WASHINGTON WEEKLY
October 19, 2007
Senate Banking Committee Approves 7-Year TRIA Extension
The Senate Banking Committee approved a seven-year extension of the Terrorism Risk Insurance Act (TRIA) this week. TRIA is currently scheduled to expire on December 31, 2007. The House previously approved a fifteen-year extension.
The Senate Banking Committee also approved a bill that would promote divestment from companies doing business with Sudan.
Policymakers in Washington continued to focus on issues in the mortgage market. Treasury Secretary Henry Paulson gave a speech on current developments in the housing and mortgage markets this week.
Senate Banking Committee Approves TRIA Extension Bill
The Senate Banking Committee approved legislation to extend the terrorism risk insurance program for seven years by a vote of 20-1. The bill would keep the threshold at which the government is obligated to help pay for losses from terrorist attacks at $100 million. The bill does not expand the program to include group life insurance nor does it require insurers to “make available” coverage for nuclear, biological, chemical or radiological attacks. The TRIA extension bill also requires Treasury to submit a report and issue regulations regarding the allocation of pro rata payments for insured losses if such losses exceed $100 billion. Prior to adopting the bill, the Banking Committee adopted by voice vote an amendment that would require the Government Accountability Office (GAO) to conduct a study into the feasibility and affordability of covering nuclear, biological, chemical and radiological terrorist events. The GAO would also be required to study whether parts of the country, such as New York City, have unique capacity concerns on the amount of available terrorism insurance. Sen. Wayne Allard (R-CO) voted in opposition to the bill.
The current two-year TRIA extension expires at the end of the year. The House approved a fifteen-year extension (H.R.2761) in September by a vote of 312-110. H.R.2761 would lower the threshold to $50 million and would require insurers to “make available” coverage for nuclear, biological, chemical and radiological attacks. H.R.2761 would also expand TRIA to include group life insurance. The administration threatened to veto the House bill. While the administration would prefer a shorter extension, in a letter to Senate Banking Committee Chairman Chris Dodd (D-CT), Treasury Secretary Henry Paulson said the administration would not oppose the Senate bill in its current form.
Banking Committee Approves Sudan Divestment Bill
The Senate Banking Committee unanimously (21-0) approved a bill that would promote divestment from companies doing business with Sudan. The bill would allow states, asset and pension managers to divest from companies doing business in Sudan. Under the bill, federal contractors are required to certify they do not work with the Sudanese government. The House approved a similar bill (H.R.180) by a vote of 418-1 in July. Unlike H.R.180, the Senate bill does not require the Treasury Department to establish a list of companies who do business with the Sudanese government. The Senate bill also does not include a “safe harbor” for managers of mutual funds and corporate pension managers who choose to divest the holdings of mutual or pension funds they manage from companies on the Treasury Department list. Sen. Chuck Hagel (R-NE) offered and withdrew an amendment that would allow the president to waive the provisions of the bill for national security reasons.
Paulson Warns against Broad Assignee Liability Provisions
In a speech this week, Treasury Secretary Henry Paulson said imposing broad liability provisions on investors and securitizers would likely generate significant unintended consequences. Paulson said broad assignee liability provisions could paralyze the securitization process, which has been extremely valuable in extending the availability of credit to millions of homeowners and lowering the cost of financing. Paulson said the proper role for the government in the current problems facing the housing and mortgage markets is 1) to help as many able homeowners as possible stay in their homes; 2) to minimize the impact of the current downturn on our economy, recognizing the tension between such actions and the possibility of moral hazard; and 3) to identify public policy changes that will reduce the likelihood of repeating some of the excesses of recent years while maintaining access to credit for homeowners.
Paulson said public policy changes must be done in a balanced, thoughtful way to avoid unintended consequences that might shut off credit to able borrowers. The most critical facts should be on a single page in clear, easy-to-understand language to be signed by the borrower and the lender. Paulson said we also need to bring a higher level of integrity to the mortgage origination process. He recommended considering a uniform national licensing, education and monitoring system for all mortgage brokers. Paulson said the Treasury Department and the President’s Working Group on Financial Markets (PWG) is reviewing the role of the credit rating agencies, financial institution risk management and related regulatory issues. Treasury and the PWG are also examining enhancing management of counterparty credit risks, market infrastructure issues, reporting and risk disclosure, the role of investors and how the long-standing regulatory structure responds to the evolving financial system.
