May 25, 2007

House Approves ILC Legislation with CSE Exemption

Congress worked this week to complete a number of outstanding issues before adjourning for the week-long Memorial Day recess. The House approved legislation (H.R.698) that would prohibit commercial companies from owning industrial loan companies (ILCs). Under the Industrial Bank Holding Company Act, ILC holding companies and subsidiaries would be subject to registration and examination by the Federal Deposit Insurance Corporation (FDIC). ILC owners supervised as "consolidated supervised entities" (CSEs) with the Securities and Exchange Commission (SEC), the Federal Reserve Board or the Office of Thrift Supervision would be exempt from duplicative regulatory oversight by the FDIC.

The House also approved legislation to reform the regulatory oversight of the housing-related government sponsored enterprises (GSEs). Prior to approving H.R.1427, the House adopted an amendment that would limit the authority of the new regulator to reduce the size of the GSE mortgage portfolios.

The House and Senate approved the supplemental war spending package including an increase in the minimum wage, $5 billion in tax relief and four technical corrections to last year's pension reform bill. The bill does not include revenue raiser provisions opposed by SIFMA, which were included in a previous Senate version.

The House Financial Services Committee approved legislation that would tighten sanctions on Iran by allowing investors to pursue divesture from companies with significant holdings in Iran's energy sector.

The Senate Banking Subcommittee on Security and International Trade and Finance held a hearing this week to examine China market access.

The House Transportation and Infrastructure Subcommittee on Highways and Transit continued its examination of public-private partnerships this week.

The Securities and Exchange Commission (SEC) unanimously adopted final rules to implement provisions of the Credit Rating Agency Reform Act, signed into law in September 2006, which would establish a registration and regulatory oversight system for the credit rating agency industry. Under rules adopted this week by the SEC, a credit rating agency is required to apply to the SEC for registration as a nationally registered statistical rating organization (NRSRO) and must provide the SEC with certain financial reports and business reports. NRSROs are also required to have written policies and procedures in place governing the use of material non-public information obtained in connection with performance of credit rating services and pending rating actions. Credit rating agencies must file with the SEC as an NRSRO as soon as the rule is published in the Federal Register. The other rules approved by the SEC will go into effect June 26.

The American Bankers Association, Mortgage Bankers Association, America's Community Bankers, Consumer Bankers Association and the Housing Policy Committee (an affiliate of the Financial Services Roundtable) issued a joint statement on subprime mortgage lending. The statement describes what lenders are currently doing to assist subprime borrowers and the steps the industry has taken to strengthen underwriting standards. The trade groups called on lawmakers—if lawmakers do act on a legislative solution—to establish a single uniform national standard that applies to both bank and non-bank mortgage lenders.

The Mortgage Cancellation Relief Act (S.1394), introduced by Sen. Debbie Stabenow (D-MI), would exclude forgiven residential mortgage obligations from an individual's gross income. Under current law, any loan amounts forgiven by a lender because the owner was unable to pay the mortgage is considered gross income and is taxable.

Sen. Judd Gregg (R-NH) introduced the Stop Over-Spending (S.O.S.) Act (S.15), an update from legislation Gregg previously introduced in 2006. The S.O.S. Act reinstates statutory caps on discretionary spending, enforceable by an across-the-board sequester if Congress goes above the caps; creates an automatic deficit reduction mechanism to balance the budget by 2012; grants the president line-item veto authority and creates a bi-partisan commission to study the accountability and efficiency of government programs.

The America's Better Classrooms (ABC) Act (H.R.2470), introduced by House Ways and Means Committee Chairman Charles Rangel (D-NY), Rep. Jim Ramstad (R-MN), and Rep. Bob Ethridge (D-NC), would authorize states and local governments to issue up to $25 billion in tax-credit bonds to finance school construction over the next two years. Under H.R.2470, 60 percent of the $25 billion in school modernization bonds would be allocated to states based on school-age population. The remaining 40 percent would be directly allocated to the 125 school districts with the largest number of low-income students.

