FHLBank Approves Changes to the Member Products Policy
November 1, 2016
At its recent meeting, FHLBank Topeka’s Board of Directors approved changes to its Member Products Policy. Details are available in the online Member Products and Services Guide (MPSG). Policy changes become effective Dec. 1, and lending values for loan collateral reported via the Qualifying Collateral Determination (QCD) form will be effective with the filing of the Dec. 31, 2016, QCD form.
General Policy Changes
1. Advance Notice of Elimination of Credit Product – FHLBank will provide members and housing associates at least a 30-day notice if a credit product will no longer be offered.
2. New Criteria for Additional Security Measures – FHLBank has added total assets (i.e. size of institution’s balance sheet) to the list of factors that may require FHLBank to take additional security measures to secure a member’s outstanding credit obligations. Blanket Pledge members meeting the following conditions will be required to deliver collateral to FHLBank or an FHLBank-approved third-party custodian:
- Bank and Thrift Members - Total assets of $20 million or less with Total Credit Obligations to Unsubordinated Assets greater than 10%
- Credit Union Members - Total assets of $50 million or less with Total Credit Obligations to Unsubordinated Assets greater than 10%
This policy change will address the risks associated with small asset size institutions, specifically the speed in which an institution’s financial condition can deteriorate (i.e. placed into receivership or conservatorship by its primary regulatory).
3. Collateral Review Fees on Certain Case-by-Case Securities – policy was changed to clarify that state and local securities that have been issued to refund previously issued securities will be charged a $125 case-by-case review fee based on the total number of refunded securities, ex. two refunded securities = $250 review fee.
Schedule of Eligible Collateral Changes
1. Additional Breakdown of Delivered (Expanded) Lending Value - the Schedule of Eligible Collateral, specifically the Delivered (Expanded) Lending Value has been separated into two classes to address the potential risk of longer collateral liquidation periods by certain types of members. Those members subject to a longer liquidation period may have lower lending values applied to collateral assets to address these liquidation risks.
- Class A is applicable to those insurance company members domiciled in a state in which the law exempts the FHLBank from any applicable injunctions and stays, repudiation of agreements, fraudulent transfer provisions and preference provisions relating to any FHLBank security agreement or any similar arrangement or agreement relating to the security agreement.
- Class B is applicable to (i) entities subject to Chapter 11 bankruptcy reorganization (i.e., non-depository Community Depository Financial Institution members or housing associates); and (ii) any insurance company member domiciled in a state in which the law does not exempt the FHLBank from any applicable injunctions and stays, repudiation of agreements, fraudulent transfer provisions and preference provisions relating to any FHLBank security agreement or any similar arrangement or agreement relating to the security agreement.
In conjunction with this policy change, all references regarding mandatory overcollateralization for Specific Pledge members were removed from the policy.
2. Student Loans and Student Loan Asset Backed Securities – eliminated the underwriting requirement regarding minimum loan servicing volumes for both student loans and student loan asset backed securities. In addition, removed the underwriting requirement that called for the submission of an independent public accountant’s annual examination for student loan asset backed securities.
3. Loans with PACE Program Liens – amended the underwriting requirement to clarify that loans secured by property subject to a lien granted to a locality pursuant to an energy retrofit program that takes priority over the first mortgage will not be accepted as eligible collateral.
4. Maximum Loan-to-Value Ratio Required for Certain Loans – an underwriting requirement was added specifying a maximum loan-to-value ratio of 85% for multifamily residential mortgages, commercial real estate loans, multifamily construction mortgages and commercial construction mortgages. Loans with loan-to-value ratios in excess of 85% may be submitted for consideration on a case-by-case basis.
5. Marijuana-related Business Loans - added an underwriting guideline to identify that loans secured by property to be used for any marijuana-related business are not eligible to be pledged to FHLBank. This applies to agricultural real estate, commercial real estate, commercial construction mortgages, operating loans and equipment loans.
6. Annual Credit Reviews for Commercial Real Estate – eliminated the underwriting requirement that called for Specific Pledge members to submit to the FHLBank annual credit reviews for commercial real estate loans. FHLBank will expect members to update commercial real estate loan data detail periodically, but will discontinue the need to submit the annual credit review.
7. Agency Securities Collateral – amended the underwriting guideline to clarify that all Agency securities collateral must be issued and guaranteed by GNMA, FNMA or FHLMC. Securities issued by one of these agencies, but not guaranteed, may be submitted for consideration on a case-by-case basis.
Lending Value Changes
1. Secured credit risk exposure arising from the extension of credit to members and nonmembers is managed by employing multiple strategies and processes, known as FHLBank’s Member Credit Methodology (Methodology). One component of the Methodology is periodic evaluation of the lending value assigned to each type of asset. Based on management’s recent review of the lending values under its Methodology, various lending value changes were made. Click the link below for the detailed list.
Lending Value Changes
2. Increased Maximum Lending Value on Certain Loans and CMBS – increased the maximum lending value from $50 million to $75 million on commercial mortgage backed securities less than 100% defeased, mortgages on multifamily residential real property, commercial real estate, multifamily construction mortgages and commercial construction mortgages.
Definition Changes
1. Debt Service Coverage Ratio (DSCR) – added a definition, which acknowledges that there are various prudent underwriting and risk assessment methods used in creating and calculating DSCR within the real estate financing industry. The definition indicates that FHLBank does not dictate a specific DSCR calculation, but asks members to document the method used, and that the method be made available at FHLBank’s request.
2. Delivered (Expanded) Lending Value – modified the definition to acknowledge the new classes as described above.
3. Sub-Prime Loans – the definition was enhanced to identify specific tolerance levels for FICO scores (less than 620) and monthly debt-to-income levels (greater than 55%). Loans meeting these specific tolerance levels will be considered to have sub-prime characteristics, unless the member or housing associate has documented compensating factors that FHLBank determines supports the member’s or housing associate’s position that the borrower does not have a weakened credit history or have reduced repayment capacity.
You can find out more about our collateral policies and other collateral topics at our complimentary webinar series this December. Dates and times are available here.
If you have any questions about these changes, please contact Sonia Betsworth, chief credit officer or Tom Bliss, director of member credit analysis at 785.233.0507.