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Legislative Updates

Policy Outlook - 110th Congress

The 110th Congress began its two-year life on January 4, 2007. Early promises of bipartisan cooperation are but echoes in February and that spirit of goodwill is fast becoming replaced with the tough dynamics of hardball politics as usual. After all, the next election is a mere 20 months away.

In the banking arena, both incoming House Financial Services Committee Chairman Barney Frank (D-MA) and Senate Banking Chairman Chris Dodd (D-CT) have said they will focus on affordable housing, consumer protection, and predatory lending. They have also stated their intent to quickly take up Government-Sponsored Enterprise (GSE) regulatory reform legislation where the last congress left off. As it looks at GSEs, it can be expected that the 110th Congress will have a greater focus on GSE mission.

Key players in the GSE reform debate will be Rep. Paul Kanjorski (D-PA) who chairs the Subcommittee on Capital Markets, Insurance and GSEs, and subcommittee members Rep. Shelley Moore Capito (R-WV), Mike Castle (R-DE) and Jim Gerlach (R-PA). Freshman Senator Bob Casey (D-PA) will be a key player on the Senate Banking Committee.

GSE Regulatory Reform Outlook

In the last Congress, the full House passed legislation by a huge bipartisan margin. The Senate’s counterpart legislation passed the Senate Banking Committee on a partisan vote but moved no further.

The primary focus for most participants in this debate will be Fannie Mae and Freddie Mac. Federal Home Loan Banks (FHLBanks), as housing related GSEs, will be included in the legislative deliberations and in any resulting legislation, but will not be the primary focus of debate. However, FHLBanks will be affected by the bill and the stakes for them and their stakeholders are high.

As GSEs, FHLBanks operate under a federal charter enabling them to meet the housing and community development credit needs of over 8,000 member institutions and the communities they serve. They are distinctly different in their business model, corporate structure, and a number of other fundamental ways that warrant different treatment than that accorded Fannie Mae and Freddie Mac.

Both bills from the last congress treated FHLBanks fairly. While a number of smaller issues still require attention, all FHLBanks support the passage of the legislation.

The Democrats are motivated to get the legislation that will also create a major new housing program without having to provide appropriated funds – the affordable housing program for Fannie Mae and Freddie Mac that is modeled after the FHLBanks’ Affordable Housing Program. Such a provision passed the House in the last congress.

A recent agreement between Chairman Frank and Treasury Secretary Paulsen on the authority of the new regulator over the investment portfolios at Fannie Mae and Freddie Mac is extremely significant. It shows the Administration is willing to compromise on this issue to get what will still be a significant improvement in the regulatory structure over Fannie Mae and Freddie Mac.

One possible future impediment to passage of legislation could be the opposition of conservative House Republicans to the Fannie/Freddie affordable housing program. House Financial Services Committee ranking minority member Spencer Bachus (R-AL) has already spoken out against the provision. While the House minority cannot block provisions as they can in the Senate, strident House Republican opposition could stir up problems in the Senate. Another contentious issue will be proposed changes to the conforming loan limits for Fannie Mae and Freddie Mac.

All in all, outlook for passage of GSE reform in the next Congress is definitely a better than 50/50 proposition. Both Chairman Frank and Chairman Dodd have said they will try and move legislation in the next several months. However, there is always the unknown dynamics of a new Congress which has the potential to kill bills with new, surprise issues that seem to rise out of nowhere.

In addition to the range of issues presented by congressional revision of the regulatory structure for FHLBanks, a number of other important issues will be considered this year.

Tax Legislation:

The Congress will once again be considering tax legislation authorizing FHLBank members to offer letters of credit on certain tax-exempt funding. This legislation will help local communities raise funds for water treatment facilities, infrastructure improvements, industrial development, healthcare facilities, fire stations, parking facilities, long-term care for the elderly, schools and other important activities.

In the 109th Congress, HR. 5177 was introduced in the House by Rep. Phil English (R-PA), a member of the Ways and Means Committee. He was joined as an original co-sponsor by Ways and Means member Sander Levin (D-MI) and the Chairman and Ranking Member of the House Capital Markets Subcommittee Rep. Richard Baker (R-LA) and Rep. Paul Kanjorski (D-PA). S. 3657 was introduced in the Senate by Senator Rick Santorum (R-PA), a member of the Senate Finance Committee and was cosponsored by Senator Tom Carper (D-DE).

The legislation, not yet introduced in the 110th Congress, amends Section 149 of the Internal Revenue Code (IRC) to add FHLBanks to the list of GSEs that can credit enhance certain tax-exempt municipal bonds. Fannie Mae, Freddie Mac, FHA, and VA have been permitted since 1984 under the IRC to issue these letters of credit (LOCs). At that time, FHLBanks did not offer LOCs. Now they do.

This legislation would allow many smaller banks and other FHLBank members to assist generally small communities and health and education borrowers where such borrowers are unable to obtain bond insurance or letters of credit from larger players. Numerous small, unrated rural hospitals or inner-city facilities would benefit from this credit enhancement as well as many educational institutions.

Regulatory Issues:

FHLBank Risk-based Capital: Throughout the year, the Federal Housing Finance Board will be considering the development of new risk-based capital rules for FHLBanks that would include a component for retained earnings.

Basel 1-A: Adoption by federal bank regulators of Basel 1-A minimum risk-based capital rules for banks and thrifts may affect member bank investment in FHLBanks.