Magazine article American Banker

Home Loan Banks Will Decide Details of Rules on Collateral

Magazine article American Banker

Home Loan Banks Will Decide Details of Rules on Collateral

Article excerpt

WASHINGTON -

New rules proposed Wednesday are intended eventually to determine how small banks may pledge small business or agriculture loans as collateral for advances from the Federal Home Loan Bank System.

However, the system's regulator, the Federal Housing Finance Board, left it to the 12 Home Loan banks to decide many of the details.

The key question -- how much small-business and farm loans will be discounted

is to be answered by the individual Home Loan banks. The finance board has gradually been delegating more responsibility to the banks, and historically these so-called "haircuts" have been set by the individual banks.

But finance board Chairman Bruce Morrison has made it clear that he expects the Home Loan banks to take a conservative approach until they gain expertise in valuing small-business and farm loans. "The haircuts will be larger rather than smaller," he said in a recent interview. "But they may be liberalized as there's more experience."

The proposal requires the Home Loan banks to acquire the expertise needed to value, discount, and manage the risks associated with taking small-business and farm loans as collateral, the agency said.

The Gramm-Leach-Bliley Act of 1999 made it easier for banks with less than $500 million in assets to join and borrow from Home Loan banks. Rather than pledging residential mortgage loans, the collateral traditionally accepted by the banks, the law allowed small banks to pledge small business and agricultural loans as collateral for advances.

The move was seen as a huge benefit for small banks in need of liquidity, since core deposits have dried up.

"We're excited that the Gramm-Leach-Bliley Act has this provision in it and we're looking forward to its fruition," said Jeffrey L. Plagge, president and chief executive officer of First National Bank of Waverly, Iowa. …

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