Rep. Rick Boucher (D-VA) introduced legislation (H.R.2365) that would restrict the ability of taxpayers to sue for alleged infringement of patented tax planning methods. The bill would amend the Patent Act to eliminate civil actions for infringement, injunctive relief, damages and attorney's fees for infringement of patents for tax planning strategies.

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House Approves ILC Bill Backed by SIFMA

The House approved legislation (H.R.698) this week that would prohibit commercial companies from owning industrial loan companies (ILCs) by a vote of 371 to 16. The Industrial Bank Holding Company Act, introduced in January by House Financial Services Committee Chairman Barney Frank (D-MA) and Rep. Paul Gillmor (R-OH), defines a commercial firm as one that makes at least 15 percent of its annual gross revenues from activities that are not financial in nature. Under the bill, industrial loan companies bought or chartered by commercial companies between October 2003 and January 2007 would be allowed to continue to operate, but would be prohibited from expanding or branching in certain states. H.R.698 requires industrial bank holding companies to register with the Federal Deposit Insurance Corporation (FDIC) and subjects the holding company and subsidiaries to examinations by the FDIC. ILC owners supervised as "consolidated supervised entities" (CSEs) by the SEC, the Federal Reserve Board or the Office of Thrift Supervision (OTS) would be exempt from duplicative holding company supervision by the FDIC. In testimony before the House Financial Services Committee in April, SIFMA strongly urged the SEC's "consolidated supervised entities" regulatory regime be recognized in H.R.648.

At this point it is unclear whether the Senate will act on ILC reform. A companion bill, the Industrial Bank Holding Company Act (S.1356), was introduced by Sens. Sherrod Brown (D-OH), Wayne Allard (R-CO) and Tim Johnson (D-SD), earlier this month. After House passage of H.R.698, Senate Banking Committee Chairman Chris Dodd (D-CT) said he plans to review the House bill and other proposals and work to resolve outstanding issues regarding the ownership and regulation of ILCs.

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House Approves GSE Reform Bill

The House approved the Federal Housing Finance Reform Act (H.R.1427) by a vote of 313 to 104. The bill overhauls the regulatory oversight of the housing government sponsored enterprises (GSEs) and creates a new, independent regulator with broad powers similar to current banking regulators. The new regulator, the Federal Housing Finance Agency (FHFA), would have the authority to adjust risk-based and minimum capital requirements, to adjust the size of the GSE mortgage portfolios for safety and soundness reasons and to place the GSEs into receivership. The bill also creates an affordable housing fund to be funded by Fannie Mae and Freddie Mac based on the average sizes of their mortgage portfolios. Prior to approving H.R.1427, the House approved an amendment offered by Reps. Melissa Bean (D-IL) and Randy Neugebauer (R-TX), which specifies the new regulator has the authority to reduce the size of the GSE mortgage portfolios only if they pose a risk to the GSEs themselves and not the broader economy. The amendment was approved 383-36 and was previously approved by voice vote late last week.

In a statement released after House passage of H.R.1427, Robert Steel, Treasury Under Secretary for Domestic Finance, said as a result of amendments made to the bill, the Treasury Department does not believe the bill adequately provides the necessary oversight. Steel said the Treasury Department remains troubled with the bill's provisions related to conforming loan limits, the Federal government's appointment of directors and parts of the affordable housing fund. Steel said the Bean-Neugebauer amendment significantly weakened the ability of the regulator to examine systemic risk issues. The Senate Banking Committee has not acted on GSE reform legislation. Senate Banking Committee Chairman Chris Dodd (D-CT) has said he is committed to finding a bipartisan consensus on the issue.

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Supplemental Ready for President's Signature

The House and Senate approved the supplemental war spending conference report (H.R.2206) including the minimum wage bill and a $5 billion tax relief package. The tax package includes a modification of the "kiddie tax;" an increase in the time period (from 18 months to 36 months) that the IRS can charge interest on tax underpayments without notifying the taxpayer; a permanent extension of IRS user fees and an extension and expansion of penalties on tax preparers to all types of tax returns. The bill does not include provisions opposed by SIFMA, which were included in the tax package approved by the Senate in February related to deferred compensation, executive compensation, settlement deductibility and contingent convertible debt. A previous version of the supplemental was vetoed by the president because of troop-withdrawal language and increases in domestic spending.

