Credit Union Exam Solutions Presents With Flying Colors

Mark Treichel: Hey, everyone.

This is Mark Trakel with another
episode of With Flying Colors.

I'm excited to be here today
with Ryan Donovan, the CEO of the

Council of Federal Home Loan Banks.

Ryan, how you doing this morning?

Ryan Donovan: Hey.

I'm doing great, Mark.

Thanks for having me.

Mark Treichel: You got it.

Yeah, we've had you on a couple times.

We go back to the CUNA days before
America's Credit Unions when

you were at the, the top of the
organization over there, and I

always enjoy chatting with you.

But I thought it'd be good to just say,
hey, what's going on with the Federal

Home Loan Banks, particularly since last
week, the day before the Bank Act turned

94, they had the first oversight hearing
in 15 years and you were able to get the

good thoughts out of the organization.

So how did that go?

Ryan Donovan: Listen I
thought it went great.

When I was at CUNA, I prepared
probably 60 different people to

testify before Congress over 15 years,
and it is certainly a much different

experience when you're the, when
you're the person behind the table.

But we had the opportunity, as you
said, it was Federal Home Loan Bank

Week, 94th anniversary of the Federal
Home Loan Bank Act, and the House

Financial Services Committee gave us
the opportunity to participate in an

oversight hearing and really tell the
story about the home loan banks and

how we're fulfilling our mission today.

And it's a great story to tell.

We've got 11 banks that are serving
6,300 members, credit unions,

banks, insurance companies, CDFIs.

We're providing liqui- liquidity to them
so that they can serve their members,

customers, and communities, and we're
supporting housing affordability.

I- We're not a well-known system, right?

You mentioned it was the first
oversight hearing in 15 years.

So we had a lot of education to do with
the members on the subcommittee and

that's where we started in the testimony.

Mark Treichel: And you
triggered something.

So y- all the different players that you
can have belong to the Federal Home Loan

Banks, I think last time we chatted, I
went back and looked at some of the notes,

cre- the growth of credit unions was
bigger than some of the other players.

How has that played
out over the last year?

Credit unions still growing robustly?

Ryan Donovan: Yeah it's continuing.

I think that credit union
membership has grown.

We've got a substantial portion
of the credit union assets.

If you look at it by asset size
there's a substantial portion.

If you look about it member size,
there's still opportunity to

grow among the smaller members.

But I think across the country and
all the various districts credit

union membership is re- is robust.

Mark Treichel: That's great.

That's good to hear.

A- and, when I'm talking to credit
unions it's always a tool in their tool-

generally a toolbox that, especially
the bigger ones, just like you say.

So it's good to see everybody's embraced
it for all it can do for credit unions.

Ab-

Ryan Donovan: absolutely.

Mark Treichel: If I, if my research
was right GAO came out in December

and said that the, the Federal Home
Loan Banks are a reliable funding

source for institutions of all sizes.

Getting an independent scorekeeper
like that to give you the Good

Housekeeping Seal of Approval
what did that do for business?

Ryan Donovan: I told I, I told
the bank presidents and our system

leaders, this was actually the second
report GAO's done in recent years.

I said, "No one in the history of GAO
reports has ever said, 'Man, I cannot

wait for that GAO report to come out.'"

We might be the first.

Because GAO does call balls and strikes.

They're a fair arbiter.

And, again, we hadn't been telling our
story until the last four or five years.

But when we told it to GAO and they
validated it what they came back with

was a lot of statements that , we
would use in our advocacy material and

now we can say, "According to GAO."

And they did talk about the the
role we play as a reliable liquidity

provider, how we help increase lending
and particularly mortgage lending the

role that we play in times of stress.

And we also had a lot of that validated
by the Urban Institute that did three

reports on us late last year coming
to many of the same conclusions.

So when you've got multiple groups
and multiple sets of researchers

asking similar questions and getting
the same answer I think there's a l-

there's a lot of validation in that.

Mark Treichel: Yeah.

That's amazing.

Yeah.

Y- you get, getting a good GAO report,

Ryan Donovan: Yeah

… Mark Treichel: is rare.

Ryan Donovan: No, absolutely.

And I think that we're in a position right
now where we're in, we're l- continuing

to launch a research pipeline to ask
interesting questions about the system.

So hopefully, i- in the months
and years ahead, we'll continue to

get that type of very positive and
informative research and analysis.

Mark Treichel: Yeah, that's exciting.

That's exciting.

So one of the stats I wrote down
here it's gonna, it's gonna mean more

to you when I say it than the, the
cryptic way I wrote it down here, but

so there's 11 Federal Home Loan Banks.

