Government Relations « Legislative Updates »

Legislative Updates

May 27, 2005

I. GSE Reform Update

The strong passage by the House Financial Services Committee of H.R. 1461 (see next item) gives the legislation strong momentum in the House of Representatives. The Senate Banking Committee is still developing its bill, and a markup may come as early as the week of June 6. The House is expected to wait until the Senate Banking Committee has acted before taking up H.R. 1461 on the floor.

II. House Financial Services Committee Reports Out Bill

The House Financial Services Committee met on May 25 and, after six hours of debate on more than 20 amendments, reported out H.R. 1461, the Federal Housing Finance Reform Act of 2005, by a vote of 65-5. Such a strong bipartisan vote makes consideration by the full House this summer quite likely. The Senate Banking Committee staff are still working on legislation, and it is possible that committee will consider legislation in June.

The legislation establishes a single regulator with bank-like regulatory powers over Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Many amendments were accepted, including a so-called managers' amendment, a group of changes negotiated between Chairman Mike Oxley (R-OH), Subcommittee Chairman Richard Baker (R-LA), and full-committee and subcommittee ranking Democrats Barney Frank (D-MA) and Paul Kanjorski (D-PA).

The FHLBank of Pittsburgh's Banking On Business (BOB) program was singled out by Rep. Kanjorski for specific praise. The congressman's comments came during consideration of an amendment to cut the new Affordable Housing Program (AHP) for Fannie Mae and Freddie Mac. Rep. Kanjorski had gotten a provision added to that new program, calling for a leveraged grant program for community and economic development. He said that cutting the AHP for Fannie and Freddie program would hurt the kind of program that Pittsburgh is already operating. He noted it was voluntary on our part. He specifically mentioned BOB and spoke of the milestone event in Wilkes-Barre, the school that was refurbished, the new jobs that were created and the importance of the program to the community.

The bill is not as strong as the White House and Federal Reserve would have hoped in two significant areas: (1) the statutory limitations placed on the size of the portfolios of Fannie Mae and Freddie Mac and (2) the flexibility of Fannie Mae and Freddie Mac to enter into new businesses, including those that could be construed as primary, not secondary markets functions (the so-called bright-line test). Chairmen Oxley and Baker rebutted that the new regulator would have sufficient authority to deal with these issues.

A. Key FHLBank Provisions in H.R. 1461

New Regulator: The Federal Housing Finance Board would be abolished one year after the passage of the legislation and folded into the new regulator, the Federal Housing Finance Agency (FHFA). The agency is given broad authority to set capital standards for the FHLBanks, enforce those standards through orders under a "prompt corrective action" system modeled on the banking laws, and take a wide range of enforcement actions in a manner similar to the Federal banking agencies.

• The FHFA would have a presidentially appointed director confirmed by the Senate.
• Three deputies would serve under the regulator: one responsible for the safety and soundness of Fannie Mae and Freddie Mac, one for the FHLBanks and one for housing. The deputy for housing will be responsible for oversight over Fannie Mae's and Freddie Mac's "housing mission and goals" and oversight over "the housing mission" of the FHLBanks.
• The FHFA would have an advisory board consisting of:
  • the director of the new FHFA;
  • Treasury secretary;
  • HUD secretary;
  • a presidentially appointed individual with capital markets, secondary mortgage market and mortgage-backed securities expertise; and
  • a presidentially appointed individual with mortgage finance, affordable housing and economic development/revitalization expertise.
• The advisory board has no executive powers, but the amended bill adds a provision that would permit the board to provide policy and strategy guidance to the director on its own initiative. In the previous version of the bill, the advisory board could not act until requested by the director.

FHLBank Boards of Directors: Under the bill as amended by the committee, the management of each FHLBank is vested in a 13-member board, or a board of a different number as determined by the director of the new FHFA.

