News: ABA Washington Perspective

The House Financial Services Committee this week made considerable progress on a systemic risk bill (H.R. 3996) that would, among other things, create an ABA-advocated systemic risk council and establish a method for winding down large, systemically important financial institutions. Among the amendments adopted, some of which ABA advocated, were:

Accounting Accountability. Following a strong grassroots effort by ABA, bankers and the state associations, the panel adopted an amendment by Reps. Ed Perlmutter (D-Colo.) and Frank Lucas (R-Okla.) that would allow the new systemic risk regulator to weigh in on accounting standards. Though the council cannot overrule Financial Accounting Standards Board as ABA would have liked, the amendment would make it difficult for FASB to ignore the findings of such a powerful council. ABA has led the effort to raise awareness of the misleading and destructive impact mark-to-market accounting policies have had, and the association believes this is an important step toward ensuring that FASB consider the systemic impact of standards such as mark-to-market accounting.

Pre-Paid Systemic Risk Fund. The panel adopted amendments that would require financial firms with more than $50 billion in assets to pre-pay assessments for a systemic resolution fund. Banks that pay into the resolution fund, which would be capped at $150 billion, would be given credit for Deposit Insurance Fund premiums. ABA has advocated the payment of assessments to resolve financial firms after a failure, and Republican panel members expressed concern that prefunding would institutionalize too-big-to-fail.

DIF Assessment Base Change. The committee also approved by voice vote an amendment offered by Reps. Luis Gutierrez (D-Ill.) and Don Manzullo (R-Ill.) that would base the payment of FDIC deposit insurance premiums on an institution�s total assets minus the amount of its tangible capital -- rather than its domestic deposits. The measure also would establish �transition� reserve-ratio requirements to reflect the new assessment base. Under those requirements, the minimum reserve ratio for any year would be set at no less than 1.15 percent of estimated insured deposits, or the comparable percentage of the new asset assessment base. ABA did not take a position on this amendment because its full impact has not been assessed. As committee members noted during the debate, no analysis has been done to determine the long-term consequences to the fund, the changes in assets and deposits that this shift would prompt, and the full impact on community banks, thrifts and larger institutions.

Break-up Authority. An amendment offered by Rep. Paul Kanjorski (D-Pa.) and approved by a 38-29 vote gives regulators on the Financial Services Oversight Council the pre-emptive authority to limit or even dismantle financial firms if it is determined that their collapse would cause harm to the broader financial system.

Secured creditors. The panel approved by a 34-32 vote an amendment under which secured creditors of failed systemically risky financial firms would be treated as unsecured creditors for up to 20 percent of their claim if the money was needed to repay the Treasury Department or the Systemic Risk Fund for amounts owed. FHLB representatives have indicated that the amendment -- offered by Reps. Brad Miller (D-N.C.) and Dennis Moore (D-Kan.) -- will prevent many large institutions from receiving FHLB advances, which would negatively impact housing finance and raise the cost of services to FHLB System community bank members. ABA and the Federal Home Loan Banks strongly oppose the amendment and will continue to work to remove the measure from the bill as the legislative process moves forward.

Protecting FDIC�s Brand. An amendment by Rep. Melissa Bean (D-Ill.) mandates that FDIC�s name will not be used in connection with a failed firm�s resolution process. The amendment is a response to ABA�s concerns, expressed in testimony, that FDIC�s role in resolving systemic failures may cause customer confusion about the safety of their insured deposits.

Frank said the final vote on the systemic risk bill would be delayed until after Thanksgiving. He said some panel members who are also part of the Congressional Black Caucus decided to withhold their votes on legislation, which is an administration priority, pending further discussions with President Obama on ways to improve the economy.

Staff Contact--Floyd Stoner (202) 663-5339

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ABA Focuses Grassroots Efforts on Senate As GOP Panel Members Pan Dodd Proposal
ABA this week trained its grassroots firepower on Senate Banking Committee Chairman Christopher Dodd�s (D-Conn.) regulatory reform proposal. In an alert to bank CEOs, ABA President and CEO Ed Yingling and COO Diane Casey-Landry said that while the association supports broad regulatory reform, the Dodd proposal takes the wrong approach.

