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ABA Washington Perspective
Vol. III, No. 1, January 2, 2009
Congress to Convene; Economy, Financial System Issues Top Agenda
FASB Issues Two Proposals To Deal with Fair Value Issues
SEC Recommends Against Suspension of Fair Value Accounting
Fed Provides Details on MBS, TALF Purchase Programs
Fannie, Freddie To Implement Appraisal Code of Conduct
Thrift Executives Named To Federal Reserve Advisory Group
Selected Short Subjects
Congress to Convene; Economy, Financial System Issues Top Agenda
The first session of the 111th Congress convenes on January 6, with high-priority issues on its immediate agenda involving the economy and the financial system. ABA will continue to work with Congress to protect the interests of its members in what is expected to be a difficult year for the industry.
TARP Funds. The House Financial Services Committee begins on January 7 with a hearing on the use of Troubled Asset Relief Program funds. Treasury has come under fire for not directing some of the money to prevent foreclosures.
House Speaker Nancy Pelosi (D-Calif.) has directed Chairman Barney Frank (D-Mass.) to craft legislation to improve accountability and transparency of the TARP program before Congress releases the second half of the $700 billion program.
Frank is drafting legislation to require that some of the remaining $350 billion in TARP funds be used to stem foreclosures and reduce mortgage interest rates. His legislation could include something like FDIC Chairman Sheila Bair's plan to modify loans by providing lenders with a guarantee against losses. The cost is estimated at $24 billion to prevent 1.5 million foreclosures.
President-elect Barack Obama has proposed reducing foreclosures by imposing a 90-day moratorium for homeowners "acting in good faith." Frank has also advocated a moratorium.
Frank is also expected to expand use of the Hope for Homeowners program, which seeks to refinance distressed loans into 30-year fixed-rate loans insured by the Federal Housing Administration. So far, very few homeowners have applied for loans under the program.
Frank and Sens. Dianne Feinstein (D-Calif.) and Olympia Snowe (R-Maine) are also expected to push for tighter restrictions on the use of TARP capital infusion funds by banks and additional limits on executive compensation. The lawmakers want to require banks to report quarterly on how they have spent the money. The Feinstein-Snowe measure, which was first introduced in the 110th Congress, would also prohibit banks from using the funds on lobbying or political contributions.
The House committee will also hold a hearing on January 9 to look into the FHA's oversight of FHA lenders in light of the great increase in the use of FHA-insured home loans.
Staff Contacts--Floyd Stoner (202) 663-5339, Robert Davis (202) 663-5588.
Economic Stimulus. President-elect Obama is expected to meet with congressional leaders of both parties on Monday to discuss an economic stimulus plan. Pelosi said her goal is to have legislation completed by January 20, when Obama is sworn in as president. Getting off to a quick start on Wednesday, the Democratic Steering and Policy Committee will solicit the views of five economists and the House Education and Labor Committee will hold a hearing.
The stimulus package being discussed by Democrats and the incoming Obama administration is said to range from $675 billion to $775 billion. The package is expected to target the creation of up to 3 million jobs and investments in public works projects, renewable energy initiatives, education and modernizing the health care system. The package will also include middle class tax cuts, according to David Axelrod, a senior Obama adviser.
House Republicans have proposed an alternative stimulus plan that would, among other things, reduce the corporate tax rate to 25 percent from the current 35 percent; suspend the capital gains tax on newly acquired assets for the next two years; and allow companies to carry back net operating losses for three years (five years for small businesses from the current two years.
While House passage is expected quickly, Senate action could take longer because Republicans have enough votes to block consideration.
Staff Contact--Larry Seyfried (202) 663-5322.
Credit Cards, Interchange Fees. The Senate Banking Committee and the House Financial Services Committee are expected to take up legislation that would put into law the credit card regulations adopted by the Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration -- and then go beyond to impose new restrictions.
