June 15, 2007

SIFMA Warns Fed of Potential Risks of Imposing Undue Liabilities on Secondary Market

SIFMA participated this week in a public hearing sponsored by the Federal Reserve Board on the effectiveness of the Home Ownership and Equity Protection Act. In his testimony, Michael Decker, Senior Managing Director of Research and Public Policy at SIFMA, warned that imposing undue obligations or liabilities on secondary market participants would drive them from the market and would stifle funding for subprime mortgage originations. Decker stressed the need for regulators and legislators to take a measured approach and use caution to ensure that any regulation or legislation does not impair the ability to legitimately serve subprime borrowers. SIFMA pledged to work with policy-makers at all levels of government as they address current issues in the subprime mortgage market.

The House Education and Labor Committee approved a higher education bill that would cut the interest rates on subsidized student loans and would reduce payments to student loan lenders by $20 billion.

The House Financial Services Committee heard from federal banking regulators and the Federal Trade Commission (FTC) this week on consumer protection in the financial services sector. Committee Chairman Barney Frank called on the Federal Reserve Board to issue rules to define unfair and deceptive practices.

The House Judiciary Subcommittee on Commercial and Administrative Law held a hearing to examine the effect of mandatory binding arbitration agreements on consumers.

Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) introduced a $13.7 billion energy tax package this week. "The Energy Advancement and Investment Act of 2007," which is aimed at improving energy efficiency and expanding production by providing tax incentives, includes a provision that would extend and modify the Clean Renewable Energy Bonds (CREB) program through 2009. The proposal authorizes $750 million annually in 2008 and 2009. The proposal also modifies the CREB amortization requirement and authorizes the use of CREB financing for electric transmission property. The Senate Finance energy tax bill would also create a new category of tax credit bonds to finance advanced coal facilities. Under the proposal, there is a national limitation for clean energy coal bonds of $1.5 billion. The proposal limits the total allocations that may be made to projects of governmental bodies to $930 million. The Senate Finance Committee is expected to markup the bill on Tuesday, June 19.

The Tax Increase Prevention Act (H.R.2734), introduced by Rep. Tim Walberg (R-MI), would make permanent tax relief approved by the Congress in 2001 and 2003. The bill, which would repeal the sunset date for some provisions included in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, including a reduction in the tax rates for capital gains and dividends, has 81 Republican cosponsors.

Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) introduced legislation (S.1624) that would change the tax treatment of publicly traded partnerships, which derive income from investment adviser or asset management services. Under current law, publicly traded partnerships are exempt from corporate taxation if at least 90 percent of their income is passive. S.1624 would require publicly traded partnerships which derive income from investment adviser or asset management services to pay the corporate tax rate instead of their current 15 percent tax rate. The bill has a June 14, 2007 effective date and would grant partnerships which have filed to go public prior to the effective date a five-year extension of their current tax treatment. Baucus and Grassley sent a letter to Treasury Secretary Henry Paulson this week asking for the Treasury Department's interpretation of existing law.

Reps. Mike Castle (R-DE) and Tim Mahoney (D-FL) introduced the Pension Security Act of 2007 (H.R.2683), which would amend the Employee Retirement Income Security Act (ERISA) to require defined benefit pension plans to disclose their investments in hedge funds in their annual reports.

Also this week, Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) introduced the Defenders of Freedom Tax Relief Act (S.1593). The bill, which would provide $550 million in tax cuts to members of the military and their families, would expand the qualified veterans tax-exempt mortgage bond program to include all veterans—not just first time homebuyers. Under the Defenders of Freedom Tax Relief Act, a reservist may make an early withdrawal from a retirement plan and have two years from the last day of active duty to replace the funds without tax penalty. S.1593 would also allow the families of soldiers killed in the line of duty to contribute up to 100 percent of the survivor benefits to a retirement savings account.

New regulations released by the Treasury Department this week provide securities and commodities dealers with a valuation safe harbor under the tax mark-to-market requirements of Section 475 of the Internal Revenue Code. Subject to certain limitations, securities and commodities covered by the new safe harbor can be valued by dealers for tax purposes at the values used for financial statement purposes. SIFMA's Committee on the Federal Taxation of the Securities Industry has long sought an administrable book-tax conformity safe harbor. The Committee is in the process of analyzing the new rules to determine whether to submit additional comments to the Treasury Department and the IRS on this topic.

TOP

SIFMA Urges Lawmakers to Take Caution

Participating in an all-day Federal Reserve Board public hearing this week on the Home Ownership and Equity Protection Act (HOEPA), Michael Decker, Senior Managing Director of Research and Public Policy at SIFMA, stressed the need for lawmakers and regulators to take a measured approach and use caution to ensure any regulation or legislation does not stifle the subprime mortgage market. Decker highlighted the need for streamlined and meaningful disclosure to borrowers of lending terms. SIFMA opposes the imposition of liability for illegal lending on secondary mortgage market participants. Decker explained it is impossible for a secondary market participant to know what information a borrower may have received from a broker during the mortgage loan process and it is not economically feasible for a secondary market participant to review all of the documents in every loan file when contemplating a purchase of a pool consisting of thousands of loans. If policy-makers do impose assignee liability, they should adhere to a number of principles—including among others, any guidance should be based on clear, objective, concise and quantifiable lending standards; assignee liability provisions, if necessary, should be enacted as a single uniform national standard; and claims against assignees should be limited to violations of HOEPA—to help mitigate any negative, unwanted effects that may harm the ability of subprime borrowers to access mortgage loans. SIFMA encouraged loan servicers to employ flexibility as provided for in loan and servicing contracts to help borrowers facing foreclosure. SIFMA opposed governmentally mandated forbearance or loan modifications, the imposition of subjective suitability standards, and regulatory restrictions on specific mortgage products.

