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The Federal Home Loan Bank Act was created in order to boost homeownership and economic investment. It established the entire Federal Home Loan Bank (FHLB) system, and today, it achieves its goals by lending long-term, low-cost credits to the 11 banks and its bank members, which include local banks, credit unions, and community financial institutions.
The Federal Home Loan Bank Act was created in order to boost homeownership and economic investment. It established the entire Federal Home Loan Bank (FHLB) system, and today, it achieves its goals by lending long-term, low-cost credits to the 11 banks and its bank members, which include local banks, credit unions, and community financial institutions. The members then pass on their savings in the form of affordable financing and projects such as social service, manufacturing, infrastructure, and public facility works.
At its inception, the Federal Home Loan Bank Act was specifically geared toward affordable homeownership. Since then, however, the various Federal Home Loan (FHL) Banks have begun to move into broader economic development too.
For example, in recent years, the FHLBanks developed the Community Investment Cash Advance (CICA) program, which offers funding to members geared toward projects that benefit certain economic development activities. It targets specific demographics including low- or moderate-income neighborhoods and rural areas. The banks also look for opportunities to develop specific geographic locations, including areas affected by a military base closing, federal or state disaster areas, Indian reservations, and more.
In terms of affordable financing, FHLBanks give their member institutions access to affordable housing grants and discounted funds. These member institutions can then, in turn, offer better rates and grants to their customers.
While there were originally 12 banks part of the system, the Federal Home Loan Bank of Seattle merged with the Federal Home Loan Bank of Des Moines in 2015. Because of this, there are now 11 Federal Home Loan Banks.
The 11 regional Federal Home Loan Banks are:
The 2008 Housing and Economic Reform Act (HERA) established the Federal Housing Finance Agency, which now regulates the Federal Home Loan Banks rather than the Federal Home Loan Bank Board.
Local institutions across America borrow funds from the FHL Banks to finance economic development, housing, infrastructure, and jobs. FHLBs act as “banks to banks,” meaning they provide long- and short-term loans known as “advances” to their members. They also offer specialized grants and loans aimed at increasing affordable housing and economic development.
These funds are then transferred to the FHLBank members, and distributed to low- and middle-income communities. As of May 2021, the FHL Bank system has approximately 6,700 members serving all 50 states, the District of Columbia, and U.S. territories.
Members of the FHL Banks represent about 80% of all insured lending institutions in the U.S.
Members include a variety of financial institutions, including commercial banks, thrift institutions, and credit unions. A financial institution joins the FHL Bank that serves the state where the business is located.
To become a member, there are certain requirements that must be met. The institution must:
So how does this work, practically speaking? Let’s say that you’re looking to invest some big money into a rental housing project but don’t quite have the funds to make it work. By joining up with a member institution of one of the FHLBs, you too can have access to grants and subsidies worth upwards of $850,000 toward your project.
Although the rules associated with the FHL Banks reflect a public purpose, the 11 regional FHL Banks are privately capitalized. This means they do not receive any taxpayer assistance.
Now let’s say that you don’t actually have the kind of cash to develop an entire rental housing project. Even if you’re just looking for affordable financing on your home, you may want to consider looking for an institution enrolled as a member of an FHL Bank. As we mentioned before, FHLB members have access to lower-cost funds that other institutions do not.
Because FHLB institutions are funded via a government system, they can be more or less vulnerable to market changes depending on the situation. However, when member institutions begin overusing FHLB benefits or tend to focus too much on any one product, it’s noticed.
In order to alleviate vulnerabilities, FHLBs without sufficient capital may be merged with other banks—as occurred with the Seattle FHLB in 2015. While you may not have personal access to information around your regional FHLB, be aware that these banks run with a relatively small capital margin buffer compared to standard banks.
