The Federal Housing Finance Agency (FHFA) has proposed a rule that will effectively exclude captive insurers from membership of any one of the 12 Federal Home Loan Banks (FHLBs).
This rule, if adopted, would prevent entities not eligible for membership from gaining access to bank advances and the benefits of membership through a captive insurer.
The definition of ‘insurance company’, under the proposed rule, would mean a company that has as its primary business the underwriting of insurance for nonaffiliated persons.
This would continue to include traditional insurance companies but not captive insurers. As a result, existing membership of captive insurers would be ‘sunset’ over five years with defined limits on advances.
The standards by which an insurance company’s “principal place of business” is identified is to be clarified under the proposed rule, so as to determine the appropriate FHLB district for membership.
The proposed rule would also establish a new quantitative test requiring all members to hold one percent of their assets in home mortgage loans (HML) and to do so on an ongoing basis.
Currently, applicants for membership need only demonstrate a nominal amount of HML on their balance sheet at the time of their application, but not thereafter.
Speaking in 8 September during the North Carolina Bankers Association’s American Mortgage Conference, FHFA director Mel Watt commented: “While captive insurers may, in some cases, be involved in housing finance, their access to the [FHLB System] raises a number of concerns that are discussed in the proposed rule. We look forward to receiving your comments on both of these topics.”
Interested parties have been invited to submit comments on this proposed rule within 60 days after it is published in the Federal Register.
Concerns over captives’ membership of the FHLB System arose when Redwood Trust’s special purpose captive insurance subsidiary, RWT Financial, received approval as a member of the FHLB of Chicago on 6 June.
This led all 12 banks of the FHLB System to agree on a three-month moratorium on admitting captive insurers as members, following the mounting concerns of the FHFA regarding the risks of such memberships.
In May, Watt described a number of issues, including ensuring that the banks “remain focused on their housing finance mission”.
