Vol. III, No. 45, November 6, 2009

Latest News:

Obama Signs Into Law NOL Carryback, Homebuyer Tax Credit Bill

Bill Reported to Exempt Auditor Attestation for Small Companies

ABA Urges Fed to Reconsider Reg Z Rules on 'Higher-Priced' Loans

Dodd To Unveil Restructuring Bill, Proceed without GOP Support

House Passes Bill To Accelerate Credit Card Reforms

Frank Changes Position, Favors Prefunding of Systemic Risk Fund

Frank, Minnick Urge Temperance in Examinations of Traditional Banks

International Bank Group Calls for Oversight of FASB, IASB

ABA Suggests to Changes in FHLBank Office of Finance Board Expansion

Regulators Issue Guidance on Commercial Real Estate Loan Workouts

FDIC Issues Guidance on Interest Rate Restrictions

Selected Short Subjects

Obama Signs Into Law NOL Carryback, Homebuyer Tax Credit Bill

President Obama signed into law today a bill overwhelmingly passed by Congress that expands the net operating loss carryback tax rules and extends the tax credit for home purchases. Both provisions are included in H.R. 3548, a bill to extend unemployment benefits. The Senate vote was 98 to 0. The House vote was 403 to 12.

NOL Carryback. Companies will be permitted to carry back 2008 or 2009 losses to reduce taxable income for the past five years and obtain a refund of taxes already paid. A refund for the fifth year would be subject to a 50 percent haircut. Companies can carry forward previous year losses for up to 20 years, using the tax credit against future income. The current law is a carryback of two years and a 10-year carryforward. Recipients of Troubled Asset Relief Program funds will not be able to use the expanded NOL. ABA was a strong supporter of the NOL extension. ABA also supported Capital Purchase Program banks being included and thought the exclusion was unfair.

Housing Tax Credit. The $8,000 first-time homebuyer tax redit, set to expire on Nov. 30, will be extended to contracts signed by April 30, 2010, and closed by June 30, 2010. Only persons who have not owned a house in the last three years are eligible.

A $6,500 tax credit will be available to persons who have owned a house for five of the last eight years. The contract and closing deadlines are the same as above.

The bill will increase the income cap for the full credit from $75,000 to $125,000 for individuals (with reduced credits phased out at $145,000) and from $150,000 to $225,000 for couples (with reduced credits phased out at $245,000).

Unemployment Benefits. The benefits will be extended for 14 additional weeks in all states and up to 20 weeks in states with an unemployment rate of at least 8.5 percent.

Staff Contact--Larry Seyfried (202) 663-5322.

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Bill Reported to Exempt Auditor Attestation for Small Companies

Small public companies would be permanently exempt from including an auditor attestation of internal controls in annual reports under a bill reported by the House Financial Services Committee. ABA has been a long time proponent of an exemption, working with members of Congress to demonstrate that the cost burden that would be imposed on small banks.

With the support of White House Chief of Staff Rahm Emanuel, the exemption amendment by Reps. John Adler (D-N.J.) and Scott Garrett (R-N.J.) was adopted 37 to 32. Committee Chairman Barney Frank (D-Mass.) and Paul Kanjorski (D-Pa.) voted against.

Securities and Exchange Commission Chairman Mary Shapiro also opposed the exemption. She had announced recently that the existing Sarbanes-Oxley Act 404(b) requirements for companies with a market capitalization of less than $75 million would take effect with annual reports for fiscal years ending on or after June 15, 2010, and there would be no more extensions. The bill would also require the SEC to study how to reduce the compliance burden on companies with market values of between $75 million and $250 million.

The amendment was included in H.R. 3817, a bill to strengthen the SEC's authority to protect investors. The bill would also double the SEC's budget over the next five years. The bill was reported by a vote of 41 to 28.

Staff Contact--Carolyn Walsh (202) 663-5253.

