Posts tagged ‘tax reform’

Why Aren’t More People Talking About This Tax Change?

Although the limits on state and local property taxes has gotten most of the attention, one of the amendments to the tax code will have a potentially large impact on credit unions has to do with loans taken out based on a home equity. Among the changes advanced by the “Stable Genius” running the country – his words not mine – and his acolytes, is one that does away with the deductibility of home equity loans.

I’m really surprised this hasn’t gotten more attention. It means that the member who has been planning to help pay for their kid’s education by taking out some of the equity on their home, or hopes to pay an unexpected medical bill is in for a rude awakening.

While Congress has completely done away with the deductibility of home equity interest, it has also reduced the amount that can be deducted for so-called “acquisition indebtedness.” As the conference report on the tax bill explains, “Acquisition indebtedness” generally means debt incurred in, or that results from the refinancing of debt incurred in, “acquiring, constructing, or substantially improving” a qualified residence. Id. § 163(h)(3)(B)(i). This means that there will still be at least limited interest on the part of some members who are doing a major construction or remodeling job. It also means that you will get members asking their front line staff if they feel the purpose of the loan will qualify for a tax break. Of course my advice is not to answer that question. I’m just here to tell you that your employees will be getting it.

Interestingly, the provision comes at a time when consumers are once again binging on consumer credit. According to today’s Wall Street Journal, “On average, US consumers are living beyond their means, as spending exceeds income.” What’s more according to the Journal, “A sizeable portion of this increase in consumer debt has been funded by credit unions, which made a big push into the sector after the recession.” I’m a big believer that where there is a demand there will be a product design to meet that demand. Remember that the growth of home equity lending is driven in part by Congress’ decision to end the deductibility of credit card debt in the mid 80’s. Creative lawyers and lenders will ultimately always stay one step ahead of the tax code.

Remember, that all this comes with the usual caveat that it is my father who was the family accountant and not me, so please run this by a tax professional.


January 9, 2018 at 8:58 am 1 comment

How Will Tax Reform Impact Housing?

Image result for tax reform housingOne of the many questions I have about pending tax reform is how, if at all, it will impact the housing market?

What I’m most intrigued by are the concerns that have been raised by GSE’s. Specifically, the American Banker headlined an article last week warning that “Tax reform threatens to drain GSEs’ dwindling capital.” The paper reports that in a regulatory filing earlier this year Fannie Mae said, “if legislation significantly lowering the U.S. corporate income tax rate is enacted, we expect to incur a significant net loss and net worth deficit for the quarter in which the legislation is enacted and we could potentially incur a net loss for that year.”

With the usual caveat that my father is the accountant in the family, not me – the problem is that in the aftermath of the mortgage meltdown, the GSE’s were able to write down future losses based on a 35% corporate tax rate. Some analysts suggest that a 20% tax rate would cost Fannie and Freddie a combined $20 billion; yes, that’s billion with a B. On the bright side, perhaps another GSE financial crisis will spur Congress to act on housing reform once and for all.

Servicers who sell mortgages but retain servicing rights dodged a huge bullet. As originally drafted, the Senate Tax Reform Bill would have made servicers pay taxes on the future value of an acquired mortgage portfolio as opposed to the current practice of paying as the payments accrue. This certainly would have put a crimp in the bottom line of your servicers and those of you who used them would have probably faced increased costs. Fortunately, a last second change explicitly exempted mortgage servicers from this requirement.

Finally, for those of us in the Northeast, there is the question of how limitations on the deductibility of state and local taxes as well as mortgage interest will impact the desire to buy that bigger, better house. Fortunately, as a result of changes pushed by Maine Senator Susan Collins, the Senate bill would allow homeowners to deduct the first $10,000 of taxes. The original tax proposal would have eliminated this exemption completely. In addition, the bill passed by the Senate (§1302) prospectively caps the mortgage interest rate write-off reduction at $500,000. Remember this is only relevant for the roughly one-third of Americans who itemized their taxes, a number which is sure to shrink assuming the standard deduction is doubled.

Peace out.

