WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
December 21, 2007
The First Session of the 110th Congress Comes to a Busy End
Congress adjourned for 2007 after a flurry of activity this week. The House and Senate completed work on a number of outstanding issues including comprehensive energy legislation, an alternative minimum tax (AMT) patch and terrorism risk insurance. The House is currently scheduled to begin the second session of the 110th Congress on January 15; while the Senate is scheduled to reconvene on January 22. The SIFMA Washington Weekly will resume publication the week of January 15.
The Federal Reserve Board released for public comment a series of proposals on mortgage lending practices. In statements made after the Fed announcement, Senate Banking Committee Chairman Chris Dodd (D-CT) and House Financial Services Chairman Barney Frank (D-MA) said the proposals do not do enough to protect consumers.
The president signed comprehensive energy legislation into law this week.
Also this week, legislation to exclude up to $2 million of forgiven debt on a principal residence from taxable income for three years was signed into law.
After the Senate was unable to pass an alternative minimum tax (AMT) patch with offsets, a one-year AMT patch bill without offsets will be sent to the president’s desk.
The president is expected to sign Terrorism Risk Insurance Act (TRIA) extension legislation into law before the program expires on December 31.
The House approved legislation that would allow states, asset and pension fund managers to divest from companies doing business in Sudan’s energy or military sectors by a vote of 411-0. The Senate approved the bill by unanimous consent last week.
The House and Senate approved a package of technical tax corrections readying it for the president’s signature.
The Senate approved legislation that would make technical corrections to the Pension Protection Act of 2006.
Work remains on a military tax relief bill after the Senate further amended the bill which was approved the House by a vote of 411-0.
The Treasury Department released its study on business taxation and global competitiveness this week.
Fed Releases Proposed Changes to Regulation Z
The Federal Reserve Board voted unanimously to approve for public comment a series of proposals on mortgage lending practices. The proposed rules would define a new category of “higher-priced loans” as mortgage loans where the annual percentage rate on the loan exceeds the yield on Treasury securities by at least three percent for first-lien loans, or five percent for subordinate-lien loans. For these loans the proposal would address the ability to repay, verification of income, prepayment penalties and the escrowing of taxes and insurance. The proposal would prohibit creditors from engaging in a pattern or practice of extending mortgage credit based on collateral without regard to the consumers’ ability to repay. Also creditors could no longer rely on the borrowers’ income or assets unless they verify those amounts with third-party documentation. Higher-priced loans cannot include a prepayment penalty unless the borrower’s debt-to-income (DTI) ratio at consummation does not exceed 50 percent (and debt and income are verified); prepayment is not made using funds from a refinancing by the same creditor or its affiliate; the penalty term does not exceed five years from loan consummation and the penalty is not prohibited under other applicable law. Prepayment penalties must expire at least sixty days before the first date of any increase under the terms of the loan.
The Fed proposal also includes several elements that would extend beyond subprime loans to all closed-end loans secured by a borrower’s principal dwelling. Yield spread premiums are prohibited unless the consumer agrees in writing in advance. Creditors and brokers are prohibited from coercing or encouraging an appraiser to misrepresent the value of a home. The proposal would also prohibit the extension of credit if the creditor knows or should have known that an appraiser has misstated the value of a property. Servicers are prohibited from failing to credit a payment to the consumer’s account as of the date of receipt. Under the proposal the practice of “pyramiding” late fees is also prohibited. The proposal also recommends changes in advertising practices, including restrictions on the use of the word “fixed” in advertisements.
Senate Banking Committee Chairman Chris Dodd (D-CT) called the Fed proposal “a significant step backwards” and said it is a clear signal that legislation is necessary to help protect homeowners from abusive and predatory lending practices. House Financial Services Chairman Barney Frank (D-MA) said the proposal confirms the Federal Reserve is not a strong advocate for consumers.
