 Bulletin No.: 2008-09 TO: STOCKHOLDERS SUBJECT: Housing and Economic Recovery Act of 2008 On July 30, 2008, President George W. Bush signed into law the Housing and Economic Recovery Act of 2008 (the “HER Act”). Among other things, this legislation consolidates the regulation of Fannie Mae, Freddie Mac and the Federal Home Loan Banks into a single new regulatory agency known as the Federal Housing Finance Agency. This bulletin provides a summary of the major provisions of the legislation, followed by a more detailed discussion of the provisions that will affect the Federal Home Loan Banks.
SUMMARY
The major provisions of the HER Act are as follows:
The HER Act is effective immediately and provides for the termination of OFHEO and the Finance Board within one year of enactment, during which time such agencies may only engage in those activities required to wind up their affairs.
REGULATION OF THE FHLBANKS
The HER Act transfers responsibility for regulation of the FHLBanks to the Federal Housing Finance Agency effective immediately, and provides that the current staff of the Finance Board will be transferred to the new Agency at the time the Finance Board ceases to exist.
Structure of the Agency
The Agency will be headed by a Director, who will be appointed by the President and confirmed by the Senate, and will serve a five-year term. He may be removed only for cause. The statute provides that the Director of OFHEO at the time of enactment shall serve as the Director of the Agency until a permanent Director is appointed and confirmed.
There will be three Deputy Directors of the Agency. The Deputy Director of the Division of Enterprise Regulation will be responsible for the safety and soundness regulation of Fannie Mae and Freddie Mac (the “Enterprises”). The Deputy Director of the Division of FHLBank Regulation will be responsible for the safety and soundness regulation of the FHLBanks. Finally, the Deputy Director for Housing Mission and Goals will oversee the housing mission and goals of the Enterprises and the community and economic development mission of the FHLBanks.
Along with the Director of the Agency, the Secretary of the Treasury, the Secretary of the Department of Housing and Urban Development, and the Chairman of the Securities and Exchange Commission (“SEC”) will constitute the Federal Housing Finance Oversight Board and the Director will serve as the chair of and consult with this board, which is an advisory body with no executive authority.
Authority of the Director
The Director has broad authority to regulate the Enterprises and the FHLBanks (collectively, the “Regulated Entities”), including the authority to set capital requirements, seek prompt corrective action, bring enforcement actions, and levy fines against the Regulated Entities and entity-affiliated parties. The HER Act defines an “Entity-Affiliated Party” to include among others (i) officers, directors, employees, agents, and controlling shareholders of a Regulated Entity, (ii) any shareholder, affiliate, consultant, joint venture partner, and any other person that the Director determines participates in the conduct of the Regulated Entity’s affairs, and (iii) any independent contractor of a Regulated Entity that knowingly or recklessly participates in any violation of law or regulation, any breach of fiduciary duty, or any unsafe or unsound practice.
Differences Between the Enterprises and FHLBanks
The HER Act requires the Director, before issuing any new regulation or taking other agency action of general applicability and future effect relating to the FHLBanks, to take into account the differences between the Enterprises and the FHLBanks with respect to the FHLBanks’ (i) cooperative ownership structure, (ii) mission of providing liquidity to members, (iii) affordable housing and community development mission, (iv) capital structure and (v) joint and several liability, and any other differences that the Director considers appropriate.
Corporate Governance of the FHLBanks
Under the HER Act, each FHLBank will be governed by a board of directors of thirteen persons or so many as the Director may determine. The HER Act divides directors of FHLBanks into two classes. The first class is comprised of “member” directors elected by the members of each State in the FHLBank’s district to fill directorships determined based on the number of shares of capital stock held by members located in the State to be represented by the directorship, subject to the same limitations with regard to excess shares that were applied prior to the enactment of the HER Act (States continue to be guaranteed at least the number of member directors that were assigned to them under the law in effect at December 31, 1960, except subsequent to a merger of the FHLBank). The second class is comprised of “independent” directors who will be nominated by a FHLBank’s board of directors after consultation with its Advisory Council and elected by members at-large based on an election process that must comply with the Agency’s applicable regulation (which still must be written) and codified in the FHLBank’s bylaws.
Member directors must constitute a majority of the members of the board of directors of each FHLBank and independent directors must constitute at least forty percent of the members of each board of directors. Two of the independent directors must be public interest directors with at least four years’ experience representing community interests in banking services, credit needs, housing, or financial consumer protections. The remainder of the independent directors must have demonstrated experience in financial or organizational management or certain related skills.