December 5, 2017 at 9:23 am Leave a comment

Five Things You Need To Know On Tuesday Morning

Here is a roundup of some of the other news that happened over the last week when I wasn’t doing the blog and the CFPB had only one Director:

Uber Data Breach

Most importantly, ride sharing app Uber disclosed, all be it belatedly, that it had been victimized by a data breach about a year ago. The breach affected at least 57 million accounts and compromised the phone numbers and emails of 600,000 US driver licenses. It ended up paying more than $100,000 in ransom money to hackers. Uber’s announcement, conveniently made as people prepared for the Thanksgiving holiday, is the latest and most blatant example of companies failing to give adequate notice of data breaches in a timely fashion. This is why it is also the latest example of why we need national data breach standards.

High Noon For Tax Reform

The push for the Republican Tax Cut Proposal is nearing another critical stage with the Senate talking about voting on the bill by the end of the week. Today the Senate Budget Committee meets to consider the bill. What’s so interesting about that is that one of the Republicans most outwardly skeptical about the plan, Senator Corker of Tennessee sits on that committee. He has indicated the he plans to vote against the bill unless changes are made. If Republicans hope to pass a tax bill without Democrat support, they can only afford two Republican no votes. Remember, that even if the legislation gets through the Senate, then the House and the Senate will have to agree to and pass a single bill.

CUNA and NAFCU Recognize Mulvaney As CFPB Director

All of this would be comical if it didn’t have real world consequences and involve adults.

CUNA and NAFCU sent letters to Mick Mulvaney congratulating him on being named the interim head of the CFPB. Meanwhile, the Justice Department was granted an extension to prepare a response to Leandra English’s lawsuit claiming that she is the rightful heir to the CFPB throne. Mulvaney also announced a freeze on CFPB rulemaking. Also yesterday, several high-profile Democratic Senators including New York Senator and majority leader Chuck Schumer and Massachusetts Senator Elizabeth Warren indicated that they would be submitting amicus briefs in support of English. All this took place as Mulvaney was passing out donuts to his new employees and English was emailing CFPB employees in between making visits to key Democrats on Capital Hill. And you thought your office was dysfunctional?

Powell To Testify At Confirmation Hearing

Gerome Powell will be testifying today before the Senate Banking Committee as he seeks to be confirmed as the next head of the Federal Reserve Board. Barring any unforeseen developments, he is expected to easily win Senate approval and take over the job when Janet Yellen’s term ends in February. Here is a link to his prepared testimony.

Is Inflation MIA?

When he takes the helm, one of the riddles he will continue to have to deal with is inflation and the lack thereof. As I’ve noted in previous blogs, there is an important debate going on among economists; in one camp are those who argue that inflation is just around the corner and that the Fed has to aggressively act now or it will act too late to control the inevitable spike; the other camp argues that the economy is changing and that the persistence of low inflation may be a permanent fixture of this new world. One of the most interesting articles I’ve read in recent weeks was this one from the WSJ in which Chairman Yellen said that the continued persistence of low inflation surprised her and that policy makers may have to consider that “there is something more endemic or long-lasting that we need to pay attention to.” Expect the Fed to raise rates again in December. But if inflation continues to be sluggish, more and more central bankers will question whether raising interest rates makes sense.

November 28, 2017 at 9:09 am Leave a comment

So Far So Good On Tax Reform

Image result for paul ryan announces tax reformWith the caveat that this is just Round 1 of a 15 round fight, the tax reform bill unveiled by the House leadership yesterday, gets a lot of things right. In fact, it shows that the Republicans learned from their healthcare mishaps and are determined to actually show that they can come up with sensible ideas.

First, as for the things that most affect credit unions, it’s of course good news to see that the first draft does not include the elimination of the credit union tax exemption. This does not mean that we can put our  guard down as an industry. Remember, that the House is determined to stay within a $1.5 trillion price tag and a tweak in one part of the code means that revenue has to be gained from another.

