Last fall, the Federal Housing Finance Agency (FHFA) released its comprehensive 14-month review of the Federal Home Loan Bank (FHLBank) System. The report found that FHLBanks have inadequately addressed affordable housing and community development, goals that constitute half the system’s mission.

As a remedy, the FHFA made dozens of recommendations, such as better defining the mission statement, developing metrics for mission accountability, reassessing Targeted Community Lending Plans, and taking congressional action to increase net earning contributions to the Affordable Housing Program. The FHFA has already issued requests for information to push some of these recommendations toward implementation, but this process will take months or years, pushing down the road any recourse for the current affordable housing crisis.

For a more immediate response, FHLBanks can turn to mission-driven community development financial institutions (CDFIs), which also feature prominently in the FHFA’s recommendations. CDFIs are uniquely qualified to help more funding flow to low-income and low-wealth markets, making them natural partners to pilot new initiatives to support affordable housing and community development. 

Already, CDFIs are calling on FHLBanks to replicate the Community First Fund (CFF), a 10-year successful pilot program created by the FHLBank of Chicago that makes direct low-interest loans to CDFIs. By dedicating some of the previously announced financial commitment (PDF) to a CFF-like fund, FHLBanks can better achieve the FHFA’s recommendations for supporting affordable housing and community development in the short term.

The Community First Fund allows CDFIs to offer more flexible loans

From an outside perspective, the CFF is neither particularly revolutionary nor complicated. Capitalized with $50 million, the revolving loan fund makes direct low-interest, long-term recourse loans to CDFIs at the enterprise level. The FHLBank of Chicago saw the CFF as a work-around to obstacles CDFIs face in accessing the traditional wholesale advance window. CDFI borrowers could use CFF capital to make loans that were consistent with the FHLBanks’ public mission but wouldn’t easily qualify as acceptable pledge collateral, such as the following:

• predevelopment and construction loans for low-income housing tax credit and naturally occurring affordable housing projects
• subordinated second mortgage and purchase rehabilitation loans on single-family homes
• community service facilities projects like child care and health care centers
• flexible micro and small business and economic development loans
• neighborhood commercial developments
• any type of loan backed by collateral on tribal lands

The CFF demonstrated that the FHLBanks can manage revolving loan funds that make unsecured investments in CDFIs’ mission-critical activities and properly underwrite a small portfolio of enterprise loans.

Further, the CFF far exceeded risk management expectations. The FHLBank of Chicago partnered with Aeris, a CDFI-rating agency, to risk rate each of its borrower CDFIs and monitor ongoing compliance. The FHLBank anticipated the pilot program would experience some losses, so it established a loss reserve. But the CFF outperformed initial assumptions and suffered no losses.

FHLBanks can act now to meet their communities’ capital access needs

For CDFIs, the CFF is an efficient and proven way of effectively addressing community capital needs. CDFIs need flexible and reliable long-term investments at the enterprise level to strengthen and scale, just as traditional bank members need FHLBanks’ stable and reliable liquidity.

The Opportunity Finance Network and the CDFI-FHLB Working Group, a collaborative of 40 CDFI members in the FHLBank System, have cited the CFF as a successful demonstration of how the FHLBank can immediately support their affordable housing and community development mission and are advocating for its replication across the country. The FHLBank of Dallas has boldly introduced CANOPY, a $35 million loan fund for its CDFI members.

A consistent criticism of the FHLBank System is its timid, glacial response to community needs. Although the FHFA report makes dozens of recommendations to remedy the FHLBanks’ inaction, many of the recommendations will take considerable time to implement. But as the FHLBank of Dallas has shown, FHLBanks need not wait for Congress or FHFA rulemaking to demonstrate to their districts that they are serious about meeting capital access needs in their communities.