Compliance Blog

Written by Angela Meyster, Senior Regulatory Affairs Counsel

Last month, the Federal Housing Finance Agency released a proposal that would change the eligibility requirements for institutions, including credit unions, to join and maintain membership in Federal Home Loan Bank (FHLBs).  While NAFCU estimates that the current level of credit union involvement with FHLBs is relatively low (around 19% of all federally insured credit unions), the Federal Home Loan Banks do provide an important avenue for liquidity to which an increasing number of credit unions may look to as lending becomes tighter in the future and interest rates rise. The impact of this proposal on your credit union today may be minimal, but as your credit union plans for the future you may want to familiarize yourself with how the FHLB system works now and would work under the proposal.

So how does it work? Federal Home Loan Banks operate a bit like credit unions in that they are cooperative, member-owned institutions. There are twelve of them, organized by region, and they offer low-cost secured borrowing to their members in order to assist with liquidity, housing mortgage markets, and community development. Federal Home Loan Banks represent the largest collective source of home mortgage credit in the U.S. and they have been a source of significant assistance to participating credit unions.

The proposal would change a number of things about FHLB membership.  The three most important for credit union purposes are that it would:

• Require FHLB members and applicants to keep 1% of assets in “home mortgage loans;”
• Require FHLB members to have at least 10% of assets in “residential mortgage loans” on an ongoing basis; and
• Require FHLBs to determine member compliance on an annual basis, and terminate the membership of any credit union that has been noncompliant for two consecutive years.

Currently, there is no 1% requirement to keep assets in “home mortgage loans.”  Under the existing regime, a credit union, upon becoming a member, must be in the business of making “long term home mortgage loans,” but there is no quantitative component of making this determination.  Additionally, the 10% requirement to hold assets in “residential mortgage loans” currently only applies upon application for FHLB membership.  The proposal’s requirement to maintain this threshold asset allocation on an ongoing basis may pose issues for some credit unions that do not concentrate on mortgage lending.

In order to make compliance with the 1% requirement somewhat easier, however, the proposal would expand the definition of

“home mortgage loans” to include “any loan or interest in a loan that is secured by a first lien mortgage or any  mortgage pass-through security that represents an undivided ownership  interest in such loans or in another security that represents an undivided ownership interest in such loans.”

NAFCU has met with the FHFA to discuss aspects of the proposal and requested an extension of the comment deadline. NAFCU requested the extension because of the complexity of the rule, and the significant impact the rule could have on the industry and credit unions ability to establish and maintain membership in FHLBs. The comment period closure, originally slated for November 12, 2014, has been extended until January 12, 2015.  We continue to emphasize that the requirements set out in the proposal are unnecessary and prohibitive, especially for credit unions, which have not participated in the type of activities the proposal targets.  NAFCU has noted that the proposal would make it more difficult for credit unions to provide credit to their members and could prevent many credit unions who have  been long-time FHLB members from being able to continue their membership.