Seemingly Innocuous Change Could Have Big Credit Union Impact

FHFA proposal could curtail FHLBanks as a liquidity option 

By David Savoie, CEO, LaCorp

A critical source of liquidity for credit unions could be reduced or lost if changes are not made to a proposal from the Federal Housing Finance Agency (FHFA) last November.

The governing body of the Federal Home Loan Banks (FHLBs) published a report that said the FHLBs should increase their support for housing and community development. The most critical proposed change affecting credit unions is an amendment that FHLBs would be “requiring all applicants to make long-term home mortgage loans, requiring all insured depository institution applicants to have a home-financing policy that is ‘consistent with sound and economical home financing,’ and requiring all non-community financial institution depository institution applicants to have at least 10 percent of their assets in residential mortgage loans in order to be eligible for membership.” Because many credit unions rely on their corporate credit unions, like LaCorp, as their connection to the FHLBs, and corporates don’t make home mortgage loans, the amendment could curb the ability of corporate credit unions – and, therefore, their member credit unions – to access liquidity through the FHLB system. Corporate credit unions, like LaCorp, maintain FHLB eligibility through their holdings of mortgage-backed securities (MBS). 

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What LaCorp Had to Say

Our very own David Savoie, CEO of LaCorp, wrote the FHFA in an official comment letter regarding the proposed change in regulations, “Louisiana Corporate Credit Union serves the credit, investment, and funds transfer services needs of over 100 credit unions in Louisiana and other states. Our membership and participation in the programs of FHLB Dallas are integral to our ability to fulfill this role.

“Following the failure of U.S. Central Credit Union in 2009, the FHLB system has become both central and critical to the liquidity needs of the credit union system.” 

LaCorp, as well as other corporate credit unions, serve a critical role in the credit union ecosystem. Currently, holding any amount of MBS as investments qualifies corporate credit unions for FHLB membership. The proposal is not fully clear on whether holding MBS would continue to qualify a corporate for membership and, if so, what percentage of MBS holdings would be required. 

LaCorp provides services that make it easier for natural person credit unions to serve their members in the best way possible in accordance with their mission. Regulating corporate credit unions out of eligibility or placing unduly burdensome requirements for their membership in FHLBs would decrease the quality of member service and go against the FHLB’s mission statement. 

“Our member credit unions are important sources of residential mortgage lending in our area and constitute a strong and robust element of the retail financial services industry,” Savoie continued. “Changes to the manner in which the FHLB System presently provides liquidity to the entire financial community would impact Louisiana Corporate, as well as our member credit unions, and the entire credit union system. We believe that curtailment of the core role that the FHLB has assumed in credit union system liquidity would have a destabilizing impact on many financial institutions across the country who rely on their Federal Home Loan Bank as a stable and reliable liquidity source, both for short-term and longer-term funding needs.” 

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Unintended Consequence

The FHFA's statement requesting input states that it intends to “allow the FHLBs to provide increased benefits to those members that demonstrate a meaningful commitment to housing and community development activity.” 

The FHFA aims to incent banking activity that will benefit the communities that financial institutions serve. However, corporate credit unions provide valuable services allowing local institutions to better serve their communities. Corporate credit unions also support home ownership by being major purchasers of FHLMC, FNMA and GNMA MBS. Implementing regulations that restrict the ability of corporate credit unions to access FHLB resources would result in a downgrade of services going into the community, thus going against the mission statement of the FHLBs.

You can reach David or any of the LaCorp team at LaCorp.com.

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