A recently finalized rule from the Federal Housing Finance Agency (FHFA) will likely translate into new members for the Federal Home Loan banks, but is not expected to contribute greatly to the system's bottom line.
The new rule allows community development financial institutions (CDFIs) to join the Home Loan banks.
Membership was previously limited to depository institutions and insurance companies, but the FHFAsaid in a press release last week that the change would expand the ability of CDFIs "to promote economic growth and stability in low- and moderate-income communities."
The membership expansion comes as the Home Loan banks have been stung by the financial crisis. The system posted a $165 million loss during the third quarter largely because of accounting losses on private-label mortgage-backed securities.
But the average size of a nondepository CDFI was $21 million in 2008, making it unlikely that they will emerge as top borrowers in the system.
Moreover, the path to membership in the system for CDFIs will remain challenging as the Home Loan banks learn more about the institutions.
"In the beginning, I don't think it's going to be as easy because it's new," said Carol Wayman, the director of federal policy at the Corporation for Enterprise Development, which advocated for CDFI inclusion at the Home Loan banks.
"Federal Home Loan banks are going to have to educate themselves about CDFIs, but over a period of time, once the standards are established, I'm sure it will be easier."
Congress mandated that CDFIs be allowed access to the Home Loan banks as part of the Housing and Economic Recovery Act enacted during the summer of 2008.
"Congress has unambiguously spoken on the matter of CDFI membership and has determined that CDFIs that satisfy the requirements for membership are entitled to become Bank members," the final rule said.
In general, the FHFA's rule requires CDFIs to adhere to the same eligibility requirements as depository institutions and insurance companies. They will have to convince Home Loan banks of their safety and soundness, buy stock in the system and post collateral to borrow advances, both of which could be difficult for small CDFIs.
The FHFA, however, did tailor its rule to address certain quirks posed by CDFIs. For instance, since the CDFIs are not examined by regulators, they will not have to share examination reports with the Home Loan banks. Given the relative small size of CDFIs compared with other Home Loan bank members, the Finance Agency downplayed the potential risks they pose.
"Even if a nondepository CDFI were to fail, the financial impact on a bank would likely not be material," the FHFA said in its final rule.
The FHFA declined to go along with a request from some CDFI advocates to require Home Loan banks to have a minimum threshold of CDFI members.
"Whether any institution may become a member of a bank depends on whether the institution has satisfied the statutory and regulatory requirements for membership," according to the final rule.
"Because each application should be evaluated individually, FHFA does not believe that it is appropriate to establish membership goals, which suggest the CDFIs should be granted membership without regard to those requirements."