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Legislative Updates

April 16, 2007

This update covers developments since the last update (3/23/07).

I. GSE Regulatory Reform

House Consideration: The House returns from its two-week recess today and picks up GSE regulatory reform where it left off. On March 29, the House Financial Services Committee voted out the legislation by a strong vote of 45-19. The bill garnered almost half of the Republican committee votes which shows that it can easily pass the full House in the coming months. While the bill is very similar to the bill that passed the House in the last Congress, it contains provisions that reflect the changed dynamics of the 110th Congress.

With the expectation that the legislation will not be changed materially on the House floor, it is a good time to take stock. Federal Home Loan Banks entered this legislative effort over three years ago with a goal that the bill not harm the System. The primary concern was structuring the new regulator to recognize the differences amongst the GSEs and to ensure FHLBank member value and utility would not be diminished. While this goal has been achieved, the legislation has taken on a number of positive provisions as the process has moved forward.

These positive provisions include:

• The expansion of the definition of community financial institutions (CFIs) to $1 billion in assets from the current $599 million;
• The expansion of CFI collateral to include “economic development activities”;
• The clarification that the FHLBanks’ mission includes “housing finance and economic and community development”;
• The removal of the prohibition on FHLBanks from operating joint offices; and
• The removal of statutory limits on director compensation and the extension of director terms.

Other FHLBank provisions in the bill include:

• The retention of appointed directors for FHLBanks (the bill does eliminate appointed directors for Fannie Mae and Freddie Mac);
• The requirement that Fannie Mae, Freddie Mac, and the FHLBanks establish an Office of Minority and Women Inclusion, which will be responsible for developing and implementing standards and procedures for including minorities and women in business activities and contracts; and
• The requirement that Fannie Mae, Freddie Mac, and the FHLBanks conduct an annual study of the levels of affordable housing inventory, and changes in the inventory, along with the types of financing and excess demand for affordable housing.

During the committee deliberations on the legislation, ranking member Spencer Bachus (R-AL) offered an amendment to direct that the Fannie/Freddie affordable housing fund (AHF) be administered by the FHLBanks. Chairman Frank said that he was not necessarily opposed to this but suggested that the issue be studied in the future. Since the first year’s AHF funds would be committed to Louisiana and Mississippi, he said there is time to consider state housing agencies, FHLBanks, and any other possible administrators. Rep. Baker (R-LA) said he was not sure the FHLBank of Dallas could handle the volume.

Senate Consideration: Senate Banking Committee Chairman Dodd (D-CT) has not given any timetable for Senate consideration, so action in the near future is unlikely. Senators Chuck Hagel (R-NE), John Sununu (R-NH), Elizabeth Dole (R-NC) and Mel Martinez (R-FL) introduced S. 1100, “The Federal Housing Enterprise Regulatory Reform Act of 2007.” The FHLBank provisions are similar to those in the bill passed by the Senate Banking Committee from the last Congress.

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

AEI Conference: On April 11, John Price appeared on a panel at a conference sponsored by the American Enterprise Institute on “The Federal Home Loan Banks and State and Local Revenue Bonds.” The session was moderated by the AEI’s Peter Wallison and John discussed the FHLBank point of view while Gary Dunton, CEO of MBIA, Inc. argued the issue from the perspective of the bond insurers. Former FHLBank of Chicago President and current AEI Resident Scholar Alex Pollock also participated.

John discussed the proposed legislation that will allow FHLBank member institutions to offer letters of credit, backed by their FHLBank, on tax-exempt bonds. He made the following points:

• The legislation is needed to benefit communities and small issuers that are currently underserved by bond insurers who are generally more hesitant to seek to do business with these entities, because doing so may not be cost-effective and does not fit their business model.
• If this legislation passes, the SLOCs issued by FHLBanks would go primarily towards modest projects such as small local colleges, health care facilities, small manufacturers and other private activity bonds issued by small local governments.
• Community banks within the FHLBank System are well suited to underwrite the credit for such projects since this is an essential aspect of the business of community banking.
• There would be little overlap between the activity of the FHLBanks and the bond insurers.
• The bond insurers would still dominate the market for both government and private activity bonds.
• This legislation is not intended to enable FHLBanks to divert business from other financial institutions, but will help community banks serve the needs of their own communities.

Congressional Action on Section 149: This week, Ways and Means Committee members Sander Levin (D-MI) and Phil English (R-PA) are expected to introduce the legislation with GSE Subcommittee Chairman Paul Kanjorski (D-PA) as an original cosponsor.

III. FHFB Meeting

The FHFB, on April 11, appointed Charles A. Bowsher to serve as the private-citizen director and Chairman of the board of the Federal Home Loan Banks’ Office of Finance (OF). Mr. Bowsher was appointed to fill a three-year term that expires on March 31, 2010. Mr. Bowsher previously has served as the Comptroller General of the United States and head of the General Accounting Office (GAO). Currently, Mr. Bowsher serves on the advisory board of the Public Company Accounting Oversight Board.