News Release: Federal Home Loan Bank System to Undergo Major Public Benefit Reforms in Modern Era


November 17, 2023

William Pierre-Louis, Jr.
(347) 499-7874

Federal Home Loan Bank System to Undergo Major Public Benefit Reforms in Modern Era

Washington, D.C. — Upcoming reforms to the Federal Home Loan Bank System will provide greater and more equitable public benefits under a detailed roadmap released last week by their regulator, the Federal Housing Finance Agency (FHFA). The welcome reform agenda is the result of national engagement of stakeholders on FHLBanks, for-profit entities that receive significant indirect public subsidies.

“The FHFA has put forth a well-researched roadmap for the Federal Home Loan Bank System – which has been in operation for almost a century – to more robustly support affordable housing and community development, and not merely to serve as a liquidity provider,” said Jessica Garcia, climate finance policy analyst with Americans for Financial Reform Education Fund. “Additionally, the FHFA appropriately recognized the need for FHLBanks to improve climate risk assessments, including how climate is incorporated into credit evaluations, similar to the recommendations of other federal banking regulators.”

The FHLBank System was set up in 1932, at the start of the Great Depression, with the Federal Home Loan Bank Act to provide liquidity to financial institutions so they could make long-term mortgages available to the US public. Today, the insurance companies and banks that comprise FHLBank membership have either stopped originating mortgages entirely or have vastly curtailed their mortgage lending activity while nonbanks, who are not permitted to become members, have come to dominate the mortgage lending space. 

A critical recommendation from this report calls for Congress to amend the FHLBank Act, to double the FHLBanks’ current statutory minimum contribution (from 10 percent of its prior year’s net earnings to 20 percent) for the Affordable Housing Programs. This change was highlighted in the report as a significant step needed to increase the FHLBanks’ engagement in affordable housing and community development.

The FHFA report outlines actions to enable FHLBanks to serve as a stable source of liquidity but not serve as lenders of last resort. FHFA plans to issue a proposed rule that would clarify the mission of the FHLBanks with updated metrics to measure more meaningfully how they achieve their missions in terms of liquidity, affordable housing, and community development during examinations by FHFA. The FHFA also aims to address operational efficiency, structure, and governance of the System, for example by recommending centers of excellence be established to encourage knowledge sharing across FHLBanks.

Additional key points from FHFA’s report: 

  • FHFA plans to issue guidance for the FHLBanks to begin pursuing climate resiliency in their core businesses, affordable housing programs, and voluntary and pilot programs.
  • FHFA intends to clarify FHLBank membership opportunities for mission-oriented organizations such as Community Development Financial Institutions (CDFIs) and Cooperativas in Puerto Rico, to develop prudent means of lending to such institutions and increase support for the communities they serve. 
  • Via rulemaking, FHFA plans to expand its affordable housing goal categories for single-family mortgage purchases (FHLBanks’ Acquired Member Asset programs) to support housing finance in minority census tracts. This follows FHFA’s 2021 amendment to its Affordable Housing Goals regulation for Fannie Mae and Freddie Mac to create a minority census tract sub-goal.
  • Another planned FHFA rule would require certain member banks to have at least 10 percent of their assets in residential mortgage loans or equivalent mission assets on an ongoing basis to remain eligible for FHLBank financing. This change aims to ensure members continue to support the FHLBank System mission. 
  • FHFA plans to make mission performance a core responsibility of FHLBank boards by amending its regulation on the Responsibilities of Boards of Directors, Corporate Practices, and Corporate Governance. To ensure each FHLBank’s board of directors focuses properly on carrying out its public policy mission, this amendment will clarify each board’s duty to take concrete steps to incorporate mission activity, not just safety and soundness, in executive incentive compensation goals which are approved by the board. 

The FHFA is already moving forward on some of its recommendations. For example, an Advisory Bulletin to FHLBanks’ boards of directors instructs them to develop and adopt frameworks to increase their support for affordable housing, equity advancement, and community development for underserved and financially vulnerable populations through their pilot and voluntary programs by no later than March 29, 2024.