There may be some sentiment in Congress to see how the new regulations work before legislating, but some, like Rep. Carolyn Maloney (D-N.Y.) and Senate Banking Committee Chairman Christopher Dodd (D-Conn.) said they will pursue legislation that would go further than the agency rules, which are effective July 1, 2010.
Bills are expected to be reintroduced by Sen. Dick Durbin (D-Ill.) and House Judiciary Committee Chairman John Conyers (D-Mich.) to allow retailers to collectively negotiate interchange fees. The House committee reported a bill by a vote of 19 to 16, with enough disputes within the committee to keep the measure from the House floor.
Staff Contact--Ken Clayton (202) 663-5337.
Bankruptcy. Senate Majority Whip Dick Durbin (D-Ill.) told a hearing of the Senate Judiciary Committee in November that bankruptcy reform will be a priority in 2009. Sen. Arlen Spector (R-Pa.), the committee's ranking Republican, said that while he is concerned about foreclosures, he opposes the Durbin bill. He said he will insist that any bill introduced next year will go through the regular legislative process, including hearings and the right to offer amendments.
The House Judiciary Committee reported a bill in late 2007 by a narrow vote of 17 to 15, keeping the measure from the House floor.
Obama also supports allowing bankruptcy court judges to modify the terms of loans.
Staff Contact--Bill Boger (202) 663-5424.
Regulatory Restructuring. A congressional effort is expected to begin in early 2009 on ways to resolve perceived problems with the system of regulating financial services providers. A major issue is how to prevent systemic risk to the financial system, including whether an agency should be designated for that task. Also expected to be considered is whether regulatory agencies should be consolidated.
The House Financial Services Committee will hold a hearing on Monday to look into the Bernard Madoff Ponzi scheme and the need for regulatory reform.
Staff Contact--Wayne Abernathy (202) 663-5222.
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FASB Issues Two Proposals To Deal with Fair Value Issues
ABA said it strongly supports a Financial Accounting Standards Board proposal that takes the first step toward improving the accounting method for determining the fair value of securities that are other than temporarily impaired.
In its comment letter to FASB, ABA supported the proposed staff position that makes the accounting rules in Emerging Issues Task Force Issue 99-20 consistent with Financial Accounting Standard No. 115. ABA said it is imperative that the change be applicable for Dec. 31, 2008, reporting.
EITF 99-20 is based on a "market participant's" view of future cash flows, while SFAS No. 115 is based on "reasonable judgment" of future cash flows. Under proposed EITF 99-20-a, it would be less likely that the securities would be categorized as "other than temporary impairment." However, the securities would be required to pass certain tests, such as the intent and ability of the institution to hold the security until recovery, before determining that OTTI does not apply.
While supporting the proposal, ABA also told FASB that it resolves only a portion of the problems with the accounting for OTTI. Among ABA's recommendations were using the International Accounting Standards Board's model, which is based on credit impairment rather than fair value, as the trigger for OTTI. ABA said it believes the IASB approach is superior to U.S. generally accepted accounting principles.
FASB also issued for comment a proposed staff position that would amend the disclosure requirements of FAS No. 107, "Disclosures about Fair Value of Financial Instruments."
The proposed staff position would apply to certain financial assets such as debt securities classified as held-to-maturity and available-for-sale and loans and long-term receivables that are not measured at fair value with changes in the fair value recognized through earnings.
FASB said the disclosures include a comparison of common measurement attributes for financial assets and the pro forma income from continuing operations (before taxes) under the different measurement scenarios. The deadline for comment is Jan. 15.
FASB said both proposals "are intended to address concerns arising from the current financial crisis relating to accounting for financial instruments." ABA has raised OTTI issues in numerous letters and discussions with FASB, the Securities and Exchange Commission and banking regulators.
Staff Contact--Donna Fisher (202) 663-5318.
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SEC Recommends Against Suspension of Fair Value Accounting
The Securities and Exchange Commission, in a report mandated by Congress, recommended against suspending fair value accounting, but suggested improvements in the application of existing fair value requirements.
