MBA supports expanding Federal Home Loan Bank membership

The Federal Housing Finance Agency released a request for input back in February, asking for industry opinions for Federal Home Loan Bank membership expansion. The FHFA decided to look closer at the guidelines after evidence surfaced regarding "conduit arrangements," in which nonmembers form relationships to members as a means of skirting membership guidelines and gaining access to the liquidity and low-cost loans that the Federal Home Loan Banks provide.

Membership is currently only legally available to federally insured banks and credit unions, non-federally insured credit unions and nondepository community development financial institutions.

In its reply to the FHFA on membership expansion, the Mortgage Bankers Association said it supports widening FHLB eligibility as long as it's done responsibly. An expansion should "better reflect the diverse providers of single-family and multifamily housing finance throughout the country," according to the MBA's letter to FHFA Director Mark Calabria.

Opening up eligibility to both banks and nonbanks would produce more competition in the marketplace and better terms for consumers, the MBA argued. Lenders in the network reap the benefits of on-demand liquidity through advances — low-cost loans — from its regional FHLB. This helps the FHLB achieve its mission to "provide reliable liquidity to its member institutions to support housing finance and community investment," the MBA wrote.

The MBA believes the mission would be bolstered with more members and that a bigger system comes with a wider selection of product offerings and, in turn, earnings.

FHLB membership plans are often a controversial subject in the industry, having provoked both widespread opposition and complete polarization. Last year, the Pennsylvania Bankers Association called for nonbanks to be barred from the group by highlighting the practice of finagling "back-door memberships."

For this iteration, the MBA took a favorable stance but it also advises that the FHFA should put a comprehensive eligibility framework in place and have counterparty oversight to ensure members align with the FHLB's mission. With clear parameters, potential members would have to meet requirements and not sneak in through any loopholes or proxy arrangements.

This "well-crafted framework would strengthen the broader housing finance system by increasing the supply of reliable, longer-term liquidity to institutions that play critical roles in this system," the letter said.