WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
May 2, 2008
During SIFMA’s first annual Wall Street to Washington Conference this week, representatives from the Securities and Exchange Commission previewed upcoming proposed rulemakings and interpretative guidance. Assistant Treasury Secretary for Financial Markets Anthony Ryan called on the financial services industry to work with regulators to maintain efficiency in the financial markets. Over one hundred and fifty people participated in the conference, which also included personal meetings with fifteen members of Congress, senior Congressional staff and Treasury officials.
Legislation to ensure capital is available in the student loan market is ready for the president’s signature after being approved by the House and Senate this week. The Ensuring Continued Access to Student Loans Act of 2008 (H.R.5715) would increase the loan limits on federal college loans. The bill also authorizes the Department of Education to serve as the secondary market of last resort for student loans and to purchase outstanding federal loans in order to provide lenders the capital needed to make new loans.
The House Financial Services Committee approved the FHA Housing Stabilization and Homeownership Retention Act (H.R.5830) by a vote of 46-21. The bill would permit the Federal Housing Administration (FHA) to provide up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages.
SIFMA joined a number of state and local government, housing and community organizations in a letter asking members of the Senate to cosponsor the Affordable Housing Investment Act of 2008 (S.2666).
The Federal Deposit Insurance Corporation (FDIC) announced a proposal that would allow troubled borrowers to receive loans from the Treasury Department to pay down up to 20 percent of their principal and restructure their debts.
The President’s Working Group on Financial Markets (PWG) sent a letter to leaders of the Senate Agriculture Committee reaffirming its view that it is not necessary at this time to deal with anti-fraud jurisdiction over products or instruments other than retail foreign currency as set forth in their proposed 2005 amendment.
House Financial Services Ranking Member Spencer Bachus (R-AL) and Rep. Deborah Pryce (R-OH) sent a letter to Securities and Exchange Commission (SEC) Chairman Christopher Cox urging the SEC to provide temporary relief to protect close-end fund shareholders and restore liquidity to the auction market preferred stock market.
Witnesses at a House Ways and Means Subcommittee on Select Revenue Measures hearing said education tax incentives should be consolidated and simplified.
SIFMA's Wall Street to Washington Conference Report
During SIFMA’s first annual Wall Street to Washington conference, Erik Sirri, director, Division of Trading and Markets, U.S. Securities and Exchange Commission (SEC), and Andrew Donohue, director, Division of Investment Management, SEC, said the SEC is digesting the RAND study on the current regulatory structure for broker-dealers and investment advisers. SEC Chairman Christopher Cox has instructed the staff to give him broad options of what should be done. Sirri said it is possible the SEC staff will require fiduciary duties similar to those in the Investment Advisor Act of 1940, but the staff must be careful because of the disparity in response by stakeholders. Thomas Selman, Executive Vice President, Investment Companies/Corporate Financing Regulation, FINRA, said one could argue brokers already have a fiduciary duty to their customer. Selman said disclosure is not the answer and would be an admission that regulators cannot fix the problem. The SEC is also reviewing the twenty-five year old 12b-1 rule. Donohue said staff is looking at the role of directors, what the fee being used for, service fees, and disclosure issues. He predicted the proposed rule—released sometime this summer—would take an investor approach. He acknowledged the staff is mindful of operational issues and tax implications. The staff has met with many of the stakeholders on the issue. The SEC is also close to releasing proposed interpretive guidance on the use of soft dollars.
During his morning remarks, House Republican Leader John Boehner (R-OH) said he is pessimistic the House and Senate can come together on a housing stimulus package. Also addressing the conference during the morning session, Sen. Robert Menendez (D-NJ) said credit rating reform is a top priority. Erik Sirri said the SEC will issue proposed rules aimed at increasing transparency in the credit rating industry soon. He said one possible way to address the problem of investors purchasing complex structured finance products without an understanding of the inherent risks, would be to highlight the different nature of the products. SEC staff will also question whether it is appropriate to have different rating symbols for different products. He noted that the SEC has received a number of different opinions on whether municipal bonds should be put on a global scale—some institutional investors have warned a global scale may have distortive effects. Sirri said the SEC will enter into a pilot program mutual recognition regime with Australia by the end of the year. The SEC is also examining modernization of Rule 15a-6. Staff is taking a fresh look at the basic framework, including chaperoning, record retention, foreign research and wealth custody.