The SEC said the improvements should include "reconsidering the accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available."
The report recommends:
· Development of guidance to help companies and auditors determine when market information is not available in illiquid or inactive markets.
· Enhancement of existing disclosure and presentation requirements related to the effect of fair value in financial statements,
· Employment of educational efforts, including those to reinforce the need for management judgment in the determination of fair value estimates.
· Examination by the Financial Accounting Standards Board of the impact of liquidity in the measurement of fair value.
· Implementation by the SEC and the Public Company Accounting Oversight Board of further guidance to foster use of sound judgment in making fair value measurements.
The SEC also urged FASB to reassess current impairment models for financial instruments, including consideration of narrowing the number of models.
The report said that fair value accounting "did not appear to play a meaningful role in the bank failures" that occurred this year. The report indicated that bank failures "appeared to be the result of growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence."
Staff Contact--Donna Fisher (202) 663-5318.
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Fed Provides Details on MBS, TALF Purchase Programs
The Federal Reserve Board provided more details on programs to purchase mortgage-backed securities and asset-backed securities.
The Fed its said it expects to begin buying fixed-rate mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae in early January. The Fed hired four companies -- BlackRock Inc., Goldman Sachs Assessment Management, Pacific Investment Management Co. and Wellington Asset Management Co. -- to manage the purchases. The Fed announced in late November that it would buy up to $500 billion in MBS through June 30.
The Fed also said it revised terms and conditions and questions and answers for its Term Asset-Backed Securities Loan Facility, which is expected to become operational in February for ABS issued after Jan. 1, 2008. The ABS will be limited to student loans, auto loans, credit cards and loans guaranteed by the Small Business Administration. TALF loan maturity has been extended to three years from one. Under the program, the Federal Reserve Bank of New York will make up to $200 billion in loans and the Treasury Department will provide $20 billion in credit protection to the Fed.
Mortgage Rates. James Lockhart, director of the Federal Housing Finance Agency, predicted that mortgage interest rates could fall another 50 to 100 basis points because of the Federal Reserve's MBS purchase program. Freddie Mac's survey of rates as of Dec. 31 showed 30-year fixed-rate mortgages averaged 5.1 percent, the lowest on record.
Staff Contact--Robert Davis (202) 663-5588.
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Fannie, Freddie To Implement Appraisal Code of Conduct
Fannie Mae and Freddie Mac will implement a revised Home Valuation Code of Conduct under an agreement with New York Attorney General Andrew Cuomo, according to the Federal Housing Finance Agency. The agreement is effective for single-family loans sold to Fannie and Freddie beginning on May 1. (The original effective date was Jan. 1, 2008.)
The revised appraisal code includes modifications to two important areas requested by ABA. Lenders can continue to use in-house appraisers, provided there are strict boundaries to ensure that appraisals are independent of loan production; and joint ventures or other business arrangements providing appraisal services are permissible, provided that internal controls are in place to ensure compliance with the code.
As proposed, the code prohibits loan brokers and real estate agents from ordering appraisals. ABA did not seek to change this provision.
The Independent Valuation Protection Institute will be established to receive complaints from the public. Complaints indicating a lack of compliance will be referred to Fannie and Freddie, and will be available to the New York Attorney General and the FHFA. Lenders will be required to conduct quality control tests and provide adverse findings and noncompliance with the code to Fannie and Freddie.
Cuomo proposed the code after opening an investigation of appraisal practices involving subprime loans. In a statement, Cuomo said the revised agreement "preserves the core goals of ensuring appraiser independence and eliminating systemic conflicts of interest."
Staff Contact--Rod Alba (202) 663-5592.
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Thrift Executives Named To Federal Reserve Advisory Group
The Federal Reserve Board named six new members to its Thrift Institutions Advisory Council and designated a new president and vice president for 2009.
