The Federal Housing Finance Agency revealed the final rule on its revised regulations for members of the Federal Home Loan Bank Tuesday, omitting a proposal that garnered 1,300 comments during a public comment period.
The highly-contested proposal would have required Federal Home Loan Bank member financial institutions to maintain 10% of their assets in residential mortgages.
The FHFA said in a statement that based on its research, 98% of FHLBank members are currently in compliance with the proposed requirements. It concluded that the benefit of forcing the remaining 2% of current members to comply with the proposal would be outweighed by the burdens of the proposal.
“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,” FHFA Director Melvin L. Watt said in the statement.
NAFCU Executive Vice President of Government Affairs and General Counsel Carrie Hunt said the organization is pleased the FHFA “heeded our suggestion by not imposing the 10% standard on an ongoing basis.” She added, in a press release, that credit unions should “have the flexibility to manage the best interest of their members in mind, rather having to manage to meet an arbitrary standard.”
CUNA President/CEO Jim Nussle echoed NAFCU’s statement, noting the decision to drop the proposal was a “big win” for credit unions.
“Today’s actions by the FHFA will ensure continued access to the liquidity and flexibility the FHLB system provides, tools that help many credit unions manage their mortgage portfolios more effectively,” he said. “Credit unions understand the needs of their members, and removing the unnecessary ongoing burden of demonstrating sufficient mortgage assets for FHLB affiliation is a big win for member-owned financial institutions.”
The final rule included a proposal that defines “insurance company” to exclude captive insurers. The FHFA said that by excluding captives, the agency will prevent entities that do not meet the statutory requirements from becoming FHLBank members.
An increasing number of entities that are ineligible for FHLBank membership have been establishing captive subsidiaries as a means for their parent companies’ to become de facto FHLBank members, the agency added. A captive insurer does not underwrite for the general public, according to the FHFA, but rather underwrites insurance for its parent company or other affiliates, and is easier and less expensive to charter, capitalize and operate.
Watt said the FHFA has the authority and 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, it ensures institutions can’t frustrate the intent of Congress.
“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 added.
In order to help minimize disruption, the agency said it will give captive insurer FHLBank members that joined prior to the rule’s proposal up to five years to terminate their membership and those that joined after the rule was proposed one year to terminate their membership.
However, not all parties were impressed with the decisions made by the FHFA on the final rule. Rep. Blaine Luetkemeyer (R-Mo.) said in a statement he was not surprised by the “disappointing” decision to force captive insurers out of the FHLBank system.
“It is Congress, not FHFA, which has the authority to set membership standards for the system,” Luetkemeyer said in a statement. “Not only is this a blatant violation of the rule of law but it is a decision based on little evidence or analysis. Before making such rash decisions, FHFA should consider, in conjunction with Congress, the implications of this move on the housing finance system.”
Luetkemeyer added he introduced a bill that would block the implementation of the rule and would require a study on the implications of the FHFA decision. The bill in question, H.R. 3808, was introduced to the House Financial Services Committee on Oct. 22, 2015.
“We must ensure that decisions impacting our housing system are made in a thoughtful and educated manner and make sure that entire segments of industry are not exiled from participation in the Federal Home Loan Bank system,” Luetkemeyer said. “More importantly, FHFA needs to comply with standards already set in law. Congress changes the law, not the FHFA.”