The Federal Housing Finance Agency (FHFA) has finally banned captives from being members of the Federal Home Loan Bank (FHLB) system, despite widespread hostility to the move.
The amended rule to the regulation on FHLB membership was issued on 12 January, after more than a year of debate and 1,300 comment letters from interested parties.
Under the amended membership regulation, the definition of “insurance company” has been amended to exclude captives because “an increasing number” of ineligible entities have been using them to “circumvent the membership eligibility requirements and gain access to low-cost FHLBank funding and other benefits”, according to the FHFA.
The FHFA has given captive members that joined the FHLB system before the rule was proposed in 2014 up to five years to terminate their membership.
Those that joined after the rule was proposed have one year to end their membership.
The final rule becomes effective 30 days from publication in the Federal Register.
The FHFA moved to ban captives from being FHLB members after an increasing number of real estate investment trusts (REIT) set up captive subsidiaries as a means to access the system. Arlington Asset Investment’s captive insurance subsidiary was approved as a member of the FHLB of Cincinnati during Q3 2015.
Captive insurance representatives widely criticised the FHFA’s concerns. A bill was also introduced in US Congress last year that would have stopped the agency from moving forward with its rule change.
Despite the opposition to the ban, FHFA director Melvin Watt was adamant that his agency had a duty to press ahead with the reform.
He said in a statement: “The FHFA has the authority and the 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 we are making sure that 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.”
David Stevens, president and CEO of the Mortgage Bankers Association (MBA), which supported the House of Representatives bill proposed in October, said the MBA was disappointed with the FHFA’s decision to press ahead with the ban.
“The MBA is disappointed, to say the least, in the final rule on FHLB membership. When Congress established the FHLB membership framework, it didn't limit membership to only certain insurance companies. Today, without direction from Congress, the FHFA decided to narrow membership and exclude important members of the system.”
"In particular, the FHFA's decision to disqualify captive insurance companies removes a vital component of the FHLB membership which provides liquidity for the real estate finance market.”
He added: “In today's marketplace, we need a FHLB system that serves the wide variety of lending institutions active in today's housing finance market, including captive insurance companies, REITs, independent mortgage bankers, and other entities, all of which provide major sources of liquidity and are core components in the 21st century FHLB system. We will continue to work with Congress on this issue to address the shortcomings of today's rule.”
