| Federal Housing Finance Board |
NEWS |
FOR RELEASE:
Contact: Naomi Salus 202/408-2957
April 22, 1998 Bill Glavin 202/408-2546
FHFB 98-17
FINANCE BOARD APPROVES PROPOSALS TO
EXPAND TARGETED INVESTMENT OPPORTUNITIES
In a move to provide broader options for the Federal Home Loan Banks for addressing unmet economic development and housing credit needs, the Federal Housing Finance Board today approved for notice and comment two proposed rules: one that would establish a framework for Community Investment Cash Advance (CICA) programs and one that would codify standards for the issuance of letters of credit.
The Federal Home Loan Bank Act permits the FHLBanks to establish CICA programs in addition to the Community Investment (CIP) and the Affordable Housing Programs (AHP), which are required programs under the Act. The proposed CICA rule sets out general standards under which the FHLBanks may establish CICA programs and safe harbors for two specific CICA programs: the Rural Development Advances (RDA) and Urban Development Advances (UDA) programs. The standards are designed to encourage FHLBanks to support income-targeted community investment by creating safe harbor programs. No CICA program would require prior Finance Board approval.
"The CIP and AHP have been effective in helping to meet many unmet credit needs," said Finance Board Chairman Bruce A. Morrison, "but they cannot meet every need. We encourage the FHLBanks to take advantage of the range of options CICA programs provide to address additional targeted economic development and housing needs in urban and rural areas, and we encourage members to take advantage of new business opportunities these programs should produce."
Under the CIP, the FHLBanks provide funding at cost for their members to support the financing of housing for families with incomes at 115 percent or less of the area median income and commercial and economic development projects that benefit families with incomes at 80 percent or below of the area median.
Long-term cash advances in the RDA and UDA programs could be used by FHLBank members and non-member borrowers for financing economic development projects in rural or urban areas, and could benefit populations not targeted by the CIP. The RDA program is targeted for families at 115 percent or below the area median and the UDA program for families at or below 100 percent. CICA programs are designed to target FHLBank advances to small businesses and specified economic development projects, such as those located in an Empowerment Zone, or involving property eligible for a federal Brownfield Tax Credit, or properties in communities which have experienced NAFTA-related job losses.
Through the first eight years of the CIP, ninety-six percent of CIP advances have been used by members to finance housing rather than economic development activities. "Economic development is an important new role for the FHLBank System," said Morrison. In addition to clarifying CIP policies, the rule encourages the FHLBanks to shift the focus of the CIP from volume lending in support of home mortgage loans to a more targeted approach with an emphasis on maximizing the impact of each advance.
The proposed rule would require each FHLBank to create a strategy for providing CIP advances to support financing for projects that is not otherwise available, or is available at less attractive terms. The FHLBanks may establish each year a projected annual total of CIP advances, taking into account the Bank’s earnings and how much credit the Bank intends to provide under other CICA programs.
The proposed regulation on standby letters of credit (LOCs) provides FHLBanks with greater flexibility and discretion than they have under the agency’s current standby LOC policy and encourages greater use of LOCs that support housing and targeted economic development. It would permit the FHLBanks to issue letters of credit to assist their members in housing and targeted economic development finance, asset/liability management, and liquidity and other funding. Targeted economic development is defined the same way in the CICA rule and the LOC regulation.
The LOC proposal would also expand the types of collateral the FHLBanks can accept for letters of credit, including secured small business loans and investment-grade bonds issued by state or local governments. These changes are intended to increase the use of the LOC program by members that hold such collateral. The use of such expanded collateral would be limited to LOCs that are used for activities, such as housing and targeted economic development, that support the FHLBanks’ public purpose.
Standby letters of credit are issued by FHLBanks on behalf of an FHLBank member, obligating the Bank to honor drafts or other demands of payment received from a third party. They are generally utilized to secure public unit deposits, to credit enhance tax-exempt housing bonds and to support an FHLBank member’s commercial paper issuance.
Both the CICA and LOC proposals will have a 90-day public comment period, following publication in the Federal Register.