I have a note here about
73,000 families being helped.

Does that ring any bells
from the testimony?

Just different projects where
the banks are particularly…

'Cause credit unions have
anecdotal stories, right?

When they go to- Yeah … Congress and
they say, "We have this small little

credit union we have and they got turned
down by banks and this is how we're

able to help them start their business."

Ryan Donovan: Yeah.

And the- A-

Mark Treichel: anecdotal stories
of Federal Home Loan Bank helping

people housing-wise or however.

Ryan Donovan: Yeah.

No I, the, the 73,000 is probably a,
a y- units affordable housing units-

Okay … supported in a year or
perhaps even just by a particular bank.

One- Yeah, it was

Mark Treichel: last year.

That's right.

Yep.

Ryan Donovan: Yeah.

One of the things that we are required by
law to do is set aside 10% of our previous

year's net earnings and put it into what's
called the Affordable Housing Program.

It's a government program
that's run by the banks it's

got a very descriptive name.

It does, it's exactly what it says it is.

Afford- it helps affordable housing.

For the last couple of years, the
banks have contributed, 50% more

than what's required by law to,
broadly speaking, affordable housing

community development projects.

It could be more money into the government
AHP program or to voluntary programs.

Now here's the, here's where I'm getting
to, to some numbers for you, Mark.

Each of the last two years, that has
resulted in more than $1 billion each

year going to affordable housing.

Now, before we made that commitment
to do the extra 50%, we were already

the nation's largest source of private
capital support for affordable housing.

And now we're doing even more clearly in
recognition of the severe crisis we have.

But that, that gives us the impact to
to support projects across the country.

And when we work with our members, with
credit unions and other members at a local

level, and our affordable housing advisory
councils, we can target that support

where it's needed the most or will have
the most impact in each of the districts.

So we're real proud of that effort and
our ability to do that extra contribution.

Mark Treichel: And so the voluntary
program versus the, the AHP, I think

in your testimony you may have pointed
out some of the challenges of the AHP.

Some-- Maybe there's some regulatory
pieces that could be enhanced.

Ryan Donovan: Yeah.

The AHP is a government program.

It's created by Congress.

It's regulated by FHFA.

It's very well-intentioned, but as
with many similar efforts, what starts

in statute ends up in regulation,
ends up in regulatory burden on

the folks that have to- Right

ultimately implement it.

AHP is touched by 13 different
regulations from FHFA, six

different advisory bulletins.

What does this mean?

It means it's complicated to apply
for, which is problematic because,

you have to you have to, qualify
and, be the one-- among the best

applicants to get the money.

So that's complicated.

We-- we're often the last part
of a large capital stack we're a

s- we're a small part of it but
critical to getting jobs done.

But we're all often, In that capital
stack, you'll have other sources of

federal or state funding that has
its own due diligence requirements.

So we're adding on another
layer of due diligence there.

It could be a lot simpler.

And to FHFA's credit, and under Director
Pulte's leadership, the agency is taking

steps to overhaul the AHP program.

That will make it- A little bit
easier, I think, to apply for, win, be

awarded, easier for the banks to get
the money out the door and provi- and

perform the oversight than it is today.

What's cool about the voluntary programs
is banks create them based on the feedback

they get from their members and their
affordable housing advisory councils.

They can put them into place
relatively quickly and get the

money out the door immediately.

So one of the things, and you may
have an appreciation for this, when

we talk about the funding, sometimes
we get tripped up because with AHP,

it's the amount that we've committed
that will go out the door someday-

Mark Treichel: Right

Ryan Donovan: after all the boxes are
checked, versus with voluntary programs,

it's the amount that we contributed, which
is money that's been out the door that's

having an impact in local communities.

That flexibility I think is really
critical, and one of the points that

I made in my testimony is that if
Congress is gonna talk about or think

about adjusting that 10% statutory
floor you can't crowd out the voluntary

programs because those are the ones
that are having a localized impact.

So it's, I know that was
a lot, but- No, that's,

That's explanatory … understanding
the distinction between those

programs and what we're trying to
accomplish, I think is really critical.

Mark Treichel: A- and am I interpreting
it right, so the 10% is mandated, that

has to go through- Yeah … the AHP?

Is- That's right

And then anything on top of that is
the voluntary, but also- And y- … the

one that's more flexible that you
can get- Right … moving quicker.

Ryan Donovan: Yeah.

And voluntary could go through
the AHP, but it doesn't have to.

