Dpw Legis Reg Action 0904
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Financial Crisis Fallout: Legislative g and Regulatory g y Action Prepared for the Third Circuit Judicial Conference
Donald S. Bernstein Davis Polk & Wardwell April 2009
Financial Crisis Fallout: Legislative and Regulatory Action f Federal Assistance Initiatives f Current Legislative Proposals f On the Horizon: Possible Upcoming Initiatives
2
Overview of Troubled Assets Relief Program (TARP) f Approved by Congress in October 2008, the Emergency Economic Stabilization Act authorized Treasury access to $700 Bn
The first $350 Bn of the funds (TARP I) were released to the Bush administration in October 2008
The remaining $350 Bn (TARP II) were released to the Obama administration in January 2009
f TARP I programs included: i l d d
The Capital Purchase Program (CPP)
The Systematically Significant Failing Institutions Program (SSFIP), used for AIG
The Targeted Investment Program (TIP), used for Citigroup and Bank of America
The Automotive Industry Financing Program, used for General Motors and Chrysler
The Term Asset-Backed Lending Facility (TALF), done in conjunction with the New York Federal Reserve
3
TARP II- The Financial Stability Plan f Thus far, TARP II programs include:
Capital Assistance Program (CAP) and associated stress testing
Preferred to common equity conversion for Citigroup
Public-Private Investment Program (PPIP)
f Other Government Relief Programs
FDIC – Temporary increase in deposit insurance to $250,000 – Temporary Liquidity Guarantee Program (TLGP) • Transaction Account Guarantee • Debt Guarantee Program
Federal Reserve – Primary Dealer Credit Facility (PDCF) – Term Auction Facility (TAF) – Temporary Securities Lending Facility (TSLF) – Commercial Paper Funding Facility (CPFF) – Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) – Money o ey Market a et Investor esto Funding u d g Facility ac ty ((MMIFF))
Federal Assistance Initiatives ($Bn)
21 97.6
30
310
1250 125
241 200 269 200
Total Spent: ~$2.5 trillion
200 7
1000
600
1000 500
Federal Reserve Treasury FDIC C di Coordinated d
PPIP
5
Overview of Obama Administration Proposals f Capital Assistance Program (CAP), with associated stress testing and balance sheet transparency initiatives
Status: Several major banks have undergone mandatory stress testing and some are now contemplating repaying funds received under TARP I. Results of the tests will be released on May 4 after first quarter earnings reports - and regulators will publish a report on April 24 detailing their testing methods. The Obama administration has said that strong banks may be able to repay funds “only if such a move passes a test to determine whether it is in the national economic interest.” (Financial Times, 4/20/2009)
f Public-Private Investment Program (PPIP)
Status: Treasury announced more details on PPIP on March 23, 2009, which includes a securities purchase program, designed to remedy the illiquidity in the secondary markets for certain mortgagebacked securities, and a loan purchase program, designed to create a market for troubled loans on bank and thrift balance sheets. The FDIC will administer “toxic asset” auctions and is expected to release details of the auction process soon. The Special Inspector General for TARP notes that there are fraud and money laundering concerns with the new programs that will need to be addressed (SIGTarp Quarterly Report to Congress, April 21, 2009)
f “A New Era of Transparency, Accountability, Monitoring and Conditions”
Status: Embedded in various proposals, including Treasury’s proposal for regulatory restructuring.
6
Overview of Obama Administration Proposals (cont.) f Consumer and Business Lending Initiative (CBLI)
Status: As announced on March 3, 2009, the CBLI is being executed under the first stage of the Federal Reserve Reserve’s s Term Asset Asset-Backed Backed Loan Facility (TALF) (TALF). In the first round of TALF financing (March 17-19), $4.7 Bn of TALF loans were requested.
f Homeowner Affordability & Stability Plan
Status: President Obama announced the details of this $275 Bn plan on February 18, 2009, which includes $75 Bn to be spent on mortgage modifications according to guidelines announced on March 4, 2009, relaxed Fannie Mae and Freddie Mac restrictions on refinancing of “underwater” mortgages and an additional $200 Bn for Treasury’s existing GSE backstop.
f Small Business & Community Lending Initiative
Status: As announced on March 16, 2009, the SBI will purchase up to $15 billion in securities backed by SBA loans. loans
Overview of Obama Administration Proposals (cont.) f Obama’s Plan for Regulatory Restructuring
Status: Recent proposal focuses first on systemic risk regulation with details on the remaining prongs to come.
