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Financial Services Law Insights and Observations

FHFA allows PPP loans as collateral for FHLB advances

Federal Issues Agency Rule-Making & Guidance FHFA SBA CARES Act FHLB Small Business Lending Covid-19

Federal Issues

On April 23, the Federal Housing Finance Agency (FHFA) announced that Federal Home Loan Banks (FHLB) will begin to accept Small Business Administration (SBA) Paycheck Protection Program (PPP) loans as collateral for advances to provide liquidity to community banks and other small lenders. FHFA issued a letter to FHLBs advising that banks may accept PPP loans from members subject to certain conditions including: (i) CAMELS rating must be at least a three, or credit rating in the top 60 percent; (ii) members downgraded after pledging PPP loans as collateral will have additional conditions placed on the collateral; and (iii) if the member does not replace PPP loans after downgrade with alternate eligible collateral, the FHLB will take possession of the collateral and impose haircuts based on member rating. The letter also sets out additional conditions regarding discounts, caps and limits. Among these conditions: (i) FHLBs must have at least a 10 percent collateral discount on 100 percent or less of unpaid principal balance (UPB); (ii) PPP collateral is capped at 20 percent of a member’s “lendable pledged collateral”; and (iii) a member may not pledge PPP loans for more than $5 billion of lendable collateral.