WASHINGTON - The Federal Home Loan banks, industry representatives, and member institutions are hoping a rare united front against a Federal Housing Finance Board plan to raise retained earnings will persuade the agency to reconsider its proposal.
With a little over two weeks left for comment, the March 15 proposal has garnered 436 letters, the vast majority of which say the Finance Board should scrap the plan and rework it.
"A Federal Home Loan bank can be wrong, but we have heard from every Home Loan bank and every trade association," said John von Seggern, president of the Council of Federal Home Loan Banks. "They can't all be wrong."
Whether the Finance Board will accede remains unclear, though the amount of public opposition to its plan is unusual. Still, the agency has been resolute in the past, observers said.
Karen Shaw Petrou, the managing partner with Federal Financial Analytics, said there was a similar battle two years ago when many Home Loan banks and financial institutions fought a proposal to force the banks to register with the Securities and Exchange Commission.
"The FHFB then held firm, in part due to deep concerns at the White House and Fed over the Home Loan banks," Ms. Petrou said. "I would guess the FHFB will again stand by its proposal, but changes to the details are likely."
Opposition to the retained-earnings plan appears to be fiercer. The SEC registration plan was supported by some individual Home Loan banks, and opposition among some industry groups was relatively weak because they feared running afoul of the White House.
The Finance Board proposed that the Home Loan banks be required to slash dividends until they held retained earnings equal to $50 million plus 1% of their nonadvance assets. They would also have to buy back excess stock and ban the issuance of stock dividends.
The effect on each of the 12 Home Loan banks would vary widely. Some, like the New York Home Loan Bank, already hold enough in retained earnings; others, like the San Francisco Home Loan Bank, would have to add more than $500 million. Collectively the system would have to raise about $4.5 billion of retained earnings to comply with the plan.
The proposal is open for comment until July 13, but it immediately set off complaints from, among others, all 12 Home Loan banks, the six major trade banking trade groups, and a host of individual member institutions. Commenters criticized the Finance Board's formula as arbitrary, questioned whether such a solution was even necessary, and said it could cause members to leave the system.
"The proposed rule is essentially a $3 billion tax on the banking industry," wrote Stephen Lange Ranzini, president and chairman of University Bank in Ann Arbor, Mich., in a letter to the Finance Board.
James H. Powell, president and CEO of Highland Commercial Bank in Marietta, Ga., called the plan "a breach of trust."
Of the 436 comment letters posted so far, more than 300 are from banks in the district of the Home Loan Bank of Cincinnati, which includes Ohio, Kentucky, and Tennessee.
The Cincinnati bank would be hit hard by the proposal. It estimated that it would be forced to raise at least $109 million of additional retained earnings and buy back $421 million of excess stock because of the plan. As a result, it has suspended $16 million in housing assistance programs to cut expenses - a move that Finance Board officials have criticized.
Many letters from the district were identical submissions from different employees at the same institution.
For example, workers at Bank of Benton in Kentucky sent 24 separate but identical letters opposing the plan. They wrote that "if services are reduced and dividends are slashed and made taxable as a result of the proposed rule, many of the shareholders will inevitably choose to redeem additional stock," and seek out better investments.
Employees of Citizens Bank of Ashville in Ohio sent 15 letters, which echoed language from the Benton bank in complaining of a "rigid, one-size-fits-all format" in the proposal.
Executives from America's Community Bankers, the American Bankers Association, the Consumer Bankers Association, the Independent Community Bankers of America, the Mortgage Bankers Association, and the Financial Services Roundtable all signed one letter saying that "this rule has a great potential to fundamentally alter the direction and makeup of the system for many years to come."
"That does not happen every day," Diane Casey-Landry, the president of America's Community Bankers, said of the joint letter.
"It would be unfortunate if the only reason the Finance Board decided not to change this is because they are too proud," she said. "That would be wrong."
The letter recommends that the agency withdraw the proposal and start from scratch with a clear argument for why the change is needed, a fresh comment period, and more input from the banks.
The chairmen and vice chairmen of each of the 12 Home Loan banks have also sent a joint letter opposing the plan, arguing it "may have substantial and significant unintended consequences and other negative ramifications."
Some banks have weighed in separately as well.
The Home Loan Bank of Seattle cited Finance Board Chairman Ronald Rosenfeld's statement that the plan was needed to prevent a recurrence of activities that led to recent enforcement actions against the Seattle and Chicago banks. Both banks were faulted for how they managed their mortgage purchase programs.
But the Seattle bank said retained earnings had nothing to do with its problems.
James E. Gilleran, its chairman and chief executive and a former director of the Office of Thrift Supervision, and Mike C. Daly, the bank's chairman, wrote: "None of the actions taken by the Seattle bank that ultimately led to the written agreement were affected by the Seattle bank's level of retained earnings. Furthermore, a higher level of retained earnings would not have prevented their occurrence."
Consumer groups also spoke against the plan.
Joseph M. Michaels, president of Las Palmas Foundation, which supports affordable housing in Encinitas, Calif., said that, because funding for affordable-housing programs are tied to Home Loan bank profits, boosting retained earnings would harm affordable housing.
Not every letter was opposed. Jason L. Roth, the senior vice president of First National Bank of Alaska in Anchorage, said, "We support the proposed changes as prudent."
Mr. Roth went on to argue that the Home Loan banks "are no longer needed" and that "a plan should be put forth to have them sunset and the tax-exempt status of the banks and their debt should be eliminated."
