CUNA Comment Letter

CUNA Supports Proposal of Multiple Federal Home Loan Bank Memberships

March 4, 2002

Ms. Elaine L. Baker
Secretary to the Board
Federal Housing Finance Board
1777 F Street, NW
Washington, D.C. 20006

Re: Multiple Federal Home Loan Bank Memberships

Dear Ms. Baker:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the issue of whether the Federal Housing Finance Board (Finance Board) should permit financial institutions to join more than one Federal Home Loan Bank (FHLBank) at the same time. CUNA represents more than 90 percent of our nation’s 10,500 state and federal credit unions.

Currently, financial institutions are generally members of the district in which the institution’s principal place of business is located. The Federal Home Loan Bank Act does permit an institution to become a member of the adjoining district “if demanded by convenience and then only with the approval of the [Finance] Board.-- It has been the subject of interpretation as to whether this permits an institution to join more than one FHLBank at the same time or whether this only permits the alternative of joining the FHLBank in an adjoining district. The Finance Board is now requesting comments on this issue to decide how to proceed further on this issue.

Summary of CUNA’s Position

Credit unions would generally support allowing financial institutions to join more than one FHLBank at the same time because it would both enhance competition for the products and services that are offered and could provide additional flexibility for those who may choose to join multiple FHLBanks.

For the most part, credit unions would either consider joining another FHLBank or would like to have the option to do so and would welcome the competition that would result, both in terms of offering products that members want and pricing those products at the most reasonable cost. Also, as would be the case with other types of financial institutions, there are credit unions that are closer geographically to a FHLBank that is different than the one that currently serves their district. These credit unions would especially benefit from the flexibility that would result by being members of more than one FHLBank.

Being a member of more than one FHLBank would provide a number of benefits. These members not only could compare pricing, but could actually choose different products from each FHLBank. Each FHLBank has its own service line of products. These products are generally the same, but there are differences. Under these circumstances, members of more than one FHLBank could choose to use a product or service from one FHLBank that may not be available at another one. These members could also choose products that may not be available if they were restricted to membership in one FHLBank.

Those who are members of more than one FHLBank may also gain a better understanding of the marketplace and financial environment. For example, all FHLBank may provide excellent service, but the one that is closer geographically to a member may have a better understanding of the community than the FHLBank that serves the member’s district.

However, to limit any adverse impact on smaller financial institutions, we recommend that the Finance Board guard against unreasonably deep discounts for high transaction volumes conducted by larger institutions. We believe this can be accomplished by requiring FHLBanks to justify such discounts and to ensure that these discounts are not detrimental to those smaller institutions that have lower transaction volumes. We also believe that a financial institution seeking membership in an adjoining district should demonstrate that a material portion of its business, such as ten percent or more, is derived from sales or other activities that originate in the district that the institution seeks to join.

Although we support allowing members to join more than one FHLBank, we believe that financial institutions should not be permitted to join more than three FHLBanks at any one time and that affiliate memberships acquired through subsidiaries should be counted toward this number. A total of three memberships should provide all institutions with sufficient choice and flexibility, while preventing a single institution from unduly influencing the FHLBank system.

Also, a financial institution with multiple memberships should not be permitted to participate in the election of directors of more than one FHLBank. We recommend that institutions with multiple memberships be required to designate one FHLBank as their “primary-- one and vote only in the election of the directors of their “primary-- FHLBank. Stock owned in other FHLBanks should be designated as non-voting stock. This limitation on electing directors would ensure that large financial institutions do not exercise an inordinate amount of influence on the FHLBank system to the detriment of smaller institutions or those that choose not to join more than one FHLBank.

Without further clarification of collateral rights, multiple memberships could adversely affect the security interests of credit unions' primary liquidity and settlement providers, corporate credit unions, in addition to FHLBanks. The inability to sort out and clearly communicate priority of collateral and liens may actually hinder a credit union's ability to receive settlement and liquidity services if the provider of such services cannot obtain adequate security.

Therefore, we recommend that the Finance Board require a financial institution with multiple memberships in FHLBanks to allocate a percentage of its eligible collateral to each of its FHLBanks for loan advances. In the case of credit unions, such allocation of collateral should not excessively diminish the priority of pre-existing security interests held by corporate credit unions. Clarifying these collateral rights should mitigate undue risks to security interests that may arise from multiple memberships.

As with the credit union system, the FHLBanks appear to have a positive cooperative relationship with each other. Products developed by one FHLBank have been offered to others. For some product lines, support services are provided among the FHLBanks in order to provide such services in a cost-effective manner. Our hope would be that the increased competition that would result by allowing multiple memberships would not adversely impact this cooperative structure.

Thank you for the opportunity to comment on the issue of whether financial institutions should be permitted to join more than one FHLBank at the same time. If you or other staff have questions about our comments, please give Associate General Counsel Mary Dunn or me a call at 1-800-356-9655.

Jeffrey Bloch
Assistant General Counsel