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ABA Urges Fed to Reconsider Reg Z Rules on 'Higher-Priced' Loans

Recent changes to Regulation Z involving "higher-priced" mortgage loans are already having a detrimental impact on homebuyers' access to credit and should be reconsidered, ABA said in a comment letter to the Federal Reserve. Most of the new requirements became effective on Oct. 1.

"Anecdotal comments received from a wide range of our members in the days since the rules took effect suggest that many lenders are likely to abandon the segment of the market covered by the new rules, and those who remain will inevitably face higher compliance and liability costs -- which will ultimately be passed along to consumers," ABA said.

In previous comment letters, ABA strongly urged the Fed to reconsider several issues to avoid the effects now occurring in the marketplace. 

While the Fed amended the definition of "higher-priced" loans, ABA said "far too many prime loans" come under the definition." A recent survey of ABA's Mortgage Markets Committee found that 50 percent of respondents would not make "higher-priced" loans as defined under the regulation. Under current interest rates, the "higher-priced" category is triggered at a rate of approximately 6.5 percent for 30-year loans.

ABA had also previously recommended adjusting the benchmark triggers for specific markets, including jumbo loans, loans with mortgage insurance and Federal Housing Administration loans.

The rules are also having the effect of a de facto ban on certain loan products, ABA said. Small banks have told ABA that they are finding it impossible to continue to make balloon loans absent guidance from the Fed and their primary regulators on how to document compliance.

Staff Contact--Bob Davis (202) 663-5588.

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Dodd To Unveil Restructuring Bill, Proceed without GOP Support

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) plans to unveil his financial regulatory reform legislation next week and mark up a bill in December, with or without Republican support.

Dodd said he reached out to Republicans without success in trying to develop a consensus bill. "My intention is to go forward," he told reporters.

Dodd said the committee will begin to meet in mid-November to consider the draft bill, and will vote thereafter. He said he hopes the committee will finish work by December and the measure can go to the Senate floor. Dodd said "there's still a very good chance we'll be done with it this year."

Prior to Dodd's announcement, an aide to Sen. Richard Shelby (R-Ala.), the committee's ranking Republican, said Shelby wants more time to work out a bipartisan agreement before the committee marks up the bill.

"In light of the fact that the safety and soundness of our financial system is at stake, Senator Shelby believes that we should take the time to get this right, not adhere to artificial timelines," said Jonathan Graffeo, the senator's spokesman, in an e-mail to Bloomberg News. "He remains hopeful that a bipartisan agreement can ultimately be reached."

Dodd supports creation of a separate Consumer Financial Protection Agency. Shelby said he would support a new agency if it is part of a bank regulatory agency.

Shelby's spokesman cited several other issues that are unresolved. These include creating a new authority to unwind failing systemically important companies, derivatives regulation and a systemic regulator.

Graffeo also said Shelby believes the "appropriate extent of consolidation [of the regulatory agencies] remains open for debate." Dodd has said he favors creating a single regulator.

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

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House Passes Bill To Accelerate Credit Card Reforms

The House passed a bill to accelerate the effective date of credit card reforms to Dec. 1 from the Feb. 22, 2010, or later dates set in the legislation enacted last May. The vote was 331 to 92.

ABA opposed the legislation, telling House members that accelerating the time frame will be extremely difficult, if not impossible, for card issuers. ABA said it will continue to work with Congress when the legislation moves to the Senate.

The bill would exempt from the Dec. 1 effective date smaller companies with fewer than 2 million cards in circulation at the time of enactment and pre-paid gift cards from the expedited deadline.

The House adopted several amendments. One, by Rep. Dan Maffei (D-N.Y.), makes the effective date for certain provisions of the bill the day that President Obama signs the measure, rather than Dec. 1. An amendment by Rep. Bart Stupak (D-Mich.) imposes a nine-month moratorium on increasing annual rates, fees  and finance charges, as well as changing terms for repayment and outstanding balances on credit card accounts.