The supplemental war spending bill also included four employee benefit provisions that would make technical corrections to the Pension Protection Act (PPA), signed into law last summer. The four provisions would 1) extend the time period allowed for non-calendar year airline pension plans to utilize special funding relief for plan contributions in the PPA; 2) allow plans to cover both multiple employers and employees working under collectively bargained arrangements to convert into multiemployer plans; 3) allow airline sponsors using 10-year amortization to bring their frozen defined benefit plans to full funding to use a 8.25 percent interest rate and 4) would amend tax code Section 420, relating to transfers of excess pension assets to retiree health accounts. Senate Health, Education, Labor and Pensions Committee Chairman Edward Kennedy (D-MA) and Ranking Member Michael Enzi (R-WY) sent a leader to Senate leadership this week expressing concern with the inclusion of the pension-related provisions in the supplemental. Kennedy and Enzi said the Committee is working on a technical corrections package and hope to reach a consensus soon.

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HFSC Approves Iran Sanctions Enabling Act

The House Financial Services Committee adopted legislation this week that would protect investors and state and local governments that choose not to invest in company's that support Iran's oil and gas industry. Under the Iran Sanctions Enabling Act (H.R.2347), the U.S. government would be required to publish a list of companies with more than $20 million invested in Iran's energy sector every six months. The bill, introduced by House Financial Services Committee Chairman Barney Frank (D-MA) and House Foreign Affairs Committee Chairman Tom Lantos (D-CA), would allow state and local governments to divest the assets of their pension funds and other funds under their control from any company on the list and would provide a safe harbor to fund managers, managers of mutual funds and corporate pension funds who divest from companies on the list from actions by shareholders. An amendment adopted by the Committee would allow local and state governments to also pursue divestiture from companies with less than $20 million in Iranian energy holdings.

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Senate Banking Subcommittee Examines U.S. Economic Relations with China

The Senate Banking Subcommittee on Security and International Trade and Finance held a hearing this week on Chinese exchange rates and market access. Subcommittee Chairman Evan Bayh (D-IN) said while the policies of the U.S. Treasury Department toward China are well-intended, there has not been enough progress to improve China currency and market access. Bayh said market access for the financial services sector would balance China's already existing access to U.S. markets, and help China participate more fully in the global economy. Morris Goldstein, Peterson Institute, said an increased revaluation of Asian currencies of 25% could result in a $130 billion positive movement on the U.S. trade deficit. Goldstein recommended the U.S. put more pressure on the International Monetary Fund (IMF) by not supporting the IMF budget or IMF initiatives. He also suggested the U.S. Treasury label China a manipulator. Goldstein concluded if neither recommendation is effective, Congress will need to act with legislation. Rob Nichols, president and chief operating officer, Financial Services Forum, testifying on behalf of the Engage China Coalition said $2 trillion in China's domestic savings would have a large impact for financial services jobs in China and the U.S. SIFMA is a member of the Engage China Coalition.

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House Subcommittee Continues Examination of P3s

During the House Transportation and Infrastructure Subcommittee on Highways and Transit hearing on public-private partnerships (PPPs) this week, Subcommittee Chairman Peter DeFazio (D-OR) said the House Transportation Committee is working on two tracks 1) looking at potential revenue sources and 2) assessing the future needs and a vision for the national transportation system. DeFazio expressed concern with fragmentation of the national highway system and with PPPs. Transportation Committee Ranking Member John Mica (R-FL) said it is important to continue examining PPPs because there currently is not a Federal plan for the financing and development of the transportation system and many states are trying to figure out how to finance their transportation needs. Pennsylvania Governor Ed Rendell said without a federal capital budget, and with a gas tax of 30 cents a gallon, the traditional funding methods will not meet Pennsylvania's transportation demands. Governor Rendell said any PPP lease agreement for the Pennsylvania Turnpike would include some level of state government control of toll increases and would involve smaller annual payments rather than a larger one-time amount.

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© 2007 The Securities Industry and Financial Markets Association