2012-24639. Advisory Bulletin on Collateralization of Advances and Other Credit Products Provided by Federal Home Loan Banks to Insurance Company Members

AGENCY:

Federal Housing Finance Agency.

ACTION:

Notice with request for comments.

SUMMARY:

The Federal Housing Finance Agency (FHFA) is requesting comments on a proposed Advisory Bulletin which would set forth standards to guide agency staff in its supervision of secured lending to insurance company members by the Federal Home Loan Banks (Banks).

DATES:

Written comments must be received on or before December 4, 2012.

ADDRESSES:

You may submit your comments, identified by FHFA notice number 2012-N-14, by any of the following methods:

• Email: Comments to Alfred M. Pollard, General Counsel may be sent by email to [e-mail]. Please include “2012-N-14” in the subject line of the message.
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. If you submit your comment to the Federal eRulemaking Portal, please also send it by email to FHFA at [e-mail] to ensure timely receipt by FHFA. Please include “2012-N-14” in the subject line of the message.
• U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service: The mailing address for comments is: Alfred M. Pollard, General Counsel, Attention: Comments/2012-N-14, Federal Housing Finance Agency, Eighth Floor, 400 7th Street SW., Washington, DC 20024.
• Hand Delivered/Courier: The hand delivery address is: Alfred M. Pollard, General Counsel, Attention: Comments/2012-N-14, Federal Housing Finance Agency, Eighth Floor, 400 7th Street SW., Washington, DC 20024. The package should be logged at the FHFA Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT:

Neil Crowley, Deputy General Counsel, Office of General Counsel, [e-mail], [phone]; Joseph A. McKenzie, Associate Director, Division of Bank Regulation, Bank Analysis Branch, [e-mail], [phone]; or Thomas Doolittle, Senior Financial Analyst, Division of Bank Regulation, Bank Analysis Branch, [e-mail], [phone] (these are not toll-free numbers), Federal Housing Finance Agency, 400 7th Street SW., Washington, DC 20024. The telephone number for the Telecommunications Device for the Hearing Impaired is [phone].

SUPPLEMENTARY INFORMATION:

I. Comments

FHFA invites comments on all aspects of this Notice and the attached Advisory Bulletin. Copies of all comments will be posted without change, including any personal information you provide, such as your name, and address (mailing or email), and telephone numbers, on FHFA's Internet Web site at http://www.fhfa.gov. In addition, copies of all comments received will be available for examination by the public on business days between the hours of 10 a.m. and 3 p.m. at the Federal Housing Finance Agency, Eighth Floor, 400 7th Street SW., Washington, DC 20024. To make an appointment to inspect comments, please call the Office of General Counsel at [phone].

II. Background

The Federal Home Loan Bank System consists of twelve regional Banks and the Office of Finance (OF). The Banks are instrumentalities of the United States organized under the Federal Home Loan Bank Act (Bank Act).^[1] The Banks are cooperatives; only an institution that is a member of a Bank may purchase its capital stock, and only members or certain eligible non-member housing associates (such as state housing finance agencies) may obtain access to secured loans, known as advances, or other products provided by a Bank.^[2] Each Bank is managed by its own board of directors and serves the public interest by enhancing the availability of residential mortgage and community lending credit through its member institutions.^[3] Generally, any federally insured depository institution (i.e., a commercial bank, thrift, or credit union) or state-regulated insurance company, or any entity certified as a Community Development Financial Institution (CDFI) by the United States Department of Treasury, may become a member of a Bank if it satisfies certain criteria and purchases a specified amount of the Bank's capital stock.^[4]

Section 10(a) of the Bank Act authorizes each Bank to make secured advances to its members, each of which must be fully secured by certain types of eligible collateral enumerated in the statute.^[5] Part 1266 of FHFA's regulations implements and expands upon the statutory requirements pertaining to Bank advances by addressing, among other things: the types and amounts of collateral that a Bank may or must accept when making advances; the priority of Bank claims to such collateral in relation to other creditors; and requirements regarding the valuation and verification of the existence of pledged collateral.^[6]

FHFA is an independent agency of the Federal government that is responsible for the supervision and oversight of the Banks, as well as Fannie Mae and Freddie Mac. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) invests the Director of FHFA with general regulatory authority over those regulated entities and charges him with ensuring that they operate in a safe and sound manner, comply with applicable laws, and carry out their respective policy missions.^[7] The Director is authorized to exercise whatever incidental powers are necessary or appropriate to fulfill his duties and responsibilities in overseeing the regulated entities, and to issue any regulations, guidelines or orders as are necessary to carry out his duties.^[8] Advisory Bulletins are documents through which the agency provides guidance to its regulated entities regarding particular supervisory issues. Although Advisory Bulletins do not have the force of a regulation or an order, they reflect the position of FHFA staff on the particular issues addressed and are followed by FHFA staff in carrying out the agency's supervisory responsibilities.