Addressing the conference, Treasury Assistant Secretary for Financial Markets Anthony Ryan called on financial services participants to work with regulators to maintain efficiency in the financial markets. He highlighted four areas where regulators hope to partner with the industry including confronting the current market turmoil, hedge funds, market infrastructure and the U.S. Treasury Market. He said the Treasury Department is looking forward to seeing recommendations implemented and efforts made to strengthen practices in transparency and disclosure, risk awareness, risk management and capital management. Ryan said improvements in these areas and attaining better coordination among regulators could provide important support to the process of normalizing our financial markets. He asked the private sector to continue to work to implement the Best Practices for Asset Managers and the Best Practices for Investors proposed by the PWG’s private sector committees. Assistant Secretary Ryan also asked for further progress by the private sector in market-making capacity and systems for processing, settling and clearing financial transactions. He said we must constantly seek to improve our position and ensure business continuity. Finally, Ryan said the Treasury Department values the symbiotic relationship it has with participants in the Treasury market. He pointed out that SIFMA is engaging its membership on negative repo rate trading, improved buy-in procedures and the margining of fails. Ryan said these are all important issues, which we need to see material steps taken towards our goals. He said all stakeholders, including regulators, must remain on top of these issues. Ryan said we must not define solutions, but implement them and continually seek to strengthen both the market and regulatory practices. Over one hundred and fifty people participated in the conference, which also included personal meetings with fifteen members of Congress, senior Congressional staff and Treasury officials.
Student Loan Bill Ready for President
The House and Senate approved the Ensuring Continued Access to Student Loans Act of 2008 (H.R.5715) this week. The bill would increase the loan limits on federal college loans by $2,000 per year for all students—increasing the limits for dependent undergraduates to borrow an aggregate total of $31,000, up from $23,000. The bill would allow parent borrowers to defer repayment on their federal PLUS college loans until six months after their child graduates from college and would extend PLUS loan eligibility to some parents who are 180 days delinquent on a mortgage. The bill would grant the Secretary of Education the authority to purchase outstanding federal loans in order to provide lenders with capital needed to make new loans. The bill authorizes the Department of Education to serve as the secondary market of last resort for loans originated through the FFEL program. The bill also requires the Departments of Education and Treasury and the Office of Management and Budget (OMB) to issue regulations to ensure loan purchase terms do not increase the net cost to the government. The House approved the bill on April 16 by a vote of 395-1. This week, by unanimous consent, the Senate amended the House-approved bill. The Senate bill added requirements that loans awarded through the lender of last resort program have similar terms and conditions as other federally-backed loans. The Senate also amended the bill to direct some of the new revenue from the bill to Academic Competitiveness and SMART grants. The Senate included sunset provisions ensuring the authority of the Secretary of Education to buy existing loans and the authority to designate colleges as eligible for the lender of last resort program expire at the end of the 2008-2009 school year. The House approved the Senate-amended bill by a vote of 388-21. The president is expected to sign the bill.
HFSC Approves Frank FHA Bill
The House Financial Services Committee approved the FHA Housing Stabilization and Homeownership Retention Act (H.R.5830) by a vote of 46-21. The bill would permit the Federal Housing Administration (FHA) to provide up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages. Under the program, a borrower or servicer would contact an FHA-approved lender, who would then determine the size of the new loan and whether the borrower could repay. In exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder would be paid from proceeds of the new FHA loan in an amount based on the current value of the house. Only mortgages on owner-occupied principal residences meeting certain criteria are eligible. The bill protects the FHA against losses by giving the FHA liens on properties and requiring homeowners to share a portion of any appreciation in equity with the FHA. H.R.5830 also establishes an Oversight Board—including the Secretary of the Treasury, the Secretary of the Department of Housing and Urban Development and the Chairman of the Federal Reserve Board or their designees—to oversee the program. During the two sessions held this week, the Committee adopted a number of amendments, including an amendment offered by Rep. Jim Marshall (D-GA) relaxing FHA's restrictions prohibiting federal loan insurance for individuals who have been in bankruptcy in the previous two years or are currently in bankruptcy. The Committee also adopted by voice vote an amendment offered by Rep. Patrick McHenry (R-NC), requiring the mortgager to certify to the new loan originator the residence is the only one where they have an ownership interest; and another amendment offered by Rep. McHenry requiring a new one-page disclosure document for borrowers about the new loan. The Committee also adopted an amendment offered by Rep. Jeb Hensarling (R-TX), which would require legislative approval to lower the debt-to-income (DTI) ratio--striking language in the bill giving the Oversight Board the discretion to lower the DTI if circumstances warrant.
