Background

		Overview of the FHLBank System

The FHLBank System, established in 1932 by the Federal Home Loan  Bank Act, is a group of government-sponsored enterprises comprising 12  regional, federally chartered banks. Each FHLBank is cooperatively  owned by its members––such as commercial and community banks,  thrifts, credit unions, and insurance companies. The FHLBanks represent  12 districts located in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des  Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle, and  Topeka. As of year-end 2014, over 7,300 financial institutions were  members of the FHLBank System. The number of members in individual  FHLBank districts ranged from 303 to 1,155, with the FHLBank of  Pittsburgh having the fewest members and Des Moines the most. In  2014, the 12 FHLBanks had approximately $914 billion in assets, with  asset size ranging from $35 billion (Seattle) to $138 billion (Atlanta).
FHLBank members included commercial banks (66 percent of all  members), credit unions (17 percent), thrifts (12 percent), insurance  companies (4 percent), and certified community development financial  institutions (CDFI) (less than 1 percent). Eligible financial institutions may  become members of the FHLBank, generally in the district where they  have their principal place of business. For example, if a financial  institution’s home office is in Hartford, Connecticut, the institution would  join the FHLBank of Boston. However, subsidiaries of financial  institutions’ holding companies may be members of the same or of a  different FHLBank, depending on where the subsidiary’s principal place of  business is located. Eligible financial institutions become members  through an application process and, once approved, purchase stock in  their regional FHLBank.
The FHLBank System issues debt securities in capital markets, generally  at relatively favorable rates made possible by the system’s status as a  government-sponsored enterprise. Buyers of FHLBank debt securities  represent the entire spectrum of domestic and international investors,  including commercial banks, central banks, investment managers, major  corporations, pension funds, government agencies, and individuals. The  FHLBanks do not engage in lending to the public but instead provide  loans to lenders to support housing finance and community lending.  These loans, or advances, to member institutions are primarily  collateralized by residential mortgage loans. Some member institutions  also may pledge small business, small farm, and small agribusiness loans  as collateral. In addition to the advances, FHLBank members also have  the ability to earn dividends on purchased capital stock and access to  various products and services, such as letters of credit and payment  services.

		Housing and Community Lending Programs

Beginning in 1989, Congress expanded the FHLBanks’ role and  responsibilities. FIRREA created two principal housing and community  lending programs—the Affordable Housing Program (AHP) and the  Community Investment Program (CIP)—in addition to community support  programs. Other community lending programs may be voluntarily  offered by the FHLBanks under the Community Investment Cash  Advance (CICA) program regulations, which were issued by the Federal  Housing Finance Board (now FHFA) from an authority in FIRREA that  authorized other community lending programs. AHP and CIP are required  programs under FIRREA, while other CICA programs are voluntary.
The subsidy may be in the form of a grant or a subsidized interest rate on a secured  loan from an FHLBank to a member lender. According to statute, low- or moderate-income  households are defined as households with incomes of 80 percent or less of area median  income. Very low-income household means any household that has an income of 50  percent or less of the area median. combining them with other programs and funding sources, such as the  Low-Income Housing Tax Credit and investments from private  developers. The competitive application program generally constitutes  at least 65 percent of an FHLBank’s required annual contribution to  supporting affordable housing. Under the homeownership set-aside  program, member institutions apply to their FHLBanks for grants then  disburse those grants to homeowners. At least one-third of the annual  set-aside contribution must be allocated to first-time homebuyers.
CIP provides member institutions with advances and letters of credit for  housing, economic development, and mixed-use projects. CIP offers  flexible advance terms for members to undertake community-oriented  mortgage lending. The price of advances made under CIP shall not  exceed the FHLBank’s cost of issuing consolidated obligations of  comparable maturity, taking into account reasonable administrative  costs. beneficiaries on behalf of members, help facilitate residential housing  financing and community lending and may provide liquidity or other  funding, among other purposes. Finally, under the voluntary CICA  programs, FHLBanks offer advances, letters of credit, and grants for  economic development that are targeted to small business concerns, or  geographies, or households at specified income levels.
Letters of credit, which support obligations to third-party  FIRREA also created advisory councils for the FHLBanks—made up of 7  to 15 persons from each district and drawn from community and nonprofit  organizations that are actively involved in providing or promoting low- and  moderate-income housing or community lending. The advisory councils  meet with representatives of the FHLBank’s board of directors at least  quarterly to provide advice on ways in which the FHLBank can carry out  its housing finance and community lending mission. They also submit an  annual analysis to FHFA on the low- and moderate-income housing and  community lending activities of their FHLBank.
12 C.F.R. § 1292.5(d)(2). to accept alternative forms of collateral, such as agricultural and small  business loans, from small members known as community financial  institutions. The goal of these reforms was to help smaller banks or  thrifts, which may have limited single-family mortgages and other  traditional assets to pledge as collateral, gain greater access to the  liquidity offered by FHLBank advances. In so doing, the reforms were  targeted to help improve economic development credit opportunities in  rural areas and other underserved communities.

		FHLBanks’ Regulation, Supervision, and Reporting

Section 20 of the Federal Home Loan Bank Act (12 U.S.C. § 1440) requires each  FHLBank to be examined at least annually. reporting annually on the FHLBanks’ activities in affordable housing  and community development.
FHFA’s Office of Inspector General has also reported on certain aspects  of the FHLBanks, including the AHP and advances made to the largest  institutions. register a class of its common stock and comply with SEC disclosure   As a result, FHLBanks must file periodic and annual  requirements.financial reports and other information (such as annual and quarterly  reports, forms 10-K and 10-Q) with SEC.
See FHFA, Office of Inspector General, Recent Trends in Federal Home Loan Bank  Advances to JPMorgan Chase and Other Large Banks (Washington, D.C.: April 2014);  FHFA’s Oversight of the Federal Home Loan Banks’ Affordable Housing Program  (Washington, D.C.: April 2013); and An Overview of FHLBank System’s Structure,  Operations, and Challenges, accessed on June 18, 2014 at  http://www.fhfaoig.gov/Content/Files/FHLBankSystemOverview.pdf.
2011 FHFA established an OMWI that would be responsible for all  matters related to diversity in FHFA’s management, employment, and  business activities. The OMWI is responsible for developing and  implementing standards and procedures to promote diversity in all  activities and submitting an annual report detailing the actions taken to  promote diversity and inclusion. FHFA’s OMWI is tasked with helping to  ensure that minorities, women, and persons with disabilities are fully  included in all activities at the FHLBanks, and with helping to promote  diversity on FHLBank boards of directors.

		FHLBank Boards of Directors

Each bank has its own board of directors made up of member and  independent directors. Member directors represent and by law must be  officers or directors of member institutions. Independent directors are  individuals from outside the FHLBank membership base. Additionally, at  least two of the independent directors must be designated public interest  directors with more than 4 years of experience in representing consumer  or community interests on banking services, credit needs, housing, or  financial consumer protections. In 2014, the size of the FHLBank boards  ranged from 14 to 19 directors, for a total of 189 board directors across all  12 FHLBanks. Of the 189 board directors, 108 were member directors  and 81 independent directors, including 26 public interest directors (see  fig. 1).
Each board elects a chair and vice chair who serve 2-year terms. Of the  12 board chairs, 7 were member directors and 5 independent directors,  including 1 public interest director (see table 1). Unlike the boards of  publicly traded companies, which typically include company managers  among their board directors, no representatives from FHLBank  management may serve on FHLBank boards. Each FHLBank has a  president who reports to the bank’s board of directors.
Two rules applicable to the FHLBanks govern the roles and  responsibilities of FHLBank board directors. The first describes the  directors’ general authority and powers, which include establishing and  maintaining effective risk management policies, internal control systems,  and strategic business plans; establishing audit committees; adopting  annual operating expense budgets and a capital expenditures budget;  and paying dividends; among other things. The second outlines the  general responsibilities of the FHLBank board directors with respect to  the management of internal controls, audit systems, asset growth,  investments, and credit and counterparty risk. FHFA officials told us that  board responsibilities included establishing the risk appetite of the bank  (including reviewing risk exposures), overseeing bank products policies  (e.g., collateral, underwriting standards, and advance policies), and  overseeing executive performance. Additionally, according to FHFA’s  examination manual, which includes board director responsibilities, the  boards are responsible for hiring and retaining senior management.
FHLBank boards typically organize themselves into committees. The  boards are required to have an audit committee and typically also have  committees on finance, governance, and affordable housing and  economic development. Because the boards are not required to have  specific committees (other than the audit committee) or a minimum  number of committees, the type and number of committees and the tasks  they perform vary across FHLBank boards.