III. The Advisory Bulletin on Insurance Company Collateral

Lending to insurance companies exposes the Banks to a number of risks that are not associated with advances to their insured depository institution members. In large part, these risks arise from the fact that, unlike the Banks' commercial bank, thrift and credit union members, insurance companies are regulated at the state level. In dealing with its insurance company members, each Bank must understand multiple statutory and regulatory regimes and must assess how its interests may be affected by the variations between those regimes. This is made more difficult by the fact that there is little precedent to indicate how the insurance commissioner in any given state would deal with repayment of the member's outstanding advances or with the Bank's security interest in advances collateral in the event of a failure of an insurance company member. In some states a Bank might be required to liquidate collateral in order to obtain repayment of its advances to a failed insurance company, which introduces additional uncertainties about its ability to be made whole.

In addition, the financial statements of insurance companies are based upon statutory accounting principles that are specific to insurance companies, as opposed to the generally accepted accounting principles in the United States on which the financials of most other domestic companies and all federally insured depository institutions are based. While the statutory accounting principles adopted by each state are similar, required reporting practices and reporting frequencies, as well as data definitions and data formats may be quite different from state to state.

Over the last several years, lending to insurance company members has come to represent an increasingly larger portion of the Banks' overall business, and several Banks are actively targeting this member segment. Although insurance companies comprise only about 3.3 percent of total Bank system membership, 12.6 percent of total outstanding advances were to insurance companies as of December 31, 2011—up from 8.7 percent of total advances as of December 31, 2009. This growth, combined with the unique risks to which the Banks are exposed in lending to insurance companies, has led FHFA to focus more intently upon the effective supervision of Banks' credit transactions with their insurance company members.

The attached Advisory Bulletin sets forth a series of considerations that FHFA proposes to use in monitoring these transactions. It focuses upon principles that would be used by agency supervisory staff to assess each Bank's ability to evaluate the financial health of its insurance company members and the quality of their eligible collateral, as well as the extent to which the Bank has a first-priority security interest in that collateral. The risks inherent in lending to insurance companies, which are summarized above, are addressed more thoroughly in the Advisory Bulletin. FHFA seeks comments on all aspects of the Advisory Bulletin, but is especially interested in receiving comments about the most appropriate method for Banks to obtain “control” of securities collateral and to otherwise obtain a first-priority perfected security interest under the Uniform Commercial Code in any types of collateral pledged by its insurance company members. FHFA is also interested in receiving comments on the use of funding agreements as a means of documenting advances and whether the Banks have confirmed under state law that a Bank would be recognized as a secured creditor with a property interest in the collateral that is pledged to the Bank under a funding agreement. In addition, FHFA welcomes comments on whether it should consider establishing specific and uniform standards for making advances to insurance companies.

IV. Consideration of Differences Between the Banks and the Enterprises

Section 1201 of the Housing and Economic Recovery Act of 2008 amended the Safety and Soundness Act to add a new section 1313(f), which requires the Director of FHFA, when promulgating regulations or taking any other formal or informal action of general applicability and future effect relating to the Banks, to consider the differences between the Banks and the Enterprises (Fannie Mae and Freddie Mac) as they relate to: The Banks' cooperative ownership structure; the mission of providing liquidity to members; the affordable housing and community development mission; their capital structure; and their joint and several liability on consolidated obligations.^[9] The Director also may consider any other differences that are deemed appropriate. In preparing the appended Advisory Bulletin, FHFA considered the differences between the Banks and the Enterprises as they relate to the above factors, and determined that the guidance set forth therein is appropriate.

Dated: October 1, 2012.

Edward J. DeMarco,

Acting Director, Federal Housing Finance Agency.

Footnotes

1.  See 12 U.S.C. 1423, 1432(a).

2.  See 12 U.S.C. 1426(a)(4), 1430(a), 1430b.

3.  See 12 U.S.C. 1427.

4.  See 12 U.S.C. 1424; 12 CFR part 1263.

5.  Section 10(a)(3) of the Bank Act enumerates five categories of collateral that are eligible to secure Bank advances: (1) Current whole first mortgage loans on improved residential property and securities representing a whole interest in such mortgages; (2) securities that are issued, guaranteed, or insured by the United States Government, or any agency thereof; (3) deposits of a Bank; (4) other real-estate related collateral acceptable to the Bank if it has a readily ascertainable value and the Bank can perfect its security interest in the collateral; and (5) (for certain smaller insured depository institutions) secured loans for small business, agriculture, or community development activities or securities representing a whole interest in such secured loans. See 12 U.S.C. 1430(a)(3).

6.  See 12 CFR part 1266.

7.  See 12 U.S.C. 4511(b); 12 U.S.C. 4513(a).

8.  See 12 U.S.C. 4513(a)(2), 4526(a).

9.  See 12 U.S.C. 4513(f).