What Is the Federal Home Loan Bank Act?

The Federal Home Loan Bank Act Explained in 5 Minutes or Less

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The Federal Home Loan Bank Act, passed in 1932, created a network of government-sponsored banks. In turn, that network makes home ownership more affordable and promotes economic development in communities throughout the U.S. Along with 12 Federal Home Loan Banks (FHLBs), the Act established the Federal Home Loan Bank Board, which oversees and regulates the system.

Let’s take a look at the Federal Home Loan Bank Act, how it works, and how it impacts your finances.

Definition and Examples of the Federal Home Loan Bank Act

The Federal Home Loan Bank Act was created in order to boost homeownership and economic investment. It established the entire Federal Home Loan Bank (FHLB) system, and today, it achieves its goals by lending long-term, low-cost credits to the 11 banks and its bank members, which include local banks, credit unions, and community financial institutions. The members then pass on their savings in the form of affordable financing and projects such as social service, manufacturing, infrastructure, and public facility works.

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.

While there were originally 12 banks part of the system, the Federal Home Loan Bank of Seattle merged with the Federal Home Loan Bank of Des Moines in 2015. Because of this, there are now 11 Federal Home Loan Banks.

The 11 regional Federal Home Loan Banks are:

  • Federal Home Loan Bank of Atlanta 
  • Federal Home Loan Bank of Boston
  • Federal Home Loan Bank of Chicago
  • Federal Home Loan Bank of Cincinnati
  • Federal Home Loan Bank of Dallas
  • Federal Home Loan Bank of Des Moines
  • Federal Home Loan Bank of Indianapolis
  • Federal Home Loan Bank of New York
  • Federal Home Loan Bank of Pittsburgh
  • Federal Home Loan Bank of San Francisco
  • Federal 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 of the FHL Banks represent about 80% of all insured lending institutions in the U.S.

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 laws
  • Purchase and maintain stock in proportion to its holdings of mortgages, mortgage securities, and its assets
  • Make long-term home mortgage loans
  • In the case of federally insured depository institutions, have at least 10% of total assets in residential mortgage loans
  • Allow FHL Bank loans to be made safely and securely
  • Have 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.

Although the rules associated with the FHL Banks reflect a public purpose, the 11 regional FHL Banks are privately capitalized. This means they do not receive any taxpayer assistance. 

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.

Key Takeaways

  • The Federal Home Loan Bank (FHLB) Act was established in 1932 during the Great Depression in order to create more affordable homeownership. 
  • There are 11 Federal Home Loan (FHL) Banks with more than 6,800 member institutions that help support ownership and community development.
  • The Federal Housing Financial Agency regulates the FHL Banks as a part of the Federal Home Loan Bank Act system.