Exclusive: Cortez Masto offers bill to reform FHLBs

WASHINGTON — Sen. Catherine Cortez Masto, D-Nev., is introducing a bill that would aim to focus the Federal Home Loan banks more strongly on housing finance and community development, according to a copy of the text seen by American Banker. 

Cortez Masto, a member of the Senate Banking Committee, has made the Federal Home Loan banks a centerpiece of her work on the committee. Her new bill, she said, would push the Home Loan banks “to do more to support affordable housing in our communities.” 

Although Cortez Masto sits on the opposite side of the aisle of the controlling party in Washington, this bill will likely inform and serve as the base for any future Federal Home Loan bank legislation, even if Cortez Masto can’t gather bipartisan support in this Congress. 

“When Congress created the Federal Home Loan banks in 1932, the mission was simple: help families across the United States afford a home,” Cortez Masto said in a statement. However, in the more than 90 years since, they have strayed from their mission, she said.

The bill would require that each Federal Home Loan bank contribute 30% of its net earnings to the Affordable Home Program and other programs that meet community needs, or a systemwide minimum contribution of $200 million for those programs. Currently, the banks are mandated to set aside 10% of their profits for affordable housing or a $100 million systemwide minimum. 

It would also allow small credit unions and community development financial institutions to pledge nonhousing loans as collateral and to join a Federal Home Loan bank if they only provide small-business, agricultural or community economic development loans. And the bill would tie the Federal Home Loan bank presidents’ compensation to how well the banks are supporting affordable housing and community development. 

Criticism of the Federal Home Loan Bank System came to the fore in the wake of the midsize banking crisis in 2023, as troubled banks tapped the Home Loan banks for liquidity just before they failed. Critics argued that the Home Loan banks’ practice of doling out billions of dollars to fill the short-term liquidity needs of troubled banks bears little resemblance to the banks’ stated goal of supporting housing.

The Federal Housing Finance Administration, which oversees the Home Loan banks, said in a long-awaited report last year that the Home Loan Bank System should return to its housing finance roots rather than serve as a lender of last resort to imperiled financial institutions. The FHFA said that it plans to increase federal oversight of how banks are using the Home Loan banks and steer more banks toward the Federal Reserve’s discount window for liquidity needs in the future.

Federal Home Loan banks have rebuffed the idea of setting aside more of their profits for affordable housing in the past. The Home Loan Banks voluntarily contribute 15% of their profits for affordable housing. When the Treasury Department requested that they reserve 20% for affordable housing support, the chairs of the boards of the 11 banks wrote back that Congress would have to pass a law to get them to do so. 

“We believe that simply raising the AHP and voluntary contributions to 20% of our pre-assessment net income will not address the underlying complexities of the housing crisis,” the bank chairs said in the letter, noting that the banks’ voluntary commitment to contributing 15% of their net income toward affordable housing is already 50% more than what is required by statute. “Consideration of a higher set aside should be undertaken by Congress,” the letter said.

Pushback to the Federal Home Loan banks’ role in providing liquidity to banks has mostly come from the Democratic side of the aisle. Lawmakers, including Cortez Masto and now-ranking member of the Senate Banking Committee Elizabeth Warren, D-Mass., wrote to then-head of the FHFA Sandra Thompson, urging her to move forward with rulemakings that would focus the banks more squarely on housing finance. 

That said, Senate Banking Committee Chair Tim Scott, R-S.C., has signaled that he has some openness to working with Democratic lawmakers on housing issues, even if they may disagree on methods.

“On the housing issue, I think we have a chance to get a bipartisan piece of legislation to the president’s desk and sign into law, because [Warren is] willing to work with me,” Scott said at the American Bankers Association Washington Summit earlier this week. “She says, the bigger the better. And I actually embrace that philosophy, that in order for us to get something accomplished, it’s not going to be a philosophically pure way of doing things on the right.” 

Still, there is likely to be hesitancy among many Republicans who wouldn’t want to limit a source of liquidity for community bankers, especially as the sector might need to tap that liquidity should the Treasury market continue to falter in the wake of President Donald Trump’s tariff policies.