KATTEN MUCHIN ZAVIS
A Summary of
Title VI - Federal Home Loan
Bank System Modernization
GRAMMBLEACHBBLILEY ACT
For Future Information Contact:
Carol R. Van Cleef
Thomas Brooks
Kellie Larkin
202-625-3730
202-625-3635
202-625-3509
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Title VI
Federal Home Loan Bank System Modernization
Table of Contents
A.
B.
C.
D.
E.
F.
G.
H.
I.
Savings Association Membership...................................................................................... VI-1
Advances and Collateral................................................................................................... VI-1
Long Term Advances........................................................................................... VI-1
Collateral............................................................................................................. VI-2
Qualified Thrift Lender Test Eliminated.............................................................................. VI-2
Eligibility Criteria .............................................................................................................. VI-2
Management of Banks...................................................................................................... VI-2
Decision Making.................................................................................................. VI-2
Board of Directors ............................................................................................... VI-2
Chairperson and Vice Chairperson....................................................................... VI-2
Compensation...................................................................................................... VI-3
Micromanagement Reduced................................................................................. VI-3
Powers and Duties of the Finance Board .......................................................................... VI-3
Resolution Funding Corporation ....................................................................................... VI-3
Capital Structure of the Federal Home Loan Banks........................................................... VI-4
Capital Structure Plan........................................................................................... VI-4
Stock................................................................................................................... VI-4
Uniform Capital Standard..................................................................................... VI-4
Pre 1997 Withdrawals.......................................................................................... VI-4
Financial Management and Mission Achievement Proposal................................................ VI-5
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Title VI
Federal Home Loan Bank System Modernization
Title VI makes a number of reforms in the Federal Home Loan Bank System (ASystem@).
Membership in the System becomes voluntary for all savings associations. The payment obligation of the
Federal Home Loan Banks (AFHLBanks@) to the Resolution Funding Corporation ("REFCORP") is
reallocated proportionately among the 12 FHLBanks, with each FHLBank paying a straight 20 percent of
net earnings. The qualified thrift lender (AQTL@) test is eliminated for purposes of borrowing from the
FHLBank System, making it easier and more cost effective for commercial banks to access FHLBank
advances.
New capital standards are imposed on the 12 FHLBanks, including a minimum leverage capital
ratio of 4 percent, and risk based capital requirements to be established by the Federal Housing Finance
Board (AFHFB@). A number of changes also are made in the corporate governance of the FHLBanks.
Both elected and appointed FHLBank board members will serve three-year terms. Each FHLBank board
chairman and vice chairmen will now be elected by the individual FHLBank boards, rather than appointed
by the FHFB. Many day-to-day and policy decisions affecting individual FHLBanks previously made by
the FHFB are turned over to the FHLBanks.
FHLBank members with less than $500 million in assets are permitted to pledge small business and
agricultural loans (or securities representing a whole interest in such loans) as collateral for System
advances. Also eliminated for such institutions is the System membership requirement that at least 10
percent of a bank=s assets be maintained in housing loans. Certain other limits on collateral are loosened
for all members. For example, the requirement that Aother real estate related collateral@ be limited to 30
percent of advances is eliminated.
A.
Savings Association Membership
Membership in the System is made voluntary for all institutions, permitting federal savings
associations for the first time to have the same rights as commercial banks to join or withdraw from the
system. Beginning May 12, 2000, any member will be eligible for withdrawal from the System as long
as the FHFB certifies that such withdrawal will not cause the System to fail to meet its REFCORP
obligations or cause the member's FHLBank to fail to meet its capital requirements due to redemption
of the withdrawing member=s stock. Any member that withdraws from the System and divests itself of
all FHLBank stock is now permitted to rejoin any FHLBank after five years, rather than 10 years as
provided under prior law. 1
B.
Advances and Collateral
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Long Term Advances. In addition to providing funds for residential housing finance, long-term
advances can now be made for the purposes of providing funds to any community financial institution
for small businesses, small farms and small agri-businesses. A Acommunity financial institution@ is an
institution (i) the deposits of which are insured by the FDIC and (ii) that has less than $500 million in
average total annual assets, based on average total assets over the 3 years preceding the date of the
transaction at issue. This asset measure is subject to annual adjustment based on any annual increase
in the Department of Labor's Consumer Price Index for all urban consumers.2
Collateral. The types of loans that may be used as collateral for advances also are expanded.
Community financial institutions can now pledge secured loans for small business, agriculture, or
securities representing a whole interest in such secured loans. This could lead to a viable secondary
market in these loans.
The FHFB is given additional authority to review the collateral standards imposed by each
FHLBank and may, if necessary for safety and soundness purposes, require an increase in such
standards for any or all classes of collateral. 3
C.