Systemic Risk Regulation – A single independent regulator with responsibility over systematically important firms and critical payment and settlement systems, including a prompt corrective action regime – Higher standards on capital and risk management for systematically important firms – Resolution authority, separate from the Bankruptcy Code, to protect against the failure of financial institutions that may pose systemic risks – Regulation of hedge funds and other private funds, including mandatory registration with the SEC for advisers with assets under management over a certain threshold, disclosure to the SEC of investors and trading partners and confidential disclosures to the SEC to determine whether a fund is “systemically important” – Regulation of credit default swaps (CDS) and other over-the-counter (OTC) derivatives, including mandatory use of central counterparties for all “standardized” OTC derivatives, encouraging exchange trading and deeming all OTC dealers as “systemically important” and subjecting them to capital and other restrictions – New requirements for money market funds to reduce the risk of rapid withdrawals
Protecting Consumers & Investors Eliminating Gaps in Our Regulatory Structure F t i International Fostering I t ti l Coordination C di ti 8
Regulatory Restructuring f Treasury Proposal: Systemic Risk Regulator
Who will be regulated? – Consolidated supervision of “systemically important” firms • Treasury does not provide any specific criteria, but only general factors to consider, including: • the financial system’s interdependence with the firm; firm’s size, leverage and degree of reliance on short-term funding; and the firm’s importance as a source of credit for households, businesses and governments and, of liquidity for the financial system • In I particular, ti l all ll dealers d l iin OTC d derivative i ti markets k t are systemically t i ll iimportant t t fi firms – “Broad and clear” authority over systemically important payment and settlement systems and activities
Who will be the regulator? – Treasury does not express a view on who ought to be the systemic regulator – Scope of the systemic risk regulator’s authority • “Appropriate checks and balances”: the systemic risk regulator should consult and coordinate with the existing federal regulators • It should have primary authority to supervise, examine and set prudential standards for at least certain systemically important firms
Other legislative proposals: HR 1754 and S 664 both would create a financial stability council to regulate systemically important institutions 9
Regulatory Restructuring (cont.) f Resolution authority over systemically important financial companies
Currently, there is no single uniform Federal law governing the restructuring or liquidation of diversified US financial g groups p such as AIG
Would cover financial institutions that may pose systemic risks – Bank or thrift holding companies, holding companies of an SEC-registered broker-dealer, an insurance company or a futures commission merchant or commodity pool operator and certain subsidiaries
Systemic risk determination – Positive recommendations by the Federal Reserve Board and the appropriate federal regulatory agency, such as the FDIC, the SEC or the CFTC – Treasury, T in i consultation lt ti with ith th the P President, id t would ld make k a ttriggering i i d determination t i ti
The FDIC, with the approval of Treasury, may provide a covered financial company with various forms of financial assistance or put it into conservatorship or receivership
Modeled on the statutory framework of the Federal Deposit Insurance Act, the FDIC, as conservator or receiver, i h has b broad d powers, iincluding l di th the power tto: – sell or transfer assets or liabilities of the company; – renegotiate or repudiate the company’s “burdensome” contracts; and – replace the board of directors and senior officers of the company company.
Funding mechanism – Automatic appropriation to the FDIC from the general funds of Treasury and a scheme of special assessment on all financial companies to recoup the expenditures Status: Hearing before the House Financial Services Committee Committee, Frank and Dodd promise action by end of 2009 2009.
Status: Barney Frank has promised combined legislation creating the resolution authority and systemic risk regulator by the end of 2009
Treasury Initiatives: Glossary f Automotive Industry Financing Program (Auto)
The objective of this program is to prevent a significant disruption of the American automotive industry and auto supplier industry that pose a systemic risk to financial market stability and will have a negative effect on the real economy of the United States. The program required both General Motors and Chrysler to submit restructuring proposals in return for TARP funds.
f Capital Assistance Program (CAP)
A financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse worse-than-expected than expected economic environment.
Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
f Capital Purchase Program (CPP)
Capital injection of up to $250 Bn in eligible institutions in exchange for preferred stock. The first $125 b was earmarked bn k d ffor nine i systemically t i ll iimportant t t fi financial i l iinstitutions tit ti whose h participation ti i ti was effectively mandatory.
To date, $197 Bn has been invested in 511 institutions (Wall Street Journal, March 23, 2009)
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Treasury Initiatives: Glossary (cont.) f Systematically Significant Failing Institutions Program (SSFIP)
Unlike the broad-based Capital Purchase Program (CPP), financial Institutions (as defined in EESA) will be considered for participation in the SSFI Program on a case-by-case basis. The primary objective of this program is to provide stability and prevent disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings and retirement security from the failure of a systemically significant institution.
