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Legislative Updates

June 11, 2008

Policy Outlook

As the 110th Congress enters the summer of its second session, with the November elections looming, time for work on legislation is a precious commodity.  For all intents and purposes, serious legislative activity will cease at the end of next month, after which only the most non-controversial or absolutely urgent matters will be considered. 

Bills of direct interest to the Federal Home Loan Bank System that are in play include GSE regulatory reform and authority for FHLBanks to issue letters of credit on a wide variety of tax-exempt bonds.

I. GSE Regulatory Reform

At the end of April, enactment of GSE reform legislation was not likely.  Action in May has dramatically increased the likelihood for passage of this landmark legislation.  As has been the case since this debate began in 2003, FHLBanks have been on the periphery, with the greatest focus being on Fannie Mae and Freddie Mac.

On May 8, 2008, the House passed GSE reform, by a vote of 266-154, as part of a broader housing relief package in H.R. 3221, the “American Housing Rescue and Foreclosure Prevention Act of 2008.”  This action is significant because it merges the GSE bill the House passed last year with foreclosure relief legislation and housing tax legislation which creates stronger pressure for passage.

On May 20, 2008, the Senate Banking Committee voted out a similar GSE reform bill by a vote of 19-2.  This is significant because the Senate Banking Committee had been stymied in reaching a bipartisan consensus for several years.  This strong vote means that any final bill will be very close to the Senate Banking Committee’s language.
 
Throughout this process, Congress has listened to the System’s concerns and addressed most of them.  There are a number of positive provisions in the House and Senate versions of the legislation that will almost assuredly be in any final bill.  These provisions include statutory recognition of the unique nature of the System as compared to Fannie Mae and Freddie Mac, changes to FHLBank governance, the increase in size of community financial institutions (CFIs) to $1 billion with an expansion of eligible collateral, and the option for FHLBanks to operate joint offices.  A broader review of the House and Senate GSE bills can be found at Attachment 1.

II. Update on Legislation to allow FHLBank Standby Letters of Credit (LOCs) on Certain Tax-Exempt Bonds

The bill introduced in the House by Ways and Means Committee members Reps. Sander Levin (D-MI) and Phil English (R-PA), H.R. 2091, has passed the House as part of a major housing relief package that also includes GSE legislation.

On April 9, The House Committee on Ways and Means voted out H.R. 5720, the Housing Assistance Tax Act of 2008, with a strong bipartisan vote of 35-5.  Section 143 of this bill is H.R. 2091, with a few modifications.  The first provides for a sunset on December 31, 2010.  The other substantive modification is that it requires that LOCs issued must follow applicable FHFB collateral regulations that were in effect on April 9, 2008.  This provision was sought by the bond insurers, who now do not oppose the legislation. The House provision was scored by the staff of the Joint Committee on Taxation at $124 million over 10 years.

These developments are significant because the House passed a provision with a very modest cost and the only group that had opposed the legislation no longer does so.

On May 9, the House accepted H.R. 5720 as an amendment to the H.R. 3221 by a vote of 322-94.  A majority of the House Republicans supported the amendment. 

When the House and Senate leaders meet in the coming weeks to develop the final housing related legislation of this Congress, this legislation will be considered for inclusion.

III. FDIC Raises Including FHLBank Advances in Assessment Base

On April 15, 2008, the FDIC Board approved the issuance of a new Policy Statement relating to the FDIC’s treatment of covered bonds.  The term “covered bond” refers to a debt security issued by a bank or other insured depository institution that is collateralized by both a pool of mortgages and the issuing institution.

Of special interest to the FHLBank System, the FDIC is specifically requesting comments on whether an institution’s percentage of secured liabilities should be factored into the assessment rate or assessment base, and whether there should be an overall cap on secured liabilities.  Since FHLBank advances are “secured liabilities” from the FDIC’s perspective, this request for comments indicates that the FDIC is considering changes that will directly impact the Bank System.

A number of FHLBanks, FHLBank members and stakeholders are commenting on the matter and making the point that advances should not be included in the assessment base.  The comment period closes June 23.