Qualified Thrift Lender Test Eliminated
The use of the qualified thrift lender (QTL) test as the basis for determining the amount of
advances that may be made to members has been eliminated. No longer will the total of all FHLBank
System advances to non-QTL members be limited to 30 percent of total system advances. Likewise,
non QTL members will no longer (i) be limited in the amount they can borrow or (ii) required to apply
advances for the sole purpose of housing finance.
In addition, a savings association that fails the QTL test will no longer be immediately ineligible
for new FHLBank advances. Moreover, such an institution will no longer be required to repay all
outstanding advances within three years after failing the test.4
D.
Eligibility Criteria
Community financial institutions proposing to join the System will no longer be required to have
10 percent of their assets in residential mortgage loans.5
E.
Management of Banks
Decision Making. Many of the day-to-day management decisions are transferred from the
FHFB to the individual FHLBanks.
Board of Directors. Previously, directors were required to be residents of the FHLBank
district in order to serve on the board of that FHLBanks. Now, individuals seeking appointment or
election as directors may be either (i) residents of that FHLBank district or (ii) an officer or director of
a member institution located in that FHLBank=s district. The terms of all directors of the FHLBanks,
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VI-2
whether elected or appointed, is set at three years. The terms of directors will be staggered, with
approximately 1/3 of the terms expiring each year.6
Chairperson and Vice Chairperson. Each FHLBank Chairperson and Vice Chairperson will
be elected by a majority of all directors of each FHLBank. The terms of the Chairperson and Vice
Chairperson are set at two years. The Vice Chairperson will act as Chairperson when the office of
Chairperson is vacant or during the absence or disability of the Chairperson. Procedures must be
established for (i) designating an acting Chairperson when neither the Chairperson nor the Vice
Chairperson are available for any reason and (ii) removing such persons for good cause.7
Compensation. For the first time, limits are set on compensation that may be paid to directors
of the FHLBanks. The annual salary is capped at $25,000 for the Chairperson; $20,000 for the Vice
Chairperson and $15,000 for all other members. These amounts may be adjusted annually to reflect
increases in the CPI. Reimbursement of expenses in connection with service on the board is not
prohibited.8
Micromanagement Reduced. FHFB approval requirements are eliminated for the following
functions: setting FHLBank officer, employee, attorney or agent compensation; purchasing or erecting
a bank building or leasing a building for more than ten years; the terms of advances and determining the
form of application for advances; setting interest rates on advances; the sale or participation of advances
to another FHLBank; paying FHLBank dividends. The Housing Opportunity Hotline program has been
eliminated.9
F.
Powers and Duties of the Finance Board
The FHFB is provided with the same enforcement powers that the federal banking agencies and
the Office of Federal Housing Enterprise Oversight ("OFHEO") have with respect to organizations under
their jurisdictions. Such authority includes the ability to issue orders limiting the activities of a FHLBank
or its executive officers or requiring affirmative actions to correct unsafe and unsound practices or
violations of law, regulation, order or written condition imposed by the FHFB. It also may address any
insufficiencies in capital levels resulting from permitting savings associations to withdraw voluntarily from
the system.10
G.
Resolution Funding Corporation
Beginning January 1, 2000, the annual payment owed to the REFCORP by all of the FHLBanks
is changed from the lesser of $300 million or 20 percent of net earnings to a straight 20 percent of net
earnings (after deducting expenses related to the interest rate subsidy associated with loans for the
Affordable Housing Program and operating expenses) of each FHLBank. This new formula eliminates
the need for the second assessment that was necessary when 20 percent of the System=s earnings was
less than $300 million.
The terms of payment under the new formula could be extended or shortened as necessary to
ensure that the value of all payments is equal to the FHLBanks= original $300 million REFCORP
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obligation which was established in 1989. Originally, the annual REFCORP payments made to the
FHLBanks were scheduled to end in 2029. Under this new formula, the obligation is likely to be fulfilled
sooner if current assumptions remain unchanged.11
H.
