Federal Home Loan Bank Membership For Community Development Financial Institutions

1. Federal Home Loan Bank Membership For Community Development Financial Institutions Sylvia C. Martinez, Senior Adviser Federal Housing Finance Agency February 22, 2009 File Name: CDFI Presentation for CFED-smtz

2. About FHFA On July 30, 2008, the Housing and Economic Recovery Act of 2008 (HERA) was enacted, creating FHFA with the combined responsibilities of the Office of Federal Housing Enterprise Oversight (OFHEO), the Federal Housing Finance Board (FHFB) and the HUD GSE mission team. HERA also provided FHFA with additional authority to regulate Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.

3. FHFA Regulations on CDFI Membership. The Housing and Economic Recovery Act of 2008 authorized formerly ineligible Community Development Financial Institutions (CDFIs) to become members of a Federal Home Loan Bank (FHLBank.) The FHFA, as supervisor of the Federal Home Loan Banks, is responsible for publishing regulations and issuing guidance to implement the provisions in HERA. The FHLBanks administer the membership application process. General requirements for membership in a FHLBank can be found in the Code of Federal Regulations at Title 12 Part 1263 et seq. [Link: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=%2Findex.tpl. Click on Title 12 and then on 1263.] The final rule governing CDFI membership , along with the explanatory preamble can be found in the FHFA web site at http://www.fhfa.gov/webfiles/15336/CDFIPR122909F%5B1%5D.pdf.

4. About the Federal Home Loan Banks • Federal Home Loan Bank System is a cooperative consisting of 12 Federal Home Loan Banks owned by their member financial institutions. • Over 8,000 FHLBank members. • FHLBank membership is made up of insured depositories (thrifts, commercial banks and credit unions) and a small number of insurance companies. • HERA enabled Community Development Financial Institutions (CDFIs) that are not insured depositories to also become eligible for membership. • There are 12 FHLBank Districts. FHLBank membership is determined by the District where the member has its “principal place of business”.

5. Federal Home Loan Bank DistrictMap 12 Federal Home Loan Bank Districts Seattle Boston Chicago New York Des Moines Pittsburgh San Francisco Indianapolis Topeka Cincinnati Atlanta Dallas

6. Benefits and Requirements of Membership • BENEFITS: • Access to FHLBank advances (loans), credit products, dividends and member services. • Capital for liquidity, asset/liability management, and housing finance. • Access to Affordable Housing Program (AHP) and Community Investment Program (CIP) funds. • REQUIREMENTS: • Statutory minimum stock purchase and activity-based stock purchase requirements. Each FHLBank has different stock purchase requirements based on its capital plan. Class B stock can only be redeemed at par and with five-year notice. • Member must pledge eligible collateral for advances. Long-term advances (greater than 5 years) can only be used for housing finance.

7. About Certified CDFIs • CDFI Fund Certification: promoting community development as primary mission, be a financing entity, serve one or more target markets, provide development services, maintain accountability to its target market(s), and, with the exception of Tribal governments, be a non-government entity. • There are 834 certified CDFIs*: • 72 Bank or Thrift CDFIs • 165 Credit Unions • 23 Depository Institution Holding Companies • 550 Loan Funds • 24 Venture Funds * Source: CDFI Fund, Certified Financial Institutions by Organization Type as of 12/31/09.

8. Newly Eligible CDFIs • Approximately 125 CDFIs insured by the FDIC or NCUA were already members of a FHLBank prior to passage of HERA. • Newly eligible members: CDFI Fund-certified loan funds, venture funds, bank holding companies, and state or privately insured CDFI credit unions (if any). Most CDFI credit unions are insured by NCUA and were already eligible prior to HERA. • Most newly eligible members are loan funds, almost all of which are non-profit institutions. • CDFI bank holding companies can apply for membership through their insured depository, possibly to greater advantage than through the holding company. • Venture funds might not meet membership threshold home mortgage and home financing standards.

