Collateral Eligibility Requirements UpdateAugust 31, 2020
The Federal Home Loan Bank of Cincinnati (FHLB) periodically reviews and updates its collateral eligibility requirements. Pursuant to such a review, the FHLB has recently made two changes, one of these stemming from the current COVID pandemic and one amending our historical stance of only accepting whole loans as collateral. Members are permitted to submit intra-quarter, month-end certifications to include these newly eligible loan types in your borrowing base. Please contact our Collateral Operations Department in advance if you intend to do so.
The FHLB has determined that certain lower risk loan participations should be allowed to support Advance activity and thus, may be allowed as eligible loan balances in collateral reporting (Certifications and Listings). On the first certification for each loan type you report that includes eligible participations, we ask that you separately report the total number and unpaid principal balance of participations included in eligible collateral. For members submitting loan level listings, we ask that you include your institution's participation interest percentage in the newly added field for this purpose. In order for a loan participation to be included in eligible collateral, the following criteria must be met.
- The Member must be the "Lead participant," meaning that it originated the loan and is responsible for Servicing the loan or contracting with a third party servicer.
- Monitoring the financial condition and performance of the borrower(s) or project to the extent required for any other loan of that type which is not a participation.
- The application of principal and interest is pro rata with other participants or the Member institution is first out on payments of principal.
- The Member must own over 50 percent of the outstanding loan balance over the life of the loan.
- The Member must carry an FHLB assigned credit rating of "4" or better (Any collateral shortfall resulting from a downgrade below that level will result in suspension of additional capacity, but not a requirement to cure the shortfall).
- The Member must be compliant with all terms and conditions of the participation agreement and participation certificate, if applicable.
- Loan payments are current (less than 30 days delinquent), even if a 1-4 family loan for which a 59 day delinquency is normally allowed.
- Minimum debt service coverage requirements for commercial real estate and multi-family loans must be met for the borrower's entire loan balance, including that owned by participants.
- Maximum loan to value ratio requirements must be calculated with the entire loan balance in the numerator, including that owned by participants.
- All other FHLB eligibility criteria are met.
Loans in Forbearance
The FHLB does not have collateral eligibility criteria related to formal loan modifications. The assumption we make is that in modifying a loan a Member first determines that the borrower is able to make payments under the modified terms. However in the midst of the current pandemic, some Members are suspending payment due dates without entering into formal loan modifications. [A formal modification for these purposes is an agreement executed by all parties to the original note (including standard notarization and witnessing requirements) and which identifies the note being modified and all changes to repayment terms]. Normally, the FHLB treats a loan that has not made payments in compliance with the original note as delinquent (even if the forbearance is informally agreed to by the financial institution), and thus ineligible to support FHLB borrowing capacity. In early June, the FHLB set out requirements for a Member to obtain borrowing capacity against such loans if a Member lists loan level details in collateral reporting and the loans are subject to a market valuation process. We are now extending this eligibility to certain loans reported to the Bank on Collateral Certifications. Beginning August 31, a separate line item will be included on Certifications that requires a Member to identify the unpaid principal balance of the unmodified loans in forbearance. These loans will support marginally lower FHLB borrowing capacity. The following additional requirements apply and unless these are met. Members should exclude the loans from eligibility.
- The loan must not have been delinquent in excess of normal delinquency restrictions (30 days for commercial mortgages and 60 days for 1-4 family loans) for non-COVID related reasons prior to start of the forbearance period.
- The total length of the forbearance period cannot exceed 6 months (initial plus any extensions).
- Member must have documentation of its communication to its customers of the existence and length of the forbearance arrangement, and possible repayment terms at the end of the forbearance period.
- The Member's forbearance program and/or individual forbearance arrangements must have been approved by an authorized staff person and have the Member's board's authorization to do so.
- The unpaid principal balance of otherwise eligible loans in forbearance cannot exceed 20% of the reported total of eligible loan balances.
Loans that have not been modified per the above definition of a modification and that do not meet all of the above requirements should be excluded on the line item of the Collateral Certification for loans with salability problems.
Additional information on these topics can be found in collateral reporting completion guidance located on our Members Only site. If you have any additional questions on the above requirements for the eligibility of loans in forbearance or loan participations, please contact our Collateral Operations team at (800) 828-4191, or at CollateralOperations@fhlbcin.com.