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Legislative Updates

May 17, 2006

I. Outlook for Balance of Second Session of the 109th Congress

While just midway through May, this session of Congress has 50 days remaining when Congress will be in legislative session. In addition to the short calendar, a number of factors are conspiring to make the balance of 2006 an extremely challenging policy environment.

The Administration's remarkably low standing in the polls has meant less White House control over the Republicans in Congress, who, in turn, are very concerned about retaining the majority in this November's elections. Republican unity is dissipating into at least three camps — fiscal conservatives, social conservatives and moderates —- and is facing a cohesive Democratic minority that can sense victory. Whether or not voter discontent results in a still-unlikely change in control of Congress, the dynamic of possible change underlies every significant policy debate this year.

These forces are creating a political/legislative meteorological scenario for the opposite of the perfect storm ... the perfect calm. Democrats are loath to enable this Congress to achieve anything significant but must appear to be working for such a goal. Republicans have seen their support eroding amongst their conservative base and will tee up issues designed not to pass, but to reinvigorate and bring the disenchanted out to the polls this fall.

Whether it is immigration reform, energy policy, ethics reform, a federal budget, or a whole host of other pressing issues, passage of any significant legislation faces an uphill battle. In an unusually early recognition of the challenges of managing Congress in this environment, the House leadership has already signaled the necessity of a lame duck session to get essential legislation passed after the election. If either body does indeed change hands, this lame duck session will be very brief.

II. GSE Regulatory Reform

GSE reform remains stalled. Portfolio limits for Fannie Mae and Freddie Mac continue to block passage and consensus appears unlikely. Both sides to this dispute do not seem to view significant compromise in their respective self-interest — the basic ingredient for an end to the stalemate.

Against this overriding inertia, a number of key policymakers have made recent speeches, sent letters and made public gestures in an effort to break the logjam. Until serious negotiations on the portfolio issue begin, and none are currently taking place, the chances of passage within an overall hostile legislative environment are diminishing.

Washington is currently awaiting next week's release by OFHEO of its long-awaited report on Fannie Mae's accounting and governance problems. Speculation is rampant about additional personnel changes at Fannie Mae, possible written agreements with the regulator, significant fines and what impact this might have on the legislation. The Senate Banking Committee has already indicated its intention to hold a hearing following the release of the report which might also bring additional pressure to bear on the parties involved in the portfolio dispute.

III. Section 149 Legislation Introduced in the House

On April 25, Rep. Phil English (R-PA), a member of the House Ways and Means Committee, introduced H.R. 5177 legislation to allow FHLBanks to provide credit support for municipal tax-exempt bonds. He was joined as an original cosponsor by Ways and Means member Rep. 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).

The following national groups support the legislation:

• Independent Community Bankers of America
• American Bankers Association
• National League of Cities
• U.S. Conference of Mayors
• Council of Federal Home Loan Banks
• National Association of Home Builders

The following in-district groups also support the H.R. 5177.

• Pennsylvania Housing Finance Agency
• Pennsylvania Builders Association
• Pennsylvania Bankers Association
• Pennsylvania Association of Community Bankers
• Pennsylvania League of Municipalities
• West Virginia Municipal League
• West Virginia Bankers Association
• West Virginia Association of Community Bankers
• Charleston Association of Home Builders
• Home Builders Association of North Central West Virginia

IV. Bair Nominated to Chair FDIC - Deposit Insurance Reform
     to be Implemented

The White House has nominated Sheila Bair to become the chairman of the FDIC. Bair currently teaches in the business school at the University of Massachusetts. During the first George W. Bush Administration, she served as Treasury assistant secretary for Financial Institutions, and prior to that, she served two terms at the Commodities Futures Trading Commission.

While at Treasury, she was very involved in the Treasury's GSE policy. If confirmed this year, she will chair the FDIC while it revamps the deposit insurance system (see next item). In 2001, Bair testified in Congress for changing the deposit insurance assessment base at depository institutions. She said, "The Gramm-Leach-Bliley Act, by giving community banks broader access to Federal Home Loan Bank advances, has accentuated our concerns about these potential risks. Reform efforts should consider whether the existing assessment base should be modified to account for the effect of liability structure on FDIC's expected losses."

No date has been announced for her confirmation hearing.

The FDIC has announced that the element of deposit insurance reform dealing with risk-based premiums will be presented to the board of the agency in July and released for public comment. The deposit insurance reform legislation mandates that all final rules be completed this fall.

It is not likely that the FDIC will change the assessment base for deposit insurance premiums as was suggested in 2001. However, the makeup of institutions' liabilities will be one of the factors under consideration in developing risk premiums for deposit insurance. To address this issue, the following report language was added to the House Committee on the Financial Services version of the legislation. "The Committee is concerned that the FDIC's development and implementation of a new risk-based assessment system not negatively impact the cost of homeownership or community credit by charging higher premiums to prudently managed and sufficiently capitalized institutions simply because they fund mortgages and other types of lending through advances from Federal Home Loan Banks."

V. Regulatory Relief Bill Passes Senate Banking

On May 4, the Senate Banking Committee passed the Financial Services Regulatory Relief Act of 2006. The bill was designed to avoid contentious issues that could block its passage on the Senate floor. House Financial Services Chairman Mike Oxley (R-OH) has expressed a desire that the bill that eventually passes the Senate could be passed by the House, obviating the need for any conference. The full House has already passed regulatory relief legislation.

These bills do not include any provisions affecting compensation or terms for FHLBank directors as was in earlier versions of the House legislation.