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LOC Authority for Non-housing Tax-exempt Bonds May Soon Expire, Closing Current Deals Recommended

by Craig Howie, Group Director, Member Services

In September, we contacted FHLBank Pittsburgh members about the possibility that Congress may not extend FHLBank authority to issue letters of credit (LOCs) for non-housing tax-exempt financing. We believed then, and still believe today, that it is in the best interest of all FHLBank members working on or planning LOC deals in support of tax-exempt issues to close them as expeditiously as possible, but in any event no later than December 31, 2010.

When Congress granted us this authority, it did so on a time-limited basis and the provision expires at the end of this year. Congress often sets expiration dates on these types of tax provisions so as to reduce the budget impact. It also often extends this authority, and in fact there are more than 40 tax provisions expiring this year that are targeted for extensions.

The Bank is working very hard with a large coalition to extend the LOC authority and other important but (in the national debate on taxes) fairly small provisions. While we are hopeful that we will eventually get this authority extended, given the uncertain political environment and the upcoming elections, we cannot predict if that will happen this year or next.

While all deals closed by year-end will remain in place until maturity, if Congress does not extend our LOC authority beyond this date, FHLBank LOCs will not be able to support non-housing tax-exempt issues that close after the current year. Therefore, we strongly encourage you to bring all outstanding deals to a successful conclusion.

This expanded authority, granted by the Housing and Economic Recovery Act of 2008 (HERA), has allowed FHLBanks to issue a confirming or direct pay LOC in support of their members to assist them in financing original or refinanced tax-exempt issues for public purposes such as water and sewer, industrial development, healthcare facilities, retirement communities, school districts and colleges and universities. The HERA provision does not affect the long-standing and permanently authorized authority to use FHLBank LOCs to support tax-exempt housing bonds.

The authority granted in HERA has allowed participating members to book new business or deepen existing relationships, earn a fee, and garner greater community goodwill. In our own district, FHLBank members have enjoyed these benefits as they helped bring to market tax-exempt issues for water and sewer, student housing and other purposes.

We sincerely appreciate our members’ growing interest in this innovative product and will work diligently to maximize prospects for passage so we can keep this important economic and business development tool alive.