Federal Home Loan Bank System:

Key Loan Pricing Terms Can Differ Significantly

GAO-03-973: Published: Sep 8, 2003. Publicly Released: Sep 9, 2003.

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William B. Shear
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The Federal Home Loan Bank System's (FHLBank System) traditional approach to providing community and housing finance through 12 regional FHLBanks faces continual challenges due to consolidation in the financial services industry and the emergence of mortgage lenders with nationwide operations. In addition, the Federal Housing Finance Board (FHFB), the System's financial regulator, is analyzing the benefits and costs of potential changes to the System's membership rules that would make it easier for financial institutions to join multiple FHLBank districts (referred to as multidistrict membership). To provide information that would be helpful in assessing the potential safety and soundness implications of these developments, GAO was asked among other items to (1) determine whether key differences exist in the terms--such as interest rates and collateral requirements--that FHLBanks make on loans, also known as advances, to member financial institutions such as banks and thrifts and (2) discuss FHFB's oversight of the FHLBanks and safety and soundness data reporting requirements.

Federal statutes and regulations require that the FHLBanks set advance interest rates above their borrowing costs and fully secure advances with eligible forms of collateral, such as single-family mortgage loans. However, within this framework, each of the 12 FHLBanks has independent authority to set advance pricing terms, which can result in several significant key differences among the banks. For example, due to differing costs and business strategies, FHLBank advance interest rates may differ and many FHLBanks charge lower interest rates based on advance size while others do not. Moreover, FHLBanks may set differing collateral requirements for their members. For example, one FHLBank allows its members to borrow up to 60 percent of the value of single family mortgages pledged as collateral to secure advances while another allows up to 85 percent. Among the FHLBanks' differing approaches to setting advance pricing terms, FHFB has not found that any practice results in significant violations of statute or regulation. However FHFB also collects collateral data from the FHLBanks that have questionable value in their current format for monitoring the System's safety and soundness. Because FHLBank officials do not have clear information about how FHFB would like the data reported, the FHLBanks use different reporting definitions and criteria, which limits the data's analytical usefulness. Moreover, FHFB has not collected data necessary to assess the current extent of competition within the FHLBank System and the implications of holding companies with subsidiaries that operate in multiple FHLBank districts as well as multidistrict membership.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Federal Housing Finance Board (FHFB) has revised the guidance that it distributes to the Federal Home Loan Banks (FHLBanks) for the collection and reporting of advance collateral data. The revised guidance should help ensure consistent data reporting and assist FHFB in monitoring the FHLBanks' safety and soundness, as well as the placement of certain types of collateral, particularly small business and agricultural collateral.

    Recommendation: To strengthen FHFB's safety and soundness oversight, FHFB should review its current collateral reporting requirements and work with the FHLBanks to obtain data that are useful in understanding collateral practices within the System.

    Agency Affected: Federal Housing Finance Board

  2. Status: Closed - Not Implemented

    Comments: Per a letter from FHFB to GAO dated 3/23/2007, the agency stated that it did not plan to collect additional information on the competitive implications of FHLBank members that have subsidiaries that are members of multiple districts. FHFB said that it had studied the issue but decided not to collect additional data for several reasons. For example, comparing FHLBank advance rates (and therefore) is complicated by differing collateral and stock purchase requirements among the 12 FHLBanks. However, FHFB said that it would continue to examine the banks in terms of their advance rate pricing and related issues.

    Recommendation: FHFB should also work with the FHLBanks to obtain data necessary to understand the competitive and safety and soundness implications of holding companies whose subsidiaries operate in different FHLBank districts as well as multidistrict membership.

    Agency Affected: Federal Housing Finance Board


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