For over 90 years, the Federal Home Loan Bank (FHLB) System has served as a critical source of liquidity for its members, especially during times of market stress, such as the Great Recession and the outset of the COVID-19 pandemic. That is why LIIF joined the FHLB of San Francisco when the system opened membership to community development financial institutions (CDFI). We needed access to lower-priced credit facilities that would better support our customers.
In the last few years, we were able to tap into emergency financing programs offered by our local branch, with such funding directly serving our borrowers facing dire economic impacts caused by the pandemic. Additionally, we utilize our branch’s offering of a line of credit for short-term liquidity purposes. We acted as advisors to the Access to Housing and Economic Assistance for Development (AHEAD) grants and assisted our customers with securing this support.
As the FHLB approaches its centennial, we applaud the Federal Housing Finance Agency (FHFA) for conducting a comprehensive review of the system that includes collecting input from its members, thereby ensuring the former remain positioned to meet the needs of today and tomorrow. As a CDFI with a mission of equitable deployment of capital, we believe there is more that the FHLB can do to support the CDFI sector. Our recommendations are true structural change that will help the system fulfill its charter of supporting affordable housing financing and community lending.
- Full system change to better support CDFIs. A key concern for the CDFI industry is the conservatism often demonstrated by the FHLB, exemplified by “haircuts” and “mark to market” processes. These make significant borrowings from FHLB impractical and disadvantageous for CDFIs. Further, each branch differs in how flexibly it operates. The San Francisco branch has the most CDFI members within the system yet maintains a much more conservative approach. We believe creating concrete volume goals for FHLB, like other government-sponsored enterprises, will create a broader force for change by deepening the system’s understanding of their CDFI clients and providing increased levels of service. By deepening the system’s understanding, it will better support smaller CDFIs that could truly benefit from the sort of flexible capital the FHLB System is looking to offer.
- Change underwriting criteria to reflect the creditworthiness of CDFIs. FHLB pricing is most beneficial to members viewed as less risky because they take deposits and have a consistent income stream. Think banks and insurance companies. Because of this criterion, CDFIs are often treated as second-tier borrowers. We receive worse borrowing rates from FHLBs, with haircuts ranging from 10% to 40% across the system. LIIF is an S&P-rated organization and should be treated similarly to other FHLB members with the same rating. Changing FHLB’s underwriting criteria to reflect the creditworthiness of its borrowers would vastly improve our ability to leverage capital. FHLB should take an individual look at each CDFI’s financial strength, portfolio characteristics and repayment capacity rather than grouping all CDFIs under the same general standards.
- Consistent advance ratios. The FHLB System should create consistent advance ratios between CDFIs and those afforded to insurance and regulated bank members. FHLBs should establish and fund a shared insurance or reinsurance pool that would serve as a first-loss backstop on advances to non-depository CDFIs. This mechanism could be used by FHLBs on a competitive basis, like the Affordable Housing Program, to support lower haircuts and greater advances. Providing member organizations with the ability to offer third-party collateral advances would increase access to the FHLB’s advance window. CDFIs work with other FHLB member organizations, such as banks and credit unions, as well as other investors like foundations. Based on LIIF centering racial equity in our lending strategies, these relationships are vital because they allow us to create innovative capital products that address historic inequities with which our society continues to grapple. For example, we partnered with Bank of America and Wells Fargo to create the Black Developer Capital Initiative, which is a Special Purpose Credit Program (SPCP) that allows us to drive capital to specific communities. Leveraging these existing relationships provides banks with another opportunity to meet their Community Reinvestment Act (CRA) obligations, and for foundations to meet their charitable objectives.
- CDFI-specific products and services. Developing standardized products specifically for CDFIs in each branch will better support its CDFI members and is consistent with the FHLB’s charter. The true benefit of this recommendation is an increase in the flow of capital into underserved communities, which is the basis of CDFIs – and FHLB’s – work.
Our recommendations are a system change that strengthens how CDFIs work with our member branch. By creating centralized expertise, the FHLB System could more efficiently and effectively develop appropriate and impactful CDFI products and services. These changes would ensure the FHLB System is responsive to the White House’s Executive Order on Further Advancing Racial Equity and Support for Underserved Communities Through The Federal Government.
We are eager to see change and be a partner to FHFA and the FHLB System as it works to meet its charter.
Real full comment letter.