To date, only AIG has participated in this program.
f Targeted Investment Program (TIP)
Capital injections in important financial institutions to foster financial market stability.
To date, only Bank of America and Citigroup have participated in this program.
Federal Reserve Initiatives: Glossary f Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
Under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Federal Reserve makes non-recourse loans to eligible institutions to finance their purchases of highquality asset-backed commercial paper from money market mutual funds.
f Commercial Paper Funding Facility (CPFF)
The Federal Reserve created the Commercial Paper Funding Facility (CPFF) to provide a liquidity backstop p to U.S. issuers of commercial p paper. p The CPFF is intended to improve p liquidity q y in short-term funding markets and thereby contribute to greater availability of credit for businesses and households.
Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of highly-rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers.
f Purchases from Government Sponsored Enterprises (GSE debt & GSE MBS)
The Federal Reserve is purchasing up to $200 Bn in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to reduce the cost and increase the availability of credit for the purchase of houses and purchasing up to $1.25 trillion in mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginny Mae, to be conducted by asset managers.
Federal Reserve Initiatives: Glossary (cont.) f Primary Dealer Credit Facility (PDCF)
The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that provides funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.
f Term Asset-Backed Securities Loan Facility (TALF)
The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF) to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration (SBA).
f Term Auction Facility (TAF)
The Term Auction Facility allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction for a term up to three months.
f Term Securities Lending Facility (TSLF)
Provides Treasury general collateral financing through the Term Securities Lending Facility (TSLF) and TSLF Options Program (TOP) to promote liquidity in Treasury and other collateral markets and thus foster the functioning of financial markets more generally.
FDIC Initiatives: Glossary f Temporary Liquidity Guarantee Program (TLGP)
Debt Guarantee. Guarantee of certain senior unsecured debt issued by participating institutions.
Transaction Account Guarantee. In addition to the increase in deposit insurance, the FDIC also introduced a transaction account guarantee under the Temporary Liquidity Guarantee Program to provide full deposit insurance coverage for certain deposit transaction accounts regardless of the dollar amount.
15
Coordinated Initiatives: Glossary f AIG
Non-recourse loan and other Fed assistance to fund purchase of residential mortgage-backed securities from Air's Air s U U.S. S securities lending collateral portfolio and to fund the purchase of multi-sector collateralized debt obligations on which AIG has written credit default swap contracts.
f Public-Private Investment Program (PPIP)
Working together in partnership with the FDIC and the Federal Reserve, Treasury has initiated a Public-Private Investment Program that takes a new approach to removing toxic assets from financial institutions’ balance sheets.
This new program is designed with a public public-private private financing component, component which involves putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
Financial Crisis Fallout: Legislative and Regulatory Action f Federal Assistance Initiatives f Current Legislative Proposals f On the Horizon: Possible Upcoming Initiatives
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Housing / Foreclosure Relief f Bankruptcy Cramdown
“Cramdown” = judicial modification of mortgage terms in bankruptcy court Key bill: H.R. H R 1106 (Helping Families Save Their Homes Act) – Amends Chapter 13 of the federal Bankruptcy Code (adjustment of debts of an individual with regular income) – Excludes from computation of debts the secured or unsecured portions of: (1) debts secured by the debtor's principal residence if the value of the residence as of the date of the order for relief is less than the applicable maximum amount of noncontingent, liquidated, secured debts; or (2) debts secured or formerly secured by the debtor's principal residence that was either sold in foreclosure or surrendered to the creditor, if the property's value as of the date of the order for relief was also less than the applicable maximum amount of noncontingent, liquidated, secured debts. debts – H.R. 1106 also contains language to codify other portions of President Obama’s Homeowner Affordability & Stability Plan.