And what we've seen is, over the
last three or four years, the banks

have created more than three dozen
different programs again, based

on their needs in, in local areas.

Mark Treichel: I know that I, I've got
some, some friends and relatives in

the rental property business, and I
just- … remember having discussions with

them, and I think it's still the case.

There's more houses and homes
going out of being available than

there are being built new, right?

So they're the places- Yeah … that are
dilapidated and need to be torn down.

Is that still, is that still-
Yeah … the battle we're fighting?

Ryan Donovan: Yeah.

I think it is in many areas.

And, that's why, one of the things that
voluntary program money can be used for

is rehabilitation of of those units.

And, again, another example of why
it's critical to have some flexibility.

Mark Treichel: Yeah.

Makes sense.

That makes sense.

I noticed a reference to the Federal Home
Loan Bank interoperat- interoperability.

Interoperability.

Ryan Donovan: Interopera-

Mark Treichel: boy, try and
say that without enough coffee.

Ryan Donovan: What I learned was at some
of these hearings, there are these games

on, what word is gonna be used- Right

or how many times will it be said.

For, for us, it was countercyc-
cyclical and interoperability.

Hard words to say, but things that
are really important to what we do.

You,

Mark Treichel: you got it down.

I could tell you practiced
that a lot last week.

So that committee was it Jefferson
and Bauman from both sides- Yeah

of the aisle could set that up.

How…

Has that improved things?

Ryan Donovan: Yeah.

R- this work really comes out of the
lessons learned from March 2023, right?

Where we had the Silicon bag
Silicon Valley bank failure,

Signature Bank failure.

And I think there were a number of lessons
learned, but for the Fed and the home loan

bank system, it was really a lesson of,
hey, let's-- we're already coordinating

but we need to do a little bit more.

So for the home loan banks, what we've
done is we've encouraged each of the

banks has encouraged their members to
develop a relationship with the discount

window and test those lines periodically.

That's a, a good best practice.

We've also had discussions with the Fed
on a number of work streams improving

communication, making sure that the
personnel in critical positions at

the home loan bank and at the Fed
know how to get the, get ahold of

each other, at 6:00 on a Friday.

We've been working with them on, master
subordination agreements so that in a

time of crisis we can pull a document
off the shelf and move collateral faster.

W- we've also proposed, the home
loan banks have proposed what if

the Fed accepted a letter of credit
from the home loan bank on behalf

of one of our members in stress?

We can do that very quickly,
we can do that 24/7.

Take that letter of credit, it will
buy some time, maybe bridge from,

the market closing on a Friday to
market opening on Monday so that it

gives the regulators a little bit
more time to to work things out.

Again, all of this is making sure
that we've got the right tools in

the toolbox in times of stress,
and we know how to use them.

And the good news is that
the conversations with the

Fed have been very positive.

Vice Chair Jefferson and Vice
Chair Bowman have been integral,

I think, into that leadership.

But the, the thing that I have
learned about both the home loan

bank system and the Federal Reserve
system in the last several years is

that neither are a monolith, right?

So there are multiple levels and
multiple groups at the Fed, and there

are the, the same thing happens in
the home loan bank system, maybe

to a a little different extent.

But it's really important that we're
all pulling in the same direction,

and I think we're starting to do that.

Mark Treichel: And, two things
that resonate, testing the system

so that if something goes wrong
you're ready to rock and roll and

you know that the system works.

But as you're talking about, making
the contacts and all that, all I could

think about was, NCUA had buyouts
and lost about- 27% of their staff.

Federal Home Loan Banks have turnover,
the Fed has turnover- … FDIC.

And you think about those call
trees that you have where you pull

out all the people's names- you
try and call someone at NCUA right

now, 27% of them are gone, right?

So you better know who it is that
you're supposed to call in the event

of a Friday emergency for liquidity

Ryan Donovan: Yeah, there there's no
question about that, that, you wanna make

sure that, when the alarm bells ring and,
the, the trucks are ahead of the fire.

Mark Treichel: Yeah.

Yep, that's for sure.

Ryan Donovan: So o- one, one thing, Mark,
if I could just go a little bit further

on the discount window and, o- one of
the things that we also have, have tried

to make clear with our members and in
our testimony was that, borrowing from

the Fed and borrowing from the Home
Loan Bank i- very different, right?

The Fed's got very limited
lending authority, right?

They lend overnight.

There's limits on the number of
consecutive days and the number

of days within, a, a 100 and day,
120-day period that that a depository

can, can borrow from the Fed.

