GAO-15-352, Federal Home Loan Banks: Collateral ...

April 2015

United States Government Accountability Office

Report to Congressional Requesters

FEDERAL HOME LOAN BANKS Collateral Requirements Discourage Some Community Development Financial Institutions from Seeking Membership

GAO-15-352

Highlights of GAO-15-352, a report to congressional requesters

April 2015

FEDERAL HOME LOAN BANKS

Collateral Requirements Discourage Some Community Development Financial Institutions from Seeking Membership

Why GAO Did This Study

The Housing and Economic Recovery Act of 2008 (HERA) made nondepository CDFIs eligible for membership in the FHLBank System. The System includes 12 regional FHLBanks that make loans, known as advances, to their members at favorable rates. GAO was asked to review the FHLBanks' implementation of HERA provisions relating to nondepository CDFIs. Among other things, this report discusses (1) challenges posed by membership and collateral requirements for nondepository CDFIs, and (2) FHFA and FHLBank efforts to facilitate broader nondepository CDFI participation in the System.

GAO analyzed data on membership rates as of December 2014 and advances obtained as of September 2014; reviewed requirements for gaining membership and obtaining advances; and interviewed FHLBank and FHFA officials and a sample of nondepository CDFIs based on selected criteria, including geography and asset size. Specifically, GAO interviewed 10 nondepository CDFIs that were members (one from each FHLBank district with a nondepository CDFI member when GAO began work) and 12 that were not members (one from each of the 12 districts).

GAO makes no recommendations in this report. GAO provided a draft of this report to FHFA and the 12 FHLBanks for comment. FHFA and four FHLBanks provided technical comments that were incorporated into the report as appropriate.

View GAO-15-352. For more information, contact Daniel Garcia-Diaz at (202) 512-8678 or GarciaDiazD@.

What GAO Found

Collateral requirements rather than membership requirements discouraged some nondepository community development financial institutions (CDFI)--loan or venture capital funds--from seeking membership in the Federal Home Loan Bank (FHLBank) System. CDFIs are financial institutions that provide credit and financial services to underserved communities. Less than 6 percent of nondepository CDFIs (30 of 522) were members of the System as of December 2014 (see figure). Requirements for membership (such as stock purchase amounts) can vary where regulation gives FHLBanks discretion, but nondepository CDFIs GAO interviewed generally stated these requirements did not present a challenge. In addition, most FHLBanks imposed collateral requirements on nondepository CDFIs--such as haircuts (discounts on the value of collateral)--comparable with those for depository members categorized as higher risk. (This was sometimes also the case for other nondepository members such as insurance companies.) FHLBank officials stated nondepository CDFIs have different risks compared with depository members (for example, nondepository CDFIs are not supervised by a prudential federal or state regulator as are other FHLBank members). To address these risks, they imposed more restrictive requirements. Some of the nondepository CDFIs GAO interviewed cited limited availability of eligible collateral and steep haircuts as challenges for obtaining advances and therefore a disincentive to seeking membership. Less than half of the nondepository CDFIs that were members as of September 2014 had borrowed from the FHLBanks; the cumulative advances from October 2010 to September 2014 totaled about $307 million (less than 1 percent of the total advances outstanding as of December 2014). Two FHLBanks made the majority of the advances.

Rates of Nondepository CDFI Membership by FHLBank District, as of December 2014

The Federal Housing Finance Agency (FHFA), which oversees the System, and FHLBanks have facilitated efforts to broaden nondepository CDFI participation in the System by educating about and promoting membership to nondepository CDFIs. For example, FHFA officials told us that they encouraged the FHLBanks to hold a conference to discuss nondepository CDFI membership. Officials from 10 FHLBanks also stated that they had solicited applications from CDFIs. In late 2014, several FHLBanks amended stock purchase and collateral requirements to better accommodate nondepository CDFI membership and access to advances.

