Federal Home Loan Banks Letters of Credit for Tax-Exempt Bonds

However, local governments can take advantage of another market reform supported by NLC that passed on July 30 in the Housing and Economic Recovery Act (P.L.110-289). 

Among other things, the Housing and Economic Recovery Act permits Federal Home Loan Banks (FHLBanks) to issue letters of credit (LOCs) to guarantee tax-exempt municipal bonds for a wide range of projects through December 31, 2010.

Prior to the new law, the FHLBanks were restricted to guaranteeing tax-exempt bonds only for multifamily housing projects. Under the new law, FHLBank LOC’s can be used to support tax-exempt municipal bond issuances for any economic development project without jeopardizing the tax-exempt status of the bonds.   

Any entity permitted to issue tax-exempt bonds, including municipalities, can use FHLBank LOCs. Examples of eligible projects include economic development, public safety, small manufacturing, water and sewer, nonprofit hospitals and other health care facilities, colleges and universities and local infrastructure.

A small number of FHLBank LOC transactions have been completed already, including two that are providing for the expansion of a label factory in an economically depressed area of California and for improvements to a retirement community in Indiana.

One caveat of the new law, however, is that cities only have until December 31, 2010, to take advantage of the new Letter of Credit authority. Congress must renew the law at that time or allow it to expire. In addition, the FHLBanks can only provide LOC’s to bonds issued after July 30, when the law was enacted. Any issuer wanting a letter of credit for an existing bond would only be able to obtain one through a refunding. 

The Federal Home Loan Banking System is a cooperative of 12 independent regional Federal Home Loan Banks created by Congress in 1932. The FHLBanks provide liquidity to support housing finance and community lending for more than 8,000 local financial institutions including commercial banks, savings institutions, credit unions, and insurance companies.

The 12 FHLBanks are currently reaching out to municipalities and other issuers to promote the new credit enhancement authority. Several FHLBanks are also offering complimentary presentations and seminars on Letters of Credit. A list of the 12 FHLBanks and the states they serve appears below. To learn about LOC presentations in your area, or to discuss whether an FHLBank LOC could work for a specific project, contact the representatives listed below.

Bill Miller is with the Federal Home Loan Bank of Pittsburgh.

FHLBank Letter of Credit Contacts