An amendment by Rep. Jeb Hensarling (R-Texas) waives the 45-day notification period when a customer's interest rate would be reduced. An amendment by Reps. Carolyn McCarthy (D-N.Y.) and Betsy Markey (D-Colo.) waives the Dec. 1 effective date to allow card issuers to apply customer payments to the highest rate balance if they impose a moratorium on rates, fees and terms. An amendment by Rep. Betty Sutton (D-Ohio) prevents the closing of an account because of the imposition of a new fee from being reported negatively impacting a credit card or credit score.

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) introduced a bill to freeze credit card rates until the new credit card rules take effect next year.

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

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Frank Changes Position, Favors Prefunding of Systemic Risk Fund

In advance of the markup of systemic risk legislation, which began in the House Financial Services Committee this week, Chairman Barney Frank (D-Mass.) said he has changed his mind and will support requiring systemically important financial institutions to prepay into a resolution fund.

H.R. 3996, proposed by Frank and based on the Treasury Department proposal, would have imposed the assessment only after a failure. All financial institutions with more than $10 billion in assets would be assessed.

"If you wait until after the fact, you would then have to go to the taxpayer first and get the assessment to repay it and some people are afraid that would never happen," Frank said in interview on Bloomberg Television.

Treasury Secretary Timothy Geithner testified a day earlier that "a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses."

FDIC Chairman Sheila Bair testified in favor of a prefunded resolution fund. She explained in a later speech that to avoid double counting for banks that already pay deposit insurance, the assessments should be based on assets held outside of insured depositories. 

Other Changes. Frank announced as the markup began that he plans to make other changes to the bill, including limitations on the Federal Reserve's systemic risk powers and its emergency lending authority, according to press reports.

OTS-OCC Consolidation. The committee adopted an amendment by Rep. Mary Jo Kilroy (D-Ohio) that would require the Treasury Department to produce a plan within 60 days after enactment to ensure that Office of Thrift Supervision employees are not disadvantaged relative to employees of the Office of the Comptroller of the Currency during the consolidation process. The bill would merge OTS into OCC.

Kanjorski on TBTF. Rep. Paul Kanjorski (D-Pa.), chairman of the Capital Markets Subcommittee, said he is preparing an amendment to allow regulators to dismantle large financial firms so that they won't get too big to fail and harm the financial system.

Kanjorski said that in writing his amendment he is coordinating with the European Union, which is requiring large financial institutions that take state funds to become smaller.

Kanjorski said he plans to have his amendment ready by the time the markup resumes the week of Nov. 16.

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

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Frank, Minnick Urge Temperance in Examinations of Traditional Banks

House Financial Services Committee Chairman Barney Frank (D-Mass.) and Rep. Walt Minnick (D-Idaho) urged the heads of the federal banking agencies to use "some temperance in their regulation of traditional banks" without jeopardizing safety and soundness.

ABA has long expressed the same concerns as Frank and Minnick. ABA Chairman-Elect Steve Wilson and community banker Austin Roberts identified many of the same issues on several occasions this year in testimony before Congress, and ABA has urged regulators to give banks sufficient flexibility to work with their borrowers.

The regulators were called on "to show some restraint in the immediate enforcement of new rules that may prove to be excessive at a time when community banks are least able to respond," the lawmakers said.

Frank and Minnick said, "It is critical now more than ever that regulatory personnel out in the field apply a measured approach to examinations that is directed by agency leadership rather than arbitrary decisions in the field.

"Examiners that are now being inappropriately tougher in their analysis of asset quality and are consistently requiring downgrades of loans whenever there is any doubt about the loans' conditions are acting counter to the kind if balanced approach required in the current economy," the lawmakers said.

Staff Contact--Mark Tenhundfeld (202) 663-5042

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International Bank Group Calls for Oversight of FASB, IASB  

The International Banking Federation, of which ABA is a founding member, urged systemic review of new accounting standards in a letter to the finance ministers and central bankers of the G-20 Group.