ABA said its major concerns included provisions that would: create a single federal regulator by eliminating the OCC and OTS and stripping all prudential regulation from the FDIC and the Federal Reserve; create a powerful new Consumer Financial Protection Agency with authority over banking products; eliminate charter choice by prohibiting new thrift charters; and eliminate federal preemption of state laws for national banks, exposing all banks to a multitude of onerous state law requirements, while turning our national financial services marketplace into a patchwork of conflicting rules.

�Regulatory reform is the most important legislative issue our industry has faced in 70 years,� Yingling and Casey-Landry said in their memo encouraging bankers to contact their senators. �How this issue is resolved legislatively will determine the future of your industry and, to a large extent, your bank.�

GOP Reaction. Meanwhile, the Senate Banking Committee began its deliberations of the plan yesterday when it heard members� opening statements. Sen. Richard Shelby (R-Ala.), the panel�s lead GOP member, had harsh words for both the content of the Dodd draft and the process by which it was crafted.

�I don�t believe that I can express in words what a monumentally significant undertaking this is. Every American citizen and every American business will be touched in some way by this legislation,� Shelby said. �It is the type of legislation that should be supported by an exhaustive factual record, and then be thoroughly scrutinized in its own right. I am afraid that this bill fails both tests.�

Echoing concerns expressed by ABA, Shelby said the bill would undermine the dual banking system by putting supervision of all banks, state and federal, under one mammoth regulator. He also said the Dodd plan�s separation of safety and soundness regulation from consumer regulation was a dangerous idea �that was clearly demonstrated when Fannie and Freddie went under.�Shelby promised to offer a Republican substitute proposal that would, among other things, house consumer protection within the prudential regulator.

Staff Contact--Floyd Stoner (202) 663-5339

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ABA Helps Secure RESPA Enforcement Relief
After more than 18 months of intense advocacy by ABA to address problems posed by confusing new Real Estate Settlement Procedures Act rules, the Department of Housing and Urban Development last Friday said it would �exercise restraint� in enforcing the rules for the first four months of 2010. HUD�s general counsel also has sent a letter asking other federal and state enforcement agencies to exercise similar restraint with non-FHA originators and other settlement service providers.

Lenders still must demonstrate a good faith effort to comply with RESPA�s new requirements -- scheduled to take full effect on January 1. �Good faith effort� will be determined by whether the mortgagee has relied on the new RESPA rule and other written guidance issued by the department.

ABA has been the leader in seeking solutions to problems associated with the controversial RESPA rules since they were first proposed in March 2008 and finalized last November. In letters to Congress, meetings with the Office of Management and Budget and countless conversations with HUD staff, ABA has pointed out areas of confusion, sought guidance and warned that the industry would have great difficulty complying by Jan. 1. In a recent letter, dated October 13th, ABA insisted that there be more clarity before any entity is bound to the requirements.

An ABA member survey conducted earlier this month found 55 percent of banks did not believe they will be reasonably prepared to comply on Jan. 1; 65 percent did not expect service providers to complete essential programming and automated systems; and 71 percent expected RESPA compliance concerns to affect credit decisions. ABA said the figures illustrate the importance of the HUD enforcement moratorium.

Staff Contact--Rod Alba (202) 663-5592

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ABA: Overdraft Bill Would Result in Less Access, Higher Cost
ABA opposes a bill (S. 1799) that would regulate and limit overdraft services, ABA said in a for-the-record statement submitted for yesterday�s Senate Banking Committee hearing on overdraft protection. The provisions of S. 1799 -- introduced by panel Chairman Chris Dodd (D-Conn.) -- �will mean a complete retooling and redesign of checking account features,� ABA said. �The result will be more hassle and costs for customers who find their payment returned or rejected; less access to checking account services for some people; and higher prices due to the higher cost of providing bank accounts.�

The association noted that the Federal Reserve last week adopted final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless they opt in to the overdraft service for those types of transactions. Given these new rules which address consumers� primary concerns on overdrafts, ABA said there is no need for additional congressional action.

ABA also emphasized that bank overdraft programs are successful because they provide a valuable service for bank customers and small businesses. �Most consumers generally want banks to pay their overdrafts even if it means paying a fee so they can avoid the inconvenience, embarrassment and potential cost of having a payment or transaction rejected,� ABA said.