The new council president is Curtis L. Hage, chairman and CEO, Home Federal Bank, Sioux Falls, S.D. The new vice president is F. Edward Broadwell, Jr., chairman and CEO, HomeTrust Bank, Asheville, N.C.
New members, named to two-year terms, are: Barrie G. Christman, chairman, Principal Bank, Des Moines, Iowa; Richard G. Harwood, president and CEO, Newport Federal bank, Newport, Tenn.; Kay M. Hoveland, president and CEO, Kaiser Federal Bank and K-Fed Bancorp, Covina, Calif.; Richard J. Green, CEO, Firstrust Bank, Conshohocken, Pa.; Randy M. Smith, CEO and president, Randolph-Brooks Federal Credit Union, Universal City, Texas; and William R. White, chairman and CEO, Dearborn Federal Savings Bank, Dearborn, Mich.
TIAC members whose terms continue through 2009 are: William A. Donius, chairman, Pulaski Bank, St. Louis, Mo.; Joseph R. Ficalora, chairman, president and CEO, New York Community Bancorp, Westbury, N.Y.; Christopher T. Jillson, president and CEO, Sandia Laboratory Federal Credit Union, Albuquerque, N.M.; and Peter L. Judkins, president and CEO, Franklin Savings Bank, Farmington, Maine.
The council meets with the Federal Reserve Board of Governors three times a year to discuss developments relating to thrift institutions, the housing industry, mortgage finance and regulatory issues.
Staff Contact--Robert Davis (202) 663-5588.
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Selected Short Subjects
· Pension Reform. President Bush signed pension reform legislation law that would waive minimum required distributions from individual retirement accounts and defined contribution plans for 2009. The Treasury Department turned down requests from members of Congress to make the waiver applicable in 2008. The legislation also would provide funding relief for defined benefit plans, allowing pension plans to "smooth out" unexpected asset losses over 24 months, and eases the transition to new funding rules under which plans must be 92 percent funded in 2008 and 94 percent in 2009. It also allows sponsors of multi-employer plans to temporarily freeze the status of endangered plans.
· FHASecure. The Department of Housing and Urban Development shut down the FHASecure program as of Dec. 31. The program insured refinanced loans to borrowers who were delinquent on their loans. ABA had urged HUD and the Office of Management and Budget to extend the program through at least 2009.
· HOPE Now. HOPE Now estimated that participants in its alliance will prevent twice as many foreclosures in 2009. HOPE Now projected that approximately 2.2 million foreclosures will have been prevented in 2008, including almost 950,000 mortgage modifications, based on actual 11-month data. Depending on unemployment and other economic conditions, HOPE Now said the number of loan modifications could increase to 2 million or more next year.
· GMAC Funding. Following the Federal Reserve Board's decision to approve GMAC Financial Services' request to become a bank holding company, the Treasury Department announced that it will buy $5 billion in senior preferred equity with an 8 percent dividend from GMAC. Additionally, Treasury will lend up to $1 billion to General Motors so that it can participate in a rights offering at GMAC in support of GMAC's reorganization as a bank holding company.
· Rosenfeld Resignation. Ronald Rosenfeld, who has been chairman of the Federal Housing Finance Board since 2004, resigned. The FHFB was folded into the new Federal Housing Finance Agency, created on July 30. The FHFA oversees Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Rosenfeld said that during his tenure his most significant achievement was to "stop the food fights and make the FHFB into a respectable agency." In a major action, Rosenfeld led the withdrawal of a controversial proposal that would have placed a one-size, fits-all target on the FHLBanks' retained earnings. Rosenfeld stayed on after the new FHFA agency was created to smooth the transition, serving the first 90 days as acting deputy director for the FHLBanks.
· OTS Investigation. Office of Thrift Supervision Director John Reich notified the Treasury Department's inspector general that he has taken steps to prevent banks from including a capital infusion in one quarter to be applied in the previous quarter, as happened with IndyMac Bank.
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