		Our Previous Work on Diversity

Our previous work on diversity in financial institutions has primarily  focused on workforce diversity and diversity management. we identified leading practices that should be considered when  developing and implementing diversity management. In our 2005 report,  we identified a set of nine leading diversity management practices. They  are (1) top leadership commitment; (2) diversity as part of an  organization’s strategic plan; (3) diversity linked to performance; (4)  measurement; (5) accountability; (6) succession planning; (7) recruitment;  (8) employee involvement; and (9) diversity training. While we developed  these leading practices for workforce diversity, most are also relevant to  boards of directors.
See GAO-13-238, GAO-10-736T, and GAO-06-617.
Banks between 2006 and 2010 and found that it was limited. In this  2011 report, we found that the Federal Reserve Banks generally reviewed  the demographics of their boards and used a combination of personal  networking and community outreach efforts to identify potential  candidates for directors. While we found that some Federal Reserve  Banks recruited more broadly, we recommended that the Board of  Governors of the Federal Reserve System encourage all Reserve Banks  to consider ways to help enhance the economic and demographic  diversity of perspectives on the boards, including by broadening their  potential candidate pool, which has been implemented.

	HERA Made Key Governance Changes That Have Been Fully Implemented

HERA made several key changes to the FHLBank board directors. First, it  changed the process for selecting independent directors. Previously, the  regulator had appointed some directors. Now, for the first time since the  FHLBank System’s inception, FHLBank boards nominate candidates for  certain director positions and FHLBank members vote for the candidates.  Second, HERA added skill requirements for independent directors,  removed compensation caps, and changed directors’ terms from 3 to 4  years. FHFA implemented HERA’s governance changes through two final  rules—one covering nominations and elections, including skill  requirements and terms, and one addressing directors’ compensation.  Board directors and FHLBank representatives generally view HERA’s  governance changes as positive, because FHLBank boards now have the  ability to nominate qualified candidates who help meet the overall boards’  needs.

		HERA Made Several Changes to FHLBank Boards

The governance changes HERA made to FHLBank boards changed the  way certain directors are selected (see table 2). According to HERA, the  majority of each FHLBank’s directors must be member directors, who by  previously existing statute are nominated and chosen by member  institutions. Independent directors must make up not fewer than two-fifths  (40 percent) of each board. Most significantly, HERA required that  independent directors be elected rather than appointed by the regulator.  From the inception of the FHLBank System in 1932, the Federal Home  Loan Bank Act had required the regulator to appoint some directors.  Under HERA, independent directors are nominated by FHLBank boards  and elected by the FHLBank members at large.
HERA also specified that each independent director (other than public  interest directors) have demonstrated knowledge of, or experience in, at  least one of the following areas: financial management; auditing and  accounting; risk management; derivatives; project development; or  organizational management. Public interest directors must now have  more than 4 years of experience representing consumer or community  interests on banking services, credit needs, housing, or financial  consumer protections. These requirements significantly expanded the  previous requirements, as table 2 shows. HERA also removed  compensation caps for board directors and required FHFA to include  information on directors’ compensation in its annual report to Congress.  Finally, HERA expanded the length of directors’ terms from 3 to 4 years,  but maintained the 3 consecutive full-term limit, so that overall term limits  are now 12 years instead of 9 years.

		FHFA Established Two Rules to Implement HERA’s Governance Changes

FHFA implemented HERA’s governance changes through two final rules- —one covering nominations and elections, including skill requirements  and terms, and one addressing directors’ compensation. According to  FHFA officials, these two rules fully implemented HERA’s governance  changes. In October 2009, FHFA issued the first final rule, which  addressed several requirements.
Nominations and elections: In establishing the rule, FHFA added  new provisions to govern the process for nominating individuals for  independent directorships and for conducting elections in conjunction  with the member director elections. Nominations and elections of  member directors remain largely unchanged. According to FHFA  officials, as of November 2014, 21 new independent directors have  been elected across the FHLBank System under the new nomination  and election format.
Composition and term length: The rule established that FHFA  would determine the board size for each FHLBank annually and  designate at least a majority, but no more than 60 percent, of the  directorships as member directors, as required by HERA, and the  remainder as independent directors. Each FHLBank board determines  how many of the independent directors will be public interest  directors––but must ensure that at all times the board has at least two  public interest directors. The rule also stated that all of the directors  would serve 4-year terms, but FHFA may set a shorter term for some  directors so that all directors’ terms do not end at the same time.
Skill requirements and application forms: The rule requires that  each FHLBank conduct elections for expired independent  directorships, as HERA requires. The rule also notes that  independent directors must have the qualifications listed in HERA and  must complete application forms. Before nominating any individual for  an independent directorship, other than a public interest directorship,  the board of directors of an FHLBank must decide whether the  nominee’s knowledge or experience is commensurate with that  needed to oversee a financial institution of the FHLBanks’s size and  complexity. The rule also requires that any independent director  nominee who runs unopposed in an election receive at least 20  percent of the votes eligible to be cast.
FHFA’s oversight responsibilities: The rule requires that each  FHLBank board submit a list of independent director nominees, along  with the completed application forms, to FHFA for review. FHFA has  some oversight responsibilities pertaining to the eligibility and  qualifications of nominees. For example, FHFA officials told us that  the agency must review the list of nominees and the application forms  before the FHLBanks announce who is running. According to FHFA,  the agency reviews the forms to ensure that candidates meet all  eligibility and qualification requirements. FHFA told us that the agency  performed additional research on the candidates, verified information  provided on the forms, ensured that they have not engaged in criminal  activity, and checked employment history. According to FHFA  officials, the agency conducts additional searches to help verify other  roles or positions a candidate lists on an application. FHFA officials  said that the candidates proposed by FHLBanks generally met  eligibility and qualification requirements. FHFA requests supplemental  information when the information on the candidate’s qualification is  not sufficient. FHFA officials cited only one instance of a candidate  who did not meet the requirements and was not nominated, since the  HERA rules were implemented.
In April 2010, FHFA issued the second final rule implementing HERA’s  governance changes related to director compensation and expenses.  The rule removed the previous statutory compensation caps, as  mandated in HERA, and allowed each FHLBank to pay its directors  “reasonable compensation and expenses,” which can be reviewed by the  FHFA Director. Additionally, the rule stated that each FHLBank board  must annually adopt a written compensation policy. The FHLBanks must  submit a copy of the compensation policy to FHFA, along with any other  studies or supporting materials used to determine the compensation and  expense amounts paid to directors. By statute, FHFA provides  information on compensation and expenses in its annual report to  Congress.

		HERA’s Changes Have Largely Been Viewed as Positive

Our interviews with bank management and staff, board directors, advisory  council representatives, and trade associations representing member  institutions generally reflected the view that HERA’s changes had been  positive. The primary reason they cited was that HERA gave FHLBank  boards the ability to nominate qualified candidates who would help meet  the boards’ needs. Representatives from bank management at five of the  six FHLBanks we interviewed told us that the election of independent  directors gave boards greater control and helped ensure that candidates  who possessed specific skills and experience could be nominated. The  majority (81 percent) of those board directors who provided comments for  our survey also supported the election of independent directors.example, in response to an open-ended question asking about the  change, 18 board directors noted that the new nomination and election  process allowed boards to select individuals whose skills and experience  would augment those of the board as a whole. Additionally, advisory   For  council representatives from the six FHLBanks we interviewed told us that  they now had an increased role in working with the current board  directors to help identify and vet candidates who would meet board  needs. Representatives from two trade associations we interviewed told  us that they supported the change as well, because, for example,  member institutions preferred to have a vote and to be able to elect the  independent directors.
Representatives from bank management and staff at the six FHLBanks  we interviewed were positive about HERA’s inclusion of specific skills and  experience criteria for independent directors, noting that the criteria  provided guidance for the process of identifying and nominating  candidates. In addition, the majority of board directors who provided  comments on our survey (87 percent) believed HERA’s skills and  experience requirements for independent directors were appropriate or  positive for several reasons. For example, the criteria set minimum skill  requirements and helped boards intentionally find individuals with certain  skills. One board director commented that the required skills help the  nominating committees to search more broadly for good individuals.  Another commented that HERA’s skill requirements are broad enough to  enable the boards to build varied skill sets to match emerging challenges,  for instance, to nominate attorneys who understand SEC regulations—a  skill that many member directors may not have.
Representatives from all six FHLBanks we interviewed said that removing  compensation caps was a positive change, mainly because the  FHLBanks could now make compensation commensurate with the time  commitment required of board directors. Before HERA, compensation  varied by position on the board (chair, vice chair, all other directors) but  was capped across all 12 FHLBanks (see table 3). According to our  analysis of FHFA data, the annual compensation for board directors  across the 12 FHLBanks has increased significantly since HERA. For  example, in 2013 the average chair, vice chair, and director  compensation amounts were roughly three times the pre-HERA amounts.
FHLBank representatives noted that compensation was now more  competitive with compensation on private sector boards and would help  attract and retain qualified individuals. Further, the results of our survey of  2014 board directors showed that 69 percent of respondents believed the  skill levels of directors had increased as a result of the removal of  compensation caps.
Board directors and representatives from bank management at the six  FHLBanks we interviewed offered positive comments about increasing  the term length from 3 to 4 years because of the steep learning curve  involved with understanding FHLBank operations and financing. They  said that this learning curve was especially steep during the directors’ first  1 or 2 years and that the additional time allowed directors to gain more in- depth knowledge about FHLBank operations. Our board director survey  results showed that the majority of board directors who provided  comments (87 percent) supported the longer term length. For example,  in response to our request for their thoughts on the change, several board  directors noted that because of the level of complexity associated with  FHLBanks, longer term lengths helped with continuity of experience on  the board. Additionally, as part of their survey responses about thoughts  on the expanded term length, a few directors pointed out that many  individuals were familiar with publicly traded companies but that the  FHLBanks’ cooperative structure was a unique business model.  Managers from three of the six FHLBanks we interviewed told us that the  increased term length had improved the continuity and stability of its  directorships, in particular helping balance turnover when directors must  leave because they reached term limits or because of mergers and  acquisitions of member institutions.

