Posts filed under ‘Political’
What’s Next For Fannie, Freddie and Credit Unions?
As the pace begins to pick up in Congressional efforts to re-examine the tax code, credit unions are understandably nervous about even the whiff of legislation to do away with their tax exemption. But another issue, on which they need to be ready to mobilize, is reform of the housing market.
According to today’s Wall Street Journal, a bipartisan group of Senators led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner is working on a proposal that would replace Fannie and Freddie with an entity that would act as a public guarantor of mortgage-backed securities. I’ve commented in other posts about similar proposals that have been made by housing specialists. The basic idea is that instead of having Fannie and Freddie buying mortgages from credit unions and banks, which they then package as securities, a public guarantee corporation would insure mortgage-backed securities against default in return for those securities meeting baseline underwriting standards. It would not be in the business of buying mortgages. Advocates of this approach argue that it would get the GSEs with their now explicit government backing out of the business of buying mortgages and competing against the private sector for securitization. In addition, by guaranteeing mortgage-backed securities against default, the legislation would take its aim at one of the primary culprits behind the Great Recession.
Now for the bad news. Credit unions need a secondary market in which to sell their mortgages. Therefore, it is absolutely crucial that whatever structure ultimately is proposed by Senators includes a mechanism for mandating that securitizers not be able to discriminate in deciding what mortgages to buy. This brings me to a second idea. According to the same article in today’s journal, a second group of Senators led by Rhode Island’s Jack Reed, is floating a proposal that would reform Fannie and Freddie but not do away with them completely. Whatever proposal is ultimately put out there by the Senate will have to overcome the opposition of House Republicans who honestly believe that but for Fannie and Freddie there would not have been a housing crisis.
I’ve learned my lesson over the almost two years that I have been writing this blog, and I am giving up predicting if and when Congress will ever take up housing reform. But, if press reports are accurate, the process is finally moving forward, albeit at a snail’s pace. I would like to see more of a discussion within the industry about what type of Fannie/Freddy world best protects the interest of credit unions and their members.
It was nice to see you all at the Sagamore. Now get back to work!
End Of The World As We Know It?
In poker, as in life, you can do more harm than good by over-reacting to the worst case scenario. For instance, if you fold every time someone raises, then you’re never going to be in the game for the big money. Imagine if the Tom Brady, the Patriot’s quarterback, reacted to the news that his team had recruited Tim Tebow by demanding to be traded. What does this have to do with credit unions?
Well, yesterday the Senate Finance Committee released a paper outlining possible tax reforms and not surprisingly one of the suggested reform options is the elimination or narrowing of the credit union tax exemption. So first, let’s not over-react. According to the Senate Finance Committee’s website, this tax reform options paper includes “ideas from across the spectrum and, as such, do[es] not necessarily have the endorsement of the Chairman or Ranking Member.” In addition, let’s keep in mind that it would be difficult to find any proposal reconsidering the government’s tax policy over the last fifty years that doesn’t at least broach the subject of the credit union tax exemption.
But yesterday’s report is different. First, as CUNA has correctly pointed out, tax reform has never been this seriously considered since at least 1986. While it is looking increasingly unlikely that Congress will be able to seriously consider fundamental tax reform this year, who knows what the political winds will bring in the coming months.
Yesterday’s option paper might also signal a more nuanced attack on the credit union tax exemption. By suggesting that Congress should consider tightening requirements for non-profit organizations exempted from the unrelated business income tax (UBIT), we may be seeing the first salvo in an argument in which credit union critics argue that they are not pushing to get rid of the credit union tax exemption in its entirety, but simply looking to make sure that the tax exemption only applies to activities related to the core functions of credit unions. However, as we have seen in the IRS’s unsuccessful efforts to impose UBIT taxes on state chartered credit unions, if we allow the IRS to decide which activities and services are related to helping consumers, particularly people of modest means, we might as well all start converting to banks.
On that note, I’m going to go get some breakfast with my fellow credit union conventioneers in beautiful Bolton Landing, New York. As I believe the Romans once said, let’s drink and be merry for tomorrow we may die.