• At least one-third of the board must be composed of independent directors who may not be officers or directors of any member institution. At least two must be public-interest directors with specific expertise in housing and consumer affairs.
• Independent directors are to be selected by election by a plurality of the votes of the members of the Bank at large. Each member will be entitled to nominate candidates and to cast the same number of votes as in an election to fill directorship allocated to the member's state.
• Independent directors must have demonstrated knowledge of or experience in financial management, accounting, risk management, derivatives, project development or organizational management, or such other expertise as the regulator may provide.
• Compensation caps are lifted and director terms are extended to four years as in earlier versions of the bill.
• If a vacancy occurs, it shall be filled, for the remainder of the unexpired term, by a vote of a majority of the remaining directors.
• Any member of a board of directors serving on the effective date (one year after date of enactment) may continue to serve for the remainder of his or her three-year term.
• The 1960 grandfather of state representation on FHLBank boards of directors is removed.

Receiverships and Voluntary Mergers:

• The amendment broadens the receivership and conservatorship provisions in H.R. 1461 to apply a statutory receivership scheme to the FHLBanks similar to the bank receivership approach proposed for Fannie Mae and Freddie Mac. This will provide due process and a set of clear rules for the conservatorship or receivership of a failing FHLBank with clearly enunciated rights for various parties including members, counterparties and unsecured creditors.
• The bill creates a statutory framework for voluntary mergers between healthy FHLBanks. Such mergers could only take place if they were approved by the boards of both Banks and the regulator. The regulator is tasked with developing rules to promulgate this provision that will also provide for the approval of the members of all affected Banks.

Community Financial Institutions: The bill increases the asset definition of a CFI to $1 billion in assets. Rep. Kanjorski got an addition to the acceptable advance collateral provisions to include "community development activities."

SEC Registration: The bill requires that FHLBanks register with the SEC under the 1934 Act within one year of the bill's enactment. As in earlier bills, the Banks and their members are exempted from several specific provisions of the 1934 Act to reflect the cooperative nature of the system. In addition, the government securities and exempted status of FHLBank securities are confirmed.

When issuing final regulations, the SEC is required to consider the distinctive characteristics of the FHLBanks when considering the accounting treatment of REFCORP payments, combined financial statements, the accounting of redeemable capital stock, and joint and several liability.

Joint Activities of FHLBanks: The bill authorizes any two or more FHLBanks to establish a joint office for the purpose of performing functions for, or providing services to, the Banks on a common or collective basis, or may require the Office of Finance to perform such functions or services. This authority is subject to the regulation of the director.

Office of Finance: The bill keeps the Office of Finance as it is currently structured.

Greater Information Sharing Among FHLBanks: The regulator is to prescribe regulations to ensure that each Bank has access to information that the Bank needs to determine the nature and extent of its joint liability. Providing information under these regulations will not constitute a waiver of any privilege.

Study of Advance Pricing: Rep. Spencer Bachus (R-AL) offered an amendment that was accepted for a study by the GAO of Fannie Mae's and Freddie Mac's guarantee fees and advance pricing practices of the FHLBanks.

Reports on Fraudulent Financial Transactions: The GSEs must file a report upon discovery that they have purchased or sold a fraudulent loan or financial instrument, or suspect a possible fraud relating to the purchase or sale of any loan or financial instrument. The entities must establish and maintain procedures designed to catch such loans. Any entity or affiliated party that makes such a report in good faith is granted immunity from liability for the report.

B. Fannie Mae and Freddie Mac Provisions of Interest

Portfolio Limits: The committee-approved bill retains the language in the original Baker/Oxley bill that directs the regulator to periodically review Fannie's and Freddie's on-balance-sheet assets and off-balance-sheet obligations and provides authority to require disposition of assets or obligations for safety and soundness reasons. It does not include specific limits on GSE portfolios and confines the regulator's portfolio oversight to safety and soundness matters. The committee rejected a proposed amendment directing the regulator to pare Fannie Mae's and Freddie Mac's portfolios to minimum levels needed to support their mission.

High-cost-area Adjustments to Conforming Loan Limits: The amended bill adds a new high-cost-area section that would allow higher limits for areas where the median home price is higher than the conforming limit. In these areas, the limit would be the lesser of 150 percent of the conforming loan limit or the median house price. However, such high-cost limits would only apply to mortgages that Fannie Mae and Freddie Mac securitize.

