NAIC Recommended Provisions Eyed: Federal Home Loan Bank Law Will Affect Insurers’ Approach To Liquidity

by Matthew Lerner

The New York State Senate has before it an opportunity to strengthen and streamline laws governing how insurers in the region approach liquidity and other financial issues with the aid of the Federal Home Loan Bank of New York.
The Federal Home Loan Bank of New York is a part of a system of 11 regional Federal Home Loan Banks created by an act of Congress as a government sponsored enterprise to support mortgage lending, low-income housing development, and community investment after the Great Depression. Federal Home Loan Banks are supervised by the Federal Housing Finance Agency.
Each Federal Home Loan Bank, like the Federal Home Loan Bank of New York, is a separate, government-chartered, member-owned cooperative. The members own stock in the Bank, which Congress enabled to provide low-cost wholesale funding to members which, in turn, could extend affordable credit and invest in their communities.
New York State Senate Bill 6827 pertaining to the Federal Home Loan Bank of New York Proposal to Amend New York Insurance Company Insolvency Laws would enhance the Bank’s ability to service its member companies and institutions while also furthering the bank’s mission to support mortgage lending, low-income housing development and community investment, and to serve as a liquidity source for the region’s insurers.
The bill, having passed the state assembly unanimously and then the State Senate Insurance committee by a vote of 10 to 0 on May 22, is now on the floor of the state Senate for consideration.
In the last 10 years, the Federal Home Loan Bank of New York has awarded more than $208 million in subsidies to more than 290 affordable housing projects in New York communities.
The proposed changes in the Senate bill would allow the Federal Home Loan Bank of New York greater flexibility to extend resources to insurance company members, including such industry mainstays as Metropolitan Life Insurance Co., New York Life Insurance Company, and Prudential Life Insurance, to name just a few.
The bank has also acted as an important source
of liquidity for insurers, particularly in the wake of the 2008 financial crises. In 2007, the Federal Home Loan Bank of New York had lent $4.6 billion to insurance companies. By 2008, advances to insurance companies more than quadrupled to $19.1 billion, and in 2009, advances to insurance companies stood at $19.2 billion.
Specifically, the proposed legislation would amend New York’s insurance company insolvency statutory provisions with respect to “stays” and “voidable transfers” with regard to the Federal Home Loan Bank of New exclusively.

The proposed amendments would:
– Prevent the receiver from attempting to apply stay and voidable preference authority to the collateral pledged to the FHLBNY in a situation of an insurance company’s insolvency.
These changes would only apply to members of the Bank and to collateral pledged in the ordinary course of business by member insurance companies to the Federal Home Loan Bank of New York and would not prevent the receiver from imposing stays or voiding transfers when fraud or bad conduct is involved.
– Establish an orderly process codified in law for the Federal Home Loan Bank of New York to work with the receiver to help the troubled insurance company.
The proposed legislation requires that the Federal Home Loan Bank of New York act as a resource and assist the receiver with either an orderly liquidation or a rehabilitation of the insurance company, including by providing available options for the insurance company members to renew or restructure advances and the possible redemption or repurchase of Federal Home Loan Bank of New York stock. In the instance of a potential insolvency, the Federal Home Loan Bank is the only institution willing and able to provide liquidity to the troubled insurance company.
These proposed changes would help bring clarity regarding the Federal Home Loan Bank of New York’s obligations under the law in the event of an insolvency, create parity with federal law covering banks and credit unions, and lower the collateralrequirements of the Federal Home Loan Bank of New York for those New York domiciled insurance companies which are members of the Bank.
Even more importantly, Senate Bill 6827, which contains all of the specific provisions recommended by the National Association of Insurance Commissioners, would codify in law the role that the Federal Home Loan Bank of New York would play to assist the receiver in achieving the best possible outcome for any troubled insurance company.
The legislation would also improve communication and coordination between the Federal Home Loan Bank of New York and the New York Department of Financial services, the state agency charged with regulating insurers. The bill provides for a coordinated dialogue between the Department of Financial and the Federal Home Loan Bank of New York in matters involving needed liquidity for troubled insurance companies.
Member insurance companies of the Federal Home Loan Bank of New York are made up of only domiciled insurance companies in New Jersey, New York, Puerto Rico and the U.S. Virgin Islands, and only those insurance companies that meet the specific financial eligibility requirements of the Federal Home Loan Banks. The proposed legislation is narrow in its scope and would only apply to those domiciled insurance companies which are members of the Federal Home Loan Bank of New York cooperative.
Ultimately, Insurance companies that are members of the Federal Home Loan Bank of New York will be able to borrow on more favorable terms by pledging less collateral to the Bank. The types of collateral that may be used for advances could also be expanded. The bill could also benefit a member company in receivership as the proposed legislation requires that the Federal Home Loan Bank of New York work with the receiver to help resolve the issue that has caused the financial trouble.
The proposed legislation has been called “critical to the relationship between the Federal Home Loan Bank of New York and its member insurance companies,” by New York State Senator Neil D. Breslin, Chairman of Committees on Ethics and Internal Governance and Insurance.