Senate Bill Would Reverse FHFA Ruling Barring ‘Captive Insurers’ from FHLB Membership


A bipartisan bill introduced in the Senate would reverse a 2016 ruling from the Federal Housing Finance Agency (FHFA) to disallow captive insurance companies from having membership in the Federal Home Loan Bank (FHLB) System.

The Housing Opportunity Mortgage Expansion Act, sponsored by Sens. Tammy Duckworth, D-Ill.; Tim Scott, R-S.C.; and Ron Johnson, R-Wis., would restore captive insurers’ right to once again have full FHLB rights and privileges.

In January 2016, the FHFA issued a final rule amending its regulation on FHLB membership. Within that final rule was a controversial decision to change the definition of “insurance company” to exclude captive insurers.

The goal of the definition change, the FHFA said, was to prevent 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.

Interestingly, Mel Watt, director of the FHFA, pointed out in January 2016 that Congress had the power to reverse the agency’s decision.

“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,” Watt said.

Last year, a House bill that is identical to the Housing Opportunity Mortgage Expansion Act was introduced by Rep. Randy Hultgren, R-Ill.

According to a statement on Duckworth’s website, the FHFA rule “would gut the Chicago FHLB’s membership and funding source, which could fundamentally impair its ability to support affordable housing options and small-business lending – two services vital to a strengthening local and state economies.”

“The FHFA rule has a particularly devastating impact on FHLB-Chicago, which serves Americans in Illinois and Wisconsin, because its long-standing captive insurer members provide the bank with nearly one-third of its total borrowings,” the statement adds. “The HOME Act would retain longstanding FHLB members who joined prior to the FHFA proposed rule and reinstate newer members that joined a bank while the proposed rule was pending or who have already had their FHLB membership terminated.”

David Stevens, president and CEO of the Mortgage Bankers Association, expressed support for the bill.

“I want to commend Senators Duckworth, Johnson and Scott for introducing this important piece of legislation which will restore captive insurance companies membership into the FHLB system,” Stevens said. “Captive insurers whose housing focus is aligned with that of the FHLB System act as a stabilizing force in the housing finance market and create a reliable source of capital for lenders and investors. This bill represents an important step forward in recognizing the need for multiple forms of private capital as Congress considers the future of housing finance. MBA looks forward to continuing to work with these and other key senators to advance this important legislation.”

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