	Boards Have Limited Representation of Women and Minorities but Reflect Some Diversity in Skills and Education

In 2014, women represented about 16 percent of board directors and  racial or ethnic minorities around 10 percent of board directors, and the  majority of FHLBank board directors were non-Hispanic white males. Our  survey showed that board directors had a variety of skill sets and  education levels. Among member directors (who by statute represent  member financial institutions), when compared to the overall  representation, member board directors from commercial banks had the  most representation, thrifts and credit unions had some representation,  and insurance companies and community development financial  institutions had the least or no representation on any FHLBank board.  According to FHFA officials and representatives from the six FHLBanks  we spoke with, several challenges hindered efforts to increase  representation of women and racial or ethnic minorities. These challenges  included low director turnover, statutory requirements related to board  composition, and limited diversity in the financial services sector.

		Representation of Women and Racial or Ethnic Minorities on FHLBank Boards Was Limited and Most Were Independent Directors

Women represented roughly 16 percent of all FHLBank board directors in  2014. However, some of the FHLBanks had higher representation of  women than others. While each of the 12 FHLBank boards had at least  one female board director in 2014, two banks—Dallas and Pittsburgh— had five female board directors each, representing 31 percent of their  boards (see fig. 2). One of the 12 FHLBank boards’ chair was a woman  (Atlanta). Further, our analysis found that the majority of women directors  were independent directors, rather than member directors (71 percent).
Additionally, the majority of board directors were white (non-Hispanic),  including all board chairs. For example, racial or ethnic minorities  represented roughly 10 percent of board directors in 2014. Like the  representation of women on boards, the representation of racial or ethnic  minorities varied by FHLBank. In 2014, three FHLBank boards had no  racial or ethnic minority representation (Des Moines, Indianapolis, and  Topeka), and racial or ethnic minorities represented 21 percent of three  FHLBank boards—New York (four board directors), San Francisco, and  Seattle (three board directors each) (see fig. 3). We found that, as with  women directors, the majority of racial or ethnic minorities were  independent directors (81 percent).
We received information on the number of women and racial or ethnic  minority board directors over the past 5 years from 11 of the 12  FHLBanks. Based on the information, we that found the representation of  women on FHLBank boards over the past 5 years had increased for 8  boards, stayed the same for 1 board, and decreased for the 2 remaining  boards. Additionally, the number of ethnic or racial minority board  directors increased for 3 boards, stayed the same for 4 boards, and  decreased for the remaining 4 boards.

		Boards Reflected Some Diversity in Skills and Education

Board directors reported a variety of skills and education levels and, to a  lesser extent, had varied industry experience. For example, in our survey  of 2014 board directors, both member and independent directors reported  having skills in corporate governance and board operations (93 percent),  strategic planning (89 percent), organizational management (88 percent),  financial management (86 percent), and asset or liability management (80  percent). Of all the directors who responded to our survey, roughly half reported having affordable housing expertise (slightly more independent  than member directors, 50 and 39 directors, respectively). Additionally, 4  of the 12 board chairs indicated that they had expertise in affordable  housing. Member directors reported high skill rates in areas such as  accounting (80 percent), commercial and community banking (96  percent), and credit administration (83 percent). HERA did not specify  skill requirements for member directors. Independent directors were more  likely to report skills such as project development (76 percent),  community and economic development (67 percent), and affordable  housing (66 percent). As previously discussed, HERA specified that  independent directors have certain skills and experience. These  independent directors reported having skills and experience in specified  areas: financial management (74 percent), auditing (37 percent) and  accounting (62 percent), risk management (61 percent), derivatives (37  percent), project development (76 percent), and organizational  management (86 percent). According to our survey results, of the HERA  skill requirements, independent board directors reported having the most  expertise in organizational management and the least expertise in  derivatives. Figure 4 below summarizes board director skills, as self- reported in our survey, for the 12 FHLBank boards.
Board directors represented a broad spectrum of education levels.  According to our survey of 2014 board directors, most reported their  highest degree or level of education as a bachelor’s degree (42 percent),  followed by a master’s degree (33 percent), professional degree or  doctorate (19 percent), and associate’s degree or high school diploma (5  percent). Additionally, a third of respondents reported having  certifications in addition to traditional degrees. For example, 37 percent of  board directors reported having additional certifications that qualified  them as certified public accountants, chartered financial analysts, or  licensed real estate brokers.
Based on our survey results, there was some variation with respect to  board directors’ careers. As previously noted, member directors represent  and by law must be officers or directors of member institutions.  Accordingly, we found that almost all member directors reported working  in the banking and finance industry, and that they primarily held executive  management positions. Our survey found independent directors reported  greater industry sector representation and different types of occupations.  For example, roughly a quarter of independent directors reported working  in industries other than banking and finance, including industries such as  community and economic development, affordable housing, state and  local government, and real estate. Similarly, independent directors were  more likely than member directors to have worked as consultants, real  estate developers, affordable housing specialists, and attorneys. Overall,  few board directors reported having worked in the federal government (15  percent) or insurance industry (28 percent).
In 2014, for member directors who represented member financial  institutions, we found that commercial banks had the most representation,  thrifts and credit unions some representation, and insurance companies  and community development financial institutions the least or no  representation (see table 4).member directors were from commercial banks, while the overall  percentage of commercial bank membership was 66 percent. Credit  unions had some representation on FHLBank boards (5 percent)  compared with their general membership base (17 percent).

		FHLBank Boards Face Some Challenges In Their Efforts to Increase Diversity

According to FHFA officials and the FHLBanks, the boards face some  challenges that may limit their ability to increase diversity, including low  director turnover, certain statutory requirements, and lack of diversity in  the financial services sector. For example, only a few directorships are  open for election each year because director turnover is limited. FHFA  determines the size of each FHLBank’s board (in consultation with the  bank), and FHFA officials told us that they had been seeking to limit the  number of directors on each board to prevent the boards from becoming  too large. Consequently, board size has decreased for some FHLBanks,  resulting in fewer open seats for new independent directors who may  bring diverse perspectives. Further, HERA mandates that directors serve  4-year terms. By statute, directors continued after HERA to be permitted  to serve up to three consecutive terms, which after the HERA extension,  resulted in total term lengths of 12 years for some directors. Given the 12- year term lengths, opportunities for new directors to join the boards are  limited. Additionally, because directors can serve three consecutive full  terms, many boards nominate incumbent independent directors for  reelection, and these nominees may run unopposed. FHFA officials cited  these challenges and acknowledged that the low turnover and term  lengths, in particular, meant that increasing diversity would take time.
Other statutory requirements may also hinder efforts to change the  composition of FHLBank boards. As previously discussed, HERA defines  the composition of the board. At least a majority of the board must be  member directors, with not fewer than two-fifths independent directors (40  percent). While the FHLBank boards nominate independent directors,  member directors are nominated by the member institutions within the  FHLBank district, limiting the boards’ role in selecting these directors.  FHFA told us that the agency was aware of the potential difficulty of  identifying diverse candidates for member directors and noted that  increased board diversity would likely come from independent directors.  Further, geographic requirements also affect the selection of board  directors. For example, statute requires at least one member director per  state. Additionally, statute requires that member directors be officers or  directors of a member institution located in the district in which the  FHLBank is located and that independent directors be residents of the  district.
Additionally, boards must balance efforts to increase racial or ethnic and  gender diversity with other qualities, such as HERA skill requirements,  SEC expertise, and other needs of the boards. For example, board  directors from the Atlanta and Des Moines FHLBank boards stated that  their boards had been seeking individuals with risk management  expertise in an effort to satisfy HERA requirements. Further, FHLBank  management and SEC officials noted the importance of finding  candidates with SEC expertise, because the FHLBanks are SEC  registrants. SEC officials explained that the process of registering with  SEC caused the FHLBanks to improve their accounting and  organizational systems and added that board directors assumed personal  liability risk for the FHLBanks. In terms of other board needs, three board  directors from the Pittsburgh FHLBank board told us that their board was  specifically looking for candidates with insurance expertise. This need to  balance traditional gender and racial or ethnic diversity with required skills  and other board needs has limited efforts to increase women and minority  representation on boards. FHFA officials noted the overall lack of diversity  in the financial services sector, including at FHLBank member institutions,  as increasing the challenges facing efforts to improve board diversity. The  representation of women and racial or ethnic minorities on financial  services companies’ boards was limited as well. For example, according  to The Conference Board’s 2013 survey of financial services companies’  boards, roughly 14 percent of board directors were women and fewer  than 10 percent were racial or ethnic minorities. We have previously  reported that the main challenge to improving diversity was identifying  candidates, noting that minorities and women are often underrepresented  in both internal and external candidate pools for financial services  management positions.

	FHLBanks and FHFA Have Taken Some Steps to Increase Board Diversity

In response to the board governance changes under HERA, FHLBanks  have established processes to identify and nominate independent  directors. We found that these processes generally followed several  commonly cited practices for improving board diversity, such as making  diversity a priority and disclosing diversity practices. For example, our  review of FHLBank bylaws and related written policies and procedures  found that 9 of the 12 FHLBanks noted the importance of emphasizing  diversity in the process of nominating and electing board directors.  Additionally, FHFA has taken some steps to demonstrate the importance  of diversity on FHLBank boards. In the preamble to its 2009 rule, FHFA  urged FHLBanks to consider the importance of board diversity when  identifying and nominating candidates. Further, in May 2015, FHFA  issued a rule that allows for the collection and reporting of FHLBank  board diversity information to the FHFA. FHFA plans to evaluate this  information, as well as the boards’ outreach activities for identifying  diverse candidates.

		FHLBanks Have Used Some Commonly Cited Practices for Improving Board Diversity

Since HERA’s enactment, FHLBanks and their boards have developed  and refined new processes to help them identify and nominate  independent directors and respond to new requirements for their board  directors. As previously discussed, in October 2009 FHFA issued a rule  implementing several of HERA’s governance changes, including eligibility  requirements for independent directors and election processes. In the  preamble of the rule, FHFA encouraged FHLBanks to consider the  diversity of their board membership but did not mandate them to do so.
Our review of the FHFA rule, the board minutes of all 12 FHLBanks, and  selected interviews with FHLBank management and board directors  found that currently FHLBanks and their boards generally follow similar  processes for identifying new board directors. The steps the FHLBanks  take are assessing the boards’ needs as well as the makeup of the current  identifying any skill or experience gaps among the current directors; discussing the number of seats that will be on the board (determined  by FHFA) and determining how many board seats will be open to new  candidates during the election cycle; discussing upcoming elections and potential nominees for  independent directorships with their advisory councils and seeking  advisory councils’ help with candidate outreach; opening the election cycle with a call for nominees for member  directors and applications for independent directors; interviewing candidates for independent directorships and discussing  their attributes to determine which candidate(s) to select for the  ballot;  verifying the eligibility of candidates for independent directorships and  submitting candidates’ materials to FHFA for review; providing a ballot to each member institution listing the candidates  who will run in the upcoming election cycle; and declaring the results of the election to members, nominees, and  FHFA.
During the nomination and election process for independent directors, as  well as to some extent when boards request nominees for member  directors, the FHLBanks take steps that correspond to commonly cited  practices to increase diversity on boards, particularly the representation of  women and minority directors. As we have noted, our prior work has  identified practices organizations should consider in developing and  implementing diversity management programs in the overall workforce, in  the financial services sector, and at federal financial regulators. We  selected practices from our prior work and from those cited by  representatives of corporate governance organizations and academic  researchers that we determined were most applicable to FHLBank  boards. As described later, these practices include making diversity a  priority, conducting a skills and needs assessment, targeting diverse  candidates, seeking new ways to find candidates, and disclosing diversity  practices. Our review of all 12 FHLBanks’ bylaws, policies and  procedures, SEC filings, board meeting minutes, and interviews with  FHLBank representatives at 6 FHLBanks showed that boards consider  diversity in a variety of ways that correspond to these practices. We did  not assess whether these practices had an effect on the diversity and  composition of the FHLBank boards.
Making diversity a priority: Many of the FHLBank boards had taken  actions that demonstrated a commitment to diversity. Our review of  FHLBank bylaws, policies and written procedures, and written responses  found that 9 of the 12 FHLBanks noted the importance of emphasizing  diversity in the process of nominating and electing board directors. For  example, the FHLBank of Boston’s bylaws state that when making  nominations, the board may consider factors including any experience on  the board, qualifications, skills, and experience that could strengthen the  board, and diversity. The FHLBank of Dallas reported that the board  considers diversity important to a well-rounded board of directors able to  meet its fiduciary responsibilities to the bank’s members and staff.  Demonstrating a commitment to diversity—such as discussing diversity in  leadership policy statements or newsletters, or including diversity as part  of the strategic plan—has been cited by GAO and others as a first step  towards addressing diversity in an organization.
Conducting a skills and needs assessment: FHLBanks regularly  assessed the skills, expertise, and experience of current board directors– –allowing them to evaluate the board and identify additional skills and  experience that would help improve the board’s effectiveness and  address current challenges. Our review found all 12 FHLBank boards  used a skills matrix either annually or on an as-needed basis—for  example, to help identify the types of independent candidates to consider.  Additionally, several board directors noted that their board’s use of a skill  matrix or needs assessment helped in identifying desired skills and  experiences for potential nominees, including those required for  independent directors under HERA, and additional experiences such as  in the insurance or information technology industries. Board directors  from the FHLBanks of Atlanta and Pittsburgh told us they included  diversity as part of their matrix (in addition to skills). Several corporate  governance and diversity organizations have cited a skills matrix as a tool  that boards can use to facilitate assessments of board needs in terms of  skills and diversity.
Targeting diverse candidates: In our review of FHLBank board minutes  and interviews with board directors, we found that some FHLBank boards  explicitly discussed targeted efforts to add women or minority candidates  to their boards. For example, the chair of the board of the FHLBank of  Des Moines discussed finding a Native American director candidate  because the FHLBank district had a significant Native American  population. In our review of FHLBank board meeting minutes, we found  that several boards had discussed the need to consider women and  minority representation in the nomination process and had referenced  presentations by FHFA OMWI staff or FHFA’s rule as it was proposed in  June 2014 as among their reasons for doing so. Representatives from  corporate governance organizations and academic researchers cited the  practice of setting broad targets or goals for increasing the number of  women and minority directors on boards as one way boards could  increase diversity and ensure that they were taking steps to consider a  diverse array of candidates.
Seeking new ways to find candidates: The FHLBanks have taken  several steps to diversify their applicant pools for directors. Nine of the 12  FHLBanks post information about their board director nomination and  election processes on their websites. The FHLBank of Boston specifically  encourages women and minority candidates to apply. Additionally, 7  FHLBanks reported that they sometimes consulted with outside groups to  help solicit nominees, including organizations representing affordable  housing, economic development, and consumer or community interests.  The FHLBank of Topeka reported using a search firm, and the FHLBank  of Seattle reported using director databases to identify independent  director candidates for nomination. The FHLBank of Pittsburgh conducted  outreach with organizations such as Executive Women International and  Hispanic and African American Chambers of Commerce to seek out  diverse applicants. Further, directors from the FHLBank boards of Dallas  and Seattle reported using social media platforms to help attract  candidates. For example, representatives from one FHLBank told us that  LinkedIn had been useful in recruiting employees for the FHLBank and  that they had decided to use it to identify potential independent director  nominees.
We found that all 12 FHLBank boards had separate governance  committees and that 11 of the charters for these committees had  responsibility for overseeing director nominations and elections. Also, as  noted earlier, the FHLBanks consult with their advisory councils about  potential nominees for independent directors. Board directors from 4 of  the 6 FHLBanks we met with told us that advisory council members  themselves had been nominated and subsequently elected to their  boards. Board directors from three FHLBanks we interviewed told us that  their advisory councils also provided them with information about potential  candidates. For example, staff from the FHLBank of Atlanta told us that  their board relied heavily on the advisory council to identify qualified,  diverse candidates for independent director positions. These activities are  in line with practices cited by representatives from corporate governance  organizations and academic researchers, which reported that increasing  board diversity could require current directors to reach out beyond the  typical pool of applicants or their own personal networks to find qualified  women and minority candidates. They cited several steps boards could  take to find these candidates, such as partnering with outside  organizations, using search firms to identify a broader pool of candidates,  and creating nominating committees to focus on the selection of  candidates.
Disclosing diversity practices: Some FHLBanks disclose the board’s  diversity policies and the way they consider diversity in nominating and  selecting directors. We found that the boards of three FHLBanks (Atlanta,  New York, and Seattle) had adopted public statements on board diversity  and inclusion that they published on their websites. The statements noted  that the FHLBanks encouraged the consideration of diversity (including  gender, minority status, and disability classifications) in soliciting and  nominating director candidates. In its 2014 public election announcement,  the FHLBank of San Francisco’s board stated it would consider, among  other things, the overall composition of the board, the diverse  communities of the FHLBank’s district, and other factors it believes would  contribute to a diverse, balanced, and effective board. In addition, 3 of the  12 FHLBanks stated in their annual SEC 10-K filings that their boards   One of these  considered diversity in nominating independent directors. FHLBanks, the FHLBank of Pittsburgh, noted that board directors should  also consider diversity when nominating candidates for member director  positions. These factors could be seen as additional attributes that  enhanced traditional qualifications for board directors, according to the  financial statements. Some representatives from corporate governance  organizations and academic researchers have said that the disclosure of  companies’ diversity policies and the way they consider diversity in  nominating and selecting directors could increase the representation of  women and minorities on boards, particularly if they were required to do  so by a regulator or an exchange.
In 2009, SEC issued a rule requiring public companies to disclose whether, and if so  how, they consider diversity when nominating candidates for director. Proxy Disclosure  Enhancements, 74 Fed. Reg. 68334 (Dec. 23, 2009); 17 C.F.R. § 229.407(c)(2)(vi).  However, FHLBanks are not subject to this rule because they are exempt from the  requirements to file proxy statements. 12 U.S.C § 1426a. SEC did not define diversity in  this rule and, in adopting this rule, clarified that companies should be allowed to define the  term in ways that they consider appropriate.

		FHFA Has Also Taken Steps to Emphasize the Importance of Diversity and Plans to Begin Collecting Data about Board Diversity

FHFA has taken some steps to demonstrate the importance of diversity  on FHLBank boards. In rules issued in 2009 and 2010, FHFA urged  FHLBanks to consider the importance of board diversity. In the 2009 rule,  FHFA encouraged the boards to consider the diversity of their boards  both when requesting nominees for member directors and nominating  candidates as independent directors. In the 2010 rule, FHFA stated that  FHLBanks’ policies and procedures should encourage the consideration  of diversity. FHFA created an OMWI in January 2011 to promote  diversity and the inclusion of women and minorities in all FHLBank  activities, including the promotion of diversity on FHLBank boards.  OMWI staff conducted a listening tour in 2013 that included visits to each  of the 12 FHLBanks to discuss the OMWI’s role and learn more about  FHLBanks’ diversity practices. OMWI staff also asked for suggestions on  how to evaluate diversity metrics. Figure 5 outlines the timeline of events  from the enactment of HERA through the creation of OMWI and  subsequent activities related to FHLBank board diversity.
In June 2014, FHFA proposed a rule that would require FHLBanks to  report the demographic profiles of board directors and a description of  their related diversity outreach activities. FHFA finalized the rule in May  2015. The rule requires FHLBanks to report to FHFA their board  directors’ voluntarily self-reported demographic information, something  FHLBank management and employees are already required to do. The  purpose of the proposal was to allow FHFA and the FHLBanks to obtain  access to data about board diversity, particularly numbers of women and  minority directors, in order to better assess current levels of diversity and  the impact of their outreach efforts (including those practices discussed  earlier). The final rule states that current FHFA regulations require  FHLBanks to implement policies that encourage the consideration of  diversity in the nomination or selection of nominees for board directors.  The rule states the FHLBanks are required to report on board diversity  data and outreach efforts in their annual reports to OMWI, beginning  September 30, 2015. FHFA officials also told us that although  FHLBanks could interpret diversity broadly and might seek other types of  diversity on their boards, the OMWI focuses on the representation of  women and minorities, and OMWI expected FHLBanks to have diversity  outreach programs that targeted these two groups. Our prior work and  that of a global research institute have cited the practice of collecting  diversity data as a way to better measure and assess the effectiveness of  diversity programs on increasing diversity. For example, our 2011 report  on governance practices at the Federal Reserve Banks found that each  bank submitted demographic information that directors provided  voluntarily. Moreover in our April 2013 report on OMWIs, we found that  not all OMWIs were reporting on the outcomes of their diversity practices.  As a result, we recommended that the federal financial regulators collect  data and report on measurement outcomes as part of their reports to  Congress in order to enhance their own diversity initiatives. The  agencies and Federal Reserve Banks generally agreed with our  recommendations and as of April 2015 the recommendations remained  open.
Letter from FHLBanks of Atlanta, Boston, Chicago, Cincinnati, Des Moines, New York,  Pittsburgh, Seattle, Topeka and the FHLBanks’ Office of Finance to FHFA regarding  Notice of Proposed Rulemaking Regarding Minority and Women Inclusion Amendments  RIN: 2590-AA67, August 25, 2014. continue to ensure greater access to affordable housing for all sectors of  society.
Under its new director, FHFA’s OMWI reported starting several new  initiatives related to board diversity. OMWI officials are working with  FHFA policy and supervision staff to develop new supervisory guidance  for reviewing diversity efforts. They plan to analyze diversity data  collected under the May 2015 rule to assess trends and outreach efforts.  They also noted several upcoming collaborations among the FHLBanks  to promote diversity throughout the FHLBank System, including on  boards of directors. For example, during an upcoming summit of human  resources directors, OMWI staff are scheduled to present training on how  FHLBanks can improve diversity in the workforce and implement diversity  requirements.

	Community Lending Support Varies across the FHLBanks and Is Affected by Several Factors

The full extent of community lending supported by FHLBanks is unknown  because data are not available on member institutions’ use of advances.  However, the FHLBanks support community lending through two types of  programs: those designed by the FHBanks targeted to the needs of  individual districts (unique programs) and system-wide programs that are  authorized by statute and generally available in every district. Based on  our analysis, the level of activity under these programs varies across the  FHLBanks. Our survey results and interviews with FHLBank board  directors indicated that directors were responsible for overseeing  community lending and that those who served on their bank’s affordable  housing or community development committees had the most oversight  responsibilities. Board directors responding to our survey and FHLBank  representatives noted that several factors affected FHLBanks’ ability to  increase members’ community lending.

		The Full Extent of Community Lending Is Unknown, but Available Information Shows Variation across FHLBanks

Community lending is a key component of the FHLBank System’s  mission. However, it is difficult to know the full extent of FHLBanks’  support for community lending because data on how member institutions  use regular advances are not available. Specifically, the FHLBanks  annually report their total advances to member institutions. These  advances may be used for a variety of purposes, including housing  finance and community lending, and member institutions do not have to  specify how they use them. Advances can be structured in any number of  ways, allowing each FHLBank member institution to find a funding  strategy that is tailored to their specific needs. While the FHLBanks  report advances for community lending through the CIP and CICA  program, ultimately other advances may support community lending. For  example, FHLBanks may offer advances that have various terms and  rates to meet community needs such as long-term financing for small  businesses or agricultural development. Additionally, the FHLBanks  offer letters of credit to facilitate member institutions’ transactions with  third parties but report only the balances of those letters of credit to  FHFA. Letters of credit can impact community lending—for example, by  helping developers obtain funding for economic development.
Our review of FHLBank reports and statements from FHLBank  representatives showed that 6 of the 12 FHLBanks offered unique  community lending programs with different funding types in addition to the  system-wide programs. These unique programs include Chicago’s  Community First Fund®, Cincinnati’s Zero Interest Fund, Dallas’s  Partnership Grant Program, Pittsburgh’s Banking on Business and  Blueprint Communities®, San Francisco’s Access to Housing and  Economic Assistance for Development, and Topeka’s Joint Opportunities  for Building Success (see table 5).
These unique programs often complement the FHLBank’s system-wide  programs. In 2015, $2 million to $4 million dollars in funding was made  available for two of the three loan funds and the third loan fund was in the  amount of $50 million. In addition, all three grant programs were  approved for up to under $1 million dollars. Most of these unique  programs were implemented before HERA.
Representatives of four of the six FHLBanks we spoke with (Chicago,  Dallas, Pittsburgh, and San Francisco) said that conducting a needs  assessment had been helpful in the planning, development, and  execution of unique community lending programs. Specifically, some of  these FHLBanks hired third parties to conduct a housing needs  assessment or surveyed their members and used the findings to help  board directors and advisory councils better understand the regional  characteristics and needs of the states within their district.
FHLBank representatives we spoke to from Chicago, Dallas, and  Pittsburgh said that there had been an increased focus on community  lending in recent years. According to these FHLBank representatives, this  shift occurred as a result of aligning the activity of the advisory council  with the strategic goals of the FHLBank, encouraging directors to attend  advisory council meetings, and strengthening the FHLBank’s community  investment staff. For example, the FHLBank of Chicago expanded its  community investment team to better engage with and support the  FHLBank’s members and their communities.
Use of system-wide programs varied, with some FHLBank member  institutions using the community lending advances under the voluntary  CICA program more than others. Total CICA advances across the  FHLBanks increased less than 2 percent between 2013 and 2014 but two  FHLBanks more than doubled their community lending under these   Specifically, the FHLBank of Indianapolis increased its  programs.lending to member institutions by 71 percent, and the FHLBank of  Chicago increased lending to member institutions by 54 percent (see fig.  6).
Another system-wide program the FHLBanks use to support community  lending is CIP. Under CIP, the FHLBanks provide advances to member  institutions for housing projects, economic development projects, or both.  Membership use under CIP varies. For example, in 2014 four FHLBanks  funded member institutions for both housing projects and economic  development projects (Boston, Chicago, Cincinnati, and Topeka). The  remaining eight FHLBanks provided member institutions with CIP  advances for housing projects only. In 2014, total CIP advances were  approximately $44.6 million.

		Many Board Directors Oversee Community Lending but Those on the Relevant Committees Have More Responsibility

Results of our survey of 2014 board directors showed that 71 percent of  respondents had some level of responsibility for overseeing community  and economic development programs at their FHLBanks. Of these  respondents, 53 percent were member directors, 31 percent were  independent directors (not public interest), and 16 percent were public  interest directors. In addition, about 36 percent of these respondents  stated that they had an oversight role because they were serving on their  FHLBanks’ affordable housing and community and economic  development committee. According to our survey results, about 70  percent of public interest and independent directors had a career in  community and economic development or expertise in community and  economic development and the majority of these respondents were  appointed prior to HERA. Additionally, six FHLBank board chairs (two  member directors, three independent directors, and one public interest  director) reported having community and economic development  experience.
FHLBank board directors and representatives we interviewed stated that  directors who serve on affordable housing and economic development  committees have greater responsibility for overseeing their FHLBank’s  community lending programs and the metrics that monitor and evaluate  these programs. Among other things, these board directors review district  needs assessments, provide quarterly reports on the status of programs,  determine funding allocations, and recommend new products for  development. These directors also review AHP implementation and  community lending plans by suggesting changes and providing comments  during meetings. For instance, they ensure that affordable housing and  community lending programs comply with applicable legal and regulatory  requirements and are effective in meeting the goals for these programs.  Board directors who serve on these committees make suggestions to the  full board for approval, and committee chairs provide reports on the  committee’s activity. Appendix II provides a description of the various  affordable housing and community and economic development  committees of the 12 FHLBanks.
FHLBank board directors serving on affordable housing and economic  development committees generally serve as liaisons to the advisory  council and attend advisory council meetings. Six FHLBank board  directors stated that the advisory council members provide the boards  with an “on-the-ground” assessment of the FHLBank’s programs. In  addition, the board encourages the advisory council to suggest potential  community and economic development products and programs for the  board to consider. The role of the board is to determine how possible  products and programs would align with the FHLBank’s risk management  profile.

		Several Factors Can Affect FHLBanks’ Ability to Increase Community Lending

Our board director survey results showed and FHLBank representatives  told us that several factors affected their ability to increase community  development lending to member institutions, including FHFA program  requirements and statutory limitations, funding for FHLBanks and the  availability of developers, collateral requirements, and the financial  position of the FHLBanks.
FHFA program requirements and statutory limitations: Fifty  percent of those responding to our survey said that FHFA program  requirements affected community development lending. FHLBank  representatives and five survey respondents commented that both the  CIP and CICA program had outdated eligibility criteria and regulatory  requirements—for example, they said that statutory limits on eligible  incomes impacted the volume of applicants. Thirty-eight percent of  respondents noted that statutory limitations affected community  lending. However, 33 percent of respondents did not view statutory  limitations as a limiting factor, and 29 percent of respondents were not  sure if statutory limitations were a limiting factor.
Funding and the availability of developers: Two frequently  mentioned factors affecting community lending were the availability of  funds to meet the number of requests from member institutions and  the availability of developers and other lenders. Our survey results  showed that 47 percent of respondents thought the availability of  funds to meet the number of requests from members was a limitation.  In addition, 43 percent of respondents stated that the availability of  developers and other lenders to fund community and economic  development activities limited this type of lending. Seven survey  respondents commented that there were a limited number of  developers as a result of the economic downturn.
FHLBanks’ collateral requirements: According to 41 percent of  respondents to our survey of board directors, collateral requirements  were a limitation on community lending activities. In addition, nine  survey respondents generally commented that collateral requirements  of the FHLBanks may have limited CDFIs’ borrowing capabilities. We  recently reported on issues affecting nondepository CDFIs’ ability to  become members of the FHLBank System and found that collateral  requirements could prevent many of these institutions from becoming  members. CDFIs’ primary mission is to provide capital and  development services to economically distressed communities  underserved by conventional financial institutions. FHLBank  representatives and board directors we spoke with from all six  FHLBanks generally said that they had discussed expanding the pool  of eligible collateral in response to industry needs but that it was  important to closely monitor any associated risks. They also told us  that the FHLBanks were focused on valuing collateral appropriately  and taking the needs of their members into consideration.
Financial position of the FHLBanks: According to our survey of  2014 board directors, 23 percent of respondents indicated that the  financial position of their FHLBank affected community lending.  Representatives from two of the six FHLBanks (Des Moines and  Dallas) we spoke with told us that demand for advances had dropped  in recent years because their members had seen an increase in  deposits, further limiting their ability to expand their support of  community lending. Total outstanding advances across the FHLBank  System in 2014 represented an 11 percent decline from their 2009  levels. However, in 2013 and 2014 total outstanding advances across  the FHLBank System rose 15 percent and 13 percent, respectively  (see fig. 7).
Other factors: We also heard from FHLBank representatives that  HERA created a temporary exception to the general restriction against  federal guarantees of tax-exempt bonds that enabled bond issuers to  use FHLBank letters of credit to enhance tax-exempt bonds for  nonresidential community development projects, lowering the cost of  those bonds. This exception expired at the end of 2010. While this  exception was not widely used across the FHLBank System, some  FHLBanks found it to be successful in increasing community lending.  For example, the FHLBank of Atlanta used the exception to restore a  hotel and revitalize a hospital in its district. Representatives of the  FHLBank of Atlanta told us that they relied on letters of credit to  reduce financing costs for their member institutions in order to support  community lending, and were satisfied with the results produced by  the letters of credit in their district.

	Agency and Third Party Comments

We provided a draft of this report to FHFA and each of the 12 FHLBanks  for review and comment. Additionally, we provided relevant excerpts of  the draft report to SEC for review and comment. We received technical  comments from FHFA, SEC, and the FHLBanks of Atlanta, Boston,  Chicago, and San Francisco which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to FHFA, each of the  FHLBanks, the Council of FHLBanks, and SEC. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report examines (1) the Housing and Economic Recovery Act  (HERA) of 2008’s governance changes and their implementation; (2)  diversity on Federal Home Loan Bank (FHLBank) boards and challenges  the Federal Housing Finance Agency (FHFA) and the FHLBanks have  faced in trying to increase it; (3) efforts that FHLBanks and FHFA have  taken to improve diversity; and (4) FHLBanks’ community lending  programs and the boards’ oversight of them. For the purposes of this  report, the concept of diversity includes representation by gender, race,  and ethnicity and can encompass differences in backgrounds, skill sets,  and experience.
For each of our objectives, we reviewed relevant laws, particularly HERA  and FHFA’s implementing regulations. We obtained information, for  descriptive purposes, from FHFA on the number of member financial  institutions for each of the 12 FHLBanks, as well as the asset size of each  FHLBank, for 2013 and 2014. We conducted 30 semistructured  interviews with 6 of the 12 FHLBanks (Atlanta, Chicago, Dallas, Des  Moines, Pittsburgh, and San Francisco). To help ensure that we collected  a range of perspectives, we selected these locations based on several  criteria, including asset size, number of member institutions, female and  minority representation on boards, community and economic  development lending activity, and location. We conducted these  interviews to learn more about board governance and diversity practices  and how the board and bank management oversee FHLBank policies and  programs. We generally conducted in-person interviews with officials at  four of the six FHLBanks except in specific cases where we could not  schedule in-person interviews and held teleconferences for the two  remaining FHLBanks. For each of the six locations, we held group  interviews with FHLBank management and community investment staff  and a separate group interview with representatives from the FHLBanks’  advisory councils. The interviews with FHLBank management and staff  were conducted jointly. Generally, the number of representatives from  FHLBank management and staff differed by FHLBank because we  allowed the FHLBanks to determine who should be present based on the  questions we sent in advance, but in all cases the FHLBank’s corporate  secretary participated. For our interviews with advisory councils, we  generally interviewed the chair and vice-chair of the advisory council in  addition to other advisory council representatives. Additionally, we  conducted individual interviews with three board directors (a member,  independent, and public interest director) from each of the six FHLBanks.  We also interviewed officials from FHFA, including officials within FHFA’s  Division of Bank Regulation and Office of Minority and Women Inclusion  (OMWI). We examined three sets of board meeting minutes for each of  the 12 FHLBanks from 2013 to 2014 including (1) full board meeting  minutes, (2) committee meeting minutes for each FHLBank’s governance  committee, and (3) committee meeting minutes for each FHLBank’s  affordable housing and/or community and economic development  committee. We reviewed a total of 560 documents on-site at FHFA and  used a data collection instrument to independently code relevant  information, as discussed later in this appendix. We also interviewed  representatives of the Council of the FHLBanks––the trade association  representing the 12 FHLBanks. Additionally, we interviewed five trade  associations—the American Bankers Association, Independent  Community Bankers Association, Community Development Bankers  Association, Credit Union National Association, and the National  Federation of Community Development Credit Unions. These interviews  included representatives from FHLBank member institutions that were  also members of these trade associations. Finally, we interviewed  representatives from several corporate governance organizations and  academic institutions, as discussed later in this appendix.
As part of our work, we conducted a web-based survey of all FHLBank  directors who served in 2014. The purpose of this survey was to gather  information from FHLBank directors on their roles and responsibilities and  obtain their opinions on HERA’s changes, as well as to collect data on  diversity on the FHLBank boards. We sent a survey to all 189 directors  who served during 2014. We received information from FHFA on the  number of board directors designated for 2014 across all 12 FHLBanks  and we confirmed the names and director types for the 189 directors with  contacts at each of the FHLBanks. We received completed surveys from  178 board directors, for a 94 percent response rate. Six of the 12  FHLBanks had a 100 percent response rate (Atlanta, Boston, Dallas,  Pittsburgh, San Francisco, and Topeka). The remaining six FHLBanks  (Chicago, Cincinnati, Des Moines, Indianapolis, New York, and Seattle)  had response rates ranging from 80 percent to 94 percent.
The web-based survey was administered from November 19, 2014, to  January 31, 2015. Board directors were sent an e-mail invitation to  complete the survey on a GAO web server using a unique user name and  password. Nonrespondents received three reminder e-mails from GAO to  complete the survey. We presented at the Council of FHLBanks’  September 2014 meeting to encourage board directors to participate in  the survey. As a final step, we contacted the corporate secretaries at  each of the FHLBanks and asked for their preference on whether we  should send a final reminder e-mail or conduct telephone calls to all  nonrespondents. Based on their preferences, we made phone calls to  some of the nonrespondents and sent the remaining nonrespondents a  fourth and final e-mail reminder about the survey. Because this survey  was not a sample survey, it has no sampling errors. The practical  difficulties of conducting any survey may introduce nonsampling errors,  such as difficulties interpreting a particular question that can introduce  unwanted variability into the survey results. We took steps to minimize  nonsampling errors by pretesting the survey questions in person and by  teleconference with five board directors (including three board chairs)  from five different FHLBanks. We also received comments from the  Council of the FHLBanks––the trade association representing all 12  FHLBanks—based on their review of our draft survey. We conducted  pretests to make sure that (1) the questions were clear and unbiased, (2)  the data and information were readily obtainable, and (3) the survey did  not place an undue burden on respondents. We made appropriate  revisions to the content and format of the survey after the pretests and  independent review. All data analysis programs used to generate survey  results were independently verified for accuracy. Additionally, in reviewing  the answers from board directors, we confirmed that respondents had  correctly bypassed inapplicable questions (skip patterns).

	HERA’s Governance Changes

To determine HERA’s governance changes and the implementation  status, we reviewed relevant laws and FHFA’s regulations, including final  rules on director eligibility, elections, and compensation, and interviewed  FHFA officials to determine the extent to which HERA’s changes to  governance had been implemented. Specifically, we reviewed  information about FHLBank governance in the Federal Home Loan Bank  Act; the Financial Institutions Reform, Recovery, and Enforcement Act of  1989; and the Gramm-Leach-Bliley Act. To determine board directors’  roles and responsibilities and committee information, we reviewed  relevant regulations, FHFA’s examination manual (which includes a  section on board director responsibilities), and FHLBank bylaws and  committee charters. We also reviewed FHFA’s proposed rule on board  director responsibilities, corporate practices, and corporate governance   We also  matters, and as of April 2015, this rule had not been finalized.analyzed FHFA data on board director compensation for 2013 and  compared it to the pre-HERA compensation caps established by the  Gramm-Leach-Bliley Act. As part of our semistructured interviews, we  asked FHLBank management and staff, FHLBank advisory council  representatives, and board directors about their views on HERA’s  changes and summarized their responses. Additionally, we analyzed  responses we received from our survey of board directors for questions  related to the impact of HERA’s governance changes. Finally, we asked  trade associations and representatives from FHLBank member  institutions their opinions on HERA’s governance changes.

	FHLBank Diversity Information

To summarize the composition and diversity of the 2014 board directors,  we summarized information received from each of the 12 FHLBanks and  analyzed results from our survey. Because demographic information was  not publicly available for FHLBank board directors, we requested  information from the FHLBanks. Specifically, we sent a request to each  FHLBank to collect data on the number of men, women, racial or ethnic  minorities, non-racial or nonethnic minorities, and the total number of  board members who served during 2014. We also collected information  about board directors who served in 2014 from the U.S. Securities and  Exchange Commission’s (SEC) 10-K filings, SNL Financial, and FHLBank  websites. Additionally, in our survey to 2014 board directors, we asked  respondents to self-identify gender, origin, and race. The responses we  received from the FHLBanks were generally based on observation while  the survey data was self-reported. For data on the number of women and  racial or ethnic minorities, we relied on information provided by each of  the FHLBanks. For women and minority representation on FHLBank  boards, we compared the data received from the FHLBanks to the survey  data we received for data reliability purposes.

	FHLBank and FHFA Diversity Practices

To determine FHLBank and FHFA practices related to board diversity, we  first reviewed relevant regulations and all 12 FHLBanks’ policies and  procedures for identifying, nominating, and selecting board directors. We  reviewed and analyzed publicly available information including FHLBanks’  bylaws, 2013 SEC 10-K filings, and FHLBank websites for information  about their nomination and election procedures and whether these  documents discussed diversity of board directors. Specifically, we  reviewed FHLBank’s bylaws to determine whether they generally  contained the same information such as whether the board consulted with  outside groups or the advisory council for nominees, whether the board  considered diversity in the nomination process, or whether the board had  a committee in charge of elections. In addition, we reviewed each  FHLBank’s SEC 10-K filing, Part III, Item10—where each FHLBank  includes information about FHFA regulations and eligibility requirements  for independent board director nominees. We reviewed the SEC 10-K  filings for information about board directors and whether the FHLBanks  stated they considered diversity in the nomination of board directors. We  also reviewed each FHLBank’s website during the 2014 election cycle to  determine if the FHLBank posted an announcement about their upcoming  director election process, included a timeline of their election process,  and checked if the announcement posted encouraged women and racial  or ethnic minorities to apply.
We also obtained and reviewed any written nomination policies and  procedures, in addition to committee charters, annual reports, and other  information provided by each of the FHLBanks, to determine how their  board sought nominations for directors, the extent to which they solicited  nominees from outside organizations, and whether they had any  statements related to board diversity. Additionally, we reviewed GAO  survey results on the nomination and election processes and summarized  information received from our interviews with FHLBank management and  staff and FHLBank board directors. We also reviewed full board meeting  minutes (as available) for each of the 12 FHLBanks from 2013 to 2014,  including committee meeting minutes from each FHLBank’s governance  committees. Specifically, using our data collection instrument we  independently coded examples of discussion of the bank’s nomination  and election processes. Lastly, we reviewed HERA requirements for  FHLBank elections and interviewed FHFA’s Division of Banking and  Regulation about their process for reviewing member and independent  nominees for directorships and FHFA’s member and independent director  application forms.
To identify commonly cited practices used to improve board diversity, we  reviewed our previous work on diversity management in the financial  industry, among federal financial regulators, and on Federal Reserve  Bank boards. We also conducted a literature search to identify practices  cited in studies and research papers related to diversity on the boards of  directors and in the selection and election of board directors, using key  words such as board diversity and directors and board directors and  elections or nominations. Out of over 100 articles the literature search  returned, we reviewed 31 reports and articles that seemed most  relevant. We did not find any articles that directly addressed FHLBank  governance so we relied mostly on literature focused on diversity on  corporate boards.
We reviewed all of the practices cited in our prior work and the selected  literature to develop a list of practices cited by multiple organizations as  ones that would promote diversity on boards. We selected practices that  we determined were most applicable to FHLBank boards, as their election  processes are different from those of public corporations with  shareholders. literature that pertained only to corporate boards of publicly traded  companies, such as reforming shareholder elections, because they were  not applicable to FHLBanks. We also interviewed representatives from  organizations including Catalyst, The Conference Board, the National  Association of Corporate Directors, and researchers from Stanford  University’s Rock Center for Corporate Governance, and Harvard  Business School. We selected these organizations based on their  research on topics related to board composition and the effect of diversity  on boards. We also reviewed SEC’s rule related to corporate disclosure  of boards’ director and nomination selection processes.analyzed the FHLBank practices and compared them to the commonly  cited practices.
As previously discussed, FHLBanks are private, member-owned cooperatives. The  board is more limited in its ability to influence nominees for member director positions. officials about the status of the proposed rule and the activities they had  undertaken to review FHLBank board diversity. In addition, we reviewed  public comment letters for FHFA’s proposed rule on board diversity to  obtain information about others’ views on the proposed rule, for example,  the FHLBanks’ joint comment letter to FHFA. We also reviewed FHFA’s  final rule on board diversity when it was issued in May 2015.

	FHLBank Community Lending

To summarize the extent of community lending by FHLBanks, we  analyzed FHFA data on community and economic development  programs—the Community Investment Program (CIP) and the  Community Investment Cash Advance (CICA) program—including data  on advance commitments from 2008 through 2014. We also reviewed  SNL Financial data for information on FHLBank total advances from 2009  through 2014 to assess conditions post-HERA. To assess the reliability of  FHFA data, we reviewed information about the data and the systems that  produced them and interviewed FHFA officials on how they assess the  reliability of data on affordable housing and community lending programs,  and reviewed the data ourselves to assess completeness and look for  inconsistencies. To verify the accuracy of SNL Financial data, we  compared a sample of advance-level data to SEC 10-Ks to look for  inconsistencies and interviewed SNL Financial representatives about any  changes to their data systems. We consider the information to be reliable  for our purposes of determining the level of FHLBank community lending  advances and reporting on total advances across the FHLBanks. We also  reviewed publicly available documentation from FHLBanks, including  community lending plans, advisory council reports, and annual reports, as  well as information on each FHLBank’s website, to determine if the  FHLBank offered a unique community lending program in addition to their  system-wide community lending programs. For the 6 FHLBanks we spoke  with we asked them to verify that our list of their unique and system-wide  programs was accurate. We also reviewed relevant FHFA reports to  identify FHLBank policies and programs including their annual reports on  housing and community development activities of the FHLBanks.  Finally, as discussed above, we reviewed full board meeting minutes  including committee meeting minutes from each FHLBank’s relevant  affordable housing and/or community and economic development  committees. Specifically, using our data collection instrument we  independently coded examples of discussion of the FHLBank’s affordable  housing and community investment policies and programs. As part of our  semistructured interviews, we asked FHLBank management and staff,  FHLBank advisory council representatives, and board directors about  their policies and programs that support community lending, limitations to  expanding support of community lending, and interactions between board  directors and advisory council representatives. We incorporated these  limitations into our survey of board directors and also surveyed board  directors on their involvement in overseeing community lending. We  summarized responses received to these two questions including open- ended responses on board directors’ opinions on any limitations the  FHLBanks may face in expanding such lending. We also interviewed the  trade associations cited earlier about their members’ use of FHLBank  community lending programs.
We conducted this performance audit from June 2014 to May 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Federal Home Loan Bank Affordable Housing and Community and Economic Development Committees, 2014

Each of the 12 Federal Home Loan Bank (FHLBank) boards have a  committee that addresses affordable housing and community and  economic development programs and policies for their respective  FHLBank (see table 6).

Appendix III: GAO Contact and Staff Acknowledgments

	GAO Contact

Daniel Garcia- Diaz, (202) 512-8678, garciadiazd@gao.gov.

		Staff Acknowledgments

In addition to the individual named above, Kay Kuhlman (Assistant  Director), Beth Ann Faraguna (Analyst-in-Charge), Susan Baker, Emily  Chalmers, Pamela Davidson, Katherine Bittinger Eikel, Jill Lacey, Marc  Molino, Lauren Nunnally, Kelsey Sagawa, and Jessica Sandler made key  contributions to this report.

Summary:
Why GAO Did This Study

In 2014, the FHLBank System had over 7,300 member institutions and approximately $570 billion of loans (advances) outstanding. The system consists of 12 regionally based banks that are cooperatively owned by member institutions. Its mission is to serve as a reliable source of liquidity for members to support housing finance and community lending. In 2014, each FHLBank had a board of 14 to 19 directors that includes elected directors from member institutions and independent directors from outside the system, including at least 2 with consumer or community interests.
GAO was asked to review legislative changes to FHLBank governance and the diversity of the FHLBanks' boards of directors. This report discusses (1) the governance changes and their implementation; (2) FHLBank boards' diversity; (3) FHLBank and FHFA efforts to improve diversity; and (4) community lending programs and boards' oversight of them. GAO analyzed FHLBank data and reviewed bylaws, policies, board meeting minutes, and regulations. GAO also reviewed previous work on diversity in the financial services industry, as well as literature on governance and diversity, and surveyed all 189 FHLBank directors serving in 2014 (with a 94 percent response rate). GAO interviewed FHLBank management and staff, board directors, and advisory councils at six FHLBanks selected by number of member institutions, asset size, volume and type of community lending activities, and location.

What GAO Found

The Housing and Economic Recovery Act (HERA) of 2008 changed several aspects of the Federal Home Loan Bank System's (FHLBank System) governance. Among other things, HERA required that independent directors on the FHLBank boards be elected by member institutions (for example, commercial banks, thrifts, credit unions, and insurance companies) rather than appointed by the regulator. HERA also added certain skill requirements, removed compensation caps, and created a new regulator for the system, the Federal Housing Finance Agency (FHFA). FHFA fully implemented the governance changes through two rules in 2009 and 2010. Board directors, FHLBank representatives, and others generally view HERA's governance changes as positive because the changes give FHLBank boards' greater control over nominees and help ensure that candidates have specific skills and experience.
Women and minority representation on FHLBank boards is limited (see figure). A woman chaired 1 of 12 FHLBank boards in 2014, but no racial or ethnic minorities did. Most women and racial or ethnic minorities were independent directors rather than member directors. Directors' skill sets were more diverse. For example, member directors responding to GAO's survey were more likely than independent directors to report having skills in accounting and banking. Independent directors were more likely to report having skills in project development, community and economic development, and affordable housing.
Women and Minority Representation on Federal Home Loan Bank Boards, 2014
FHLBanks and FHFA have taken steps to increase board diversity. Since HERA's enactment, FHLBanks and their boards have developed processes to identify and nominate independent directors. GAO found that these processes generally followed several commonly cited practices for improving diversity, such as diversifying the applicant pools for directors. A 2009 FHFA rule encourages FHLBanks to consider diversity when selecting candidates, and a 2015 rule requires the FHLBanks to report information on board diversity in their annual reports. FHFA plans to begin evaluating board data and other information on outreach activities related to board diversity.
Community lending varies across the FHLBanks. For example, 6 of the 12 FHLBanks offer unique community lending programs in addition to the system-wide programs. Under the Community Investment Program, which provides funds for housing and economic development, 4 of the 12 FHLBanks used the funds for economic development in 2014. FHLBanks have committees that are responsible for overseeing these activities, and, according to GAO survey results, directors serving on these committees have greater responsibility for overseeing community lending programs.