                                                            Attachment 1

Summary of FHLBank Provisions in Pending GSE Reform Legislation

 Both House and Senate bills abolish the Federal Housing Finance Board and OFHEO (the regulator of Fannie Mae and Freddie Mac), and establish a new regulator – the Federal Housing Finance Agency - for the Federal Home Loan Banks, as well as Fannie Mae and Freddie Mac. The new regulator would be headed by a Director with a five year term, and three Deputy Directors. The Deputy Directors would oversee Fannie/Freddie Regulation, FHLBank Regulation, and Housing Mission and Goals. (The Deputy Director for Housing Mission and Goals has oversight of the housing mission and goals of Fannie Mae and Freddie Mac, as well as oversight of the “housing finance and community and economic development mission” of the FHLBanks.)

The Senate bill would establish a four member oversight board – the Federal Housing Finance Oversight Board – consisting of the Director, who serves as chair; the Secretaries of Treasury and HUD; and the SEC Chairman. The House bill would create a similar board, without the SEC Chairman.

The new regulator is given broad authority to set capital standards for the FHLBanks, Fannie Mae and Freddie Mac, and to take enforcement actions in a manner similar to the Federal banking agencies. The bill provides broad conservatorship and receivership authority.

With respect to the FHLBanks, the bills include the following provisions, with major differences noted:

Recognition of Distinctions Between the Enterprises and the FHLBanks – The Senate, but not the House, bill includes, at Section 201, a provision  that requires the Director, before taking any formal or informal supervisory, regulatory, or enforcement action relating to the FHLBanks (including the issuance of examination guidance) to consider the differences between the FHLBanks and the enterprises, including the Banks’ – cooperative ownership structure; affordable housing and community development mission; capital structure; and joint and several liability.

Housing Goals on AMA Programs – At Section 205, the Senate bill requires the Director to establish housing goals with respect to the purchases of mortgages by the FHLBanks. In establishing these goals, the Director is to consider the unique mission and ownership structure of the FHLBanks. To facilitate an orderly transition, the Director must establish interim target goals for the two calendar years after date of enactment of this section. (The House bill does not include this requirement.)

Community Development Financial Institutions (CDFIs) – At Section 206, the Senate bill provides that CDFIs that are certified under the Community Development Banking and Financial Institutions Act of 1994 are made eligible for FHLBank membership. (The House bill does not include this provision.)

Sharing of Information – At Section 207, the Senate bill provides that the Director must issue regulations to ensure that each Bank has access to information concerning the other Banks in order to enable each Bank to evaluate the nature and extent of its joint liability. (The House bill includes a similar provision for information sharing.)

SEC Registration and Exemptions – Both the Senate and House bills include a number of exemptions for the FHLBanks from complying with certain provisions of the securities laws, including provisions relating to proxies, purchasing their own securities, certain periodic reports and tender offers.

Voluntary Mergers – Both bills authorize the voluntary merger of FHLBanks with the approval of the Director and the Banks’ boards. The Director is to issue regulations regarding the conditions and procedures for voluntary mergers, including procedures for Bank member approval.

Authority to Reduce Districts – At Section 210, the Senate bill provides that the number of FHLBank districts may be reduced to less than 8 as a result of a voluntary merger or as a result of the Director’s action to liquidate a Bank. (The House bill does not include a similar provision.)

Community Financial Institutions (CFIs) – Both bills raise the asset size of “community financial institutions” from $500 million to $1 billion. The bills also provide that community development activities are authorized for CFI advances and collateral.

Report on Collateral and Mortgages Purchased – Section 212 of the Senate bill requires the Director to submit an annual report to Congress on the collateral pledged to the Banks, including an analysis of collateral by type and by Bank district.  Also, each FHLBank is required to provide census tract level data on mortgages purchased. The Director is to make this data available to the public, unless it is determined to be proprietary. (The House bill does not include a similar provision.)

REFCORP – The Senate bill at Section 213 requires the Director to submit to Congress semiannual reports on the projected date for the completion of the required contributions. The House bill does not include a similar provision.