The Fairest Way To Implement Dodd-Frank
Without much fanfare, the OCC announced that it will grant two year exemptions to the nation’s seven largest banks from a Dodd-Frank mandated requirement that large financial institutions “push out” their swap operations to non bank subsidiaries. The idea behind the provision is that federal insurance guarantees shouldn’t be used to bail out investment banks that make bad bets on tricky derivatives. We are told that the two year extension will facilitate the orderly implementation of this requirement. Who wants to bet that Bank of America, Citibank et al will ever have to comply with this regulation?
Now, from what I have read on this subject there are strong arguments both for and against the provision, but frankly good and bad arguments can be made about all of the most contentious provisions of Dodd-Frank.
We are coming up on the third anniversary of its enactment and astoundingly only 38% of its provisions have been implemented. It is becoming increasingly obvious that for the biggest and well-connected institutions — aka the institutions most responsible for necessitating financial reform in the first place — regulators will do everything they can to accommodate their wishes. As the former Inspector General of the TARP program commented when hearing about the latest regulatory capitulation “regulators continue to kowtow to the financial interest of the largest banks rather than inconvenience them.”
Of course this isn’t fair. Credit unions have less than six months now to comply with mortgage and servicing requirements that will have a profound impact on the way they provide home loans to their members, even though they are not responsible for these onerous mandates.
I have a solution. Let’s pass a simple amendment to Dodd-Frank providing that no provision or regulatory requirement of the act shall take effect until all of its requirements are imposed on the ten largest financial institutions in the country.
This simple amendment would tie the regulatory burden of credit unions to the lobbying efforts of our nation’s financial giants. We would get no worse a deal than that negotiated by J.P Morgan’s government representatives. It would also put Congress in the uncomfortable position of actually having to push for Dodd-Frank to be implemented.
Of course this would never happen. Instead, the way Dodd-Frank is taking effect Congress and the President can say they reformed Wall Street; Wall Street gets to carry on as usual and when consumers complain about the lack of Wall Street reform, Congress can blame regulators on the one hand while continuing to take campaign contributions from the very banks fighting Dodd-Frank with the other.
Three years ago, I had no patience for armchair extremists who saw conspiracies behind every rock of our political system. But when I compare the enormity of the problems exposed by our financial crisis with the paucity of fundamental reforms, it is getting harder and harder to brush aside the reactionaries. It is pathetic to see credit unions burdened with regulations that they didn’t need in the first place while the institutions that truly need reigning in effectively choose the mandates with which they will comply and continue to conduct themselves in a manner worthy of Russian oligarchs who know that they can get away with anything they want, just so long as they keep the political overseers happy.
On Payroll Deductions And Virtual Currencies
Around 3:00 yesterday, I did a double take when I read a summary of proposed regulations by New York’s Department of Labor provided by Bond, Schoeneck and King that would prohibit employers from deducting political contributions from the wages of employees who wish to make voluntary contributions to political action committees (PACs). To put it mildly, this proposal would inconvenience the efforts of the Association (which offers payroll deduction for employees who wish to make contributions to the federal PAC) and others throughout New York State to raise money to support their political activities.
The proposal is meant to flesh out amendments made last year to section 193 of New York’s Labor Law, which regulates payroll deductions but, in my ever so humble opinion, it seems to go well beyond what is required by including a section listing activities that the Department of Labor contends are specifically banned under the law. It is in this section that the DOL would ban deductions for “contributions to political action committees, campaigns, and similar payments.” Since federal regulations promulgated by the Federal Election Commission permit corporations to utilize payroll deduction as a legitimate fundraising tool, there is already a question as to whether or not these federal regulations preempt the state proposal as applied to federal campaign activities. I’m not an election law attorney, and I won’t even pretend to be one, so at this point I will just keep you posted on developments with this proposal.
Incidentally, your H.R. person should take a look at the regulations as well as the new statute. There are many provisions that help clarify nettlesome payroll deduction issues, one which I know that credit unions have to deal with indirectly involves clarification of an employer’s right to deduct overpayments to an employee from future wages. By the way, these regulations were about as difficult to find as a politician defending the IRS. The Department of Labor should consider revamping its website so that us non-labor lawyers might actually find it informative.
