United States: IREG Update - FHFA Cuts Off FHLB Access To Captives

FHFA cuts off FHLB access to captives

After considering input received in more than 1,300 comment letters submitted in response to a proposed rule issued in 2014, the Federal Housing Finance Agency (FHFA) issued its final rule on Federal Home Loan Bank (Bank) membership that effectively excludes captive insurers from Federal Home Loan Bank membership. The final rule defines the term "insurance company" to exclude captive insurers, and requires that an insurance company have as its primary business the underwriting of insurance for nonaffiliated persons. This continues to include traditional insurance companies but not captive insurers. Existing membership of captive insurers must "sunset" over five years and advances during that time period are limited. Additionally, the final rule requires a Bank to obtain and review an insurance company's audited financial statements when considering its application for membership; clarifies the standards by which a Bank is to determine the "principal place of business" for its members, including specific standards for insurance companies and community development financial institutions; and removes obsolete provisions and makes numerous non-substantive textual revisions so as to provide greater clarity. The final rule does not implement the proposed rule's provisions with respect to continuing eligibility requirements.


The Federal Home Loan Bank system (FHLB System) was established in 1932 by Congress to be a steady source of funding in the housing market through good and bad economies. It is a cooperative system made up of eleven regional lending institutions that are owned by their members—more than 7,500 financial institutions in the United States—and is regulated by the federal government. The Banks have been regulated by the FHFA since 2008 when that agency was created through the Housing and Economic Recovery Act of 2008. The eleven Banks are conservatively managed with a long-term view of financial investments. Because they are cooperatives, they reinvest any profits, keeping costs low. Small financial institutions and community banks rely on loans from Banks to help maintain liquidity. The FHLB System is worth over $800 billion and, after the US Treasury, is the biggest US bond borrower.

According to a speech made by FHFA director Mel Watt in May 2014, loans made by Banks to insurance company members increased from one percent in 2000 to 14 percent in 2013. Insurance companies have always been allowed membership in the FHLB System, but have accounted for a larger portion of the loans awarded. The growth in member insurance companies receiving loans is reflected in the growth of the insurance sector in the overall financial marketplace.

In 2012 through 2014, several real estate investment trusts (REIT), which are not eligible for Bank membership, began establishing captive insurer subsidiaries that then applied for Bank membership. As the Banks can generally offer better terms than traditional banks and bond markets for dependable funding, it can be an important source of liquidity for the alternative risk transfer market. The new memberships drew scrutiny from the FHFA. In May 2014, the FHFA director, Mel Watt, warned in a speech at the FHLB's Directors Conference that captive insurance membership raised a number of red flags "related to the safety and soundness and access to the system." According to the FHFA, these captives obtained advances that were disproportionately large in comparison with the investments and operations of the captives themselves. Additionally, many of the parents were guaranteeing repayment of the advances made to their captives and providing the collateral for those advances. This led the FHFA to conclude that the real purpose of the arrangement was to provide the non-member REIT with access to Bank funding to which they were not legally entitled.

In June 2014, the Banks jointly agreed to a three-month moratorium on admitting captive insurers to the FHLB System. On September 12, 2014, during the moratorium, the FHFA proposed substantial changes to the rules governing membership in the FHLB System. On January 11, 2016, the FHFA issued the final rule. The final rule will become effective 30 days from publication in the Federal Register.

The final rule prevents non-eligible entities from gaining Bank membership through a captive insurer. In defining "insurance company" to exclude captives, the FHFA seeks to prevent entities that do not otherwise meet the statutory requirements from becoming Bank members by establishing and using captives as conduits to circumvent the membership eligibility requirements and gain access to low-cost Bank funding and other benefits of Bank membership.

Captive insurer members that became members prior to publication of the proposed rule must terminate their membership within five years of the effective date. During that time, outstanding advances are limited to 40 percent of their assets and new advances or renewals must mature within the five-year transition period.

Captive insurers admitted to membership on or after the date of publication of the proposed rule have up to one year following the effective date of the final rule within which to terminate the membership of those captives. These captives have until the end of that year to repay their existing advances; they may not take new advances or renew existing advances.


REITs that have already used captive insurers to get Bank access will lose that access within five years. Thus, they will have to consider available options, including the following:

  • Maintain the captive insurer—the many benefits of a captive insurer remain. Moreover, a change in administration could bring in new views and changes to, or elimination of, the final rule.
  • Lobby for legislation clarifying that captive insurers are included in the statutory definition of "insurance company."
  • Pursue an administrative action challenging the final rule and the FHFA's interpretation of "insurance company."
  • Acquire or start a fully-licensed commercial insurance company, one that meets the criteria of the final rule—such insurance company must meet the membership requirements (including meeting the requirement that your business is primarily the underwriting of unaffiliated risk) and access limitations. A fully-licensed commercial insurance company, however, faces more regulatory requirements and a higher level of regulatory scrutiny than a captive insurer.

  • Wind down the captive after access to the Bank is terminated.

Each of these options contain pros and cons, which must be evaluated on an case-by-case basis.

Noteworthy links



  • Governor Andrew Cuomo named Paul, Weiss litigator Maria Vullo to serve as the next NY Superintendent of Financial Services [New York State, Maria Vullo bio]
  • MetLife announced that it will likely split its retail insurance business at least in part due to its designation as a Systemically Important Financial Institution [The New York Times, The Wall Street Journal 1, 2, Bloomberg BNA]
  • Metlife and the Financial Stability Oversight Council will appear in federal court for oral arguments in February [A.M. Best]
  • AIG and Prudential submitted their "living wills" to the Federal Reserve [The Wall Street Journal]
  • North Dakota Commissioner and Financial Stability Oversight Council Member Adam Hamm discussed his difficulty in getting federal regulators to understand insurance [Insurance Journal]
  • The National Association of Insurance Commissioners announced its committee chairs for 2016 [NAIC]
  • Elizabeth Kelleher Dwyer was named Rhode Island Superintendent of Banking and Insurance [Insurance Journal]


  • Kentucky's Health Insurance CO-OP was placed in liquidation [NKyTribune]
  • Kentucky's Governor announced that he will dismantle the state's health insurance exchange [NPR]
  • At least 15 state attorneys general will join the federal government's review of the Anthem/Cigna and Aetna/Humana mergers [Reuters]
  • Health insurance "ministries" that provide health care coverage continued to grow as an alternative to the Affordable Care Act [The Columbus Dispatch]

Property and Casualty

  • Studies by major investment banks found that autonomous cars will lead to fewer accidents and shrink the auto insurance industry [The New York Times]
  • Missouri announced that price optimization violates its state insurance law [Missouri Department of Insurance]

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Sep 2018, Conference, New York, United States

Dentons is delighted to support a global IT services and consulting firm Miratech as an event host partner at their annual conference called M-Force18 New York on September 27th. The event will be held at Dentons New York office in the heart of Midtown Manhattan, opposite Rockefeller Center.

2 Oct 2018, Seminar, Dallas, United States

We are pleased to offer a program of five sessions designed specifically for in-house counsel. Topics will include:

  • In-house corporate ethical issues
  • What recent Supreme Court decisions mean for business
  • Keeping lawyers out of your benefit plans
  • Litigation tactics for in-house counsel
  • Employment issues in the age of #MeToo
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions