In May 2024, the Federal Housing Finance Agency (FHFA) published a Request for Input (RFI) titled “Federal Home Loan Bank Core Mission Activities and Mission Achievement” with comments due to the FHFA on July 15, 2024. This follows the FHFA’s wide-ranging report, “Federal Home Loan Bank System at 100: Focusing on the Future” (“Report”), released in November 2023. The RFI outlines the FHFA’s assessment of the current status of the FHLBank System and explores potential changes to the implementation of the FHLBank System’s mission. The FHFA’s RFI requests input on three categories of questions: (1) updating the regulatory statement of the FHLBank System’s mission to better reflect its appropriate role in the housing finance system; (2) developing metrics and thresholds to evaluate mission achievement; and (3) identifying how the FHLBanks could incorporate incentives for members with a strong and demonstrable connection to the FHLBank System’s mission.
Summary of Proposed Actions:
The Report outlines the FHFA’s assessment of the current status of the FHLBank System and explores potential improvements that can be made to improve the implementation of the FHLBank System’s mission. Proposed actions are organized under four themes: (i) Mission of the FHLBank System; (ii) Stable and Reliable Source of Liquidity; (iii) Housing and Community Development; and (iv) FHLBank System Operational Efficiency, Structure, and Governance. The following sets forth the significant actions the FHFA plans to take to improve the FHLBank System within these four themes.
· Mission of the FHLBank System
- The RFI states that the FHFA plans to issue a proposed rule to clarify the FHLBanks’ mission of providing liquidity to members and supporting housing and community development. The FHFA also may provide additional metrics and thresholds for measuring mission achievement.
- To ensure that FHLBank membership predominantly benefits institutions that demonstrate a commitment to the FHFA’s mission, the RFI indicates the FHFA may issue a proposed rule to provide added benefits (such as discounted advance rates and differential dividends on capital stock) to members with strong and demonstrable connections to the FHLBank’s mission.
- The RFI also indicates the FHFA may issue a proposed rule to enhance the requirements for Targeted Community Lending Plans, which plans identify affordable housing and community development needs in the FHLBank districts and describe the strategy for addressing those needs. The FHFA believes this will help each FHLBank better address its district’s needs and will increase public
· Stable and Reliable Source of Liquidity
- The RFI argues that FHLBanks have suffered from insufficient capitalization due to members’ demands for last-resort, large advances, which demands the FHFA believes are better addressed by the Federal To remain a reliable and stable source of liquidity, the FHFA plans to: (i) provide guidance to FHLBanks to limit large issuances of debt to a single large borrower; (ii) work with members and the members’ primary federal regulators to ensure large depository members have protocols to borrow from the Federal Reserve rather than from FHLBanks; and (iii) negotiate agreements with Federal Reserve banks to ensure movement of collateral if a member’s lending activity must be moved to the Federal Reserve.
- The RFI also argues that the FHFA should take measures to avoid providing funds to members that are unable to repay, including strengthening regulations that limit access to advances to members with insufficient In addition, in order to disincentivize FHLBanks from providing advances to members with insufficient capital, the FHFA is considering issuing a rule that makes FHLBanks or the FHLBank System responsible for prepayment fees due from a failed member on advances provided shortly before the member fails.
· Housing and Community Development
- While FHFA regulations set forth general collateral eligibility requirements, the RFI indicates that each FHLBank establishes its practices for acceptability, market valuations, valuation caps and haircuts for each collateral The RFI states that the FHFA plans to encourage FHLBanks to establish Mission-Oriented Collateral (MOC) programs that incentive the use of collateral with a strong connection to the FHLBanks mission.
- The RFI states a goal of the FHFA is to support Community Development Financial Institutions (CDIFs) and credit unions, which are mission-focused The FHFA plans to work with Congress to amend the Bank Act to authorize CDFI and credit union members with assets below the statutory cap to pledge Community Financial Institution (CFI) collateral to secure FHLBank advances.
- The Bank Act places restrictions on the purposes for which FHLBanks can provide “long-term advances”; however, the Bank Act does not define “long-term advance,” leaving it to the FHFA to The RFI states the FHFA plans to conduct a study, and depending on the study’s outcome, propose a revised definition of “long-term advance” to balance advancing the FHLBank System’s mission, while ensuring the financial health of the FHLBank System.
- The RFI argues that Community Investment Cash Advance (CICA) and Community Investment Program (CIP) advances are currently underutilized. It states that the FHFA plans to work with FHLBanks and to amend its CICA regulations to increase use of the CIP and CICA programs.