During last week’s markup session, the Committee also adopted a number of amendments including, an amendment offered by Chairman Barney Frank (D-MA), which would limit a borrower's debt-to-income ratio to 50 percent. The Committee also adopted an amendment offered by Rep. Melissa Bean (D-IL), which would prohibit borrowers who provided false information on their loan application from participating in the program. A second amendment offered by Rep. Bean, which would prohibit a borrower from obtaining a second mortgage for at least five years, unless it is for home improvement and would require borrowers who sell the home or refinance the loan to pay from any profits the higher of 1) an ongoing exit fee equal to 3 percent of the original FHA loan balance or 2) a declining percentage of profits (100 percent in the first year, 80 percent in the second year, 60 percent in the third year and 50 percent in the fourth year or thereafter) was also adopted by voice vote. An amendment offered by Rep. Jeb Hensarling (R-TX), which would require borrowers to repay the FHA for any economic benefit gained from a misrepresentation of income, was adopted by voice vote. The bill is expected to be debated on the House floor next week. During SIFMA’s Wall Street to Washington Conference this week, House Republican Leader John Boehner (R-OH) said he is pessimistic the House and Senate can come together on a housing stimulus package.
SIFMA Cosigns Letter in Support of Affordable Housing Bill
SIFMA joined a number of state and local government, housing and community organizations in a letter asking members of the Senate to cosponsor the Affordable Housing Investment Act of 2008 (S.2666). The bill, introduced by Sen. Maria Cantwell (D-WA) and Sen. Gordon Smith (R-OR), would make changes to the Low Income Housing Tax Credit (LIHTC) program. It would also make changes to the mortgage-revenue bond program—including repealing the 10-year rule—and exempt housing bond interest payments from the alternative minimum tax (AMT). The organizations said the bill would help address the severe affordable rental housing shortage while bolstering the struggling housing sector and economy.
FDIC Announces Home Ownership Preservation Loan Proposal:
The Federal Deposit Insurance Corporation (FDIC) announced a proposal this week that would allow troubled borrowers to receive loans from the Treasury Department to pay down up to 20 percent of their principal and restructure their debts. The proposal calls on Congress to authorize the Treasury Department to make a public debt offering of $50 billion to fund modifications of approximately one million loans. Under the proposal, lenders and investors holding the original loans would agree to restructure the loan into fully-amortized, fixed rate loans for the balance of the original loan term at the lower balance. Restructured loans could not exceed a debt-to-income ratio for all housing-related expenses of 35 percent. Mortgage investors would pay the interest on the Home Ownership Preservation (HOP) loan to the Treasury Department when they enter the program. After the five-years, borrowers would begin repaying the HOP loan at fixed Treasury rates. The Treasury Department would have a super-priority interest to guarantee repayment. If the borrower defaults, Treasury would have a priority recovery for the amount of the loan.
PWG Reaffirms View on “Zelener Fix”
In a letter sent to Senate Agriculture Chairman Tom Harkin, Ranking Member Saxby Chambliss (R-GA) and Sen. Mike Crapo (R-ID), the President’s Working Group on Financial Markets (PWG) reaffirmed its view that it is not necessary at this time to deal with anti-fraud jurisdiction over products or instruments other than retail foreign currency as set forth in their proposed 2005 amendment. The PWG’s amendment confirms the Commodity Futures Trading Commission’s (CFTC) anti-fraud jurisdiction over retail foreign currency transactions offered by persons not already regulated by another financial regulator. The amendment would also grant the CFTC authority to require certain persons involved in soliciting and recommending retail foreign currency futures and similar transactions to register with the CFTC, if such persons are not already regulated by another financial regulator. The letters come as the conference committee on the farm bill, which includes CFTC reauthorization language, wrap up final negotiations.