Specifically, the group said the international Financial Stability Board should assume the role of ensuring that the U.S. Financial Accounting Standards Board and the International Accounting Standards Board assess systemic consequences when developing accounting standards.

ABA launched a grassroots campaign to support an amendment by Reps. Ed Perlmutter (D-Colo.) and Frank Lucas (R-Okla.) to use the Financial Services Oversight Council to be created in the systemic risk bill to oversee FASB's accounting policy with systemic risk implications.

Bankers are urged to contact members of the House Financial Services Committee, which is marking up a bill, in support of the amendment. Click here for an automated letter.

The federation also called on G-20 finance ministers and central bankers to consider the economic consequences of new capital standards, particularly the effect on economic recovery.

The letter emphasized the importance of consulting with the banking industry in developing financial regulatory plans as well as the need to maintain room for appropriate national variations within the context of harmonizing international financial regulations. The letter points out that harmonization does not require identical rules in each country.

The principles presented in the letter were strongly advocated by ABA in the recent IBFed meeting in Tokyo. The G-20 finance ministers and central bankers are meeting today in Scotland.

Staff Contacts--Donna Fisher (202) 663-5318, James Ballentine (202) 663-5359.

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ABA Suggests to Changes in FHLBank Office of Finance Board Expansion

ABA generally supports the expansion of the board of directors of the Federal Home Loan Bank Office of Finance and the creation of an audit committee, but suggested several changes to the proposed rule.

The proposal would expand the board to 15 to 17 directors, composed of the 12 FHLBank presidents and three to five independent directors. The audit committee would be composed of the independent directors.

In its comment to the Federal Housing Finance Agency, ABA expressed concerns about the nature and mandate of the audit committee. "We strongly believe that accounting policies and procedures should be established by the full OF board, not by the audit committee," ABA said. The audit committee should be focused on oversight of combined financial reports and the sufficiency of consistent accounting practices by each of the FHLBanks, ABA added.

The rule should also be strengthened to make clear that it is the OF board, not the FHFA or an audit committee made up of members who made be selected by the FHFA, which sets accounting policy and procedures for the Bank System, ABA said.

Staff Contact--Joe Pigg (202) 663-5480.

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Regulators Issue Guidance on Commercial Real Estate Loan Workouts

The Federal Financial Institutions Examination Council issued guidance for examiners indicating that they are expected to take a "balanced approach" in assessing prudent workouts of commercial real estate loans.

"Financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers' financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications," the FFIEC said.

In addition, the regulators said "performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined."

As requested by ABA, the guidance emphasis that loans should not be criticized solely because their collateral value has declined. It also provides that banks may consider the "as-stabilized" market value in a collateral assessment.

ABA has previously urged regulators to provide guidance to examiners to ensure that they do not inappropriately criticize banks that are trying to work with their borrowers.

Staff Contact--Mary Frances Monroe (202) 663-5324.

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FDIC Issues Guidance on Interest Rate Restrictions     

The FDIC issued guidance to help banks conform to a rule on interest rate restrictions for less than well capitalized institutions that takes effect Jan. 1. Also included are banks that are operating under enforcement orders or that are close to falling below well capitalized.

The FDIC financial institution letter addresses several questions posed by ABA in August. ABA will continue to seek clarification.

On Jan. 1, the prevailing rate in all market areas will be deemed to be the national rate as defined by the FDIC, absent a contrary determination. Between now and Jan. 1, banks can use the national rate for all deposits or for deposits outside an institution's market area. The national rates and rate caps are posted weekly on the FDIC's website.

The FDIC will publish additional guidance before the rule's effective date on how a bank can request a determination that it is operating in a high-cost area. ABA will ask the FDIC to permit a bank that has a request pending to continue using the local market rates until the request is answered.

Staff Contact--Cathy McTighe (202) 663-5331.