First Shot Fired In Regulation Of Virtual Currencies
This has no direct impact on credit unions yet, but yesterday the Department of Homeland Security took legal action seeking to freeze the business activities of a U.S. subsidiary of a Japanese Corporation that acts as a broker of the electronic currency known as the Bitcoin. Several weeks ago, FinCEN issued a guidance opining that while the user of a virtual currency does not have to be registered as a “money services business” (MSB) and are not subject to BSA regulations, an administrator or exchange which trades such currency does have to be registered with FinCEN. Why is this important?
Because while no one would question the ability of the federal government to regulate currency, the increasing use of electronic currency with which individuals buy and trade products and services without ever utilizing cash or coin raises fundamental questions as to what power the U.S. has to regulate such activities.
FED Report Underscores Need For MBL Reform
A report released by the Federal Reserve Bank of New York yesterday underscores that MBL reform is more than a proxy for the never ending battle between banks and credit unions: it is also a common sense proposal to increase access to capital for small businesses that continue to be choked off from growth.
According to the results of the New York FED’s small business credit survey covering New York, New Jersey and Connecticut, “the ability to access credit remains a wide-spread growth challenge for small businesses in the region even among profitable firms.” Here’s the bottom line from a policy perspective. Of the 800 small businesses surveyed, 49% cited access to capital as a barrier to growth but only one-third reported even bothering to apply for credit, apparently believing that the effort wouldn’t be worth the time. This is actually an improvement over previous surveys.
What about the bankers’ argument that they are actually ready, willing and able to make small business loans but just can’t find applicants? The success rate for small businesses applying for credit ticked up slightly in 2012 at 63% and this slight increase was primarily attributable to increased availability of lines of credit. In one of the more disturbing statistics from the report small businesses seeking loans over $100,000 had a 73% success rate; whereas those seeking loans below $100,000 had a 57% success rate.
Here’s my polemical point of the day. According to the survey, the average small business loan was $100,000. Could someone other than a banker opposed to MBL reform please explain to me why a law that defines a $50,000 loan as a business loan makes any sense? Politicians all say they want to help small business, but most of the small businesses I know of are run by one or two people and when the equipment goes down, they can’t work. A law that allows every financial institution that wants to lend out money for a new truck for the landscaper or a new mill for the lumber jack would help more than just those lending institutions. It would help our economy grow.
In Washington, The More Things Change, The More They Stay The Same
This morning’s news demonstrates more than ever that Washington has become a real life soap opera with plenty of plot twists but the same old unresolved stories at the end of the week.
First, as expected, the Federal Reserve decided to continue its program of buying $85 billion of Treasury Bonds and Mortgage-Backed Securities every month in order to keep interest rates low. According to the FED statement, it is prepared to “increase or reduce the pace of its purchases” depending on the outlook for the labor market and inflation. Translation: the FED thinks the economy still looks sluggish, but not so sluggish that it’s willing to make further prognostications on its future plans until it gets a clearer picture of what’s going on. Don’t expect an interest rate hike anytime soon.
Example number two is in President Obama’s nomination of North Carolina Democratic Congressman Mel Watt to head the Federal Housing Finance Agency, which oversees Fannie and Freddie. He would replace Ed DeMarco, who has held the post for three and one-half years.
First, why should you care? Because this position is evolving into the single most important position for housing policy in this country. Even though Fannie and Freddie went bankrupt and into debt to the American taxpayer for approximately $200 billion, the former GSEs have become more, not less, important, to the housing market. For example, these entities purchase about half the mortgages being financed in the country; and without Fannie and Freddie there would be no secondary market for credit unions, and banks for that matter, to sell their mortgages.
Second, for the next several years, anything that Fannie and Freddie is willing to purchase will be considered a qualified mortgage under the CFPBs qualified mortgage regulations. So let’s say the Congressman believes that underwriting standards are making it too difficult for people to buy a house, Fannie and Freddie could simply lower their standards.
