Trade groups that represent thousands of financial institutions have told FHFA Director Sandra Thompson that the regulatory agency doesn't have the authority to update the Home Loan Bank's mission. The trade groups are responded to the FHFA's request for information in May to update the system's dual mission.  

By law, Congress explicitly recognized that the Federal Home Loan Banks have a mission of "providing liquidity to members" and supporting "affordable housing and community development." The FHFA wants the private bank cooperative to increase its support for housing. 

The FHFA plans to issue a rulemaking notice to determine whether the $1.3 trillion-asset private cooperative is providing the public service it was created for in 1932 to support housing during the Depression. In comment letters, the Federal Home Loan banks and their member-financial institutions portray a vastly different view of their mission compared to their regulator, setting up a potential clash.

"Any rulemaking process has to take place within the statutory box and who draws the box? Congress is the one that draws the box," said Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, the system's trade group. "The mission is pretty clearly laid out in the statute through the activities that Congress has authorized the Home Loan Banks to take part in and the things that they've required the Home Loan Banks to do. That's why you're hearing from many stakeholders their concern that in this effort, FHFA may be stepping outside the box."

Community bankers appeared to reject the FHFA's inquiry outright. 

"The FHFA director's authority was clearly defined with [in the Housing and Economic Recovery Act of 2008] and it does not include the ability to define or redefine the mission of the FHLBs," said Tim Roy, vice president of housing finance policy at the Independent Community Bankers of America. "Any change to the FHLB mission needs to occur within statute."

The inquiry comes as Thompson, some Democratic lawmakers and Biden administration officials are suggesting that the Home Loan Banks' housing mission needs to take center stage. Thompson has called for more funding for underserved, rural and tribal communities. The FHFA also has issued 50 recommendations in a report on the "FHLBank System at 100," including suggestions for regulatory and legislative changes. 

The 11 Home Loan banks are private bank cooperatives that provide low-cost funding to 6,500 members including banks, insurance companies and credit unions. Critics suggest the system and its members receive outsized public benefits compared to what they spend to support housing. 

The FHFA has said that the composition of Home Loan Bank membership has shifted away from institutions with a strong focus on mortgage lending, while the eligible collateral that banks pledge in exchange for receiving loans, known as "advances," has broadened to include non-housing-focused assets. 

In the past five years, 42% of the system's roughly members haven't originated a single mortgage. In a report this month, the Urban Institute explored the Home Loan Banks' membership and its ties to housing finance. Independent mortgage banks that aren't allowed to be members, originated 64% of all mortgages in 2022, up from around 25% in 2008. Mortgage bankers' share of agency securitizations is 83%, up from 30% in 2013, Urban said. 

Congress has mandated that the Home Loan Banks must contribute 10% of their net income to affordable housing programs. Many but not all have voluntarily increased their contributions to 15%. 

Democratic lawmakers now are calling for the Home Loan Banks to do more, arguing that too many Americans can't afford to buy or rent homes. Last week senators Catherine Cortez Masto, Elizabeth Warren, Ron Wyden and four other lawmakers sent letters to the presidents of the 11 Home Loan Banks calling for them to increase their affordable housing contributions to 20%. 

"The United States is in the middle of an affordable housing crisis," the lawmakers wrote. "Unfortunately, the FHLBs have failed to adequately respond to this crisis." 

The Home Loan Banks received $7.3 billion in government subsidies this year, including tax exemptions, regulatory benefits and the implied government guarantee on bonds sold to investors. By comparison, the banks are on track to contribute more than $1 billion on affordable housing programs this year, up from $395 million last year. 

"The investment is inadequate, especially after years of minimal investments to meet our communities' needs for affordable housing," wrote the senators, including Sens. Tina Smith, Tammy Baldwin, Bernie Sanders and John Fetterman. 

In the letter, lawmakers raised questions about the system's executive pay. The FHFA does have the authority under statute to make changes to executive compensation.

"The FHLBs' limited affordable housing contributions are especially troubling given the generous compensation currently awarded to FHLB executives and board members," the senators wrote.

Whether lawmakers' concerns translate into legislation is unclear given the long odds of bipartisanship in a divided Congress and a contentious election year. Consumer advocacy groups also have urged the Home Loan Banks to spend more on affordable housing programs given the banks' record profits and dividends last year.

"FHLBanks celebrate their contributions to affordable housing, yet with their billions in profits and dividends, these government-sponsored enterprises do the bare minimum," said Sharon Cornelissen, director of housing at the Consumer Federation of America.

Joe Pigg, a senior vice president at the American Bankers Association, took issue with the FHFA's inquiry that included questions about whether additional financial incentive programs should be created for financial institutions that have a strong connection to the system's housing mission. He said that creating incentive programs would primarily reflect "the desires of any current FHFA leadership," and potentially open the door "to the politicization of the FHLBs."

"The FHFA has no mandate to create for itself a role of arbiter of what is 'meaningful' with regard to housing and community development," Pigg wrote in a comment letter. "Such action by FHFA goes beyond its statutory mandate. The statutory mission of the FHLBs is to provide members with liquidity to support affordable housing and community development. As long as members meet the requirements for membership and are able to provide the eligible collateral to borrow from the System, they should be able to access FHLB liquidity on an equal basis."

Community banks are particularly concerned that any changes by the FHFA will increase regulatory requirements, raise costs and potentially restrict banks from tapping the system for liquidity. 

"The FHFA is contemplating placing additional priority on the affordable housing and community development mission, potentially at the expense of providing liquidity to members," Roy wrote. "Given that this proposal appears to run counter to congressional intent, we therefore question the Director's authority to make any change that would place greater emphasis on the affordable housing community development mission."