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Selected Short Subjects

• Prepaid Assessments. The FDIC is scheduled to meet on Nov. 12 to adopt a final rule to require banks and thrifts to prepay annual Deposit Insurance Fund assessments.
• Correction. Comptroller of the Currency John Dugan's position on prepaid assessments was misrepresented in the Oct. 30 issue of Washington Perspective. Dugan supports prepaid assessments and opposes additional special assessments on the industry.
• FHLBank Losses. The Federal Home Loan Banks reported a preliminary net loss in the third quarter of $165 million compared with net income of $506 million in the same quarter in 2008. The loss was attributed to other-than-temporary impairment credit-related charges of $1.042 billion on private-label residential mortgage backed securities and home equity loan investments, according to the FHLBank Office of Finance. For the first nine months of the year, OTTI charges totaled $8.4 billion. Five of the 12 FHLBanks showed a net loss in the third quarter.
• Fannie Losses. Fannie reported a loss of $18.9 billion in the third quarter and has asked the Treasury Department for another $15 billion to keep it in business. Fannie has already received $45 billion. Meanwhile, the company announced its "Dream for Lease" program, which will allow homeowners who cannot qualify for its loan modification to turn over their deed and lease for up to a year. Freddie Mac already has such a program. Both companies also offer leases to tenants living in foreclosed rental properties.
• MBS Purchases. In addition to announcing that the target federal funds rate will remain at 0 to 0.25 percent for an extended period of time, the Federal Open Market Committee affirmed that it will purchase $1.25 trillion of Fannie Mae and Freddie Mac mortgage-backed securities and about $175 billion in agency debt -- less than the previous decision to buy up to $200 billion. The FOMC said the lower amount is "consistent with the recent path of purchases and reflects the limited availability of agency debt." Both types of purchases are set to be completed by the end of the first quarter. The FOMC said it will continue to monitor the timing and overall amounts of its purchases in light of economic and financial market conditions.
• College Savings Program. ABA expressed strong support for H.R. 3599, a bill by Rep. Emanuel Cleaver (D-Mo.) to extend tax benefits available under 529 plans to state or other authorized plans when contributors make deposits for college tuition in FDIC-insured accounts. Contributions to banking products would be insured up to $250,000.
• TLGP Risk Weight. The FDIC issued a regulatory interpretation stating that debt guaranteed under the Temporary Liquidity Guaranteed Program will have a capital risk weight of zero, rather than 20 percent as required in the TLGP rule. The risk weight is effective as of Sept. 29, 2009. At a bank's option, the third quarter Call Report can be restated, the FDIC said. The FDIC said its decision -- based on a review of the legislative history of the government's full faith and credit backing of the FDIC -- was reached after consultation with the other banking agencies. ABA is seeking confirmation from the other agencies.
• FDIC Resolutions. The FDIC saved an unspecified amount of money for the Deposit Insurance Fund by invoking seldom-used cross-guarantee authority against two healthy banks to help defray the cost of resolving seven failed banks in the same holding company, FBOP Corp., Oak Park, Ill. The cost to DIF was $2.5 billion. The nine banks had assets of $19.4 billion and deposits of $15.4 billion at Sept. 30. The FDIC and U.S. Bank, Minneapolis, entered into a loss-share transaction on approximately $14.4 billion in combined purchased assets of $18.2 billion.
• Section 23A. The Federal Reserve Board let its temporary exemption from section 23A of the Federal Reserve Act expire as scheduled on Oct. 30. The exemption, originally approved on Sept. 14, 2008, and extended on Jan. 30, 2009, allowed all insured depositories to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. The Fed said that since January the functioning of the tri-party repo market "improved considerably."
• FHA Finances. Reps. Spencer Bachus (R-Ala.) and Darrell Issa (R-Calif.) asked the Department of Housing and Urban Development for information on the Federal Housing Administration's solvency in light of reports that the agency's capital reserve will fall below the 2 percent minimum. "Congress and HUD must take whatever steps are necessary to ensure that this program operates in a manner that does not expose the taxpayer to yet another bailout," the lawmakers wrote to HUD Secretary Shaun Donovan.