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Legislative Updates

March 22, 2006

I. Finance Board Consideration of Retained Earnings/Excess
   Capital Rule

On March 8, the Federal Housing Finance Board (FHFB) unanimously voted out for comment (with a 120-day comment period) a rule that:

• Establishes a retained earnings minimum (REM) that equals
  $50 million plus one percent of non-advance assets. Until the REM is reached, an FHLBank may not pay more than 50 percent of earnings in the form of dividends without FHFB approval. The quarterly REM would be determined by the daily average of assets in the previous quarter. Steve Cross indicated that most banks would reach this target within 1.5 to 2.5 years (based on 2005 earning levels) and that all but one Bank would reach the level within three years.
• Limits excess stock to one percent of assets and prohibits dividends in the form of stock. Evidently, four Banks are currently in excess of this figure, with two only marginally so. The proposed regulation would have this provision taking effect 60 days after the regulation becomes effective.
• Requires Banks to close out the previous quarter's books before paying a quarterly dividend.

During meetings with members of America's Community Bankers on March 14, Chairman Ronald Rosenfeld repeated that this regulation was not set in stone and that all key elements would be open for review based on the comments received.

II. AHP Funds Treated as Federal Funds in the Budget

The President's fiscal-year 2007 budget now treats Affordable Housing Program (AHP) funds as federal dollars. This change emanated from the Congressional Budget Office's (CBO) scoring analysis last year of the proposed Fannie Mae/Freddie Mac affordable housing fund (AHF). CBO treated that program as government expenditure. When CBO and the Office of Management and Budget (OMB) met, as they do regularly to compare notes on how each develops scoring estimates for federal programs, the Fannie/Freddie AHF scoring was addressed and OMB decided to apply the same logic to the AHP.

The Budget states:

"The budget also reclassifies the collections and spending by the affordable housing program (AHP) funds created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) as governmental and includes them in the budget totals. FIRREA requires each of the 12 Federal Home Loan Banks (FHLBs) to contribute at least 10 percent of its previous year's net earnings to an AHP fund to be used to subsidize owner-occupied and rental housing for low-income families and individuals and to provide assistance to certain first-time homebuyers. Since 1990, the FHLBs have contributed $2.4 billion to the AHP funds, of which $1.7 billion has been spent. Although the funds remain in the possession of the FHLBs, the deposit of specific amounts into the AHP funds is compulsory, and the expenditures are to meet specific governmental purposes."

While there were apparently no ulterior motives in this change, it will be important to ensure that the rules governing federal housing programs such as the Low Income Housing Tax Credit (LIHTC) and the HOME program do not affect the use of AHP funds with these programs. The HOME and LIHTC programs currently have restrictions and limitations on the use of "federal" funds with these programs.

III. House Passes Reg Relief Bill — Strips Out FHLBank Director
     Provisions

On March 8, the House of Representatives, by a vote of 415-2, approved H.R. 3505, the Financial Services Regulatory Relief Act, that would reduce the regulatory burden on insured depository institutions. The managers of the bill stripped out provisions that would have extended the terms and lifted the compensation caps for directors of FHLBanks. The reason given was that these provisions are part of the government-sponsored-enterprise (GSE) reform bill which the House leadership is working to enact.