Bachus and Pryce Call for Relief for AMPS
House Financial Services Ranking Member Spencer Bachus (R-AL) and Rep. Deborah Pryce (R-OH) sent a letter to Securities and Exchange Commission (SEC) Chairman Christopher Cox urging the SEC to provide temporary relief to protect close-end fund shareholders and restore desperately needed liquidity to the frozen auction market preferred stock (AMPS) market. Bachus and Pryce asked the SEC to use its exemptive authority to temporarily permit close-end funds to allow the same asset coverage for debt and preferred shares so they can refinance outstanding auction market preferred stock (AMPS). They said this will help preferred shareholders achieve liquidity while protecting the interests of common shareholders.
Witnesses Say Education Tax Incentives Should Be Consolidated and Simplified
During the House Ways and Means Subcommittee on Select Revenue Measures hearing on education tax incentives, Chairman Richard Neal (D-MA) said Congress may have over-responded to the needs of families paying higher education costs with conflicting and overlapping incentives. He pointed to data from the Government Accountability Office (GAO), which found that a quarter of taxpayers with education expenses either do not claim the right benefits or miss these tax incentives altogether, and half of those tax returns were done by professional preparers. Michael Brostek, director, Strategic Issues Team, United States Government Accountability Office (GAO), said simplifying the grants, loans and tax preferences may reduce complexities in higher education financing, including reducing the number of eligible tax filers that do not claim tax preferences, but more research is necessary to understand the full benefits and costs of any such changes. Brostek said the effectiveness of education tax incentives needs to be better understood generally to allow policymakers to make the most efficient use of limited federal resources to help students and families. Karen Gilbreath Sowell, Deputy Assistant Treasury Secretary for Tax Policy, said education tax incentives under current law are overlapping and complex. However, she said it is important to remain cognizant that revisions to the tax regime may lead to unintended consequences and any revision may unsettle taxpayer expectations. Sowell said recognizing budgetary constraints, legislative reform of tax incentives will almost invariably result in additional benefits for certain taxpayers and fewer benefits for others. Dan Ebersole, director, Georgia Office of Treasury and Fiscal Services, said computers should be considered an allowable expense for Section 529 plans to better conform treatment across education incentives. He also called for the Saver’s Credit to be extended to Section 529 plans. Debra Townsley, president, Nichols College, said the expiration of the tuition deduction and IRA charitable rollover provisions at the end of 2007 is a cause of great concern and should be remedied through a retroactive extension.
Bills Introduced This Week
The Student Loan Access Act (H.R.5914), introduced by House Financial Services Subcommittee on Capital Markets Chairman Paul Kanjorski (D-PA), would clarify the Federal Financing Bank (FFB) has the power to purchase loans guaranteed under the Higher Education Act. The bill also clarifies the Federal Credit Reform Act does not apply to using the FFB for these purposes. The bill would be in effect through the 2008-2009 academic year and could be extended by the Secretary of Treasury, in consultation with the Secretary of Education, in increments of up to 12 months.
Rep. Wally Herger (R-CA) introduced legislation (H.R.5908) that would permanently reduce to zero the current 15 percent tax rates on individual capital gains and dividend income. H.R.5908 would also extend the lower rates to corporations.
Sen. Olympia Snowe (R-ME), Sen. John Kerry (D-MA), Sen. Gordon Smith (R-OR) and Sen. Sherrod Brown (D-OH) introduced legislation (S.2885), which would permit small-issue tax-exempt industrial development bonds (IDBs) to be used to finance high-tech and biotech facilities, software and other intangible processes.
The Week Ahead
- The Senate Judiciary Subcommittee on Administrative Oversight and the Courts will hold a hearing to examine whether mortgage lenders are abusing the bankruptcy court system on Tuesday, May 6.
- On Wednesday, May 7, the Senate Banking Committee will hold a hearing entitled, “Turmoil in the U.S. Credit Markets: Examining the Regulation of Investment Banks by the U.S. Securities Exchange Commission.”
- The House Transportation and Infrastructure Committee and the House Budget Committee will hold a joint hearing on infrastructure investment on Thursday, May 8.