Second, the plan is reasonable. In contrast to the healthcare debate where Republicans argued for years that Obama Care had to be reformed only to have no idea how to reform it when they got the opportunity to do so, the tax plan is a thoughtful, mainstream Republican piece of legislation that cuts the corporate income tax, maintains higher tax rates for the wealthy and will probably make paying taxes a little simpler for low-income Americans. In fact, I will bet you right now that the tax plan will get some Democratic votes.

The most problematic part of the legislation is that it takes dead aim at high tax states such as New York. It caps at $10,000, the deduction for state and local taxes. It also eliminates the mortgage interest deduction for loans of $500,000 or greater for new home purchases.  It’s not a coincidence that both of these changes will have the biggest impact in big states that didn’t vote for Donald Trump. For example, the median home price in Palo Alto, California is a mere $2,695,000. While the mortgage interest tax deduction remains intact for existing homes, Congressmen from the most impacted areas are already complaining that the Republican tax plan will hurt resale values.

The question at the end of the day is, will the elimination of these exemptions have a discernible impact on home buying activity for your average credit union? And if I lived in a state other than New York, I would ask why the Federal government should be in the business of subsidizing the high tax policies of the Northeast and West Coast?

Washington has lowered the bar pretty low in recent years but from what I’ve seen so far, this is tax reform we can all live with.

Powell Named New Fed Chair

In case you missed it because of all the talk about tax reform, President Trump nominated Jerome Powell to be the next Chairman of the Federal Reserve, replacing Janet Yellen whose term ends early next year. The conventional wisdom is that Powell will continue Yellen’s gradualist approach to raising interest rates while being more open to mandate relief for the largest banks. Remember, that in recent years under Yellen, the Fed has moved aggressively to have the largest institutions develop credible plans for winding down their businesses in the event of bankruptcy (so-called living wills) and also instituted stress tests.

One more personnel note. I forgot to mention that Jeb Hensarling, the Republican Chairman of the House Financial Services Committee announced he’s retiring from Congress. The American Banker is already speculating that he may be filling a regulatory post for the Trump Administration.

This Just In…

One of the first things Powell will have to decide is how quickly to slow down the economy. The labor department just announced that the unemployment rate fell to 4.1% in October, its lowest level since December 2000. Wages rose 4.2%. I’m going to go out on a limb here and say that these numbers guarantee that the Fed will raise interest rates in December.

November 3, 2017 at 9:12 am Leave a comment

Five Things You Need to Know This Friday

With apologies for the late start, here are five things you need to know:

Show Me the Money 

As you probably already know, at yesterday’s board meeting, the NCUA announced that it was closing down the Temporary Corporate Credit Union Stabilization Fund on October 1, 2017 The decision sets the stage for credit unions to see a rebate of between $600 million and $800 million in 2018.

Now for the bad news: NCUA is forging ahead with plans to raise the Normal Operating Level to 1.39%. Under federal law, NCUA can set the Normal Operating Level anywhere between 1.20 and 1.50 provided that any funds in excess of the NOL are returned to CUs.

In his statement, Chairman J. Mark McWatters broke down the 1.39 rationale this way

There are three key risks to the equity ratio for which the 1.39 percent normal operating level accounts. Specifically, the 1.39 percent level accounts for the following:

  • Four basis points to reflect the risk posed by the remaining obligations of the Corporate System Resolution Program;
  • Two basis points to reflect the projected decline in the equity ratio through 2018 that will occur even without a recession; and
  • 13 basis points of protection for risks to the equity ratio posed by insured credit unions.

GOP Tax Plan Takes Dead-Aim at NY

 Credit unions in states with high local and state taxes—I’m talking to you New York, New Jersey and Connecticut—have more to more to worry about then protecting the credit union tax exemption as Congress debates tax reform. The tax cut blueprint announced by GOP leadership earlier this week ends the deductibility for state and local taxes. In addition, by doubling the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers, members will find it less attractive to itemize for the mortgage interest deduction. This could impact the mortgage businesses, particularly downstate.

By the way, contrary to popular belief, New York State gives a lot more money to the federal government than the federal government gives to New York State.

Advertising Relief

The Share Insurance Fund wasn’t the only thing on the minds of the NCUA yesterday. It also released proposed regulations amending signage requirements. OK, this might not be the most exciting thing in the world, but it does affect what goes into your advertising disclosures.