Now, the only thing I know about the Congressman is that he represents the Charlotte area in North Carolina and is a long-serving member of the House Financial Services Committee. He is always good for an intelligent line of questions at committee hearings. But his nomination is a real head scratcher in some respects. First, it guarantees a contentious nomination battle. Republican senators are already saying how disappointed they are by the President’s choice and the liberal of liberals Massachusetts senator Elizabeth Warren is already kicking DeMarco on the way out the door for not doing enough to help the American consumer, who she, of course, feels was bamboozled into buying houses they couldn’t afford and who apparently now need more help to stay in those houses or buy other houses they can’t afford. Remember that with a divided Senate making confirmation unlikely and the legality of recess appointments in doubt, there’s a very good chance that Watt will never hold the position.
So in a worse case scenario, the scenario I consider to be most likely in this case, his nomination will serve as a proxy for a larger debate about housing policy while doing nothing to resolve the future of Fannie and Freddie or deciding the appropriate role of government in subsidizing mortgage lending in this country.
One more point, and then I’ll let you get on with your day. Even before they were taken into conservatorship in 2008 and we pretended that Fannie and Freddie were private corporations, the GSEs were already being criticized as being way stations for the politically connected. I have no idea what the Congressman’s plans are in his role, but the nomination of a Democratic Congressman will make it easy to argue that nothing really changes all that much in Washington.
GAO Report Frames Credit Union Tax Debate
A recent report released by the Government Accountability Office (GAO) underscores just how tenuous the credit union tax exemption may be. The report, combined with the Obama Administration’s description of the credit union tax exemption as a tax expenditure that costs the American taxpayer $9.5 billion over four years, demonstrates why the tax debate, if it ever does get going in earnest, is so perilous to the industry.
The worst case scenario has always been that the credit union tax exemption gets swept into the vortex of a larger tax reform package. Like I have said before, credit unions would never lose an up or down vote on the importance of their not-for-profit status but they are potentially vulnerable to inclusion in a larger compromise package of so-called tax reforms. In some respects, this is already happening. For example, the fact that the credit union tax exemption is now being described as government spending underscores that credit unions are vulnerable to being included in a larger debate on the need to overhaul corporate taxes. Simply put, very few congressional Republicans will come out in favor of tax increases, but they are in favor of cutting loop holes even if the effect is the same.
According to the GAO, the credit union tax exemption is part of a category of 24 tax expenditures with only estimated corporate revenue losses. In other words, while there are many more than 24 exemptions for corporations, according to the GAO, only 24 benefit corporations exclusively. The GAO estimates that the credit union exemption cost the public fisc $1.1 billion annually. The expenditure by itself is peanuts compared to the combined estimate of the entire category, which is about $59 billion. Interestingly enough, the single biggest culprit in the GAO’s category of 24 is deferral of income from controlled foreign corporations. One would hope that Congress would be willing and able to make a common sense distinction between major corporations hiding money overseas to keep it out of the hands of the federal government and cooperatives dedicated to helping people and providing competition to commercial banks, but based on what I’ve seen in Congress lately, you can’t be too sure.
The GAO report is also noteworthy because it highlights the fact that credit unions, unlike other depository institutions that have long since lost their tax exempt status, have been allowed to maintain their exemption because of their unique cooperative, not-for-profit structure and their commitment to people of modest means. You don’t have to be Nostradamus to see where this debate is headed. Be ready to explain to Congress that not all tax exemptions are evil and that the need for credit unions is as important today as it was when the exemption was first granted. Along the way we may want to point out that the credit union tax exemption is not only for credit unions but the tens of millions of Americans who have sought credit unions out for better rates, better service and maybe even to work in cooperation with their neighbor or colleague.
The Mother of All Mandates
Good luck and Godspeed to the credit union witnesses including Melrose Credit Union’s General Counsel Mitch Riever at today’s Congressional hearing on mandate relief for credit unions. God knows there’s enough regulatory burden to be shed and even talking about doing something about it is better than nothing.
But how do you explain to Congress that the biggest regulatory burden credit unions face is Congress. Specifically, a political system which is hell-bent on treating credit unions like for-profit banks when it comes to imposing mandates, but at the same time is all too willing to cut special deals for banks including the sainted community banks with which we ostensibly have so much in common.