Prior law called for fourteen directors (one more than under the HER Act) or so many as the Finance Board might determine. Of the fourteen directors stipulated under prior law, eight were “elective” directors chosen by the members of each State and six were “appointive” directors appointed by the Finance Board, which in recent years sought, but was not bound by, nominations from the FHLBanks. Under prior law, if the Finance Board increased the number of directors, it was required to maintain the ratio of appointive to elective directors at seventy-five percent. The Federal Home Loan Bank of Dallas currently has eleven member directors and eight independent directors, a division that complies with the HER Act. It is not known whether the Finance Agency will generally (or specifically in the case of the Bank) maintain the number of directors at certain FHLBanks above the statutory minimum. If the Finance Agency were to reduce the number of discretionary directorships, incumbent directors at the time of enactment of the HER Act would be permitted to serve out the remainder of their terms.
The HER Act changes all directors’ terms of office from three years to four years and provides that all directors remain directors until the completion of their current terms of office. It is not clear whether this means that the term of each sitting director will be extended by one year. Such a determination would leave open the question of what to do with the results of the 2008 elections for member directors (formerly “elective” directors) that are now underway at the FHLBanks, including the Bank. The Bank expects that the Finance Agency will expeditiously promulgate new regulations or issue orders or other guidance regarding these matters as well as the process that the FHLBanks must follow in conducting the elections of independent directors.
The HER Act also repeals the prior statutory limits on compensation of directors of FHLBanks and allows the Director to prohibit executive compensation that is not reasonable and comparable with compensation in similar businesses. If a Regulated Entity is undercapitalized, the Director may also restrict executive compensation. Through December 31, 2009, the Director has additional authority in certain circumstances to approve, disapprove or modify the compensation of executives of the Regulated Entities.
Community Development Financial Institutions (“CDFIs”)
The HER Act makes CDFIs that are certified under the Community Development Banking and Financial Institutions Act of 1994 eligible for membership in a FHLBank. A certified CDFI is a person (other than an individual) that (i) has a primary mission of promoting community development, (ii) serves an investment area or targeted population, (iii) provides development services in connection with equity investment or loans, (iv) maintains, through representation on its governing board or otherwise, accountability to residents of its investment area or targeted population, and (v) is not an agency or instrumentality of the United States or of any State or political subdivision of a State.
Housing Goals
The HER Act requires the Director to establish housing goals with respect to the purchase of mortgages, if any, by the FHLBanks and to report annually to Congress on the FHLBanks’ performance in meeting such goals. In establishing the housing goals, the Director is required to consider the unique mission and ownership structure of the FHLBanks. To facilitate an orderly transition, the Director is charged with establishing interim housing goals for each of the two calendar years following the date of enactment of the HER Act.
Sharing of Information Regarding the FHLBanks
The HER Act requires the Director to promulgate regulations under which he will make available to each FHLBank information regarding the other FHLBanks in order to enable the FHLBanks to assess their risk under their joint and several liability with respect to consolidated obligations and to comply with their disclosure obligations under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Exceptions to such disclosure are provided with respect to information of or regarding a FHLBank that is proprietary.
Exemptions from Certain SEC Laws and Regulations
The HER Act exempts the FHLBanks from certain requirements under the Federal securities laws, including the Exchange Act, and the SEC’s related regulations. These exemptions arise from the distinctive nature and the cooperative ownership structure of the FHLBanks and parallel relief granted by the SEC to the FHLBanks in no-action letters issued at the time the FHLBanks registered with the SEC under the Exchange Act. In issuing future regulations, the SEC is directed by the HER Act to take account of the distinctive characteristics of the FHLBanks when evaluating (i) the accounting treatment with respect to payments to the Resolution Funding Corporation, (ii) the role of the combined financial statements of the FHLBanks, (iii) the accounting classification of redeemable capital stock, and (iv) the accounting treatment related to the joint and several nature of the obligations of the FHLBanks.
Liquidations, Voluntary Mergers and Reduction in the Number of FHLBank Districts
The HER Act permits any FHLBank to voluntarily merge with another FHLBank with the approval of the Director and the boards of directors of the FHLBanks involved. The Director is required to promulgate regulations establishing the conditions and procedures for the consideration and approval of any voluntary merger, including the procedures for FHLBank member approval.
The Director is authorized on thirty days’ prior notice to liquidate or reorganize any FHLBank. A FHLBank that the Director proposes to liquidate or reorganize is entitled to contest the Director’s determination in a hearing on the record in accordance with the provisions of the Administrative Procedures Act.