A- whereas the Home Loan Bank is
a, we're a daily liquidity provider

to support the needs of the credit
union to make sure that they can

continue to serve their members.

And for us, where our nexus to housing
is, it's really in the collateral that

credit unions bring to to the system.

So it's mortgage-related collateral,
either mortgages that they've

originated or bought or mortgage-backed
securities that they've invested in.

That's our nexus to
colla- nexus to housing.

And our, and it gives us the
ability to be a reliable lender

to our members every day.

Mark Treichel: Yeah, it makes total sense.

And again, going back to the
Signature and SVB and how you were

able to help on a Friday to prevent,
you know- Contagion … contagion.

Yeah, exactly.

Contagion.

And then a note from the testimony,
I believe regulators treating

advances like ordinary wholesale
funding a- how could things…

things are going well, but how
could things get even better in that

Ryan Donovan: regard?

So this, what this really gets at is- The
Home Loan Bank System has demonstrated,

certainly in the last several decades,
but I hope, but probably throughout its

history, that we are reliable, affordable
quick and safe form of liquidity.

That you, that a member can count
on the Home Loan Bank System

to get the liquidity they need.

So what we're starting to talk to
the regulators about, we've had a

conversation at F- FDIC we'll have some
conversations with the other regulators,

including the the new incoming chair
of NCUA is when you're looking at the

liquidity coverage ratio and other
other measures and y- you're taking into

consideration home loan bank advances
that those should be treated as as,

as core liquidity for those purposes.

Just reflective of the, the
reliability that we've seen

throughout the history of the system.

Mark Treichel: Sure.

No, that makes sense.

And you mentioned the
incoming NCUA chairman.

Rumor has it that's gonna
happen next Monday or Tuesday.

The episode we're recording will come
out the following Monday or Tuesday.

Yeah.

Again, that's rumor.

I'm not sure if it's- Which rumor?

Yeah … I'm not sure if it's a good
rumor or a bad rumor, but it is rumor.

Ryan Donovan: I've heard the same and,
I, I- there's reason to have confidence,

Mark Treichel: there is reason
there's reason to have confidence.

That's right.

And and so then what happens
then, it's August, right?

The, the NCUA doesn't have a
board meeting every, every month.

They used to just not have them
in August, but they definitely

don't have them in August.

But that's gonna gear up you and and
your crew getting over there to meet

the new chair and all that, and making
sure they understand all the good

things that that the FLBAs do, right?

Ryan Donovan: Yep.

No, we're we're, eager to to connect.

We had as, as part of our advocacy,
we try to go to the top of the house

at all of the member regulators and
and certainly getting to know Mr.

Cruz as he as he takes office
will will be important.

Mark Treichel: Yep very much yeah,
he's gonna be drink- he's a smart

guy, you can tell that, and he
knows a lot about the, the industry.

But it's g- they got their budget coming
up and all that, so he's … It's good

they got him in, hopefully in August
so he can get up to speed before all

that hits him, Absolutely … with
drinking water from a fire hose, let's

see, Chicago, Boston, and Cincinnati
all run subsidized programs for CDFIs.

How does that … credit unions can take
advantage of that as well, I presume.

Ryan Donovan: Yeah, absolutely.

The CDFI membership is one of the, one of
the smaller segments of our membership.

Setting, set aside the
depository CDFIs, right?

Yep.

When we think about CDFIs as a
membership class, we're really thinking

about the non-depository CDFIs.

And, and- Yeah … they face some
obstacles that other members may not face.

And one of them is the fact that
their, the non-depositories don't

have a prudential regulator, and
the collateral that they bring,

particularly the LIHTC collateral
that they bring is hard to value.

And it's a shame that it's hard
to value because LIHTC collateral

is pretty reliable collateral
because no one sells it, right?

So it's … The issue
is it's hard to value.

They … So as a result, the haircuts that
are often applied to CDFIs are a little

bit steeper than to to other members,
which is why these programs are important

to try to provide a m- more access
on a more parity basis for for CDFIs.

Mark Treichel: A- and LIHTC,
could you describe that?

Ryan Donovan: Yeah, low
income housing tax credit.

It's,

Mark Treichel: Okay

… Ryan Donovan: the provision of the of
the tax code that really incentivizes

investment into to- … affordable
housing in low in- low-income areas.

Mark Treichel: Got it.

Got it.

HR 7647,

Ryan Donovan: The MENSA Act

… Mark Treichel: yeah, so that would add
credit unions to the community financial-

Ryan Donovan: Oh, that, no, yeah, the,
the credit unions to the CFI definition.

