What Is the Federal Home Loan Bank Act and How Does It Work?

The Federal Home Loan Bank Act, enacted in 1932, aimed to stabilize the housing market during the Great Depression by improving access to affordable home financing. It created a network of regional banks that provide liquidity to financial institutions, ensuring continued lending to homebuyers and businesses.

This system remains vital today, supporting community banks, credit unions, and other lenders. By offering low-cost funding, it helps maintain mortgage credit availability, particularly during economic downturns.

Organizational Model

The Federal Home Loan Bank (FHLB) system consists of 11 regional banks, each serving a specific geographic area. These banks operate as government-sponsored enterprises (GSEs), meaning they have a public mission to support housing finance while functioning as private entities owned by member institutions. Unlike commercial banks that serve individuals, FHLBs provide wholesale funding to financial institutions, enabling mortgage lending and other loans.

Each regional bank operates independently but follows regulations set by the Federal Housing Finance Agency (FHFA), which oversees financial stability. Governance includes a board of directors composed of elected representatives from member institutions and independent directors with expertise in housing finance, accounting, or risk management.

FHLBs raise capital by issuing debt securities, known as consolidated obligations, which are jointly backed by all 11 banks. These securities are highly rated due to the perceived backing of the federal government, allowing FHLBs to borrow at lower rates. The funds raised provide advances—short- and long-term loans—to member institutions, ensuring liquidity remains available even during financial stress.

Membership Qualifications

Institutions seeking membership in the FHLB system must meet eligibility criteria set by the Federal Home Loan Bank Act and the FHFA. Membership is limited to federally insured depository institutions, including commercial banks, credit unions, savings associations, and insurance companies involved in residential mortgage lending. Institutions must allocate a certain percentage of assets to housing finance.

Prospective members must purchase non-tradable FHLB stock, with the required amount based on asset size and borrowing activity. Ownership grants access to funding programs, including advances and letters of credit, which support mortgage lending and community development.

Regulatory compliance is essential for maintaining membership. Institutions must meet safety and soundness standards set by federal and state regulators to ensure solvency and repayment capacity. If an institution fails to meet these standards, its membership may be revoked, limiting access to FHLB funding.

Collateral Requirements

To secure funding, member institutions must pledge eligible collateral. Acceptable collateral, as defined under federal law and FHFA regulations, primarily includes first-lien residential mortgages. Other qualifying assets may include government-backed securities, multifamily loans, and certain commercial real estate loans.

Collateral valuation involves a haircut—a discount applied to account for potential market fluctuations. For example, a conventional mortgage loan may have a collateral value set at 80% of its outstanding balance, while commercial real estate loans may receive lower advance rates due to higher risk. These adjustments help protect the FHLB system from potential losses.

Members must meet ongoing collateral maintenance requirements, including providing updated loan performance data, maintaining proper lien documentation, and complying with regulatory capital standards. Institutions that fail to meet these obligations may face borrowing restrictions or increased scrutiny.

Funding Approach

FHLBs raise capital by issuing consolidated obligations, including bonds and discount notes sold in the capital markets. These debt instruments are considered low-risk due to their joint backing by all 11 regional banks and the market perception of implicit government support, allowing them to secure favorable interest rates. Investors such as pension funds, mutual funds, and foreign central banks frequently purchase these securities.

Funds raised through these issuances provide advances—secured loans tailored to meet the liquidity needs of member institutions. These advances come in various structures, including fixed- and adjustable-rate options, amortizing and bullet maturities, and terms ranging from overnight to 30 years. Pricing depends on market conditions, loan duration, and the credit quality of the pledged collateral, with lower-risk assets securing better borrowing terms.

Dividend Plan

FHLBs distribute earnings to their member institutions through a dividend system, providing a return on the mandatory stock investment required for membership. Dividend rates vary by regional bank and depend on profitability, interest rate conditions, and financial health.

Each regional FHLB sets its own dividend policy, balancing member returns with the need to maintain sufficient retained earnings. Dividends are typically paid in cash or additional stock, with rates often benchmarked against short-term interest rates. While dividends enhance membership value, they are not guaranteed and may be reduced or suspended during financial downturns. Regulatory oversight ensures that dividend policies remain prudent.

Oversight and Administration

The FHFA serves as the primary regulator of the FHLB system, ensuring compliance with statutory requirements and financial soundness. Established under the Housing and Economic Recovery Act of 2008, the FHFA has broad supervisory authority, including setting capital requirements, conducting examinations, and enforcing risk management standards. It also reviews and approves new products and services to ensure they align with the system’s housing finance mission.

Each regional FHLB operates under an independent board of directors, which includes elected representatives from member institutions and independent directors with expertise in housing finance, accounting, or risk management. These boards set strategic direction, approve major financial decisions, and ensure regulatory compliance. Additionally, the Office of Finance manages the issuance of consolidated obligations, coordinating debt offerings to optimize funding costs.