Association Testifies On Data Breach Solutions  

 In the aftermath of the Equifax Data breach, the State Senate’s Consumer Protection Committee held a hearing to examine steps that could be taken to strengthen consumer data protections. The Association was among those groups invited to testify. Our key points were:

  • We need baseline security standards for all businesses that hold large amounts of consumer information.
  • The Legislature should not impose additional obligations on financial institutions such as credit unions, which have been taking steps to prevent identity theft for more than a decade.
  • Consumers and credit unions need the right to sue businesses for the direct and indirect costs of data breaches.
  • More needs to be done to enhance consumer education in schools.

Why Dentists Are the Best Marketers In The World

 The brilliance of the dental industry is that it has figured out a way to have parents pay thousands of dollars for the right to inflict medieval treatments on their children that would make an inquisitor squirm. My eight year-old recently got an expander, which, as far as I can tell, is the equivalent of sticking a pair of pliers in your kid’s mouth for a couple of years and seeing what happens.

On that note, have a nice weekend.

September 29, 2017 at 11:15 am Leave a comment

Preparing for the Worst, Hoping for the Best

Maybe it’s because the desolate Albany landscape with its frozen mounds of exhaust-tinged snow and sub-zero temperatures makes me feel like I’m inhabiting a post-apocalyptic world, but a couple of days ago I got around to reading the FFEIC’s new appendix to its examination handbook dedicated to disaster preparedness entitled Strengthening the Resilience of Outsourced Technology Services. In all seriousness, it is a must-read for any credit union that has to have a business continuity plan (BCP) and contracts with third parties for services that should be integrated into this business plan. I bet that is almost every credit union.

Regulators have long emphasized the need for appropriate due diligence when entering into third-party relationships. In addition, Business Continuity Planning has been a major point of regulator emphasis  since 9-11; not to mention that “once in a century storms” seem to be coming every other year. This new appendix zeros in on the importance to financial institutions of insuring that appropriate vendor services are integrated into BCP plans and testing. As the regulators commented in releasing the appendix, “a financial institution should ensure that its third-party service providers do not negatively affect its ability to appropriately recover IT systems and return critical functions to normal operations in a timely manner.“

The appendix highlights four key points of emphasis for examiners assessing third-party relationships.

(1) Third-party management addresses a financial institution management’s responsibility to control the business continuity risks associated with its third-party service providers (TSPs) and their subcontractors.

(2) Third-party capacity addresses the potential impact of a significant disruption on a third-party servicer’s ability to restore services to multiple clients.

(3) Testing with third-party TSPs addresses the importance of validating business continuity plans with TSPs and considerations for a robust third-party testing program.

(4) Cyber resilience covers aspects of BCP unique to disruptions caused by cyber events.

I don’t want anyone to break into a cold sweat thinking that a new compliance requirement is necessarily being imposed on them. If you don’t outsource core operational functions to third parties this appendix shouldn’t concern you much. But if your credit union can’t operate effectively unless a vendor is also on the job, then you have an obligation to work with that vendor and make sure that it has a Business Continuity Plan that is compatible with your own.

Think about it: if your vendor backs up all your account information at a facility down the block from your credit union, your BCP plan has some serious holes.

Don’t Fire Until You See the Whites of Their Eyes

Yesterday, the CU Times reported that Sen. Richard Shelby (R-Ala.), chairman of the Senate Banking, House and Urban Affairs Committee, would not rule out doing away with the credit union tax exemption as part of an overhaul of the tax code.

Shelby’s equivocation on the tax exemption underscores that tax reform poses dangers for credit unions, but his stance should hardly surprise anyone, nor should it send us scrambling to the ramparts as if the industry is in imminent danger. The fact is that in any push to overhaul the tax code a prominent veteran lawmaker like Shelby isn’t going to take anything off the table. There is a lot of negotiating to be done, if and when we ever get to a tax reform end game.