Mark Treichel: Yeah.

Ryan Donovan: Listen, this is an area in
we're, we are required, by law to treat

all of our members pretty much the same.

This is an, a, an area where Congress
has created sort of an exception to that

for community financial institutions.

And when they did that they defined
a community financial institution as

a community bank under, I think at
the time it was a billion dollars.

What the, what the legislation would
do, I think, is it would add credit

unions to that to that definition.

Our view on these matters has
always been that is a, that's a

decision for Congress to make.

Absolutely.

And that, if they're gonna, make a change
y- they should also consider increasing

the threshold to, to 10 billion.

But ultimately we're gonna, we're gonna
follow whatever law that Congress allows.

The playbook

Mark Treichel: Congress
gives you is who you will

Ryan Donovan: serve.

Yeah.

Yeah.

I think it's not much different
than a credit union, right?

Yeah.

This is the really, the, the wonderful
thing that I've really enjoyed over

the last four years is that there
isn't much difference between a federal

home loan bank and a credit union.

Both federally chartered.

They operate with limited powers
limited field of membership, who

they can serve, what they can do.

The, Congress has really set up a box,
and the responsibility, I think, for

both is to how can you have the biggest
impact operating within that box, right?

Sure.

And that's what we try to do.

Mark Treichel: Yep.

No, that makes perfect sense.

Any other takeaways from the hearing
that, that you wanna highlight?

Ryan Donovan: I, I-- there
were several moments in the

hearing that stand out to me.

I had a, I think, a pretty positive
exchange with Representative Pressley from

Massachusetts, and it is-- it's, it stuck
in my head because of a statistic that

she shared, which was in her district,
which includes, many of the prestigious

universities in Boston, including MIT.

If you go just three miles away from MIT,
the life expec-expectancy drops 30 years.

Mark Treichel: Wow.

Ryan Donovan: And that just,
that blew me away in the hearing.

And her question really got to what
can we do to get CDFIs more in the

game and leveraging the home loan
bank membership to a greater extent.

We've explored a couple
of solutions to this.

You mentioned three three
programs that banks are running.

In the last administration, we
suggested using the CDFI Bond Guarantee

Fund to help guarantee advances
to C- to CDFIs as one solution.

They didn't take us up on that.

We'd like to work more closely with F-
FHFA to get better supervisory guidance on

LIHTC valuation, so we can do more there.

There-- the home loan banks are
committed to serving their CDFI

members to address issues like the
ones that were raised at the hearing.

But there are some things that
the government needs to do,

I think to facilitate that.

And that, and we work with the CDFI
community on that You know, the other

moment that that stands out really
has to do with the a class of our

membership that some people might
think why are they involved in this?"

The insurance companies.

And the, the hearing gave us the
opportunity to reinforce that,

listen, every member that's coming
to the Home Loan Bank for advances

is bringing with them housing related
assets, whether whole mortgages or

mortgage-backed securities that they
either originated or bought or invest in.

And and that's the nexus to collateral.

And for insurance companies, they're
some of the largest purchasers of whole

loans at MBS in, in the country, and
they help keep those markets liquid.

And that's important because that provides
scale, not just to the home loan banking

system, but also to, to those markets in
general which is helpful 'cause it, scale

helps bring the cost down for everybody.

So being able to reinforce that
was really critical as well.

That's great … no, it
was a great opportunity.

The, the joke at the end of the hearing
was, "We'll see you in 15 years."

I hope it's not that long.

We need to keep an understanding of
home loan banks front and center.

And I- that's why I appreciate
being on your podcast to, to elevate

this to credit unions' attention.

Mark Treichel: You got it.

Yeah, I always enjoy touching base
with you, see what's going on.

And as always, I you, I learned a
few things, and the timing is great

because, 'cause you just had to
cram for that big test last week.

That's right.

And, I

Ryan Donovan: got it all in
here, I just have to get it out

… Mark Treichel: yeah exactly.

Ryan, I wanna thank you.

If someone wants to reach out to
you, your organization, what's

the best way for them to do that?

Ryan Donovan: So both the council and
I are both very active on LinkedIn.

Council of Federal Home Loan Banks
and Ryan Donovan on LinkedIn.

And that's a great way
to get in touch with us.

That, that's probably
the, the easiest way.

You'll get all of the information
that we're putting out, and

it's a good way to connect.

Mark Treichel: Awesome.

All right.

Thanks so much, Ryan.

And listeners, watchers thanks
for listening or watching.

I hope you'll do the same again soon.

This is Mark Trakel signing
off with Flying Colors.