Bills Introduced This Week
As announced last week, Sen. Chuck Schumer (D-NY) and House Financial Services Committee Chairman Barney Frank (D-MA) introduced legislation (S.2169) (H.R.3838) that would increase the portfolio limits of the housing related government sponsored enterprises (GSEs) by ten percent for a six-month period. Under the bills, 85 percent (an estimated $125 billion) would be devoted to help refinance the loans of subprime borrowers.
The Escrow, Appraisal, and Mortgage Servicing Improvements Act (H.R.3837), introduced by Rep. Paul Kanjorski (D-PA), requires certain borrowers to have escrow or impound accounts established in conjunction with their mortgages to provide protection against tax liens, the forced-placement of insurance and unanticipated taxes and insurance premiums. The bill, cosponsored by House Financial Services Committee Chairman Barney Frank (D-MA), also requires the inclusion of escrow payments for taxes and insurance in any repayment analysis conducted at the time of a quote on a mortgage. H.R.3837 includes standards when a server can impose force-placed insurance, mandates swifter responses to consumer written inquiries, increases penalties for abuses and requires the prompt crediting of payments. The bill also creates Federal appraisal independence standards within the Truth in Lending Act (TILA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
Sen. John Kerry (D-MA) and Rep. Rahm Emanuel (D-IL) introduced the Offshore Deferred Compensation Reform Act (S.2199, House number not available) that would eliminate the ability of U.S.-based hedge fund managers to defer compensation that is earned in offshore tax havens. The bill would provide an exemption for employees of U.S. companies working abroad and deferring more modest sums. The bill would cap tax-deferred compensation at the combined maximum levels allowed for 401(k) plan contributions and individual retirement account deposits.
The Income Equity Act of 2007 (H.R.3876), introduced by Rep. Barbara Lee (D-CA), would limit the amount of executive compensation corporations can deduct as a legitimate business expense to 25 times the pay of a company’s lowest paid worker. Under the bill, companies whose lowest paid employees earned the national average salary, $29,544, would be able to deduct $738,000 in executive compensation. For companies where the lowest paid employee earns minimum wage, the deductible compensation would be $304,200.
Sen. Elizabeth Dole (R-NC) introduced legislation (S.2184) to make permanent the ability of individuals who are called to active duty for at least 179 days to make penalty-free withdrawals from retirement plans.
The House Ways and Means Committee discussion draft of the Trade Adjustment Assistance program reauthorization bill, released this week, would authorize state and local governments to issue tax-exempt and tax-credit bonds for the redevelopment of abandoned manufacturing areas. As drafted, the legislation would create a new category of taxable, tax-credit manufacturing redevelopment bonds to be used for promoting development or other economic activity in a manufacturing redevelopment zone. Issuers would be required to spend all bond proceeds within three years, to enter into binding contracts with third parties to spend at least 10 percent of the proceeds within six months, and to comply with arbitrage restrictions. The draft bill would also create a new category of exempt facilities bonds to finance property in the manufacturing zone. The bonds would be exempt from the annual volume cap. The discussion draft did not include the size of the bond issuance authorized.
The Week Ahead
- SIFMA is scheduled to testify at a House Financial Services Committee hearing entitled “Legislative Proposals on Reforming Mortgage Practices” on Wednesday, October 24.
- The House Small Business Subcommittee on Finance and Tax will hold a hearing entitled Pension Parity: Addressing the Inequities between Retirement Plan Options for Small and Large Businesses” on Wednesday, October 24.
- Also on October 24, the Senate Special Committee on Aging will hold a hearing on 401(k) fees.
- The Senate Banking Subcommittee on Securities, Insurance and Investment will hold a hearing on international accounting standards on October 24.
- The House Agriculture Subcommittee on General Farm Commodities and Risk Management will hold a hearing to review the reauthorization of the Commodity Futures Trading Commission (CFTC) on Wednesday, October 24.
- On October 25, the House Judiciary Subcommittee on Commercial and Administrative Law will hold a legislative hearing on the Arbitration Fairness Act of 2007 (H.R.3010).