During the hearing, Federal Reserve Board Governor Randall Kroszner, who presided over the hearing, said that in the wake of rising foreclosures regulators must walk a fine line to prohibit abuses while allowing the market to function and provide credit to borrowers. There appeared to be general support among the hearing participants for an "opt out" approach to requirements for escrow for taxes and insurance in mortgage packages. There was not agreement on the use of prepayment penalties. The Center for Responsible Lending supported banning prepayment penalties while participants in the lending industry argued prepayment penalties for fixed rate loans help to assure liquidity in the secondary mortgage market. State officials participating in the panel urged the Federal Reserve to "stated income" loans and to issue a rule related to borrower's ability to repay the loan.

TOP

House Ed Committee Approves Higher Education Bill

The House Education and Labor Committee approved the College Cost Reduction Act of 2007 (H.R.2669) by a vote of 30-16. The bill would reduce payments to student loan lenders by $20 billion dollars and would cut the interest rates on subsidized student loans over the next five years. The College Cost Reduction Act would also reduce the guaranty rate on student loans from the current rates of 99 percent to 95 percent and would eliminate of a special rate for "exceptional performers." H.R.2669 would reduce the Special Allowance Payment (SAP) to Federal Family Education Loan Program (FFELP) lenders for loans made on or after October 1, 2007 by 55 basis points. The Senate Health, Education, Labor and Pensions (HELP) Committee is currently scheduled to markup its higher education bill next week.

TOP

HFSC Examines Consumer Protection

During a House Financial Services Committee hearing this week on federal consumer protection in the financial services sector, Committee Chairman Barney Frank (D-MA) told the Federal Reserve Board to use or lose its consumer protection rule-making authority. Under the Federal Trade Commission Act, banks, thrifts and credit unions are exempt from oversight by the Federal Trade Commission (FTC), but the Federal Reserve, the Federal Housing Finance Board and the National Credit Union Administration are required to prevent unfair and deceptive practices. Chairman Frank called on the Fed to issue rules to define unfair and deceptive practices. Federal Reserve Board Governor Randall Kroszner said there is a very fine line when crafting rules on unfair and deceptive practices and the Fed has focused on addressing potentially unfair and deceptive practices by using its supervisory powers on a case-by-case basis. Sheila Bair, Federal Deposit Insurance Commission (FDIC) Chairwoman, and John Dugan, Comptroller of the Currency, said granting the rule writing authority to the FDIC and the Office of the Comptroller of the Currency (OCC) would be very helpful. In her written testimony, FDIC Chairwoman Sheila Bair spoke about deceptive mortgage practices—she recommended the Fed write rules to require lenders to underwrite mortgages at the fully indexed rate and prohibit stated-income loans. She also suggested the Fed discourage loans that exceed a debt-to-income ratio of 50 percent after taxes and insurance.

Chairman Frank said laws are needed to cover unregulated entities, which participate in the financial services sector. He said the recent Waters v. Wachovia decision by the U.S. Supreme Court erodes consumer protection at the state level. Committee Ranking Member Spencer Bachus (R-AL) said it was particularly important that banking laws are uniform in oversight and are strong in consumer protection across both state and federal levels. Rep. Richard Baker suggested creating a working group—similar to the President's Working Group on Financial Markets (PWG)—which could make recommendations related to consumer protection to Congress.

TOP

House Judiciary Subcommittee Examines Mandatory Arbitration

The House Judiciary Subcommittee on Commercial and Administrative Law held a hearing this week focused on the effect of mandatory binding arbitration agreements on consumers. Subcommittee Chairwoman Linda Sanchez (D-CA) said it was important to review the types of mandatory arbitration agreements and determine whether they are in the spirit of the Federal Arbitration Act of 1925, which first established arbitration agreements. Paul Bland Jr., Esq., Public Justice, called arbitration a "lawless system." Mark Levin, Esq., Ballard Spahr Andrews and Ingersoll, said many consumer groups have participated with the American Arbitration Association to develop consumer protocols, and the courts serve as a check and balance to the arbitration system—the courts have the authority to scrutinize and review arbitration decisions. Subcommittee Ranking Member Chris Cannon (R-UT) said Congress should be cautious in placing restrictions on mandatory arbitration, which state and federal courts have found to be effective and efficient in dispute resolution. He said he would prefer to see arbitration language standardized in current statute with deviations explained rather than to craft new arbitration legislation.

TOP

The Week Ahead

• The Senate Finance Committee is scheduled to markup the "Energy Advancement and Investment Act of 2007" on Tuesday, June 19.
• Also on Tuesday, June 19, the House Financial Services Committee will hold a hearing on consumer credit reports.
• Treasury Secretary Henry Paulson will appear before the House Financial Services Committee on Wednesday, June 20, to discuss the state of the international finance system.
• The Senate Health, Education, Labor, and Pensions (HELP) Committee is scheduled to markup higher education legislation on Wednesday, June 20.
• On Thursday, June 21, the House Ways and Means Subcommittee on Social Security will hold a hearing on social security numbers and identity theft.
• The House Financial Services Subcommittee on Capital Markets will hold a hearing entitled "Examining a Legislative Solution to Extend and Revise the Terrorism Risk Insurance Act" on Thursday, June 21.
• Also on June 21, the Senate Judiciary Committee is scheduled to markup the Patent Reform Act of 2007 (S.1145). The Committee was originally scheduled to markup S.1145 on June 14.

TOP

If you have any questions or if you require additional information about any of the items in this update, please call 202.216.2000

© 2007 The Securities Industry and Financial Markets Association