The association added that overdraft fees are easy to avoid, and a recent Ipsos-Reid survey conducted for ABA shows that 82 percent of bank customers did not pay an overdraft fee in the previous 12 months, up 2 percent from the year before.

Staff Contact--Nessa Feddis (202) 663-5433

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GAO Report Finds Lowering Interchange Fees Could Harm Consumers
Proposals to reduce interchange fees could result in consumers paying more for their credit cards, according to a study released this week by the Government Accountability Office. The study examined a variety of proposals to lower interchange fees and found that while they would reduce merchant costs, they also may actually increase consumer costs if issuers compensate by raising fees or rates.

�As we have consistently argued, efforts by the merchant community to have the government interfere with the payment system amount to little more than retailers not wanting to pay their fair share and to have consumers bear this burden,� said ABA SVP Ken Clayton. �That�s unfair to consumers, especially during this time of continuing economic uncertainty.�

The study noted that cards help to increase sales and reduce labor for merchants, and that competition has resulted in cards with no annual fees, greater rewards and lower interest rates. GAO also noted that smaller issuers like community banks rely on interchange fees as a significant source of revenue.

�The GAO study confirms what we have long understood: merchants get significant benefits when they accept credit and debit cards for purchases, and it is consumers that will ultimately be harmed if Congress steps in to lower what merchants pay to accept debit and credit cards,� said Clayton.

ABA has led the fight against retailers� efforts to shift interchange costs to consumers. The GAO study was mandated by a provision in last spring�s credit card law. That provision was added after bankers sent more than 20,000 letters strenuously opposing an alternative merchant amendment that could have driven community banks from the debit/credit card marketplace.

Staff Contact--Ken Clayton (202) 663-5337

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ABA Participates in Small Business Financing Forum
ABA pledged to work with the Obama administration to educate the banking industry on the Small Business Administration�s various loan guarantee program options, ABA�s Bob Seiwert told Treasury Secretary Timothy Geithner, Small Business Administrator Karen Mills and other officials at an administration forum on small business financing issues.

Seiwert, SVP and director of the ABA Center for Commercial Lending and Business Banking, described the current small business lending environment, noting that despite the weakened economy, tougher regulatory scrutiny of commercial loan portfolios and capital challenges, U.S. banks are lending to small businesses, just very prudently. Seiwert also cited a recent survey of small businesses that found the major cause in the drop in business loan volume is decreased applications by borrowers, not credit denials by banks.

ABA will continue to offer the administration suggestions on how to improve SBA�s loan guarantee programs to attract more industry participants. Mills, in turn, expressed interested in meeting with Seiwert and other ABA experts on SBA program issues.

Staff Contact--Bob Seiwert (202) 663-5225

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Report Calls for Merging FHFA and FCA into Single GSE Regulator
Congress should consider merging the Federal Housing Finance Agency and the Farm Credit Administration into a single, unified government-sponsored enterprise regulator, Bert Ely, the nationally respected financial services consultant, said in a Farm Credit System research report released at the ABA National Agricultural Bankers Conference in San Antonio.

�Merging the FHFA and the FCA will give the merged regulator a more diverse group to regulate,� Ely said in the report. �Consequently, no one GSE could influence the regulator to the extent that the FCS has influenced the FCA, often leading it astray. That diversity will free the regulator to put the public interest first in overseeing all the GSEs.�

Ely said the Obama administration�s forthcoming proposal to restructure Fannie Mae and Freddie Mac will provide an ideal opportunity to consolidate all GSE regulation under one new agency.

Staff Contact--John Blanchfield (202) 663-5100

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IASB Heeds ABA Concerns in Issuing Mark-to-Market Accounting Standard
The International Accounting Standards Board late last week issued its new mark-to-market accounting standard -- effective Jan. 1, 2013 -- that defines the circumstances under which companies must account for their loans and securities using mark-to-market, and when amortized cost may be used. The IASB�s new standard reverses its initial positions that had concerned ABA and would have required mark-to-market for investments in nonsenior tranches of structured securities, and also for many acquired loans and securities with credit impairment.

