September 14, 2021

FHLB Membership Guidance Released by FHFA


On September 9, 2021, the Federal Housing Finance Agency (“FHFA”) released guidance regarding Federal Home Loan Bank (“FHLB”) membership eligibility.1 In particular, the guidance discusses the effect of certain types of mergers on FHLB membership eligibility and the eligibility of insurance companies. The guidance continues FHFA’s narrow and restrictive approach to membership eligibility and does not reverse its longstanding concerns regarding membership for captive insurers.


The FHLB Act restricts membership in the FHLB System to US-based insured depository institutions, community development financial institutions and insurance companies that make home mortgage loans.2 In recent years, FHFA has construed this restriction narrowly to exclude licensed insurance companies whose primary business is underwriting insurance for affiliates.3 As a result of this regulatory change, a number of captive insurance companies lost their FHLB system membership in 2017.4 FHFA has taken similarly restrictive interpretations for other aspects of membership eligibility and issued a request for information to consider further changes to the eligibility criteria.5 Notwithstanding these barriers, many market participants remain interested in joining an FHLB to obtain access to funding for residential mortgage loans.

September Guidance

The guidance addresses several membership eligibility issues that FHFA states have arisen recently through the examination process or as a result of inquiries from market participants. In particular, the guidance discusses the effect of certain types of mergers on FHLB membership eligibility and the eligibility of insurance companies.

Large Non-Member Institution Merging with a Small Member

As a general matter, when a non-member institution merges into an existing FHLB member, the resulting institution may remain a member if it continues operating under the existing member’s charter. The guidance states that FHFA recently encountered a situation in which a large financial institution otherwise ineligible for FHLB membership attempted to acquire membership by merging with a much smaller FHLB member institution. FHFA indicates that it regards attempts to attain FHLB membership through a merger transaction intended to circumvent controlling statute or regulation to be impermissible.6 Therefore, FHFA viewed the proposed merger to be an attempted circumvention of the membership regulation and advised the merging institutions that it would require the relevant FHLB to nullify any membership obtained through the merger.

Definition of “Insurance Company”

FHFA regulations define an eligible insurance company in relevant part as “an entity that holds an insurance license or charter under the laws of a State and whose primary business is the underwriting of insurance for persons or entities that are not its affiliates.”7

The guidance indicates that FHFA has several issues with regard to insurance company eligibility that are currently under review by its Bank System Insurance Working Group and thus are not addressed at this time. However, a number of other questions have arisen recently regarding application of FHFA’s regulatory definition of “insurance company” that are addressed in the guidance.

First, the guidance indicates that the definition requires that the underwriting of insurance to non-affiliates be the primary part of an institution’s total business, not merely the primary part of the institution’s insurance business.

Second, the guidance states that the reinsurance of risks ceded from entities meeting the definition of “affiliate” under 12 C.F.R. § 1263.1 may be considered to constitute “the underwriting of insurance for persons or entities that are not its affiliates” to the extent that the reinsurance is on risks incurred by non-affiliates and is not for the purpose of providing a self-insurance vehicle for an affiliate.

Third, the guidance states that when determining whether an applicant’s primary business is the underwriting of insurance for non-affiliates, an FHLB should, at minimum, consider data from the applicant’s most recent year-end audited financial statements, in addition to year-to-date information.

Fourth, the guidance states that meeting the regulatory definition of “insurance company” is an ongoing requirement, and, therefore, FHLBs should periodically confirm that insurance company members continue to meet the definition of an insurance company in FHFA’s regulation. If an insurance company member’s business has changed to the extent that an FHLB is unsure whether the company continues to meet the definition, the FHLB should work with the member to resolve the issue in a reasonable amount of time. In such cases, the FHLB should notify FHFA of the situation. In the event the member cannot come into compliance within a reasonable amount of time, the FHLB must terminate its membership. The guidance does not address some of the issues that state licensed insurance companies have faced regarding their eligibility for FHLB membership based on whether their insurance business is the “right” type of insurance. Presumably, that is one of the eligibility issues that FHFA indicated is currently under review by its Bank System Insurance Working Group.


There is substantial interest from market participants for access to FHLB advances to fund mortgage loans. FHFA continues to take a narrow view of the eligibility criteria that excludes a number of interested market participants from membership. While the guidance is useful in conveying FHFA’s views to the industry, it does not expand the eligibility criteria.



1 FHFA, Supervisory Letter on FHLBank Membership Issues (Sept. 9, 2021),

2 12 U.S.C. § 1424(a)(1).

3 81 Fed. Reg. 3246 (Jan. 20, 2016).

4 81 Fed. Reg. at 3269; Tim Zawacki, Handful of mREITs left to enjoy ‘extreme competitive advantage’ of FHLB funding, SNL (Mar. 29, 2017).

5 Brad Finkelstein, Commerce Home says FHLBank’s denial of membership akin to redlining, National Mortgage News (Sept. 15, 2020). See our prior Legal Update on FHFA’s request for information:

6 FHFA cited a federal court case involving the Federal Energy Regulatory Commission for the proposition that “regulatory agencies may set aside sham transactions where an arrangement is devised to circumvent a regulatory requirement or prohibition.” One might question why a principle of such import is not explicitly stated in FHFA’s regulations.

7 12 C.F.R. § 1263.1.

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