Should the industry be vigilant? Absolutely. But, in my ever so humble opinion (and I stress only my opinion), in recent years the industry has overreacted to the threat of tax reform with the result that it has not pushed aggressively enough for other parts of its agenda. There may come a time when we need to activate the grassroots in a major push to save the exemption, but that time is not here yet. In the meantime, let’s not let the bankers sideline our agenda every time they advocate for ending the exemption or draw too many conclusions every time a legislator gives less than 100 percent support for the industry.

February 12, 2015 at 9:16 am 2 comments

Ding Dong, the Witch is Dead

Well, it’s all but official that no major tax reform, let alone tax reform putting the credit union tax exemption at risk, will take place this year. Not only is the credit union tax exemption not to be included in draft legislation but no lesser an authority than Senate Minority Leader Mitch McConnell took tax reform off the table for this year. While this is, of course, good news, given the amount of time and energy that the industry has devoted to the issue over the last several months, the bankers have still scored a partial victory. We’re in a mid-term election year and we have yet to get serious traction on what I consider the single most important issue facing the industry: the need for secondary capital.

Why is secondary capital so important? Let me count the ways. First, it simply makes no sense for credit unions to be penalized while growing in popularity. This is precisely what happens every time a member opens an account in this low interest, moderate growth economy where it is extremely difficult to make money off other people’s money. If credit unions are going to grow then they need the ability every other financial institution has to seek out investors.

Second, any doubt as to the crucial need for secondary capital has been dispelled by the NCUA’s Risk Based Net Worth regulatory reform proposal. In its simplest form, there are two ways a credit union can improve its risk weighting. It can either reduce its assets or increase its capital. But unlike the nation’s largest banks, our largest credit unions don’t have the opportunity to seek out additional capital. In short, if NCUA’s proposal goes forward it will put the brakes on the growth of credit unions whose only sin is to be large.

I understand how divisive the secondary capital debate is within the industry. Credit unions are, at their core, mutual institutions. They have to remain that way if they are going to continue providing members a unique financial experience. But secondary capital reform can be introduced in ways that maintain the essence of the credit union movement, which is one person one vote. If an institution is willing to invest in a credit union it would only do so against the backdrop of restrictions that give it no more or less influence than any other member of a given credit union.

Let’s keep in mind that low income credit unions can already take secondary capital and no one can seriously suggest that these institutions, in the aggregate, do not advance the core missions of the credit union movement.

Tax reform is like one of those Friday the 13th movies. The villain never really dies. The industry must, of course, remain vigilant. But, we don’t want to win the battle and lose the war by letting concerns over the credit union tax exemption crowd out other important pieces of the credit union agenda.

February 26, 2014 at 9:04 am 1 comment

End Of The World As We Know It?

imagesIn 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.

June 14, 2013 at 7:47 am Leave a comment

Tax reform passes in the blink of an eye

If you blinked, you missed it.  In a matter of four days, New York has implemented tax reform raising taxes on the wealthiest New Yorkers and putting a down-payment on a budget deficit projected to be as high $3.5 billion in the coming state fiscal year.  If he is totally honest, President Obama would admit to being a little jealous of the Governor this morning.

As I suggested in Monday’s post, Governor Cuomo changed his position on his prior refusal to raise taxes on even the wealthiest New Yorkers, arguing then that such taxes were bad for the state’s business environment.  yesterday evening the State Senate with a one-seat Republican majority unanimously passed the new package of tax reforms and other stimulus measures.  The Assembly passed the bill late Wednesday night.

The bill reportedly creates a new tax bracket of 8.82% on single income earners making more than $1 million and joint filers making more than $2 million.  The bill also slightly reduces the rate for middle-income earners of between $40,000 and $300,000 a year.

The legislation also scales back, but does not eliminate, the payroll tax that funds the MTA and reduces corporate franchise taxes for upstate businesses.

Mid-December meetings in Albany are typically used to wrap up unfinished controversial business.  It appears that attempts to negotiate a compromise on a bill to expand the number of taxi medallions in New York City were not successful.  Given the Governor’s public opposition to the current bill, a veto remains likely.

December 8, 2011 at 6:49 am Leave a comment

Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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