Legislation Introduced to Support Letters of Credit for
Tax-exempt Bonds
August 7, 2007

U.S. Representatives Sander Levin (D-MI) and Philip English (R-PA), members of the House Ways and Means Committee have introduced H.R. 2091 and Senate Finance Committee Members John Rockefeller (D-WV) and Mike Crapo (R-ID) have introduced S. 1963. Both of these bills would amend Section 149 of the Internal Revenue Code (IRC) to add FHLBanks to the list of GSEs that can credit enhance tax-exempt municipal, industrial development and other private activity bonds. The legislation would:

• Help local communities raise funds for water treatment facilities, infrastructure improvements, industrial development, healthcare facilities, fire stations, parking facilities, long-term care for the elderly, schools and other important activities.

• Allow FHLBank member banks to assist these issuers by offering FHLBank LOCs without triggering the loss of the bonds’ tax-exempt status. Obtaining a performance guarantee from a Triple-A rated entity, such as the FHLBanks, further lowers costs for communities.

• Not transfer risk to the federal government nor provides a double subsidy of tax-exempt bonds. FHLBanks are privately owned financial institutions whose obligations are explicitly not guaranteed by the United States. The credit markets independently rate the obligations of the FHLBank letters of credit on objective criteria assessing the financial strength of each FHLBank.

• Add the FHLBanks to the list of GSEs (Fannie Mae, Freddie Mac, Ginnie Mae, FHA, and VA) that have been permitted since 1984 under the IRC to provide credit support. At that time, FHLBanks did not offer letters of Credit (LOCs) for tax-exempt bonds. Now they do – for tax-exempt housing bonds (in addition to taxable bonds).

The legislation is needed to support communities and small issuers that are currently underserved by bond insurers who are generally more hesitant to seek to do business with these entities because doing so may not be cost-effective and does not fit their business model. This will increase competition, helping to ensure the best cost for municipal governments and their taxpayers.

Please contact your legislators and let them know of your support. Thank you.