Much speculation has been made in reporting of the lien — often referred to as the "super lien" — status of Federal Home Loan banks under the Competitive Equality Banking Act (CEBA).
This authority often is mischaracterized — sometimes willfully — as allowing the Home Loan banks to jump the line when a bank that owes them money fails, purportedly costing the Federal Deposit Insurance Corp., and even taxpayers, money. Consequently, critics allege the Home Loan banks lend money to members recklessly, knowing they will be protected from loss by their special "super" lien powers. Of course, this is not at all how it works.
Congress created this "super" lien in 1987 to ensure that the Federal Home Loan banks could safely make loans to members who are experiencing stress at the very times that the market needs those members to lend to consumers and small businesses. It was enacted amid the failure of thousands of thrift institutions and was intended to encourage Home Loan banks to continue lending to members as the Federal Savings and Loan Insurance Corporation (FSLIC) worked desperately to stabilize the thrift industry in the 1980s. And it gives the banks security interest priority over other lien creditors when a member bank or credit union fails.
It is critical to note that it only applies to a Home Loan bank's security interest, which the banks are required to obtain when making an advance to a member. At the time it was created, the only way to perfect a security interest in mortgages was to take physical possession of the notes. The CEBA lien protected Home Loan banks if there were multiple creditors without possession of the collateral.
However, since 2001, it has become far less relevant to ensuring that advances are repaid, because updates to the Uniform Commercial Code now allow security interests to be perfected by filing a financing statement with the appropriate state office where the collateral is located.
The Federal Deposit Insurance Corp. said it will propose a special assessment to cover losses from Silicon Valley Bank and Signature Bank in May, and noted that bank deposit outflows are largely uninsured.
Today, this is how all creditors — including Federal Home Loan banks — perfect their security interests. Any creditor with a perfected security interest stands in front of any other secured (if first to file) or unsecured creditors, including the FDIC, when claiming the assets of the failed institution in receivership or bankruptcy.
As a result, the application and effect of the CEBA lien has been significantly narrowed, to the point that it is only relevant in the rare instance in which no secured creditor has perfected its security interest in the collateral through either possession or filing at the time of the receivership. This has never occurred, because Federal Home Loan banks are required to obtain a perfected security interest for their advances.
Given these changes, Home Loan banks stand ahead of other creditors of failed institutions, including the FDIC, not because of some "super" power conveyed to them exclusively by Congress, but because they always perfect their security interest and enjoy protections available to any other secured creditor.
The preference the CEBA provision once provided is largely irrelevant today. The use of the term "super lien" should similarly be placed in the dustbin of history.
