In general the Bank's policy concerning services or loan provisions are as follows: 1. Service Charges. Under ordinary circumstances the Bank does not assess service charges for granting or However, if the Bank is involved in pay maintaining a loan. However, if ments for servicing credits originally extended by a government agency and sold to the Bank, the cost of such servicing is borne by the program agency or the borrower. In other words, the basic rates charged by the Bank are net of any servicing cost. 2. Prepayment Privileges. The Bank ordinarily makes loans with a fixed term and without prepayment privileges. the extent that agency programs necessitate such privileges the Bank will make provisions for the resale of the loan to the agency on terms consistent with protection of the Bank and the Treasury from financial loss. 3. Commitment of Funds. The Bank is willing to assure the availability of funds to eligible borrowers without fee at an interest rate to be determined at the time the loan is made. Such assurances are dependent upon the agencies' adherence to the terms of its statute and subject to any necessary approvals outside the framework of the Bank. In return for such a commitment, the borrower or guaranteeing agency will agree, if permitted by its statutes, to finance solely with the Federal Financing Bank. 4. Commitment of Rates. The Bank ordinarily sets loan rates at the time funds are disbursed. If program requirements necessitate future rate commitments in connection with a firm borrowing commitment, the cost of the future rate commitments will be borne by the borrower. 5. Lines of Credit. Line-of-credit type loans are made if program requirements necessitate. The Bank generally arranges such lines of credit for 91-day periods at a fixed charge above the Treasury 91-day bill rate (coupon equivalent) for advances made during the period. 6. Purchase of Guaranteed Tax-Exempt Issues. The Federal Financing Bank provides in section 16: "(a) Notwithstanding any other provisions of this "(b) The Federal agency guaranteeing obligations purchased by the Bank may contract to make periodic payments to the Bank which shall be sufficient to offset the costs to the Bank of purchasing obligations of local public bodies or agencies upon terms and conditions as prescribed in this section rather than as prescribed by section 6. Such contracts may be made in advance of appropriations therefor, and appropriations for making payments under such contracts are hereby authorized (12 U.S.C. 2294)." In implementing this provision the Bank will consult with the agency involved looking toward the purchase of these securities at a rate commensurate with the highest quality municipal security of similar terms. The difference between this rate and the normal FFB lending rate will be determined and a contract for the difference will be entered into between FFB and the agency involved. Borrowing Policy The Secretary of the Treasury purchases obligations issued by the Federal Financing Bank under subsection 9 (b) of the Federal Financing Bank Act of 1973 (12 U.S.C. 2288 (b)) to provide the financing of Bank purchases under subsection 6(a) of the Act (12 U.S.C. 2285(a)) of obligations issued, sold, or guaranteed by Federal agencies. With the exception of the rates of interest, obligations issued by the Bank to the Treasury have terms and conditions equivalent to the obligations purchased by the Bank. Such obligations bear rates of interest based on the estimated Treasury new issue rates. Excess funds of the Bank are invested in Treasury market-based special issues of appropriate maturities. On Originally the Bank had expected to finance its operations by borrowing on an interim basis from the Secretary of the Treasury and by borrowing in the market periodically to repay the borrowings from the Secretary of the Treasury. July 23, 1974, the Bank auctioned $1.5 billion of 244-day Federal Financing Bank bills to repay borrowing from the Treasury. The average interest rate was 8.048% on a bank discount basis on those FFB bills which matured March 31, 1975. The 52-week Treasury bill maturing April 8, 1975, the nearest to the FFB bill maturity, closed yielding 7.88% on a mean bank discount basis on July 23, 1974, the day of the FFB bill auction. The 8-month FFB bills were the only public offering of an FFB security. Since the Bank's cost of borrowing in the market was somewhat greater than Treasury's cost would have been for obligations of like terms and conditions, the Board of Directors of the FFB decided that the Bank should borrow solely from the Treasury. On February 10, 1975, Secretary of the Treasury William E. Simon, in testimony before the Senate Finance Committee stated: "In the future, I believe that the Bank should When the FFB purchases an obligation, it borrows from the Treasury Department simultaneously for the same maturity period as the obligation purchased. If the FFB purchased a note maturing in 25 years with equal annual payments of principal and semiannual payments of interest on the unpaid balance, the Bank would borrow from the Treasury under the same repayment terms. The new issue curve for marketable Treasury securities is the basis for pricing transactions, so that the FFB pays the Treasury new issue rate for its borrowings and charges FFB customers 1/8 of 1 percentage point above the Treasury new issue curve rate. |