Many players in the insurance industry may consider the Federal Home Loan Bank as an agency that facilitates affordable home mortgages.
The system, founded at the end of the Herbert Hoover administration to support community investment, is that. But it also lends to member insurance companies that may need help with liquidity or can’t find such low rates in the commercial loan market. More than 500 US insurers now participate in the program – more than double the number from just a decade ago, the FHLB reported.
And, if bills currently pending in several state legislatures become law, more insurers will likely consider joining and benefit from even better terms on commercial loans. This year, FHLB officials quietly traveled statewide, urging lawmakers to approve measures that would ensure mortgage lenders would have priority over collateral pledged by insurers.
With this, the FHLB system would no longer have to require member insurers to pay a premium on loans, which could save insurers considerable sums, explained Melissa Dallas, senior vice president and general counsel for the Home Loan Bank of Cincinnati, one of 11 regional banks in the system.
The Kentucky House of Representatives last month became the first house this year to approve the FHLB-backed bill. Some 21 other states have adopted similar measures in recent years.
“This bill will allow Kentucky-domiciled insurance companies to borrow from the Federal Home Loan Bank on the same terms as banks and credit unions in Kentucky do,” said Rep. Joe Fischer, R. -Fort Thomas, during a Jan. 19 meeting of the House Banking and Insurance Committee.
These rates can be as low as 1.6% on three-year notes, according to the FHLB.
The cogs and bolts of HB 171 reads: “A Federal Home Loan Bank shall not be suspended or otherwise barred by any court from exercising its rights in respect of securities pledged by an insurer member for more than 10 days from the date of a temporary restraining order, a preliminary injunction or a permanent injunction is issued by the court…”
An FHL bank must act on the collateral within seven days of receiving a redemption request from an insurer and may redeem any outstanding capital from the insurer beyond the amount the insurer must hold as a minimum investment . In the event of receivership, the bank must establish procedures for the release of collateral, and must provide options for restructuring the loan, invoice notes.
At the committee meeting, Kentucky Rep. Susan Westrom, D-Lexington, asked Fischer whether the legislation had been recommended by the National Council of Insurance Legislators. He said no.
“Well, you’re brilliant, then,” Westrom said.
The entire Kentucky House approved the bill by an 89-0 vote late last month. He is now awaiting action in the state Senate. Similar measures are pending in at least four other states where lawmakers are currently in session, including Florida, New Jersey, New York and Virginia.
The bank of Cincinnati vice president said the liquidation is rare among member insurers in the Cincinnati tri-state area, which includes Kentucky, Tennessee and Ohio. Florida, however, where a number of P&C insurers have gone insolvent over the past two years and several more may soon need low-cost capital, could be one of the states where the legislation could have an impact. most important.
But Florida Senate Bill 1888 and its twin, Bill 1405, saw little movement in the 2022 session, which began Jan. 11 and ends in mid-March.
Only eight Florida-based insurers, all P&C insurers, are members of the FHLB system. A lobbyist for one of those companies said the bills weren’t on the carrier’s radar this year. A spokesperson for Florida’s Department of Financial Services, home to the state’s Insurance Regulatory Office, said only that the department monitors bills.
It’s unclear exactly how the state-level effort to put insurers on an equal footing with banks began. Dallas, the Cincinnati vice president, said a state regulator had pointed out to the FHLB in recent years that banks are federally regulated and supported, at least to some degree, which automatically gives banks home loans the first priority over collateral when banks run into trouble.
But insurers are primarily regulated by the states, so the FHLB, governed by the Federal Housing Finance Agency (FHFA), has taken the state-by-state approach to address the discrepancy.
The push likely has something to do with federal law that governs mortgage lending banks, explained Cornelius Hurley, an assistant law professor at Boston University and former director of the New England Regional Bank of FHLB. The law prohibits discrimination against members, but allows discretion based on creditworthiness and the security that is pledged.
Hurley noted that the move to lobby legislatures, however, raises questions about whether states have the power to pass laws that regulate a federal system. And he wondered why the FHLB itself hadn’t made the effort public. No mention of the state bills can be found on the FHLB website and a spokeswoman said no information has been released on the bills.
Hurley argued that, really, Kentucky-style legislation should be just a starting point for the FHLB, which now finds itself at a critical juncture in its history. He said the FHLB had lost its relevance and its borrowers to commercial lenders during the recent period of ultra-low interest rates, and had been crippled by only allowing mortgages or backed securities to collateral mortgages.
While the number of member insurers has grown steadily over the past decade, the amount of loans to insurers fell sharply last year. Lending to insurer members topped $130 billion in 2020 but plunged to $116 billion in 2021, according to an FHLB report.
FHLB should find ways to provide credit to more insurers with different types of guarantees, Hurley said.
“A lot of insurance companies don’t have mortgage guarantees,” Hurley said.
The system should also join the modern era and quickly open the door to other types of members, including fintech companies and other types of organizations that now provide loans and can impact communities. . In a recent article in American Banker magazine, Hurley wrote, “In terms of the system’s mission, why not expand it beyond housing finance to include finance initiatives in the areas of climate change, infrastructure development and economic equity?
This new focus on the FHLB and its member insurers could be timely: the US Senate is now considering the nomination of Sandra Thompson as President Biden’s choice to lead the Federal Housing Finance Agency, supervisor of the Home Loan Banks. She is committed to undertaking a number of reforms.
In an open letter to Thompson published Monday, Hurley and a former president of the Federal Deposit Insurance Corp. urged her to launch a strategic review of the system and consider reorienting the FHLB “to meet the needs of the modern age”.
Graphic: Loans to member insurers by Federal Home Loan Banks. Source: FHLB