2012 Member News
Changes to the Seattle Bank’s Collateral Program
February 3, 2012
Dear Seattle Bank Members,
This Member News announces important changes to the Federal Home Loan Bank of Seattle’s (Seattle Bank’s) collateral program. We are making these changes to help our members optimize their borrowing capacity with the Seattle Bank, to reinforce their ready access to liquidity and funding, and to ensure the continued adequacy of collateral pledged in support of Seattle Bank advances.
The changes include:
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Updated borrowing capacity rates (BCRs) for a number of collateral types
- Adoption of revised eligibility criteria for loan collateral
- Implementation of changes to the Seattle Bank’s collateral review processes and procedures
Updated Borrowing Capacity Rates
In May 2011, the Seattle Bank recalibrated the BCRs it applies to the various categories of whole loans pledged as collateral, to adjust for differences between the market values and the unpaid principal balances of the loans. We also communicated that the bank would periodically review those market-value adjustments and recalibrate the BCRs, as needed. Based on its recent assessment of market value changes and other collateral risk factors, the Seattle Bank will implement new BCRs, which will be effective and reflected in the bank’s Online Services application on February 17, 2012.
With this update, overall collateral borrowing capacity has increased approximately four percent. Please refer to the attached listing of newly calculated BCRs for details.
Revised Loan Collateral Eligibility Criteria
Members may pledge various types of whole loans as collateral that comply the Seattle Bank’s collateral eligibility criteria. For 2012, the Seattle Bank has revised some of its loan collateral eligibility criteria and is also implementing qualitative collateral factors. These qualitative factors may result in partial eligibility for previously ineligible loan collateral, or may apply additional discounts to loans with underwriting or documentation weaknesses.
Key changes to eligibility criteria, effective March 31, 2012, include:
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Implementation of a minimum debt-service coverage ratio (DSCR) requirement for multifamily loan collateral pledged under the Blanket collateral arrangement
- Implementation of delinquency criteria for U.S. Government-guaranteed loans
Key qualitative factors, effective with your next collateral review, include:
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Title policy requirements. Previously an eligibility criterion, title policy requirements will now be considered a qualitative factor, with discounts applied to loans with less than full title policies.
- Payment histories. The Seattle Bank will require reviews of 24-month payment histories and will discount loans with chronic delinquencies.
- Second liens. Consistent with current practice, second liens on commercial and multifamily real estate loans are eligible collateral if the member also pledges the loan secured by the first lien to the Seattle Bank. However, a discount will be applied to the borrowing capacity of the second-lien loan.
- Delinquent taxes or lack of hazard insurance or required flood insurance.
- Inadequate collateral appraisals or appropriate evidence of value.
- Outdated operating statements on income-producing properties with a current loan balance greater than $500,000.
Changes to Collateral Review Processes and Procedures
The Seattle Bank is required by regulation and policy to ensure advances are fully secured by eligible collateral at all times. The bank conducts collateral verification reviews of all members pledging collateral under the Blanket and Segregated/Listing collateral arrangements. Reviews are conducted by Seattle Bank staff, authorized contractors, or both. For 2012, the Seattle Bank is changing how it determines the frequency and scope of collateral reviews and will also begin applying assumed exception rates to pledged loan collateral that has not yet been verified through a standard collateral review.
Frequency of Reviews
Typically, a collateral review will be completed for each member every one to three years. The bank will determine the frequency and priority of reviews based on its assessment of risk factors. The Seattle Bank will review its prioritization of members for annual and three-year reviews on a quarterly basis to consider any significant changes that might justify conducting a collateral review earlier than originally anticipated.
The annual risk-based selection criteria include:
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Outstanding indebtedness (advances and Letters of Credit) that exceed $100 million
- Borrowing capacity of pledged collateral greater than $500 million
- Credit line greater than $500 million
- Member financial condition
Members on a three-year cycle will be prioritized for review in the next 12 months based on criteria such as:
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Member has not been reviewed in the prior three years.
- Member has been identified as eligible to move off of the Physical Possession collateral arrangement, but has not been reviewed in the last three years.
- Member recently completed a merger or acquisition with another institution.
- A new member has been approved to pledge loan collateral under the Blanket or Segregated/Listing collateral arrangements.
- Member relies upon assumed exception rates for some or all of the pledged loan collateral.
Scope of Reviews
The Seattle Bank will conduct collateral reviews onsite at the member institution. Occasionally, the bank may approve a member request for an offsite review between review cycles for a specific pledged collateral class.
The scope of a collateral review will consist of verifying compliance with the Seattle Bank’s eligibility and qualitative criteria for the specific class of collateral. The scope will also include a review of the member’s policies and procedures, specifically those dealing with underwriting and pledging of collateral to the Seattle Bank. The Seattle Bank’s review of member policies and procedures will be performed prior to the onsite review and will help to determine the scope of the onsite review.
Assumed Exception Rates
Any loan collateral that is pledged but has not yet been reviewed will be subject to an assumed exception rate applicable to the specific class of collateral. The assumed exception rate will remain in effect until the Seattle Bank has performed its collateral review. Members may request an offsite review of specific collateral type(s) subject to an assumed exception rate in lieu of a full collateral review conducted at the member institution.
Considering All of Your Collateral Options
The Seattle Bank accepts more than single-family and multifamily residential and commercial real estate loans as collateral for advances. Home equity conversion mortgages, for example, are acceptable collateral, but may not be among the types of collateral you currently pledge. We also encourage all eligible community financial institutions (CFIs)—those with less than $1.040 billion of assets—to pledge CFI collateral. CFI collateral includes small business loans, small farm loans, and small agri-business loans. By regularly certifying as to the eligible amount of these collateral types, you can expand your pool of collateral readily available to support your Seattle Bank advances, whenever you may need them.
Learn More
We appreciate that you may have questions regarding these changes, and we are pleased to provide the following resources for you to learn more. You can access the resources below on the Seattle Bank’s website: www.fhlbsea.com.
We also invite you to contact your Seattle Bank Relationship Manager or Collateral Department with any questions you have regarding these changes.
Seattle Bank Collateral Department: 800.973.6223 (toll free) / 206.340.2300 (Local / Seattle)
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