The Federal Housing Finance Agency issued a long-awaited final rule governing Federal Home Loan Bank membership requirements on Tuesday, giving community banks a significant victory by dropping one contentious part of the plan even while it held fast on a separate issue.
The agency scrapped a part of the 2014 proposal that would have required Home Loan Bank members to maintain a certain percentage of residential mortgage assets in order to keep their membership. But the FHFA acknowledged that 98% of members are already in compliance with the proposed requirements, and that it was too burdensome to impose a new requirement just to weed out the remaining 2%.
"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," said FHFA Director Mel Watt in a press release.
As originally proposed, small banks and credit unions with less than $1 billion in assets would have had to maintain at least 1% of their assets in mortgages.
At the same time, however, the FHFA stayed the course on another controversial part of the plan to kick real estate investment trusts out of the Home Loan Bank system. The final rule defines "insurance companies" to exclude so-called "captive insurers." All current captive insurance companies who are members of the system must exit over the next five years, the FHFA said.
The agency warned that an "increasing number of entities that are ineligible" for Home Loan Bank membership have been establishing captive subsidiaries in order to allow their parent company to become a de facto member.
"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 said. "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."
While community banks and credit unions are liable to be relieved by the FHFA's decision to forgo an asset membership requirement, the Home Loan Banks said that kicking REITs out of the system was a mistake.
"In disqualifying captive insurance companies altogether, the agency has removed a longstanding category of FHLBank members who are important to housing finance," said John von Seggern, the president of the Council of Federal Home Loan Banks.
The battle over REITs is likely not over. A bipartisan group of lawmakers introduced a bill in October that would have stopped the FHFA from finalizing its plan, in part over objections to the exclusion of captive insurers.