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October 31, 2007
The Honorable ____________
Dear Representative ____________:
On behalf of the Independent Bankers Association of Texas, I am writing to ask you to support and cosponsor HR 2091. This legislation, introduced by Representatives Sander Levin (D-MI) and Phil English (R-PA) will provide an important additional tool for community banks to partner with Federal Home Loan Banks (FHLBanks) in supporting the needs of the communities they serve.
HR 2091 amends Section 149(b) of the Internal Revenue Code (IRC) allowing FHLBanks to issue stand-by Letters of Credit (LOC) through their members in tax-exempt bond transactions. The LOC, also known as a credit enhancement, reduces the cost of the bonds by raising the debt to the AAA-rating of the FHLBank. This clarification of the IRC is supported by sixteen national associations including the American Bankers Association, America’s Community Bankers, the Independent Community Bankers of America, the National League of Cities, the U.S. Conference of Mayors and the National Association of Homebuilders among others.
Issuing letters of credit (LOCs) is not a new activity for the FHLBanks and their community bank members. Community Bank/FHLBank LOCs are routinely issued throughout the nation for the purpose of supporting taxable bonds and tax-exempt housing bonds. The problem arises in the area of non-housing tax-exempt financing. The Internal Revenue Service has questioned whether FHLBank LOC’s might trigger a loss of the tax exempt status of the bonds. It is for that reason that legislation is needed.
HR 2091 would allow community banks to assist economic development authorities, municipalities, charitable health care facilities and institutions of higher education in raising needed funds. Frequently these entities are unable to obtain other credit enhancements such as bond insurance or letters of credit from larger market players to provide for more attractive terms.
This legislation will give local banks the opportunity to compete for this business and serve their communities, and will benefit the public entities and the taxpayers who support them by lowering borrowing costs.
Thank you for your consideration of this request, and we are hopeful that you will be supportive of this important legislation.
Sincerely,
Stephen Y. Scurlock
Executive Vice President
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