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Senate Introduces Bill Reversing FHLB Ban on Captive Insurers

Senators Tammy Duckworth (D-IL), Tim Scott (R-SC), and Ron Johnson (R-WI) have just introduced a new bipartisan bill to the United States Senate. This bill would amend the existing Federal Home Loan Bank (FHLB) Act to allow captive insurers to be permitted full membership into the FHLB system.

On January 12, 2016, the Federal Housing Finance Agency (FHFA) issued a final ruling that amended the FHLB’s previous membership regulations, making captive insurers unable to be members. Specifically, the ruling amended the definition of an “insurance company” to “exclude so-called ‘captive insurers’”. This was done in order to prevent entities that otherwise were not eligible for FHLBank memberships from utilizing captives as a means of circumventing these requirements and gaining access to funding, de facto FHLBank membership, and other benefits. This rule was proposed in 2014 before being officially adopted in 2016. The ruling allowed captive insurers with existing FHLB membership to take up to five years to terminate their membership, and one year to terminate for captives who had joined after the rule was issued.

This new bill proposes to amend the definition of “insurance company” to include captive insurers. The bill seeks to do so by expanding on the Housing Opportunity Mortgage Expansion (HOME) Act that legislators Randy Hultgren (R-IL) and Gwen Moore (D-WI) introduced to the House of Representatives on June 13, 2017. The HOME Act proposes to reinstate captive insurance membership in the FHLB System if:

  1. The captive insurer joined before the FHFA initially proposed their ruling to make them ineligible, and
  2. The captive insurer can demonstrate a commitment to residential mortgage activities.

A press release on Senator Duckworth’s website states that the FHFA ruling has had a devastating impact on the FHLB-Chicago, which receives nearly one-third of its total borrowings from captive insurers. In addition, it states that this proposed legislation, in addition to making FHLB membership more accessible, would increase resources for affordable housing and provide greater liquidity for small business lending.

David Schroeder, the senior vice president of the Federal Government Relations of the Community Bankers Association of Illinois, has stated, “The participation of larger financial institution members in the FHLBs enhances the value to members of all sizes, particularly smaller member banks and thrifts which often have limited or no direct access to the capital markets other than through their FHLB.”

David H. Stevens, president and CEO of the Mortgage Bankers Association, said, “Captive insurers whose housing focus is aligned with that of the FHLB system act as a stabilizing force in the housing finance market and create a reliable source of capital for lenders and investors. This bill represents an important step forward in recognizing the need for multiple forms of private capital as Congress considers the future of housing finance.”

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (317) 575-4440.

Sources: Federal Housing Finance Agency, Tammy Duckworth, Captive Insurance Times, Captive