Capital Structure of the Federal Home Loan Banks
Capital Structure Plan. By November 12, 2000, the FHFB is required to issue regulations
prescribing uniform leverage and risk-based capital standards applicable to each FHLBank. The Board
of Directors of each FHLBank must submit a capital structure plan for FHFB approval that is best suited
for the condition and operation of the FHLBank and its members' interests, and meets the minimum
capital standards and other requirements within 270 days after the date of publication of the final FHFB
regulations. Before the plan is filed with the FHFB, it must be reviewed by (i) an independent certified
public accountant to ensure that implementation of the plan will not result in any write downs of their
members' redeemable bank stock investment and (ii) at least one major credit rating agency to determine
whether implementation of the plan will have any material impact on the bank's credit rating. Any
modifications of an approved plan must also be approved by the FHFB. Each FHLBank must come
into compliance with the capital requirements, and its members must comply with the minimum required
investment by November 12, 2002.12
Stock. The FHLBanks are authorized to issue two classes of stock: Class A stock, which is
redeemable with 6 months written notice; and Class B stock, which is redeemable with 5 years written
notice. The stock may be issued to and held by members of a FHLBank and is tradable only between
that FHLBank and its members. The current capital structure of a FHLBank will continue in effect until
the necessary regulations and capital structure plan has been approved by the FHFB and implemented
by the bank.13
The capital structure plan of a FHLBank must require each member to maintain a minimum stock
investment, which should be set at a level that is sufficient for the FHLBank to meet its minimum capital
standards. Stock purchase requirements may be based on a percentage of a member=s total assets or
on a percentage of the outstanding advances from the FHLBank to the member. Each FHLBank
member will have the option of maintaining its required investment through the purchase of any
combination of authorized classes of stock.14
Uniform Capital Standard. Under the uniform capital standard, FHLBanks will be required
to have a minimum leverage ratio of 5 percent total capital to total assets and a minimum risk based
capital ratio that is sufficient to meet applicable credit and market risks to which a FHLBank is subject.
In establishing the risk based capital standard, the FHFB must take due consideration of any risk based
capital standard established by OFHEO, with appropriate modifications to reflect the differences
between the FHLBanks and Fannie Mae and Freddie Mac. Permanent capital includes Class B stock
and retained earnings. Total capital includes permanent capital plus Class A stock, a general allowance
for losses and other amounts determined by the FHFB to be appropriate to absorb losses incurred by
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the FHLBank. In determining compliance with the minimum leverage ratio, the paid-in value of Class
B stock and retained earnings are multiplied by 1.5 times. However, a FHLBank=s total capital,
determined without taking into account any multiplier, must not be less than 4 percent of total assets.15
Pre 1997 Withdrawals. Any institution that withdrew as a member of a FHLBank before
December 31, 1997 may acquire shares of a FHLBank's stock at any time thereafter, subject to FHFB
approval and satisfaction of all other requirements.
I.
Financial Management and Mission Achievement Proposal
The conference report contains a reprint of a letter dated October 18, 1999 from the Chairman of
the FHFB to the Senate and House Banking Committee Chairmen providing assurances that a recently
proposed rule regarding Financial Management and Mission Achievement ("FMMA") would be
withdrawn upon enactment of the Act. The conference report states that Ait is the conference committee=s
understanding and expectation@ that the FHFB would take no further action with respect to proposed or
final regulations limiting assets or advances beyond those currently in effect until the new System capital rules
are finalized and the period for submission of capital plans by the FHLBanks has expired. The conference
committee indicated its expectation that the FHFB will provide ample opportunity for public comment and
hearings if and when the FHFB develops a new FMMA or similar rules. The conference committee
expressed its desire that the FHFB consult with the Banking Committees regarding both the capital
regulations and any financial management and/or mission related rules prior to issuing them in proposed
form.16
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4074489
1.
H.R. Conf. Rep. No. 106-434, at 117, Sec. 603, 128-9, and 608 (to be codified at 12 U.S.C.
' 1464(f) and 12 U.S.C. ' 1426).
2.
Id. at 117, Sec. 602 (to be codified at 12 U.S.C. ' 1422).
3.
Id. at 117-8, Sec. 604 (to be codified at 12 U.S.C. ' 1430(a)).
4.
Id. at 118-9, (to be codified at 12 U.S.C. ' 1430).
5.
Id. at 119, Sec. 605 (to be codified at 12 U.S.C. ' 1424(a)).
6.
Id. at 119-20, Sec. 606 (to be codified at 12 U.S.C. ' 1427(d)).
7.
Id. at 120, (to be codified at 12 U.S.C. ' 1427(g)).
8.
Id. (to be codified at U.S.C. ' 1427 (i)).
9.
Id. at 121, (to be codified at U.S.C. ' 1432).
10.
Id. at 121-2, (to be codified at 12 U.S.C. ' 1422b(a)).
11.
Id. at 122-3, Sec 607 (to be codified at 12 U.S.C. ' 1441b(f)(2)(C)).
12.
Id. at 123-4, Sec. 608 (to be codified at 12 U.S.C. ' 1426).
13.
Id. at 124.
14.
Id. at 126.
15.
Id. at 124-5.
16.
Id. at 176-7.
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