The Federal Home Loan banks and their members are urging the Federal Housing Finance Agency (FHFA) to scrap a proposal that would make it tougher to join — and stay a part of — the cooperative system.
The banks and their allies argue the plan is too restrictive and could both harm the economy and jeopardize the future of the Home Loan Bank System.
"To layer new requirements on top of the admittedly undigested changes brought about by the Dodd-Frank legislation is 'piling on' and threatens to bring to a screeching halt what little economic recovery has occurred," wrote William White, chairman and president of the $262.1 million-asset Dearborn Federal Savings Bank in Michigan.
At issue is a proposal released in December that is designed to strengthen qualifications for belonging to a Home Loan Bank. Among other things, the proposal would force members to maintain at least 10% of their assets in mortgages on a permanent basis, create long-term mortgage lending requirements, and mandate adherence to an explicit home financing policy. Failure to adhere to any of these requirements would terminate a bank's membership.
That is a marked shift from the current system, where institutions must meet certain qualifications, including a 10% threshold for mortgage assets, but do not have to maintain that level.
In 135 comment letters to the FHFA, community banks and their representatives said the proposal was a mistake. If institutions know they can be kicked out of the system, they will no longer look to it as a stable source of funding.
"Requiring members to meet ongoing, long-term mortgage lending requirements would add an element of uncertainty to FHLBank membership," wrote Roger Beverage, president and CEO of the Oklahoma Bankers Association. "Members could never be sure of their ability to meet these tests and, therefore, maintain access to FHLBank liquidity, particularly in times of financial stress."
The Home Loan banks warned it could upset their operations as membership becomes more volatile.
"The ramifications of members failing the test at some point in time but then later satisfying the requirement would disrupt the workings of the FHLBanks because institutions might be required to terminate their memberships and redeem their capital stock only to later requalify and possibly rejoin their FHLBank," the 12 bank presidents wrote.
Though many commenters called the proposed qualifications unnecessary and burdensome, the FHFA signaled last year that it was concerned such requirements were lax.
"The residential mortgage loan requirement is a one-time requirement, and, until FHFA reversed an earlier regulatory interpretation in March , that requirement could have been met through a single repurchase agreement," the agency's acting director, Ed DeMarco, said in a speech last April. "In short, borrowed assets could have been used to meet the requirement to support housing finance."
The agency issued its proposal for two key reasons. For one, there has been a significant increase in the number of FHLB members, namely insurance companies that have joined the system because of the relatively easy standards that were applied to the qualification process.
Secondly, although the system was set up in the 1930s as a way to fund mortgage loans, current rules permit an insured depository institution that does virtually no mortgage lending to be a member.
For example, an institution could buy a MBS as an investment to count for its long-term home mortgage loan requirement, become a member of a Home Loan bank, sell off the MBS and never again need to own a mortgage, while still having access to FHLB advance system.
Even if such occurrences are rare, there are concerns whether it should be allowed to happen at all and if there should be stricter standards in place.
The system's members, including banks, credit unions and insurance firms, see it differently. They say the proposal undercuts the purpose of the Home Loan bank system by making membership more uncertain.
"This will destabilize a key premise of the FHLBank System, the reliability of accessing liquidity," wrote Nicola Foggie, director of compliance for the New Jersey Credit Union League, which represents 146 credit union members.
While many of the comments focused on the proposed 10% asset threshold, members also worried about a provision that long-term mortgage loans adhere to one or more quantifiable standards and that a percentage of member assets must be held in such loans.
That rule, which would apply to all members, mostly targets insurance companies and other nonbanks that do not currently have to meet the 10% asset requirement like insured depository institutions.
Additionally, all members would need to maintain a "home financing policy," something the agency has not defined and has left relatively open.
Many portrayed the proposal as a solution in search of a problem.
"The advance notice of proposed rulemaking fails to provide any compelling reason for imposing stricter membership regulations, and it does not present any information showing there is a problem with current membership rules," wrote Ronald Wente, chairman of the Federal Home Loan Bank of Topeka.
The National Association of Federal Credit Unions emphasized that the agency did not cite benefits it hoped to achieve. The group and others asked the agency to at least grandfather in insured depositories to ensure they are not disrupted.
Many bankers were also concerned about a potential hit to Home Loan bank earnings, which have declined in the past year as the banks have struggled with their advances business. The proposal would inevitably drive down membership, hurting the bottom line of the Home Loan banks, they said.
"As a director who sits on the financial operations committee of an FHLBank that has faced some challenges and who has spent many hours thinking about how best to resolve those challenges, it is clear to me that the level and consistency of earnings are the key determinants of FHLBank success or failure," wrote James Livingston, a Zions First National Bank executive on the board of directors of the Federal Home Loan Bank of Seattle.
Others worried that a struggling institution would suddenly find itself excluded from Home Loan Bank membership, potentially pushing it toward failure. "Many FHLB member banks view the FHLB as secured lender of last resort — in essence, a source of funds regardless of market disruption," said Mark DuHamel, executive vice president and treasurer of the $14.1 million-asset FirstMerit Bank in Akron, Ohio. "Surely, this was never truer [than] during the financial crisis, when FHLB advances systemwide increased dramatically as other market-based sources of funding failed."
During the financial crisis, the banks increased their lending to members by 58%, to $1 trillion, between the second quarter of 2007 and the third quarter of 2008.
Banks also made the case that it was Congress' job to decide on the system's membership, not regulators. They argued that such a proposal conflicts with past efforts by Congress to expand the system's membership.
"Mission and membership are core attributes of the system and are appropriately left to the Congress to determine," wrote Joseph Pigg, vice president and senior counsel of mortgage finance for the American Bankers Association.
Others simply said that bankers had more critical issues to worry about, asking the FHFA to back off.
"It is counterproductive to implement a continuous review of system membership at a point where the focus should be on encouraging an economic recovery through small business and mortgage lending," wrote William Crowell, legislative counsel for the Independent Bankers Association of New York State.