ABA had spelled out its views to the IASB through direct meetings, letters, position papers and conference calls between the board and the ABA Accounting Administrative Committee. While it�s possible the new IASB standard may require bankers to use mark-to-market in certain circumstances, it does not appear to automatically require it. For the most part, the accounting determination will be based on whether the assets are in a trading portfolio, and whether or not the asset retains basic loan features.

The IASB is now addressing impairment (loan loss reserving) and hedge accounting and is expected to coordinate the timing of these phases with the U.S. Financial Accounting Standards Board over the next year. FASB�s initial plans -- unlike the IASB standard -- require all loans to be recorded on the balance sheet at fair value, and a FASB exposure draft is expected in late January.

Staff Contact--Michael Gullette (202) 663-4986

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Selected Short Subjects

Estate Tax. House Ways and Means Committee Democrats agreed to move forward on legislation extending for one year the current estate tax rate -- 45 percent with an exemption level of $3.5 million for individuals and $7 million for couples -- rather than a multiyear plan. Unless legislation is passed, the rate and exemption level will fall to zero in 2010, and then jump up to 55 percent and $1 million, respectively, in 2011.
Community Bank Capital. ABA again requested that the Treasury Department consider creating an equity matching program to assist well-managed, viable community banks. The program, which ABA first recommended in a Sept. 21 letter to Treasury Secretary Timothy Geithner, would be available to any bank with $5 billion or less in total assets that submitted an acceptable capital restoration plan to its primary regulator. ABA also urged Treasury to make the administration�s recently announced Small Business Lending Initiatives available to viable community banks with less than $5 billion in assets, instead of the originally announced asset threshold of less than $1 billion.
Privacy notices. Federal regulators released a final model privacy notice that banks can use to notify consumers about their information-sharing practices and the right to opt out of certain information sharing. Banks are not required to use the final model notice but those that do will enjoy a compliance �safe harbor.� Those who have relied on the sample language from the previous rules may continue to use it through 2010.
Foreign Account Tax Compliance. ABA expressed support for a bill (H.R. 3933) that would give the government new tools to find and prosecute U.S. taxpayers who illegally use offshore accounts to hide taxable income. ABA however raised several issues, including an unrealistic effective date, that must be addressed to avoid unintended negative consequences, the association said in a statement submitted this week to a House Ways and Means subcommittee.
Financial Fraud. President Obama announced an interagency Financial Fraud Enforcement Task that will work to combat mortgage, securities and corporate fraud, address discrimination in the lending and financial markets, and monitor the spending of federal stimulus money. The new task force will be led by the Justice Department and will include representatives from the Securities and Exchange Commission, the Treasury Department, the Department of Housing and Urban Development and about two dozen other agencies.
Discount Window Loans. The Federal Reserve Board said it will cut from 90 days to 28 days the maximum maturity of primary credit loans at the discount window, effective January 14, 2010. The move reflects a continued improvement in financial market conditions.
Gift Cards. The Federal Reserve Board announced proposed rules that would restrict the fees and expiration dates that apply to retail and network-branded gift cards. The rules would prohibit dormancy, inactivity, and service fees on gift cards unless: the cards have had no activity for at least one year; no more than one such fee is charged per month; and the consumer is given clear and conspicuous disclosures about the fees. Funds underlying gift cards may not expire sooner than five years after the date of issuance, or the date when funds were last loaded.
UBIT. Income from investment products, such as stocks, bonds, mutual funds and annuities, sold to nonmembers by a state-chartered credit union is subject to unrelated business income tax, a federal court ruled last week. However, the court also said that investment products made available to members were "substantially related" to a credit union's tax-exempt purposes, and therefore income from those activities is exempt from UBIT.
IRS. The Internal Revenue Service yesterday issued a notice creating an ABA-requested pilot program that would allow financial institutions and others to truncate taxpayer tax identification numbers and Social Security numbers on paper payee statements for IRS forms 1098, 1099 and 5498. The pilot program is aimed at deterring identity theft.
HAMP. Federal regulators issued a final rule allowing mortgage loans modified under Treasury's Home Affordable Mortgage Program to retain the risk weight appropriate to the mortgage loan prior to modification. The final rule is the same as the interim final rule issued on June 30, except that it clarifies that mortgage loans whose HAMP modifications are in the trial period qualify for the final rule�s risk-based capital treatment.

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