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. The 11 regional Federal Home Loan Banks are:
Federal Home Loan Bank of Atlanta Federal Home Loan Bank of BostonFederal Home Loan Bank of ChicagoFederal Home Loan Bank of CincinnatiFederal Home Loan Bank of DallasFederal Home Loan Bank of Des MoinesFederal Home Loan Bank of IndianapolisFederal Home Loan Bank of New YorkFederal Home Loan Bank of PittsburghFederal Home Loan Bank of San FranciscoFederal Home Loan Bank of Topeka
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.
Acronym: FHL Banks, FHLBs
How the Federal Home Loan Bank Act Works
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 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:
Be organized under the laws of any state of the U.S.Be ready to undergo inspection and regulation under banking, state, or federal lawsPurchase and maintain stock in proportion to its holdings of mortgages, mortgage securities, and its assetsMake long-term home mortgage loansIn the case of federally insured depository institutions, have at least 10% of total assets in residential mortgage loansAllow FHL Bank loans to be made safely and securelyHave policy and management practices that are consistent with economical home financing
What the Federal Home Loan Bank Act Means for You
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. 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.