United States Government Accountability Office

Contents

Letter

Appendix I Appendix II Appendix III Appendix IV Tables

1

Background

4

Nondepository CDFIs Differ from Other FHLBank Members in

Several Ways

9

Collateral Requirements Pose Greatest Challenge for

Nondepository CDFIs

13

FHFA and FHLBanks Have Made Efforts to Facilitate Broader

Participation of Nondepository CDFIs in the FHLBank System

30

Agency and Third Party Comments and Our Evaluation

33

Objective, Scope, and Methodology

36

Federal Home Loan Bank Collateral Requirements for

Nondepository Community Development Financial Institutions and

Depository Institutions

41

Federal Home Loan Bank Advance Terms and Borrowing Limits for

Nondepository Community Development Financial Institutions and

Depository Institutions

44

GAO Contact and Staff Acknowledgments

46

Table 1: Distribution of Total Assets for FHLBank Members by

Type, as of December 31, 2014 (Dollars in Millions)

10

Table 2: Requirements for Purchases of Membership Stock by

FHLBank, as of November 2014

17

Table 3: Percentage Haircut (Discount) for Selected Securities

Collateral for Depository Institutions and Nondepository

CDFIs by FHLBank, as of December 2014

24

Table 4: Percentage Haircut (Discount) for Selected Loan

Collateral for Depository Institutions and Nondepository

CDFIs by FHLBank, as of December 2014

25

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GAO-15-352 CDFI Membership in FHLBanks

Figures

Table 5: Requirements for Pledge Method and Haircut (Discount)

by FHLBank, as of December 2014

41

Table 6: Advance Terms and Borrowing Limits by FHLBank

44

Figure 1: The 12 Federal Home Loan Banks and Districts

6

Figure 2: Rates of Nondepository CDFI Membership by FHLBank

District, as of December 31, 2014

20

Figure 3: Total Advances Made to Nondepository CDFIs by

FHLBank District, from October 2010 through September

2014

30

Abbreviations CARS CDFI CDFI Fund

FDIC FHFA FHLBank FHLBank System GAAP HERA

NCUA OFN Treasury

CDFI Assessment and Ratings System community development financial institution Community Development Financial Institutions Fund Federal Deposit Insurance Corporation Federal Housing Finance Agency Federal Home Loan Bank Federal Home Loan Bank System generally accepted accounting principles Housing and Economic Recovery Act of 2008 National Credit Union Administration Opportunity Finance Network Department of the Treasury

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GAO-15-352 CDFI Membership in FHLBanks

441 G St. N.W. Washington, DC 20548

Letter

April 23, 2015

The Honorable Maxine Waters Ranking Member Committee on Financial Services House of Representatives

The Honorable Carolyn Maloney Ranking Member Subcommittee on Capital Markets and

Government-Sponsored Enterprises Committee on Financial Services House of Representatives

The Honorable Keith Ellison House of Representatives

The Federal Home Loan Bank System (FHLBank System), which is a government-sponsored enterprise created to support mortgage lending and related community development, includes 12 regional Federal Home Loan Banks (FHLBank) with over 7,300 financial institutions that are active members. The primary mission of the FHLBank System is to serve as a reliable source of liquidity for its members. To carry out its mission, the FHLBank System issues debt in capital markets, generally at relatively favorable rates due to its status as a government-sponsored enterprise, and each FHLBank makes loans known as advances to its member financial institutions. As of December 31, 2014, the FHLBanks had about $566 billion in total outstanding advances. FHLBank members must pledge collateral to secure these advances.

FHLBank members include banks, thrifts, credit unions, and insurance companies--as well as community development financial institutions (CDFI) certified by the Community Development Financial Institutions Fund (CDFI Fund) within the Department of the Treasury (Treasury).1 CDFIs can be federally insured depository institutions such as community development banks and certain credit unions or nondepository institutions

1The CDFI Fund was established by the Riegle Community Development and Regulatory Improvement Act of 1994, Pub. L. No. 103-325, ? 104, 108 Stat. 2160, 2166 (1994).

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GAO-15-352 CDFI Membership in FHLBanks

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