WASHINGTON - The House Ways and Means Committee must schedule a vote as soon as possible on a bill that would modify the tax code to permit 12 Federal Home Loan Banks to issue letters of credit to tax-exempt bonds, members of the House Financial Services Committee urged this week.

In a letter addressed to Ways and Means chairman Rep. Charles Rangel, D-N.Y., and ranking member Rep. Jim McCrery, R-La., the committee members argued that the current struggles in the subprime mortgage market and the resulting rating downgrades of bond insurers, should make prompt consideration of the bill a high priority.

"During this time of economic uncertainty, we need to work together to help our local communities to lower their borrowing costs in order to move forward ... The enactment of HR 2091 would help to bring greater stability to the municipal finance market," the members said in the letter.

The bill was introduced by Rep. Sander Levin, D-Mich., May 1 and was referred to Ways and Means on the same day. The legislation, which has 40 co-sponsors in the House, in addition to 10 in the Senate, would amend Section 149 of the Internal Revenue Code to allow any of the 8,100 member lenders of the FHLB system to issue letters of credit to back small tax-exempt industrial development bond deals or transactions involving small nonprofit health care facilities, colleges, or universities.

Currently, only housing bonds can be backed by a federal guarantee and still retain their tax-exempt status. The bill would put the FHLB on the same level as Fannie Mae and Freddie Mac, government-sponsored enterprises that can provide letters of credit for tax-exempt housing bonds.

In their letter, Financial Services Committee members argue that the downgrades to several major bond insurers has created a need for new forms of credit enhancement for tax-exempt bonds.

"Adding letters of credit from Federal Home Loan Banks as an option for municipal governments and issuers of tax-exempt bonds for charitable health care facilities and schools will create a new source of credit enhancement and help to fill a void created by the ongoing problems in the bond insurance industry," they said. "These reforms are especially important at a time when we have experienced a contraction in the credit enhancement marketplace."

The Financial Services Committee held a hearing Feb. 14 to examine issues facing bond insurers, and is also planning on holding a hearing in the near future that will examine the impact the current credit turmoil is having on state and local governments attempting to issue municipal bonds.

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