CDFA Spotlight: FHLB Developing Program to Take Advantage of New Legislation

The Federal Home Loan Banks (FHLBs) have begun to mobilize and implement new legislation included in the recently passed housing bill. One provision of the bill permits FHLBs to issue letters of credit (LOCs) on tax-exempt bond deals.

This change expands the use of FHLBs LOCs beyond tax-exempt housing deals, which the banks had been permitted to issue in the past. FHLBs were also permitted to issue LOCs on taxable bonds.

CDFA and its members were supporters of this legislation and were instrumental in obtaining key co-sponsors. CDFA members in Illinois and California were particularly active during the grassroots campaign.

With over 8,000 member banks, the 12 regional FHLBs have initiated a marketing and information campaign to educate and prepare banks and issuers about the change and the process necessary to take advantage of it.

Craig Howie, group director of the member services department with FHLB Pittsburgh, will be speaking at CDFA’s Development Bond Finance Course, September 18-19 in Washington, D.C. as part of that campaign. He will discuss how local issuers and banks can utilize the new legislation.

Each of the regional FHLBs is preparing plans to begin administering the new LOC program. More formalized guidelines will be forth coming from the FHLBs in addition to a contact list for each of the 12 regional banks.

To complete a deal using the new legislation, the issuer must go to a FHLB member bank for an initial LOC. The appropriate regional FHLB will then issue a confirming LOC. The FHLB would be guaranteeing continued payment to investors if the member bank fails.

The benefit is that the issuer would be able to utilize the FHLB rating for the bond transaction. Ten of the 12 FHLBs are currently rate triple-A. The issuer would be able to reduce costs, while the FHLB is actually not assuming much of the risk. The member bank takes the majority of the risk of default.

Supporters of the legislation are also working with bond counsels and the IRS to address any tax and regulatory issues that need to be addressed. Additional language pertaining to qualifying criteria must also be finalized. The final criteria is expected to be broad enough to allow many types of tax-exempt bonds to qualify for the new LOC program if they provide a clear benefit to the community.

Industrial development bonds (IDBs) would fulfill the job creation/retention criteria and will be eligible for FHLB LOCs. IDBs and non-profits are expected to be among the types of bonds that will be able to take the most advantage of this credit enhancement measure.

As currently enacted, the FHLBs are permitted to issue LOCs through the end of 2010. Reauthorization will be dependent on FHLB member banks and local issuers ability to utilize the program to finance important community projects and demonstrate the change has created benefits to local communities.

CDFA will continue to post news and information related to this new legislation and will make case studies available as deals are finalized.

This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.