On Monday, the FHFA issued a 116-page notice of proposed rulemaking that laid out four regulatory actions the agency will take to strengthen the boards of the 11 regional Home Loan Banks. The proposal would require that each bank conduct an annual assessment of incumbent directors to determine whether each director is contributing positively to the board's ability to oversee the bank's operations. 

The proposal also would require that director compensation reflect performance, and would permit the board to remove a director for continuous poor performance or lack of participation that compromises a bank's operations. It would require for the first time that each bank conduct background checks for board nominees and prohibit any individual from serving on a board without first confirming their fitness to serve in a fiduciary role.

On compensation, the FHFA said it will consider a variety of factors such as director compensation at other banks, the banks' status as government-sponsored enterprises and the fact that the system was created to serve a public purpose. 

During outreach for its "FHLBank System at 100," initiative, the FHFA said that stakeholders stressed the importance of independent voices. The proposed rule would make modest changes to increase the separation between independent directors and would prohibit former member directors from serving as an independent director until they have been off the board for at least two years.   

The FHFA also plans to clarify the required qualifications for public interest independent directors and expand the list of experience for regular independent directors to include housing finance, emerging risks and complex problems. The agency also wants the banks to "evaluate potential gaps in board knowledge and pursue opportunities to address these gaps by nominating individuals with particular skills, backgrounds, and experience." The agency also wants to facilitate the nomination of individuals with technical subject matter expertise.

The proposed rule would add a host of skills that would now qualify as experience for board members including artificial intelligence, climate risk, information technology and the business models of Community Development Financial Institutions. That list is on top of experience or knowledge currently required in one or more areas: auditing and accounting, derivatives, financial management, organizational management, project development, risk management practices, and the law.

"FHFA's vision for the future is to have an effectively governed Bank System that efficiently provides stable and reliable funding to creditworthy members and delivers innovative products and services to support the housing and community development needs of the communities its members serve, all in a safe and sound manner," FHFA said in its proposal. Each of the banks would be required to take active steps to seek independent directorship nominees and to prioritize those with knowledge and experience that has come primarily from full-time paid executive, management, or other senior positions. Banks would be able to fill a vacant public interest independent directorship by redesignating a qualifying incumbent regular independent director as a public interest independent director and vice versa.

In one of only a few revisions addressing governance below the board level, the proposal would require each bank to adopt and implement a conflict of interest policy covering all bank employees. 

The Home Loan Banks are a private cooperative collectively owned by its 6,500 members. But the system was created by Congress in 1932 with the passage of the Federal Home Loan Bank Act, which established the system to serve the public interest through residential housing finance and community lending. Members of the system have access to low-cost secured loans and the system's Office of Finance issues bonds backed by an implicit government guarantee. 

Some of the FHFA's proposed changes reiterate or clarify existing policy. The Bank Act requires that at least two of a bank's independent directors qualify as "public interest" independent directors, with more than four years of experience advocating for or acting on behalf of consumers or community interests.

"Corporate governance of the Banks is strengthened when: the public interest is adequately represented, Bank boards have the collective knowledge and expertise to guide the Bank through new and emerging risks and complex problems [and]; independent directors represent a true independent voice," the FHFA  said in its proposal. 

The proposed rule is open for public comment for 90 days after it is published in the Federal Register.