1). In addition, nondepository CDFIs are not supervised by a prudential  federal or state regulator unlike other FHLBank members. Stock purchases. Financial condition requirements. Stock-purchase requirements. (We discuss these and other changes later in this report.) As of December 31, 2014, 30 of the  522 nondepository CDFIs were FHLBank members, and 6 of the 12  FHLBanks had membership rates of less than 5 percent for the  nondepository CDFIs in their districts. (This  is also sometimes the case for other nondepository members such as  insurance companies.) Collateral Requirements for Nondepository CDFIs Are Comparable to Those for Higher-Risk Institutions

The collateral requirements—specifically, the pledge method and  haircuts—applicable to nondepository CDFIs seeking advances are  comparable to those generally imposed on depository members  categorized as higher risk and, in some cases, to those imposed on  insurance companies. Lack of Eligible Collateral Viewed as Primary Challenge to Obtaining Advances and Steep Haircuts Viewed as Disincentives

Officials from most of the nondepository CDFIs we interviewed cited  access to low interest-rate advances from the FHLBanks as the primary  benefit of membership, and some FHLBanks and nondepository CDFIs  officials cited collateral requirements as challenges or disincentives to  obtaining advances. For example, officials from FHLBank-Chicago stated that most  nondepository CDFIs possessed assets, such as small business  loans, that did not qualify based on statute and regulation as eligible  collateral. Less Than Half of Nondepository CDFI Members Have Borrowed from FHLBanks

From October 2010 to September 2014, less than half of the  nondepository CDFI members obtained advances from the FHLBanks. However, two  FHLBanks provided 57 advances to four nondepository CDFIs that  accounted for almost 98 percent of the total advance amount. Efforts to Facilitate Nondepository CDFI Participation in the FHLBank System Include Education and Outreach

FHFA and the FHLBanks have undertaken several efforts to help educate  nondepository CDFIs about and promote membership in the FHLBank  System. FHFA officials  told us that they have continued to encourage the FHLBanks to facilitate  broader nondepository CDFI membership and access to advances. Agency and Third Party Comments and Our Evaluation

We provided a draft of this report to FHFA and the 12 FHLBanks for their  review and comment. FHFA and four FHLBanks (Chicago, Cincinnati,  Indianapolis, and Topeka) provided technical comments, which we  incorporated as appropriate. Appendix I: Objective, Scope, and Methodology

The objectives of this report were to discuss (1) how nondepository  community development financial institutions (CDFI) differ from other  members of the Federal Home Loan Bank (FHLBank) System, in  particular depository members; (2) the membership and collateral  requirements for nondepository CDFIs and challenges posed by these  requirements; and (3) Federal Housing Finance Agency (FHFA) oversight  of FHLBanks in relation to nondepository CDFIs and efforts by FHFA and  FHLBanks to increase participation of nondepository CDFIs in the  FHLBank System. To describe differences between nondepository CDFIs and other  members of the FHLBank System, we reviewed relevant sections of the  Housing and Economic Recovery Act of 2008 (HERA) and FHFA’s final  rule on nondepository CDFI membership in the FHLBank System. To develop the purposive, nonrandom sample of 10 nondepository  FHLBank member CDFIs to interview, we selected a nondepository CDFI  from each of the 10 FHLBanks that had a nondepository CDFI member  as of March 31, 2014 (the most recent data available when we began our  work and selected members to interview). We also selected a purposive, nonrandom  sample of 12 nondepository CDFIs that were not members of the  FHLBank System, one from each of the 12 FHLBank districts.
Why GAO Did This Study

The Housing and Economic Recovery Act of 2008 (HERA) made nondepository CDFIs eligible for membership in the FHLBank System. The System includes 12 regional FHLBanks that make loans, known as advances, to their members at favorable rates. GAO was asked to review the FHLBanks' implementation of HERA provisions relating to nondepository CDFIs. Among other things, this report discusses (1) challenges posed by membership and collateral requirements for nondepository CDFIs, and (2) FHFA and FHLBank efforts to facilitate broader nondepository CDFI participation in the System.
GAO analyzed data on membership rates as of December 2014 and advances obtained as of September 2014; reviewed requirements for gaining membership and obtaining advances; and interviewed FHLBank and FHFA officials and a sample of nondepository CDFIs based on selected criteria, including geography and asset size. Specifically, GAO interviewed 10 nondepository CDFIs that were members (one from each FHLBank district with a nondepository CDFI member when GAO began work) and 12 that were not members (one from each of the 12 districts).
GAO makes no recommendations in this report. GAO provided a draft of this report to FHFA and the 12 FHLBanks for comment. FHFA and four FHLBanks provided technical comments that were incorporated into the report as appropriate.

What GAO Found

Collateral requirements rather than membership requirements discouraged some nondepository community development financial institutions (CDFI)—loan or venture capital funds—from seeking membership in the Federal Home Loan Bank (FHLBank) System. CDFIs are financial institutions that provide credit and financial services to underserved communities. Less than 6 percent of nondepository CDFIs (30 of 522) were members of the System as of December 2014 (see figure). Requirements for membership (such as stock purchase amounts) can vary where regulation gives FHLBanks discretion, but nondepository CDFIs GAO interviewed generally stated these requirements did not present a challenge. In addition, most FHLBanks imposed collateral requirements on nondepository CDFIs—such as haircuts (discounts on the value of collateral)—comparable with those for depository members categorized as higher risk. (This was sometimes also the case for other nondepository members such as insurance companies.) FHLBank officials stated nondepository CDFIs have different risks compared with depository members (for example, nondepository CDFIs are not supervised by a prudential federal or state regulator as are other FHLBank members). To address these risks, they imposed more restrictive requirements. Some of the nondepository CDFIs GAO interviewed cited limited availability of eligible collateral and steep haircuts as challenges for obtaining advances and therefore a disincentive to seeking membership. Less than half of the nondepository CDFIs that were members as of September 2014 had borrowed from the FHLBanks; the cumulative advances from October 2010 to September 2014 totaled about $307 million (less than 1 percent of the total advances outstanding as of December 2014). Two FHLBanks made the majority of the advances.
The Federal Housing Finance Agency (FHFA), which oversees the System, and FHLBanks have facilitated efforts to broaden nondepository CDFI participation in the System by educating about and promoting membership to nondepository CDFIs. For example, FHFA officials told us that they encouraged the FHLBanks to hold a conference to discuss nondepository CDFI membership. Officials from 10 FHLBanks also stated that they had solicited applications from CDFIs. In late 2014, several FHLBanks amended stock purchase and collateral requirements to better accommodate nondepository CDFI membership and access to advances.