The latest example of the uneven playing field on which credit unions find themselves comes in the form of a report by the Special Inspector General for the Troubled Asset Relief Program (TARP). TARP was the emergency line of credit Congress passed to give banks loans to get through the financial crisis they created. Credit unions were not eligible for TARP funds, but, to be fair, we were only able to fund the continuing obligations resulting from the bad investments of the Corporates with the support of the Treasury. Last I checked, not only were credit unions dutifully paying an assessment to pay back that loan, they weren’t getting government money to do so.
As you may remember, Congress passed legislation authorizing community banks with $10 billion or less in assets to get front money from TARP in return for making loans to small businesses. The idea makes sense in theory. With the support of the Obama Administration, community banks with $10 billion or less in assets would make government subsidized loans to small businesses. But a funny thing happened on the way to the loan fund. Most of the eligible community banks took the money and didn’t increase small business lending, but instead used it to pay off TARP funds they had taken from the federal government in the first place. I would say this is robbing Peter to pay Paul, but there was nothing in the law that made this shell game unlawful.
Eligible community banks did have to submit a lending plan as part of their application. However, according to the IG’s report there was a lack of coordination between the Treasury and the other regulators, meaning that no one followed through on whether these plans were being implemented. The bottom line in all this is that 132 of the 137 former TARP banks remaining in the SBLF “have not effectively increased small business lending because they used approximately 80% of the funds they received to repay TARP.”
As I have said before, life’s not fair, get over it. And it shouldn’t be a shock to anyone that despite the vitally important efforts of credit unions, banks have more political influence in Washington than we do. But I am getting increasingly tired of having Congress, and for that matter Legislators, extol the virtues of credit unions while doing absolutely nothing to help us help our members. Talk is cheap, let’s see some action.
Force-Placed Frenzy
This morning I can’t help thinking that regulators sometimes act like the guy playing defense who runs onto a pile of tacklers about five seconds after the play ended just so he can be part of the action. The latest industry to be taken through the mill for its perceived excesses is the force-placed insurance industry. The Wall Street Journal reports that later today the Federal Housing Finance Agency (FHFA), which oversees the ostensibly bankrupt Fannie Mae and Freddie Mac, will issue proposed regulations banning fees and commissions paid by insurers to financial institutions. The proposal will have a 60-day comment period. Fannie and Freddie are responsible for at least half of all outstanding mortgages, so any regulations they make will become the defacto industry standard. But the FHFA is simply the latest regulator to clamp down on the industry.
Last week, New York’s Department of Financial Services announced a multi-million dollar settlement with Assurant, Inc., the nation’s largest force-placed insurer, under which it will pay a $14 million penalty to the Department. Among the practices criticized by the Department was the paying of bank “expenses” related to force-placed insurance. These expenses typically represented a percentage of the premium imposed on the home owner.
But wait, there’s more. Not to be outdone, as part of its mortgaging reform regulations, effective January 2014 the CFPB is requiring that servicers managing escrow accounts pay the insurance premiums for delinquent insurance where such premiums are cheaper than the cost of force-placed insurance. So, in other words, in the span of about six weeks, we have three separate actions to address the same problem. Lost in all this regulatory frenzy is the wacky idea that there is no need for reforming the industry in the first place since the only time consumers have to pay for force-placed insurance is when they neglect to pay their bills.
To be sure, New York’s Department of Financial Services points out that commissions and fees paid to financial institutions do little to keep the rates of such insurance reasonable, but to be blunt, people should have to pay higher forced-placed insurance as a disincentive for not paying their insurance premiums in the first place. There is nothing more difficult to deal with than an uninsured house after a storm has hit. Is this another example of forgetting that the consumer has a responsibility to pay his or her bills? I’d say yes.
Johnson Not to Seek Re-election
South Dakota Democrat Tim Johnson is reportedly going to announce later today that he will not seek a fourth term in the U.S. Senate. Johnson is the Chairman of the Senate Banks Committee and there is already speculation about who may succeed him should the Democrats hold on to the Senate majority. Aside from the banking angle, Johnson’s retirement adds one more name to the list of retiring Democratic Senators whose seats are potential Republican pick ups.
