WASHINGTON -- The Federal Housing Finance Agency has stirred up by a hornet's nest by proposing to tighten membership rules for the Federal Home Loan Banks.

More than 60 members of Congress joined credit union and bank trade groups this week in urging the agency to modify its plan to require members of the 12 regional Home Loan Banks to hold a certain percentage of mortgages on their books. Currently, there is no such holding requirement.

"The proposed rule includes significant changes to the long-standing membership rules for the FHLB System and is likely to have a profound adverse impact on the existing and prospective members and on the communities served by the system," according to the letter that was signed by 68 lawmakers, including Reps. Spencer Bachus, R-Ala., and David Scott, D-Ga.

The Nov. 17 letter also points out that Congress has frequently reviewed the FHLB membership rules.

"As recently as four years ago, Congress adjusted the FHLB membership rules and did not choose to narrow eligibility for participation in the system, making its intent clear," the joint letter says.

FHFA issued the membership proposal in early September. It would require many large institutions to hold 10% of their assets in the form of mortgages in order to maintain their FHLB membership. Smaller institutions with less than $1 billion of assets would have to maintain at least 1% of their assets in mortgages.

Currently, applicants have to meet these asset requirements to become a FHLB member but there is no on-going requirement to retain a certain percentage of mortgage assets in portfolio.

The FHFA also wants to curtail the growing number of real estate investment trusts becoming FHLB members through their captive mortgage insurance subsidiary operations.

The Spencer-Scott letter urges FHFA to "reconsider" the membership proposal. FHFA should "begin a dialogue with Congress, where these important policy decisions should be made."

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