GAO report ritiques FHLB small business support efforts
Published: August 11, 2010
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U.S. Rep. Paul E. Kanjorski (D-Pa. 11), the chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, on Aug.11 released a report by the Government Accountability Office (GAO) finding that the Federal Home Loan Bank (FHLB) System has fallen short in its efforts to prioritize economic development in communities throughout the country, as mandated by a bipartisan law that Kanjorski wrote. At the chairman’s request, GAO reviewed the small business and agricultural lending initiatives of the FHLBs. In releasing the study, Kanjorski called upon the FHLBs and their regulator, the Federal Housing Finance Agency (FHFA), to focus more on the system’s mission of fostering job growth and expanding small businesses. Kanjorski also announced plans to introduce a bill establishing a dedicated funding stream for FHLBs to support business lending.
“This GAO report confirms my suspicions about the unfortunate lack of progress by too many Federal Home Loan Banks during the last decade in facilitating small business and agricultural lending,” said Kanjorski. “During these difficult economic times, we must use an ‘all hands on deck’ approach, including involving the Federal Home Loan Banks. Small businesses are the engine of job growth, and the banks must work to support small business development in communities throughout the country. The failure of too many banks and their regulator to make economic development a priority is extremely disappointing and it ignores the reforms adopted by Congress more than a decade ago. Simply put, the Federal Home Loan Banks must do more to promote job growth.”
Kanjorski added, “As all the Federal Home Loan Banks work to help small businesses start and expand, I encourage them to build off of the Pittsburgh Federal Home Loan Bank’s successful Banking on Business program, which I helped to establish. Since its creation, the program has generated more than 5,300 jobs in three States and assisted many small businesses to strengthen local economies using low-cost loans and traditional financing from local lenders. I encourage the creation of similar programs nationwide which, in conjunction with other lending initiatives, could greatly help struggling workers and small businesses, thus allowing communities to grow.”
The GAO report examines the implementation of the bipartisan reforms included in the Federal Home Loan Bank System Modernization Act of 1999 (Title VI of P.L. 106-102), which Chairman Kanjorski worked with former Congressman Richard Baker (R-LA) to draft and enact. This law works to provide more lending capacity to community banks without any cost to taxpayers by authorizing the FHLBs to accept alternative forms of capital from community banks as collateral, specifically small businesses and agricultural loans. Among other things, the report finds that:
- After a decade, small business and agricultural loans account for only 1 percent of FHLB advances;
- Two FHLBs do not accept alternative collateral, and the strategic plans of 5 FHLBs have established no goals for business lending while 3 others have set goals at 0 percent.
- Implementation has fallen short of the congressional intent to improve economic development in local communities and enhance the availability of capital for small business and agricultural loans.
Another chief finding of the report found that FHLBs charge unjustified haircuts for advances on small business and agricultural loans, in some instances as much as 80 percent. With a maximum haircut of 80 percent, a community bank will only receive 20 cents on the dollar of the amount pledged to the Federal Home Loan Bank to support the advance. Many community bank officials interviewed by the GAO for the report expressed concerns with the size of these haircuts. Some also indicated that such charges were inconsistent with historical losses on small business and agricultural loans.
The GAO report further finds that from a mission standpoint the FHFA’s oversight of the alternative collateral policies and practice has been limited. FHFA does not require FHLBs to identify and address the small business and agricultural needs within their regions as part of their strategic plans. Additionally, FHLBs currently have no requirement to contribute funding to support economic development efforts, while the similarly structured Affordable Housing Program run by each FHLB does. The Federal Home Loan Bank of Pittsburgh, however, has operated a successful economic development program, known as Banking on Business, for 10 years.
