FHFA Final Rule on FHLB Membership Retains Controversial Captive Insurer Restriction

The Federal Housing Finance Agency yesterday issued a final rule on Federal Home Loan Bank membership that retains a controversial Mortgage Bankers Association-opposed restriction on captive insurers.  

The final rule (https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Members-of-Federal-Home-Loan-Banks-Final-Rule.aspx) implements provisions of the Federal Home Loan Bank Act that govern eligibility for membership and establish requirements for an institution to become and remain a member of a FHLBank. FHFA oversees membership regulation of the FHLB.  

The final rule adopts a provision in the 2014 proposed rule that defines “insurance company” to exclude so-called “captive insurers.” The final rule would prevent non-eligible entities from gaining de facto FHLBank membership through a captive insurer.   

“The primary business of a captive insurer is underwriting insurance for its parent company or for other affiliates, rather than for the public at large, and captives are generally easier and less expensive to charter, capitalize and operate,” FHA said in a news release. “In defining ‘insurance company’ to exclude captives, FHFA seeks to prevent entities that do not otherwise meet the statutory requirements from becoming FHLBank members by establishing and using captives as conduits to circumvent the membership eligibility requirements and gain access to low-cost FHLBank funding and other benefits of FHLBank membership.”  

MBA President and CEO David Stevens, CMB, expressed disappointment in the FHFA decision on captive insurers,  

“When Congress established the FHLBank membership framework, it didn’t limit membership to only certain insurance companies,” Stevens said. “Today, without direction from Congress, FHFA decided to narrow membership and exclude important members of the system. In particular, FHFA’s decision to disqualify captive insurance companies removes a vital component of the FHLBank membership which provides liquidity for the real estate finance market.”    

“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 [real estate investment trusts], Independent Mortgage Bankers and other entities, all of which provide major sources of liquidity and are core components in the 21st century FHLBank system. We will continue to work with Congress on this issue to address the shortcomings of today’s rule.”  

The final rule does not include two provisions from the 2014 proposed rule that would have required FHLBank members to maintain ongoing minimum levels of investment in specified residential mortgage assets as a condition of remaining eligible for membership.  

FHFA said it considered input from more than 1,300 comment letters. The final rule, which becomes effective 30 days from publication in the Federal Register, also requires FHLBanks to obtain and review audited financial statements for insurance company applicants when considering them for membership and clarifies the standards for determining the location of an institution’s “principal place of business” for purposes of identifying the appropriate FHLBank district for membership.  

Last year, the Senate Banking Committee passed legislation blocking the FHFA rule as part of a broader regulatory relief effort.  

In September, MBA led a coalition of groups in a letter (http://mba-pac.informz.net/mba-pac/data/images/PolicyDocuments/Joint Letter to Congress re FHLB ProposalSigned final.pdf) to leadership of the House Financial Services Committee urging Congress to block FHFA’s proposed rule, calling it “problematic” because of its prohibition of captive insurance companies from being part of the FHLB system.   

“Captive insurance companies are widely-recognized risk management vehicles and have been productive members of the System for more than two decades,” the letter said. “In the wake of the financial crisis and uneven housing market recovery, captive insurance companies represent a new opportunity for private capital to expand homeownership opportunities for credit-worthy borrowers.”  

A link to FHFA final rule Frequently Asked Questions can be accessed at http://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/FAQs-for-Final-Rule_01-12-16.pdf