FHLB Eligibility Plan Hurts Credit Unions, NCUA Official Says

WASHINGTON — A key credit union regulatory official this week raised concerns about the Federal Housing Finance Agency's recent proposal to tighten eligibility for lenders to become members of the Federal Home Loan Bank system.

Rick Metsger, who sits on the National Credit Union Administration's board, said the proposed membership requirements could be too steep for some smaller credit unions and could give banks an unfair advantage. Without access to the FHLB system, he said, certain credit unions would lose a key source of liquidity.

Credit unions "can use the Federal Home Loan Bank advances to help manage the interest rate risk of mortgages that they hold in their portfolio. These are valuable tools," Metsger said at a Washington conference for the National Association of Federal Credit Unions. "I believe that all credit unions, but most particularly small credit unions, may need to consider alternatives in addition to Federal Home Loan Banks. And that would take a very, very valuable tool out of the mix."

The proposal would require FHLB members to meet minimum targets for mortgage-related assets. All members would have to hold 1% of their assets in home mortgage loans on an ongoing basis. But the plan would also expand the requirement — currently mandated by law — that certain FHLB members, upon entering the system, have 10% of their assets in residential mortgage loans. The proposal would require those institutions to maintain the 10% minimum long-term, not just when they become members.

Metsger criticized the plan. He argued that smaller banks — those with less than $1 billion in assets — could be exempted from the 10% requirement, while smaller credit unions would not be exempted.

The proposal describes the statutory exemption as applying to "any 'community financial institution'" while defining CFIs as being insured by the Federal Deposit Insurance Corp. (Credit unions are insured by the NCUA.)

"I believe that the rule will have a very serious disparate impact on credit unions because, while the rule would apply to credit unions of all sizes, no matter how small, the FDIC-insured banks under $1 billion are exempt from rule," Metsger said.

The FHFA proposal is intended to ensure that lenders keep to the FHLBs' core mission of promoting housing finance. Traditionally, lenders have had to meet core eligibility requirements to enter the home loan bank system — including holding minimum levels of mortgage assets — but did not have to keep those mortgages on their books thereafter.

In May, FHFA Director Mel Watt hinted the proposal was coming after raising concerns that the FHLB system was veering away from its core function. The proposal would also effectively block captive insurance companies from gaining entry to the FHLB system. The memberships of captive insurers already in the system would sunset after five years.

"Focusing on your core mission is very much related to safety and soundness and is much less likely to cause financial difficulties. It is a source of historic pride that the FHLBanks have never experienced a credit loss on advances," said Watt during his first public speech after being sworn into office in January. "But, some of the Banks' investments outside their core mission prior to the housing crisis brought them close to economic peril and affected their ability to perform normal FHLBank functions like repurchasing stock."

But Metsger said he was also concerned that the proposal would conflict with a rule the NCUA issued last year that requires credit unions to adopt a liquidity plan and larger credit unions to have access to backup sources of liquidity. He said the tighter membership requirements proposed by the FHFA "essentially damages that liquidity plan" since credit unions use funding from the FHLBs as a key source of liquidity.

Community banking groups have already asked for changes to the proposal. And the Council of Federal Home Loan Banks, along with other bank and credit union trade groups, has requested that the FHFA extend the comment period for another 60 days. Currently, the comment period ends on Nov. 12.