Fannie Mae and Freddie Mac Affordable Housing Fund: The bill overhauls Fannie Mae's and Freddie Mac's mortgage purchase goals by making them more challenging and focused on underserved areas. In addition, the bill sets up a dedicated fund requiring Fannie and Freddie to set aside a percentage of their profits to fund deeply targeted affordable housing initiatives.

• The enterprises are to allocate 3.5 percent of after-tax income to this fund in the first year, and 5 percent per year thereafter. An entity would not have to contribute if not adequately capitalized.
• The purpose of the funds is to increase homeownership opportunities for very-low- and extremely low-income households; to increase investment in housing in low-income areas; to increase and preserve the supply of rental and owner-occupied housing for very low- and extremely low-income households; and to increase economic and community development investment in economically underserved areas.
• Eligible activities include new production, rehabilitation and preservation of rental and ownership housing (there is a 10 percent set-aside for homeownership activities).
• Rep. Kanjorski got the inclusion into the manager's amendment of a 12.5 percent set-aside for "leveraged grants" to housing finance agencies, low-income housing funds, community development financial institutions, community development corporations and entities, and national and local housing nonprofits.
• An Affordable Housing Board would be established to advise the regulator on the establishment of program criteria, consider program changes and evaluate reports on program results. This board would have seven, nine or eleven members with balanced representation for for-profit entities (GSE regulator; HUD secretary or designee; agriculture secretary or designee; two representatives from nonprofits; and two representatives from for-profits).

C. Defeated Amendments

All amendments that went to a recorded vote were defeated.

• Rep. Frank proposed to replace the proposed director of the new regulatory agency with a five-member board consisting of no more than three members of the same party and a chair designated by the president. Rep. Frank argued that a single director would reflect the administration's ideological concerns and political agenda. This amendment was defeated by a roll-call vote of 33-37.
• Rep. Kanjorski attempted to restore presidentially appointed directors for Fannie Mae and Freddie Mac and regulator-appointed directors for the FHLBank boards. He offered this to keep an existing GSE attribute and to bring in directors with outside points of view. The amendment was defeated by a tied roll-call vote of 35-35.
• Rep. Ron Paul (R-TX) offered an amendment to remove the Treasury line of credit to the GSEs. The amendment lost by a vote of 14-56.
• Rep. Ed Royce (R-CA) proposed the elimination of the new AHP for Fannie Mae and Freddie Mac. It was defeated by a vote of 17-53.

D. Amendments of Interest Accepted by Voice Vote

• Rep. Paul Gillmor's (R-OH) amendment to require the disclosure of charitable contributions by Fannie Mae and Freddie Mac.
• Rep. Royce's amendment to include the new regulator within the Federal Financial Institutions Examination Council and to establish an office of ombudsman within the new agency.
• Rep. Jim Gerlach's (R-PA) amendment commissioning a GAO study of how the FHLBanks' AHP assists long-term care facilities and requires recommendation to the new regulator to apply these approaches in the development of the new AHP for Fannie Mae and Freddie Mac.
• Rep. Jeb Hensarling's (R-TX) amendment to study privatization of the GSEs.

III. Deposit Insurance Reform Passes the House

On May 4, for the third time, the House approved deposit insurance reform legislation. The bill passed by a vote of 413 to 10.

This year's legislation, H.R. 1185, the Federal Deposit Insurance Reform Act of 2005, is identical to H.R. 522, which passed the House in the 108th Congress by a vote of 411-11, and H.R. 3717, which passed the House in the 107th Congress by a vote of 408-18.

The bill would:

• merge the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF);
• end the 23-basis-point premium rate cliff that occurs when the reserve ratio of deposits insured to premiums held falls beneath 1.25 percent for more than one year;
• create a reserve range within which the reserve ratio can float;
• increase coverage limits for individual accounts to $130,000 and index future coverage limits to inflation;
• double coverage limits for certain types of IRAs and 401(k)s; and
• increase coverage limits for municipal deposits.

Any increase in deposit insurance coverage remains extremely controversial in the Senate.