Senate Bill Introduced to Reinstate FHLB Captive Membership
V&E REIT Update E-communication, February 7, 2018
January 30, 2018, Senator Tammy Duckworth (D-IL) introduced the Housing
Opportunity Mortgage Expansion (HOME) Act (“S. 2361”), a
bill that would amend the Federal Home Loan Bank Act to permit captive
insurance companies that were previously Federal Home Loan Bank (“FHLB”)
members prior to January 19, 2016, to continue, or restore, their FHLB membership
and, consequently, allow them to access funding through the FHLB system.
Senators Tim Scott (R-SC) and Ron Johnson (R-WI) have joined this effort as
original co-sponsors of S. 2361, which has been referred to the Senate
Committee on Banking, Housing and Urban Affairs.
system comprises 11 federal home loan district banks and an office of finance
that are regulated by the Federal Housing Finance Agency (the “FHFA”). The FHLBs,
which were created under the Federal
Home Loan Bank Act to, among other things, improve the
availability of residential housing finance, are cooperatively owned by more
than 8,000 member institutions. The FHLBs provide members low-cost advances
that are fully secured by certain forms of collateral, including conventional residential
mortgage loans, certain commercial real estate loans, agency RMBS and nonagency
RMBS that meet certain credit standards. In January 2016, the FHFA released a
final rule (the “Final Rule”) that amended regulations governing FHLB
membership. The Final Rule prevents captive insurance companies, including
captives affiliated with a number of publicly traded REITs, from obtaining and
maintaining FHLB membership and eliminates their access to funding through the
proposes to reverse certain aspects of the Final Rule and restore membership
eligibility for captive insurance companies that were FHLB members prior to
January 19, 2016, and, solely as a result of the Final Rule, were required to
terminate their FHLB membership by February 2017 (one-year captives)1
or will be required to terminate their membership by February 2021 (five-year
condition of continued FHLB membership or reinstatement, S. 2361 would
require covered captive insurance companies to remain under the same ownership
and control of the entity that owned, either directly or indirectly, the
captive on the date of enactment of S. 2361. Depending on the language in
the bill adopted by Congress, companies may need to consider how this
requirement would impact the captive insurance companies that are dormant or
were dissolved under state law. In addition, S. 2361, as introduced, would
limit the amount of FHLB advances available to those captive insurance companies
unaffiliated with insured depository institutions to an aggregate amount not to exceed 50% of the total assets held by the
captive, unless the FHLB has executed a guarantee with the captive’s parent.
introduction of S. 2361 and its referral to the Senate
Committee on Banking, Housing and Urban Affairs is a promising first step
for those companies, including publicly traded REITs, that were able to access the
FHLB funding platform prior to the Final Rule. However, we expect that the
legislative process may be lengthy and the proposed legislation may evolve over
time. We will continue to monitor the progress of S. 2361 and expect to provide
updates as the legislative process moves forward.
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that became members after publication of the FHFA’s proposed rule in 2014 were
required to terminate their memberships within one year following the effective
date of the Final Rule. The Final Rule allowed such captives until the end of
that one-year period (or until the date of termination, if earlier) to repay
their existing advances, but prohibited them from taking new advances or
renewing existing advances that expired during that transition period.
that became members prior to publication of the FHFA’s proposed rule in 2014 are
allowed to remain members for up to 5 years after the effective date of the Final
Rule. For these captives, the Final Rule limits outstanding advances during the
five-year transition period to 40% of the total assets of
the captive and prohibits new advances or renewals that mature beyond the
five-year transition period. Existing advances that mature beyond this
transition period are permitted to remain in place.