I cannot think of a more illustrative example of a “Community Financial Institution” (CFI) than a credit union. A credit union’s field of membership is built around a specific community of individuals and its owner-members are representatives of that community. Unfortunately, the Federal Home Loan Bank Act (FHLB Act) fails to recognize credit unions in its definition of Community Financial Institution.
Currently, the FHLB Act’s definition of a CFI only includes members whose deposits are insured under the Federal Deposit Insurance Act (FDIC Act) and have assets under the calculated asset cap, which is $1.461 billion for 2024. This definition excludes credit unions because they are not insured under the FDIC Act, but rather are insured by the National Credit Union Administration (NCUA) under the Federal Credit Union Act, or another insurer approved by their primary regulator.
Senator Cortez Masto (D-Nev.) and Senator Lummis (R-Wy) recently circulated a draft amendment to the National Defense Authorization Act (NDAA) that would continue to exclude federally-insured credit unions from the statutory construction of the definition of a “community financial institution (CFI)” in the FHLB Act. The proposed amendment, comprising six sections, proposes to change the definition of CFIs to also include community development financial institutions (CDFIs) that fall under the asset cap in the FHLB Act.
The amendment proposes to change the “and” to “or” so credit unions who are CDFIs should be included in the definition of CFI but would still leave non-CDFI credit unions facing a more difficult path to becoming a FHLB member, while greatly expanding FHLB membership. Unfortunately, CDFIs make up only a small fraction of federally insured credit unions.
For true parity, section 2(10)(A)(i) of the FHLB Act (12 U.S.C. 1422(10)(A)(i)) should be amended to read, “the deposits of which are insured under the Federal Deposit Insurance Act or the Federal Credit Union Act.” America’s Credit Unions has also advocated for raising the asset cap to $10 billion and recognizing the ability of privately insured credit unions to join a FHLB.
Why is it important for credit unions to qualify for CFI status? Under the FHLB Act, member financial institutions must hold 10 percent of their assets in residential mortgage loans. CFIs are exempt from this requirement and can become full FHLB members even if their percentage of mortgage assets does not meet that requirement or fluctuates. Recent call report data indicates that over 1800 credit unions would be eligible for FHLB membership only if they could qualify as CFIs.
The remaining five sections of the proposed amendment address the board of directors’ qualifications and requirements in section 1427 of the FHLB Act:
- The second section of the proposed amendment removes a requirement that independent directors must be “bona fide” residents of the district in which the Federal Home Loan Bank (FHLB) is located. As community institutions, FHLBs should have boards that reflect their population.
- The third section of the proposed amendment strikes language grandfathering the ability of some FHLBs to have more members on their FHLB board. This could make it more difficult for credit unions to gain board seats and potentially eliminate board seats that credit unions currently hold in some districts.
- The fourth section of the proposed amendment strikes a reference to board members “first elected after the date of the enactment of the Federal Housing Finance Regulatory Reform Act of 2008” and replaces it with “as necessary.” At this time, all board members should be first elected after 2008 (terms are four years and the limit is three terms before requiring a two-year break in service), so this could affect a board member who was originally elected prior to July 30, 2008, served for 12 years, and then was elected to the board again after two years. Someone in that position would be eligible to have their term staggered to ensure one-quarter of the terms expire each year.
- The fifth section of the proposed amendment would grandfather elective directorships into the current board makeup. America’s Credit Unions believes this should only apply to directorships that predate the July 30, 2008, enactment date. As the terms are four years and the limit is three terms, that should not affect any sitting members.
- The sixth section of the proposed amendment strikes a section allowing members who sat on the board prior to the July 30, 2008, enactment date to finish their terms. As the terms are four years, this should not affect any sitting members.
The amendment has not yet been introduced and the full Senate did not consider the NDAA before leaving for the August recess. America’s Credit Unions will stay engaged to oppose any harmful interchange or unrelated financial services amendments as the legislation comes to the Senate floor. The House advanced its version of the NDAA in June, also without any financial institution-related amendments.