President Signs Energy Bill
The president signed comprehensive energy legislation into law this week after the House approved the Senate amendment to H.R.6 by a vote of 314-100. The Senate approved the bill last week by a vote of 86-8. The final energy bill does not include the $21 billion tax title included in the energy bill approved by the House on December 6. The tax title included a number of new tax credit bond programs and was largely paid for by a repeal of tax incentives for the oil and gas industry, an extension of the Federal Unemployment Tax Act (FUTA) and basis reporting requirements for brokers. The final bill does include an increase in fuel efficiency standards, which is offset with two revenue raisers: 1) an increase in the amortization period for geological and geophysical expenses from five to seven years and 2) a one-year extension of the FUTA surtax.
President Signs Mortgage Debt Forgiveness Bill
The president signed H.R.3648 into law this week. The Mortgage Forgiveness Debt Relief Act excludes from tax up to $2 million of forgiven debt on a principal residence in 2007, 2008 and 2009. The bill also extends the current-law deduction for private mortgage insurance through December 31, 2010. The bill is offset by an increase in penalties for failing to file partnership and S corporation tax returns. The bill was cleared for the president’s signature after the House passed H.R.3648 by voice vote. The Senate approved the bill by unanimous consent last week. The House had previously passed legislation which would have provided a permanent exclusion for forgiven debt on a principal residence and a seven-year extension of the deduction for private mortgage insurance.
One-Year AMT Patch Without Offsets Ready for President’s Signature
After the Senate failed to receive the necessary votes to move forward on the $55.72 billion fully offset alternative minimum tax (AMT) bill approved by the House last week, the House agreed to the Senate-approved AMT bill (H.R.3996) which would extend the AMT patch for one year without any revenue offsets. The House approved the H.R.3996 by a vote of 352-64. The day before the House vote on H.R.3996, the Senate failed to get the necessary sixty votes to advance the AMT Relief Act of 2007 (H.R.4351), which was approved by the House last week. H.R.4351 included a number of offsets to pay for the AMT patch and other provisions including current taxation of certain offshore deferred compensation arrangements, an eight-year delay in the effective date of the worldwide interest allocation election, codification of the economic substance doctrine, penalties for failure to file partnership and S corporation returns and an increase in the general failure to file penalty. The president is expected to sign the one-year AMT patch without offsets in the coming days.
7-Year TRIA Extension Sent to the White House
The House approved a seven-year extension of the Terrorism Risk Insurance Act (TRIA) by a vote of 360-53. The bill (H.R.2761) was approved by the Senate by unanimous consent on November 16. The Terrorism Risk Insurance Program Reauthorization Act would keep the threshold at which the government is obligated to help pay for losses from terrorist attacks at $100 million. H.R.2761 would expand the TRIA program to cover both domestic and foreign attacks. The bill also calls for a study of whether the program should be expanded to include nuclear, biological, chemical and radiological (NBCR) attacks. The president is expected to sign H.R.2761 before TRIA expires on December 31.
Sudan Divestment Bill Ready for President
The House approved legislation (S.2271) that would allow states, asset and pension fund managers to divest from companies doing business in Sudan’s energy or military sectors and would provide a safe harbor from lawsuits over profits lost as a result. The bill, approved by a vote of 411-0, also permits states and localities to adopt measures for divesting from companies doing business with Sudan. Under the bill, federal contractors are required to certify they do not work with the Sudanese government. The Senate approved the bill last week by unanimous consent.
Tax Technical Corrections Bill Advances
The House and Senate approved by unanimous consent a package of technical tax corrections. The Tax Technical Corrections Act (H.R.4839) includes several corrections to the Tax Relief and Health Care Act of 2006, the Pension Protection Act of 2006, the 2005 Energy Policy Act and the 2005 Highway Reauthorization Act. One provision would clarify that certain partnerships, such as real estate and venture capital partnerships, are not subject to Section 470, which addresses sale-in, lease-out leveraged leasing transactions. The original provision was enacted as part of the American Jobs Creation Act of 2004. The bill is expected to be signed by the president.
