New ag rule opens FHLB membership to more banks

Northwestern Financial Review, Sep 5, 1998

The Federal Home Loan Bank System began implementation of a new rule designed to ease membership requirements and liberalize collateral requirements. The rule, which went into effect July 29, will open FHLB membership to a number of banks which previously may not have been eligible.

The rule, commonly referred to as the Ag Rule, allows financial institutions with assets of less than $500 million to use combination ag or business property loans where there is a permanent residence for membership and collateral purposes. Previously, combination loans could not be used for membership, and for collateral purposes the residence had to account for 50 percent of the loan's value. In most cases, particularly with ag loans, the residence is significantly less than 50 percent of the total value of the property.

"This is an important step for providing much needed funds for rural housing and economic development," said Thurman C. "Sam" Connell, Home Loan Bank of Des Moines president. "With this regulation we are able to better fulfill our mission in all geographic areas, but with special emphasis on rural communities."

Until the rule change, to be eligible for membership financial institutions had to hold 10 percent of their assets in mortgages, which prohibited numerous financial institutions from applying for membership. With the anticipation of combination ag and business property loan eligibility, the Des Moines FHLB had approximately 40 applications waiting for the rule to become effective. Officers at the Des Moines bank expect several hundred other financial institutions will now be eligible for membership.

"We are pleased by the number of financial institutions affected by this rule that have expressed interest in becoming members," Connell said. "We believe bank membership offers products and services that will greatly benefit these financial institutions and their communities."

The new rule also impacts current members and what they may use as collateral. Almost 94 percent of the Des Moines FHLB's more than 900 members are favorably impacted by the new provisions. Overall, members with less than $500 million in assets may use combination business or ag loans to collateralized Home Loan Bank loans. Beyond that, the specific collateral requirements have been established individually by each of the 12 Home Loan Banks.

At the Des Moines Bank, for a loan to be eligible, the maximum outstanding principal balance for individual loans must be equal to or less than $3 million; a first mortgage; fully disbursed; fully amortizing and non-revolving; and a whole loan (no participation). Loans must not be contractually past due more than 90 days, classified substandard, doubtful or loss, or pledged to secure other debt.

"Overall this rule stands to impact most of the FHLB members regardless of whether they are located in rural or urban areas," Connell said. "The Ag Rule is a major step to ensuring the FHLB can provide funding unmet for housing and economic development credit needs in our district."