On January 30, 2018, Senator Tammy Duckworth (D-IL) introduced the Housing Opportunity Mortgage Expansion (HOME) Act (“S. 2361”), a bill that would amend the Federal Home Loan Bank Act to permit captive insurance companies that were previously Federal Home Loan Bank (“FHLB”) members prior to January 19, 2016, to continue, or restore, their FHLB membership and, consequently, allow them to access funding through the FHLB system. Senators Tim Scott (R-SC) and Ron Johnson (R-WI) have joined this effort as original co-sponsors of S. 2361, which has been referred to the Senate Committee on Banking, Housing and Urban Affairs.

The FHLB system comprises 11 federal home loan district banks and an office of finance that are regulated by the Federal Housing Finance Agency (the “FHFA”). The FHLBs, which were created under the Federal Home Loan Bank Act to, among other things, improve the availability of residential housing finance, are cooperatively owned by more than 8,000 member institutions. The FHLBs provide members low-cost advances that are fully secured by certain forms of collateral, including conventional residential mortgage loans, certain commercial real estate loans, agency RMBS and nonagency RMBS that meet certain credit standards. In January 2016, the FHFA released a final rule (the “Final Rule”) that amended regulations governing FHLB membership. The Final Rule prevents captive insurance companies, including captives affiliated with a number of publicly traded REITs, from obtaining and maintaining FHLB membership and eliminates their access to funding through the FHLB system.

S. 2361 proposes to reverse certain aspects of the Final Rule and restore membership eligibility for captive insurance companies that were FHLB members prior to January 19, 2016, and, solely as a result of the Final Rule, were required to terminate their FHLB membership by February 2017 (one-year captives)1 or will be required to terminate their membership by February 2021 (five-year captives).2

As a condition of continued FHLB membership or reinstatement, S. 2361 would require covered captive insurance companies to remain under the same ownership and control of the entity that owned, either directly or indirectly, the captive on the date of enactment of S. 2361. Depending on the language in the bill adopted by Congress, companies may need to consider how this requirement would impact the captive insurance companies that are dormant or were dissolved under state law. In addition, S. 2361, as introduced, would limit the amount of FHLB advances available to those captive insurance companies unaffiliated with insured depository institutions to an aggregate amount not to exceed 50% of the total assets held by the captive, unless the FHLB has executed a guarantee with the captive’s parent.

The introduction of S. 2361 and its referral to the Senate Committee on Banking, Housing and Urban Affairs is a promising first step for those companies, including publicly traded REITs, that were able to access the FHLB funding platform prior to the Final Rule. However, we expect that the legislative process may be lengthy and the proposed legislation may evolve over time. We will continue to monitor the progress of S. 2361 and expect to provide updates as the legislative process moves forward.