The Federal Housing Finance Agency (FHFA) has released its final rule amending its regulation on Federal Home Loan Bank (FHLBank) membership.
Two provisions from the 2014 proposed rule that would have required FHLBank members to maintain ongoing minimum levels of investment in specified residential mortgage assets as a condition of remaining eligible for membership have been dropped from the final rule.
After reviewing research indicating that 98% of FHLBank members are currently in compliance with the proposed requirements, as well as concerns from the industry regarding implementation burdens, the FHFA concluded that the benefit of forcing the remaining 2% of current members to comply with these proposals would be outweighed by the burden the proposal would impose.
‘The statutory requirements for members to continue their commitment to housing finance can be addressed by monitoring the levels of residential mortgage assets they hold, and we, therefore, decided not to include the ongoing investment requirements in the final rule,’ says Mel Watt, director of the FHFA, in a statement.
The FHFA considered input received from more than 1,300 comment letters in response to its proposed rule issued in 2014.
The final rule, however, does adopt a controversial provision that defines ‘insurance company’ to exclude so-called ‘captive insurers.’ The goal in doing this, the FHFA says, is to prevent non-eligible entities from gaining de facto FHLBank membership through a captive insurer.
Redefining the term ‘insurance company’ to mean a company that has the underwriting of insurance for nonaffiliated persons as its primary business allows traditional insurance companies to continue to do business with the FHLBs but effectively excludes captive insurers from membership.
As such, the final rule shuts out mortgage real estate investment trusts from applying for and maintaining membership in the FHLBs, as they commonly use captive insurance companies to gain access to low-cost funding through the FHLB system.
‘FHFA has the authority and the duty to implement the statutory membership provisions of the Federal Home Loan Bank Act, and by adopting the proposal to exclude captives from the definition of 'insurance company,' we are making sure that institutions can't frustrate the intent of Congress,’ Watt says in the statement. ‘Congress has amended the Federal Home Loan Bank Act in the past to allow additional entities to become members of a Federal Home Loan Bank, and it can certainly do so again if it wants some of these entities to be eligible for membership.’
To minimize disruption of current members and the FHLBank System, the final rule allows FHLBank captive insurer members that joined up to five years prior to the FHFA's proposed rule to terminate their membership. Those that joined after issuance of the proposed rule will have up to one year to terminate.
The final rule also requires FHLBanks to obtain and review audited financial statements for insurance company applicants when considering them for membership and clarifies the standards for determining the location of an institution's ‘principal place of business’ for purposes of identifying the appropriate FHLBank district for membership.
In a statement, David Stevens, president and CEO of the Mortgage Bankers Association, says the association is ‘disappointed, to say the least, in the final rule on FHLBank membership. When Congress established the FHLBank membership framework, it didn't limit membership to only certain insurance companies. Today, without direction from Congress, FHFA decided to narrow membership and exclude important members of the system.
‘In particular, FHFA's decision to disqualify captive insurance companies removes a vital component of the FHLBank membership [that] provides liquidity for the real estate finance market,’ Stevens says. ‘In today's marketplace, we need an FHLB system that serves the wide variety of lending institutions active in today's housing finance market, including captive insurance companies, real estate investment trusts, independent mortgage bankers and other entities – all of which provide major sources of liquidity and are core components in the 21st century FHLBank system. We will continue to work with Congress on this issue to address the shortcomings of today's rule.’
Rob Nichols, president and CEO of the American Bankers Association, however, applauded the final rule, saying there was ‘no demonstrable need for the proposed changes, which contradicted congressional intent and would have harmed the FHLBs, their member banks and the communities they serve.’
The final rule becomes effective 30 days from publication in the Federal Register.