Liquidation and Reorganization Due Process Requirement – At Section 214, the Senate bill amends Section 26 of the FHLBank Act to require that 30 days before liquidating or reorganizing a Bank, the Director must provide notice to the Bank and disclose the facts and circumstances on which the action is based. The Bank may contest the action in a formal hearing under the Administrative Procedure Act.  (The House-passed bill repeals the authority of the regulator to liquidate an FHLBank under Section 26 based on the efficient and economical accomplishment of the purposes of the Act. However, the House bill does not repeal the regulator’s authority to reorganize a Bank for these reasons.)

Securitization Study – The Senate bill at Section 215 includes a requirement that the Director conduct a study on securitization of mortgages purchased under the AMA programs and submit a report to Congress within a year. (The House bill does not include a similar provision.)

Study of FHLBank Advances   – The Senate bill at Section 217 requires the Director to conduct a study and report to Congress, within a year of the date of enactment, on the extent to which loans and securities used as collateral to support FHLBank advances are consistent with the interagency guidance on non-traditional mortgage products. The study is to consider and recommend any additional actions to ensure that the FHLBanks are not supporting loans with predatory characteristics. The Director is to provide an opportunity for the public to comment on any recommendations. (The House bill does not include a similar provision.)

Joint Offices – While the Senate bill does not include a separate section providing for joint offices, as did the House-passed bill, the Senate bill does repeal Section 2B of the Federal Home Loan Bank Act, which abolished FHLBank joint offices.

Annual Report on Affordable Housing Stock – The House bill requires the regulated entities to conduct an annual study to determine the levels of affordable housing inventory in communities throughout the U.S.  (The Senate bill does not include a similar provision.

Effective Date/Date of Abolition of Finance Board – The House bill provides for an effective date of six months after the date of enactment, and provides that the Finance Board would be abolished six months after the date of enactment. Under the Senate bill, the provisions of the bill become effective on the date of enactment. As of that date, the OFHEO Director would become the acting Director of the new agency. Under the Senate bill, the Finance Board would not be abolished until one year after the date of enactment. The Senate bill provides that during that period, the Finance Board may take actions solely for the purpose of winding up the affairs of the Finance Board.

FHLBank Governance – The Senate and House bills provide that the FHLBanks are to be governed by 13 directors (or such other number that the Director determines appropriate).  At least two-fifths of the directors must be independent (non-member) directors. A majority of the directors of each FHLBank must be member directors. All directors have four-year terms and a three consecutive term limit. Both bills repeal the present statutory caps on director compensation and require the Director to report to Congress on the compensation and expenses paid to Bank directors. The grandfather clause – providing for each state to have at least the same number of elected directors as it had as of December 31, 1960 – is retained except in the case of a merger of FHLBanks. Directors serving as of the effective date of the act may serve for the remainder of their three-year term. (The House bill included a provision allowing the Bank’s board of directors to provide for a minimum of two member directors per state, instead of one. The Senate bill did not include this.) 

Under the Senate bill, the independent directors are to be elected by the Bank’s members from persons nominated by each Bank’s board of directors after consultation with the Advisory Council of the Bank. The House bill provides that independent directors are to be appointed by the Director from a list of candidates proposed by the oversight board. The oversight board may consider recommendations for independent directors made by the FHLBanks’ boards of directors, and the number of names submitted by the FHLBanks’ boards must be equal to at least two times the number of vacancies. Under the House bill, in appointing directors, the Director may consult with each Bank about the knowledge, skills, and other needs of the Bank. In making appointments, the Director must take into consideration the demographic makeup of the community most served by the AHP program of the Banks.  

Both bills include a conflict of interest provision specifying that during their terms of office, independent directors may not be an officer of any FHLBank or a director or officer of any member. The Senate bill goes further to provide that an independent director may not be an employee of any member or any entity that receives advances from a Bank. (Both bills remove the provision in current law at Section 7(a) that provides that independent directors may not “hold shares, or any other financial interest, in any member of a Bank.”) 

Both bills provide that at least two independent directors must represent the “public interest”. The Senate bill provides that public interest directors must have at least four years experience in representing consumer or community interests on banking services, credit needs, housing, or financial consumer protections. The House bill requires two years of such experience.

Both bills require the other independent directors to have demonstrated knowledge or experience in financial management, auditing and accounting, risk management practices, derivatives, project development, organizational management, or such other expertise as the Director provides by regulation.