Senate Approves PPA Technical Corrections Bill
The Senate approved by voice vote legislation (S.1974) that would make technical corrections to the Pension Protection Act of 2006. The bill introduced in August by Senate Health, Education, Labor and Pensions Committee Chairman Ted Kennedy (D-MA), Ranking Member Mike Enzi (R-WY) and Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA), would require all plans to permit rollovers out of the plan for non-spousal beneficiaries; and would permit withdrawals for employees opting out of automatic enrollment arrangements after the first contribution has been withheld for SIMPLE IRAs and SARSEPS. S.1974 would also clarify the foreign exchange provision to exempt any foreign exchange transaction between a bank or broker-dealer (or any affiliate of either) and a plan from the prohibited transaction rules if the exchange rate used by the bank or broker-dealer is not more than three percent from the interbank bid and asked rates for transactions of comparable size and maturity as displayed on an independent service that reports exchange rates in the foreign currency market. A companion bill (H.R.3361) is still pending in the House.
Senate Further Amends Military Relief Bill
The House approved a revised version of the Heroes Earnings Assistance and Relief Tax Act of 2007 (H.R.3997) by a vote of 411-0. The bill includes a number of tax relief provisions aimed at members of the armed services and other service volunteers. The bill permanently extends the qualified mortgage bond first-time homebuyer exception for veterans, modifies the definition of a qualified veteran and increases the state veterans’ mortgage bond volume limit for Alaska, Oregon and Wisconsin. The bill would also make permanent the ability of individuals who are called to active duty for at least 180 days to make penalty-free withdrawals from retirement plans. In total, H.R.3997 provides $1.8 billion in benefits for members of the military. The cost is fully offset by imposing mark-to-market taxation on individuals who expatriate and by increasing certain information and failure to file penalties. After the House action, the Senate voted by unanimous consent to further amend H.R.3997 to create a new special enrollment right for reservists formerly covered under TRICARE to opt back into a civilian employer’s health insurance plan and to make housing financed by low-income housing credits available to low-income service members. The House and Senate are expected to meet to resolve differences in the bills when Congress reconvenes in January.
Treasury Releases Study on Competitiveness of U.S. Tax System
The Treasury Department released its study on business taxation and global competiveness. The study is a follow-up to the Treasury Department’s July conference. The report, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century, outlines broad approaches to business tax reform and outlines specific business tax areas that could be addressed but does not include any specific policy recommendations. The study examined the idea of replacing the business income tax system with a business activity tax (BAT). This approach was estimated to improve economic performance, ultimately increasing the size of the economy by roughly 2.0 to 2.5 percent, but would have various implementation and administrative issues. The study found the present U.S. international tax system may result in a competitive disadvantage for U.S. companies competing with foreign-based companies. Specific areas that could be addressed include the multiple taxation of corporate profits, the tax bias favoring debt finance, taxation of international income, and book-tax conformity.
Bills Introduced This Week
Sen. Gordon Smith (R-OR) and Sen. John Kerry (D-MA) introduced legislation (S.2517) that would allow the proceeds of qualified mortgage revenue bonds to be used for subprime refinancings. A “qualified subprime loan” is defined under the bill as an adjustable rate single-family residential mortgage loan originated after December 31, 2001 and before January 1, 2008. The bill provides an additional $15 billion increase in the volume cap for 2008, but would allow it to be carried over into future years. The bill would exempt all bonds after December 31, 2007 and before January 1, 2011 from the alternative minimum tax (AMT).
Under legislation (H.R.4912) introduced this week by Rep. Richard Neal (D-MA), holders of prepaid derivative contracts, including Exchange Traded Notes, will be required to include as interest income each year an amount determined by reference to a short-term interest rate. The holder’s basis in the contract is increased by amounts included as interest. The amount of gain or loss on the disposition of the contract is determined by taking into account prior income inclusion. The amount of interest income required to be included is capped so as not to exceed the amount of gain that accrues during the time the taxpayer holds the contract.
The Week Ahead
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No hearings of relevance are scheduled currently.