, make sure that membership requirements are equivalent for similarly-sized financial institutions.

Questions about this story? Contact James Pearson: 206.340.4790,

Posted in Federal.