The Three Percent Solution

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Th e M Rep o RT | 57 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET The laTesT credit Union trade group and lawmakers voice Opposition to Proposed FHlB requirements Revising membership rules fail to take into account asset size and other considerations and could have an 'onerous' impact, the NAFCU and like-minded senators say. a national trade group representing credit unions has come out against a proposal to revise requirements for Federal Home Loan Bank (FHLB) membership. In a January comment letter addressed to the Federal Housing Finance Agency's (FHFA) general counsel, Alicia Nealon, direc- tor of regulatory affairs for the National Association of Federal Credit Unions (NAFCU), voiced the association's opposition to the proposal, which would "dis- enfranchise over 1 million credit union member-owners," she said. "Given the onerous nature of this proposal on credit unions, the lack of a congressional mandate for 'ongoing' FHLB membership requirements and the current requirements that already exist for FHLB members to demon- strate a commitment to housing finance, NAFCU must oppose the proposed rule and urge its withdrawal," Nealon wrote. NAFCU's complaint stems from a provision of the proposed rule that would require FHLB members and applicants to keep 1 percent of assets in home mort- gage loans. Current members would also be required to hold at least 10 percent of assets in residential mortgage loans on an ongoing basis as opposed to just at the time of application, as the current rule requires. In her comment letter, Nealon says the membership require- ments fail to take into account a credit union's asset size or experience level. She also says NAFCU is concerned that the standards (particularly the 1-per- cent requirement) don't take into account the kinds of fluctuations that can happen in portfolios due to changes in economic conditions. As an alternative, the group suggests that the agency allow loans sold in the secondary mar- ket to count toward an institu- tion's 1-percent threshold. Also of concern to NAFCU is FHFA's proposal to determine if FHLB members meet eligibility standards on a yearly basis and to terminate any members that fail to comply after a two-year grace period. The group instead suggests a five-year probationary period for lenders to get back up to standard. In December, 27 senators signed a letter addressed to FHFA Director Mel Watt asking him to reconsider the stricter membership requirements for the Federal Home Loan Banks the agency proposed in September. The letter, co-authored by Sens. Joe Manchin (D-West Virginia) and Mark Kirk (R-Illinois), states that "(t)he pro- posed rule affects long-standing membership rules for the Federal Home Loan Bank system and will negatively affect new and current members in the system." Twenty-five other senators signed the letter. "Under the current regulations, if a member does not have assets that meet the system's statutory and regulatory requirements for eligible collateral, it cannot borrow," Manchin and Kirk wrote in the letter. "Under the proposed regulation, however, even if a member has assets that meet this test, a member could be expelled from membership if the member cannot meet the new—and unprecedented—mort- gage asset tests for continued membership. The consequences are harsh and the terms of the proposed rule are inconsistent with the explicit terms of the FHLBank Act." The letter states that in the 80 years since it was created, the FHLBank system has been a key partner in the success of smaller institutions, and the authors pointed out that Watt has stated the importance of these institutions in housing finance. The authors of the letter also pointed out the value of the cooperative FHLBank model was demonstrated by the stability the FHLBanks provided during the 2008 financial crisis. "Given their success and importance, we are concerned the proposed rule could jeopar- dize the ability of FHLBanks to provide liquidity to community financial institutions when they need it most," the letter said. Manchin and Kirk also asked Watt in the letter to "consult fur- ther with other agencies before finalizing any rule that affects these much needed financial institutions," since the FHLBank system is currently operating "safely and successfully." A month earlier, a bipartisan group of 68 house members signed a letter to Watt, authored by Spencer Bachus (R-Alabama) and David Scott (D-Georgia), ex- pressing the same sentiments re- garding the proposed FHLBank membership rule.

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