The Director is authorized to reduce the number of FHLBank districts to fewer than eight as a result of the merger of FHLBanks or the Director’s decision to liquidate a FHLBank. Prior law required that there be no fewer than eight and no more than twelve FHLBanks.
Community Financial Institutions and Long-Term Advances
Community Financial Institutions (“CFIs”) are redefined as institutions with average assets over the three-year period preceding measurement of less than $1 billion (up from the statutory amount of $500 million, inflation adjusted to $625 million immediately prior to enactment of the HER Act). The $1 billion amount will continue to be adjusted annually based on any increase in the Consumer Price Index.
Loans for community development activities were added to loans for small business, small farm, and small agri-business as permissible purposes for long-term advances to CFIs.
Public Use Data Base and Reporting to Congress
The HER Act requires the FHLBanks to report to the Director census tract level data regarding mortgages they purchase, if any. Such data are to be reported in a form consistent with other Federal laws, including the Home Mortgage Disclosure Act, and any other requirements that the Director imposes. The Director is required to report such data to Congress and, except with respect to proprietary information and personally identifiable information, to make the data available to the public.
Study of Securitization of Home Mortgage Loans by the FHLBanks
Within one year of enactment of the HER Act, the Director is to provide to Congress a report on a study of securitization of home mortgage loans purchased from member financial institutions under the Acquired Member Asset (“AMA”) programs of FHLBanks. In conducting this study, the Director is required to consider (i) the benefits and risks associated with securitization of AMA, (ii) the potential impact of securitization upon the liquidity in the mortgage and broader credit markets, (iii) the ability of the FHLBanks to manage the risks associated with securitization, (iv) the impact of such securitization on the existing activities of the FHLBanks, including their mortgage portfolios and advances, and (v) the joint and several liability of the FHLBanks and the cooperative structure of the FHLBank System. In conducting the study, the Director is required to consult with the FHLBanks, the Office of Finance (“OF”), representatives of the mortgage lending industry, practitioners in the structured finance field, and other experts as needed.
Study of FHLBank Advances
Within one year of enactment of the HER Act, the Director is required to conduct a study and submit a report to Congress regarding the extent to which loans and securities used as collateral to support FHLBank advances are consistent with the Interagency Guidance on Nontraditional Mortgage Products dated October 4, 2006. The study must consider any recommended actions necessary to ensure that the FHLBanks are not supporting loans with predatory characteristics and provide an opportunity for public comment on any recommended actions.
AHP Funds to Support Refinancing of Certain Residential Mortgage Loans
For a period of two years following enactment of the HER Act, FHLBanks are authorized to use a portion of their Affordable Housing Program (“AHP”) funds to support the refinancing of residential mortgage loans owed by families with incomes at or below eighty percent of the median income for the areas in which they reside. The portion of AHP funds that the FHLBanks may use for such purpose is to be determined by regulation.
Letters of Credit to Guarantee Municipal Bonds
Under prior law, if an FHLBank guaranteed (through a letter of credit) a tax-exempt bond, the bond would lose its tax-exempt status unless the proceeds of the bond were used to finance housing. Under the HER Act a tax-exempt bond originally issued during the period from enactment of the HER Act to December 31, 2010 may be guaranteed by an FHLBank without the bond’s loss of its tax-exempt status without regard to the use of the proceeds of the bond.. Letters of credit issued by an FHLBank during this prescribed period to guarantee a tax-exempt bond may also be renewed after December 31, 2010 without affecting the tax-exempt status of the bond.
Minorities, Women, and Diversity in the Workforce
The HER Act requires each FHLBank to establish or designate an Office of Minority and Women Inclusion that is responsible for carrying out all matters relating to diversity in management, employment, and business practices.
Joint Offices
The HER Act repeals the provision in prior law that prohibited the FHLBanks from establishing any joint offices other than the OF.
Continuation of Regulations
All regulations, orders, directives and determinations issued by the Finance Board prior to enactment of the HER Act remain in force unless modified, terminated, or set aside by the Director.
As outlined in this bulletin, several components of the new legislation affect the statutory and regulatory environment within which the Bank operates. We will work closely with the new regulator to ensure that the Bank’s cooperative ownership structure, our ability to provide liquidity to members, and our affordable housing and community development missions remain as the fundamental core of our business and are well understood when the new regulations are promulgated. If you would like to discuss the new legislation or if you need additional information, please contact your Member Sales Officer at 800.442.9841.
Sincerely, Terry Smith
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