The Gramm-Leach-Bliley Act of 1999:
Community Banks Gain Easier Access to FHLB Advances
Editor's Note: This is the first in a series of articles on selected parts of the Gramm-Leach-Bliley Act of 1999. The first article deals with Federal Home Loan Bank reforms. For a more complete history of this Act, including a summary of the unitary thrift loophole issue, please see the December issue of Independent Banker magazine.
Easing the entrance requirements to enable more small banks to join the Federal Home Loan Bank System, and liberalizing the collateral requirements so they can more readily access the advance window, were among the ICBA's highest priorities in the debate over financial reform. Thanks to effective and persistent lobbying by community bankers, these objectives were met, and provisions liberalizing the entrance and collateral requirements were included in the Gramm-Leach-Bliley Act signed by President Clinton on November 12. Many community bankers feel this will enable them to compete more effectively with tax-favored credit unions and the Farm Credit System. The following summarizes the major features of the Federal Home Loan Bank title.
Effective immediately, the Gramm-Leach-Bliley Act of 1999 permits any "community financial institution," defined in the bill as an FDIC insured depository with less than $500 million in average total assets during the most recent three year period, to become a member of a Federal Home Loan Bank. Previously, an institution had to have at least 10% of its total assets in "residential mortgage assets" to qualify for membership. The $500 million asset limit will be adjusted annually by the Federal Housing Finance Board ("Finance Board") based on the consumer price index.
In addition, under the new law, membership in the FHLBank System becomes voluntary. Up until now, federal savings associations were required to be members of the System (although bank and other non-thrift membership was voluntary). Beginning 6 months after the date of enactment, any member may withdraw from the System. To withdraw, a member must first obtain certification from the Finance Board that its withdrawal will not cause the System to fall short of its REFCorp obligations or cause the FHLBank to fall below its capital requirements. Members withdrawing from the systems are "locked out" from rejoining for five years.
Collateral Requirements and Uses of Advance Funds
Under the new law, community financial institutions may use residential housing, small business, small farm and small agri-business loans as collateral for advances. Up until now, only residential housing assets (and in some circumstances, "combination assets," meaning small farms or small businesses that have an occupied residence on the property) were acceptable collateral.
In addition, community financial institutions may use long-term advances to fund residential housing, small business, small farm and small agri-business loans.
QTL Test Eliminated
The new law eliminates the Qualified Thrift Lender (QTL) test (65% of a member's assets had to be in "qualified thrift investments") for advances, making the stock purchase requirements the same for all members. This means that any member, including community financial institutions, can borrow up to 20 times its FHLBank stock in advances (or more in districts where the FHLBank does not impose such a limitation). Up until now, non-QTL members were subject to great stock purchase requirements when borrowing from the advance window, and advances by non-QTL members could not exceed 30% of total System advances.
The new law establishes two new capital standards for FHLBanks: 1) a 5% total capital-to-assets leverage requirement, and 2) a risk-based capital standard that requires a FHLBank to hold adequate capital that is sufficient to pass a rigorous stress test. The 5% total capital to assets requirement may drop to 4% if the Bank has adequate Class B stock (redeemable in 5 years) and retained earnings. In meeting the capital to assets requirement, Class B stock and retained earnings may be counted 1.5 times, while Class A stock (redeemable in 6 months) and other capital can be counted only one time.
Up until January 1, 2000, the Federal Home Bank System (all FHLBanks) is subject to an annual flat $300 million REFCorp obligation to help pay off Finance Corporation bonds used in the S&L cleanup. This annual assessment is being changed under Gramm-Leach-Bliley to 20% of annual net earnings of each FHLBank (after deducting for each bank's operating expenses and Affordable Housing Program obligations). The Finance Board has the authority to extend or reduce the payment period to ensure that the value of all payments is equal to the System's original obligation over the life of the outstanding REFCorp bonds.
Some of the day-to-day governance issues will be transferred from the Finance Board to individual FHLBanks. The new law also establishes 3-year terms for FHLBank directors, with one-third of the terms expiring each year. The chair and vice chair of each FHLBank, elected by the directors, will serve two-year terms. The law also makes changes in FHLBank board compensation levels and residency requirements.
FMMA Proposal Withdrawn
The conference report on the Gramm-Leach-Bliley Act states that the Finance Board's controversial Financial Management and Mission Achievement (FMMA) proposed rule should be withdrawn and not re-submitted until after the new capital rules are promulgated and each FHLBank has submitted a new capital plan as required under the new law. The report also states that the Finance Board should consult with the House and Senate Banking Committees before issuing either new capital rules or any rules related to financial management and/or the System's mission.
In response to this directive, the Finance Board on November 15, formally withdrew the proposed FMMA regulations. But Finance Board Chairman Bruce Morrison added: "The proposed FMMA is no more. However, its various aspects will reappear, likely in modified form...." Morrison said that the portion of FMMA "... which created the definitions of and authority for new mission-related products such as member mortgage assets will be presented to our Board again early in 2000." In fact, Morrison published a tentative timetable for the presentation of proposed regulations to the Finance Board - some as early as December 1999 - that includes a number of items that were part of the FMMA proposal. Morrison also promised to consult with the House and Senate Banking Committees regarding the content of these and other regulations.