- The RFI states that the FHFA plans to recommend that Congress increase the Bank Act’s contribution requirement that each FHLBank must make to its Affordable Housing Programs (AHPs), which assist low- and moderate-income In addition, the FHFA may amend its regulations implementing the Bank Act’s AHP restrictions to expand access to AHP programs.
- The Bank Act requires FHLBank members to meet certain community investment or service standards (such as a member’s record of lending to first-time home buyers). The FHFA may undertake proposed rulemaking to enhance these standards.
· FHLBank System Operational Efficiency, Structure and Governance
- The RFI argues that the Bank Act authorizes the FHFA to reorganize and consolidate FHLBank districts, and that the FHFA plans to review the current organization of FHLBanks to determine if any reorganization or consolidation would improve internal efficiency. However, if the FHFA determines that the appropriate number of districts is less than the statutory minimum imposed by the
Bank Act, the FHFA may recommend Congress amend the statutory requirements to allow for such changes.
- The RFI also argues that while eligibility for FHLBank membership is ultimately determined by Congress, the FHFA believes it can impose regulations to provide greater consistency in applying eligibility requirements. The FHFA may initiate rulemaking to harmonize implementation of membership requirements, which may include: (i) a requirement that all members demonstrate measurable and ongoing commitment to housing finance; and/or (ii) enhanced standards by which compliance with membership requirements are assessed.
Limits on the FHFA’s Authority
- In the wake of the Supreme Court’s decision in West Virginia v. EPA, the FHFA will be under closer scrutiny as to whether it has the authority to undertake the rulemaking proposed in this Report.
- West Virginia EPA involved the question of whether the EPA had the authority pursuant to the Clean Air Act to enact the Clean Power Plan (CPP), which set state- by-state goals for cutting power plant emissions. The Supreme Court ruled that EPA exceeded its authority prescribed to it by the Clean Air Act in enacting the CPP, finding that the EPA’s imposition of industrywide changes through the CPP violated the “major questions doctrine.” The “major questions doctrine” is a principle of statutory interpretation pursuant to which courts have vacated administrative decisions under the theory that if Congress intends to give an administrative agency the power to make decisions of vast economic and political significance, it must clearly delegate such power. The Supreme Court noted that the EPA could not use an “ancillary provision” of the Clean Air Act to adopt a regulatory program that would allow the EPA “unprecedented” power over American industry, and which program Congress had considered and denied enacting itself.
- Determining whether an agency action violates the “major question doctrine” is fact-specific and will depend on the specific regulations proposed, the language of the enabling statute, and Congress’ history related to the scope of the regulations. Nevertheless, because the FHFA plans to overhaul the FHLBank System, many of the proposed actions may violate the major questions For example, if the FHFA imposes regulations that define or attempt to change the mission of the FHLBanks, this could be found to exceed the FHFA’s authority because Congress has defined the FHLBank mission in 12 USC 1430(a)(2) and 1431. If Congress had intended for FHFA define the mission, it would have given the agency the authority to do so, but it has not.
- 12 USC 1427(j) outlines the duties of directors. It states that a board of directors shall administer the affairs of the bank fairly and impartially and without discrimination in favor of or against any member, and shall, subject to the provisions hereof, extend to each institution authorized to secure advances such advances as may be made safely and reasonably with due regard for the claims and demands of other institutions, and with due regard to the maintenance of adequate credit standing for the Federal Home Loan Bank and its This seemingly conflicts with some of the suggestions in the RFI, such as that “the FHFA may issue a proposed rule to provide added benefits (such as discounted advance rates and differential dividends on capital stock) to members with strong and demonstrable connections to FHLBank’s mission.” This inequitable treatment could arguably conflict with the law and Congress has provided no support for this new approach. Arguably, there may be a variety of administrative and legal challenges if the FHFA goes down the path of treating different members inequitably, impacting safety and soundness and credit ratings.
- The FHFA has requested input on potential member incentives that will increase FHLBank System mission-aligned activity, which incentives may contravene the Bank Act’s anti-favoritism provisions.
Next Steps
The comment period for the FHFA’s RFI on the FHLBanks’ mission ends on July 15. FHFA is expected to release RFIs in the coming weeks on: (1) FHLBank membership, (2) the FHLBank AHP application process, and (3) FHLBank long-term advances.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING AN RFI REALEASED BY FHFA ON FLHBANKS. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.