Credit Unions Dodge Home Loan Bank Bullet
It might not be sexy, but credit unions scored an important regulatory victory earlier this week when the Federal Housing Finance Agency (FHFA) decided not to impose additional requirements on financial institutions that are members of the Federal Home Loan Bank system even as it went ahead with tighter regulation of the insurance industry. I know that sounds about as exciting as watching public access television, so let me explain.
The Federal Home Loan Bank system is made up of 12 regionally based banks funded by membership investment. It has been around since 1932. It is one of those Depression-era creations of the federal government intended to, in the words of the Supreme Court , put “ long term funds in the hands of local institutions in order to alleviate the pressing need of homeowners for low cost” mortgages (See Laurens Fed. Sav. & Loan Ass’n v. S. Carolina Tax Comm’n, 365 U.S. 517, 521-22, (1961). As of 2014, 19% of credit unions were bank members.
Institutions applying for membership have to have 10% of their assets in mortgage loans at the time they apply. (An exemption from this requirement for institutions with less than $1 billion in assets doesn’t apply to credit unions). The proposal under consideration by the FHFA would have required that this and other asset requirements be assessed on an ongoing basis. This would have been particularly troubling, because many credit unions sell their mortgages to Fannie and Freddie. It also was another example of regulatory overkill. Remember this proposed regulation came out just as the NCUA was unveiling proposed risk weightings for larger credit unions subject to risk based capital requirements.
Fortunately, commonsense prevailed. In announcing the final regulations, the FHFA decided that “While members’ ongoing commitment to housing finance is important to ensuring fidelity to the Bank Act, FHFA believes that the statutory requirement for members to continue their commitment to housing finance can be addressed, for the time being, by monitoring the levels of residential mortgage assets they hold.“
Credit unions almost got caught in the crossfire of a much bigger battle involving the insurance industry that you may continue to hear about. Insurance companies are allowed to be bank members because many of them invest in mortgages. According to the agency, captive insurance companies are being created by Real Estate Investment Trusts primarily so that they can qualify for FHLB membership. Subsequently, the insurance companies transfer FHLB advances to their parent REITs. The final regulation still makes captives ineligible for membership but existing captive members will have five years to pack their bags.
Folks, regulatory advocacy might not be exciting. Whenever my kids ask me what I do for a living, their eyes glaze over. But the FHFA’s final rule is the latest example of how it really does make a difference.
I will be back on Tuesday. Have a great long weekend.