9. Threshold Membership Requirements • Applicant must be subject to inspection and regulation. CDFIs not insured by the FDIC or NCUA must be certified by the U.S. Treasury Department’s CDFI Fund. • Duly organized under state or federal law. Final rule adds “tribal law”. • Character of management shall be consistent with sound and economical home financing. • Sound financial condition such that the FHLBank can safely make advances. • Member shall make long-term mortgage loans and its mortgage-related assets must reflect a commitment to housing finance. (Interpretation of a commitment to housing finance can be broadly construed to include community development activities supporting housing finance. )

10. “Makes Long-Term Home Mortgage Loans” • Federal Home Loan Bank Act and Regulatory Tests: 1) Does the applicant make first-lien mortgage loans? 2) Are loans secured by real estate (fee simple or leasehold)? 3) Is the property being used for residential purposes (one or more homes on property)? 4) Is the loan term greater than 5 years? • Loans that Qualify: First-lien loans on single-family (1-4), mortgages on multifamily residential properties, and, interests in long-term mortgages or mortgage pass-through securities. • Real property manufactured housing loans to finance resident-owned, leased homes, or co-ops also qualify. This includes first-lien loans for community facilities or infrastructure if property is used for residential purposes and at least one dwelling is located on the property. • Second liens, acquisition loans, pre-development, bridge and construction loans generally do not qualify. FHFA may review on case-by-case basis.

11. Documentation of Financial Condition Basic Documentation Required for Membership: CDFI credit unions not insured by NCUA submit state regulatory examination reports. Non-regulated CDFIs (e.g. loan funds) must submit a statement audited by a CPA within the prior year, statements for the two years prior, and quarterly statements. Statements must meet schedules and disclosures described in the FHFA’s final rule. If a CDFI loan fund or venture fund anticipates not meeting, or is found by the FHLBank not to meet, the financial condition standards in the rule it can submit additional information to the Bank to rebut the presumption of non-compliance. CARs™ statement to rebut presumption of non-compliance is acceptable but not mandatory.

12. Financial Condition Ratios for Membership Net Asset Ratio: Ratio of net assets to total assets of 20 percent including restricted assets in both net and total assets. Earnings: Pattern of positive net income based on rolling average of last 3 years. Loan Loss Reserves: Ratio of loan loss reserves to loans and leases 90 days or more delinquent, including loans with recourse, must be 30 percent. Liquidity: Operating liquidity ratio of 1:0 for four most recent quarters and for one or more of last two years. Deficiencies in financial condition can be rebutted by additional evidence demonstrating the safe financial condition of the CDFI.

13. Eligible Collateral for Advances • Federal Home Loan Bank Act Collateral Requirements: • Fully disbursed whole first mortgages or mortgage securities. • Securities issued, insured, or guaranteed by the U.S. government or government agency, including Freddie Mac, Fannie Mae, and GNMA securities. • Cash or deposits in a FHLBank. • Other real estate-related collateral acceptable to the Bank if the value of the collateral can be ascertained and the Bank can perfect its interest in the collateral.

14. Analysis of CDFI Financial Condition As financial institutions, the CDFIs have much in common with conventional financial institutions, but there are key differences. Component capital and capital ratios of insured depositories and CDFIs are not equivalent. Business and risk profiles are different. Financial analysis applicable to for-profits is not applicable to non-profits. This is not a weakness. CDFIs have unrecognized strengths. Key for a FHLBank is differentiating real risk from the perception of risk.

15. Meeting Challenges Ahead Recognize areas of mutual interest. Understand each others’ mission, business lines and imperatives. Think “how to” instead of “why not”. Remember: The AHP was born out of a financial crisis. At the time, there were once many who doubted its success. Over time, partnerships will evolve from proactive problem-solving. The FHFA’s Division of Federal Home Loan Bank Regulation will provide interpretive guidance as needed and will monitor progress.