Daily Rules, Proposed Rules, and Notices of the Federal Government
FHFA invites comments on all aspects of this Notice and the attached Advisory Bulletin. Copies of all comments will be posted without change, including any personal information you provide, such as your name, and address (mailing or email), and telephone numbers, on FHFA's Internet Web site at
The Federal Home Loan Bank System consists of twelve regional Banks and the Office of Finance (OF). The Banks are instrumentalities of the United States organized under the Federal Home Loan Bank Act (Bank Act).
Section 10(a) of the Bank Act authorizes each Bank to make secured advances to its members, each of which must be fully secured by certain types of eligible collateral enumerated in the statute.
FHFA is an independent agency of the Federal government that is responsible for the supervision and oversight of the Banks, as well as Fannie Mae and Freddie Mac. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) invests the Director of FHFA with general regulatory authority over those regulated entities and charges him with ensuring that they operate in a safe and sound manner, comply with applicable laws, and carry out their respective policy missions.
Lending to insurance companies exposes the Banks to a number of risks that are not associated with advances to their insured depository institution members. In large part, these risks arise from the fact that, unlike the Banks' commercial bank, thrift and credit union members, insurance companies are regulated at the state level. In dealing with its insurance company members, each Bank must understand multiple statutory and regulatory regimes and must assess how its interests may be affected by the variations between those regimes. This is made more difficult by the fact that there is little precedent to indicate how the insurance commissioner in any given state would deal with repayment of the member's outstanding advances or with the Bank's security interest in advances collateral in the event of a failure of an insurance company member. In some states a Bank might be required to liquidate collateral in order to obtain repayment of its advances to a failed insurance company, which introduces additional uncertainties about its ability to be made whole.
In addition, the financial statements of insurance companies are based upon statutory accounting principles that are specific to insurance companies, as opposed to the generally accepted accounting principles in the United States on which the financials of most other domestic companies and all federally insured depository institutions are based. While the statutory accounting principles adopted by each state are similar, required reporting practices and reporting frequencies, as well as data definitions and data formats may be quite different from state to state.
Over the last several years, lending to insurance company members has come to represent an increasingly larger portion of the Banks' overall business, and several Banks are actively targeting this member segment. Although insurance companies comprise only about 3.3 percent of total Bank system membership, 12.6 percent of total outstanding advances were to insurance companies as of December 31, 2011—up from 8.7 percent of total advances as of December 31, 2009. This growth, combined with the unique risks to which the Banks are exposed in lending to insurance companies, has led FHFA to focus more intently upon the effective supervision of Banks' credit transactions with their insurance company members.
The attached Advisory Bulletin sets forth a series of considerations that FHFA proposes to use in monitoring these transactions. It focuses upon principles that would be used by agency supervisory staff to assess each Bank's ability to evaluate the financial health of its insurance company members and the quality of their eligible collateral, as well as the extent to which the Bank has a first-priority security interest in that collateral. The risks inherent in lending to insurance companies, which are summarized above, are addressed more thoroughly in the Advisory Bulletin. FHFA seeks comments on all aspects of the Advisory Bulletin, but is especially interested in receiving comments about the most appropriate method for Banks to obtain “control” of securities collateral and to otherwise obtain a first-priority perfected security interest under the Uniform Commercial Code in any types of collateral pledged by its insurance company members. FHFA is also interested in receiving comments on the use of funding agreements as a means of documenting advances and whether the Banks have confirmed under state law that a Bank would be recognized as a secured creditor with a property interest in the collateral that is pledged to the Bank under a funding agreement. In addition, FHFA welcomes comments on whether it should consider establishing specific and uniform standards for making advances to insurance companies.
Section 1201 of the Housing and Economic Recovery Act of 2008 amended the Safety and Soundness Act to add a new section 1313(f), which requires the Director of FHFA, when promulgating regulations or taking any other formal or informal action of general applicability and future effect relating to the Banks, to consider the differences between the Banks and the Enterprises (Fannie Mae and Freddie Mac) as they relate to: The Banks' cooperative ownership structure; the mission of providing liquidity to members; the affordable housing and community development mission; their capital structure; and their joint and several liability on consolidated obligations.