Status: Passed the House on March 5, 2009, but currently stalled in the Senate. “Senate Democrats are scaling back legislation that would let bankruptcy judges alter mortgage terms because lawmakers don’t have enough votes for passage, a spokesman for Senate Majority Whip Richard Durbin said.” (Bloomberg, April 16, 2009)
Comments – P President id t Ob Obama endorsed d db bankruptcy k t cramdowns d b by iincluding l di a provision i i ffor jjudicial di i l modification of home mortgages during bankruptcy in his Homeowner Affordability & Stability Plan, but such a provision would require Congressional approval. – Senators Richard Durbin and Charles Schumer, key proponents of the legislation, are reportedly in d discussions scuss o s with industry dus y representatives ep ese a es who oa are e lobbying obby g to o limit the e scope o of ccramdowns. a do s (Washington Post, 3/13/09) 18
Housing / Foreclosure Relief (cont.) f Mortgage Modifications
Treasury released the guidelines for mortgage modifications contemplated under President Obama’s Homeowner Affordability & Stability Plan on March 4, 4 2009. 2009 – Guidelines include temporary reduction of interest rates, lengthened payment periods and other modifications designed to bring monthly payments down to a housing-to-income ratio of 31%, which may result from a combination of servicer modifications and government funding. The guidelines also include various financial incentives for servicers to participate and borrowers to make timely payments. – Status: H.R. 1106 (Helping Families Save Their Homes Act) attempts to codify aspects of the Obama plan, but is currently stalled in the Senate Banking Committee. Portions that do not req ire Congressional Approval require Appro al are ccurrently rrentl underway. nder a
Servicer Safe Harbor? – A key concern for mortgage servicers is the potential for lawsuits by securitization investors and b k arising banks i i ffrom modification difi ti off mortgage t tterms according di tto T Treasury guidelines. id li – Although the Obama plan did not include such a provision, H.R. 1106 includes a servicer safe harbor in line with previously proposed legislation. The H.R. 1106 servicer safe harbor (i) insulates servicers from any liability they may otherwise have to securitization investors and (ii) invalidates contractual provisions between a servicer and any securitization vehicle or investor that would limit the servicer’s ability to modify mortgages or require the servicer to repurchase loans or otherwise compensate the securitization vehicle on account of any modification, workout or loss mitigation plan. This safe harbor would only apply if the servicer complied with Treasury’s guidelines and would not apply to modifications made after January 1, 2012.
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Housing / Foreclosure Relief (cont.) f Mortgage Modifications (cont.)
The Congressional Oversight Panel claimed that because of inadequate data on mortgage modifications, “legislators, regulators and market participants are flying blind” – “The Obama housing plan and other programs designed to stem the foreclosure crisis will likely be impeded by a lack of hard data on rising mortgage defaults and why prior loan modifications have not been working working…. No federal agency has the ability to track delinquencies delinquencies, foreclosures and loan workout efforts for the entire U.S. mortgage market…. Existing data is plagued by inconsistent collection and reporting methodologies among government agencies and is often times simply unverifiable." (Congressional Oversight Panel, “Foreclosure Crisis: Working Toward a Solution,” March 6, 2009)
Housing / Foreclosure Relief (cont.) f Mortgage Lending Reform
Key Bill: H.R. 1728 (The Mortgage and Anti-Predatory Lending Act of 2009) – H.R. 1728 aims to amend the Truth in Lending Act to reform consumer mortgage practices and provide accountability for such practices, to provide certain minimum standards for consumer mortgage loans and for other purposes, through various measures including: (i) requiring lenders to retain 5% of the credit risk on subprime loans that are securitized; (ii) addressing mortgage broker compensation issues by banning certain types of yield yield-spread spread premium (YSP) payments payments, i.e., compensation based on a loan’s interest rate and terms; (iii) requiring proof of net tangible benefit for any refinancing and (iv) subjecting licensed and registered mortgage originators to a federal duty of care, obligating them to only make loans the customer can afford.
Status: St t U d debate Under d b t – referred f d to t the th House H Financial Fi i lS Services i C Committee. itt H Hearing i may b be h held ld before proceeding to mark-up and vote. The bill is co-sponsored by Representatives Barney Frank, Brad Miller and Mel Watt. – H.R. 1728 is reportedly “a tougher version of the anti-predatory lending measure that passed the H House iin 2007 2007, b butt stalled t ll d iin th the S Senate.” t ” (B (Banking ki D Daily, il 3/27/09) N No relevant l tS Senate t version i of the bill has been introduced to date.
State Legislators – The Washington Post reports “state legislators concerned with [unethical] behavior by mortgage brokers have approved regulations to crack down on the industry this year.” Legislators expressed a concern that “a lot of people were getting into foreclosures because they had dealt with unethical brokers who had steered them into high risk loans.” (Washington Post, 3/5/09)
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Housing / Foreclosure Relief (cont.) f Mortgage Lending Reform (cont.)
Comments – Comptroller of the Currency John Dugan “call[ed] for a national standard for all mortgages” and said “[r]ather than having 50 new state laws address mortgage lending practices, Congress should enact a single uniform standard that applies to all mortgages in the country, wherever they are originated. And that law should require effective and comparable enforcement by g , even where originators g are not banks.” ((New York Times Op-Ed, p , federal and state regulators, 3/15/09) – Sandra Braunstein, a representative of the Federal Reserve testifying before the House Financial Services Committee on March 11, 2009, supported mortgage lending reform but said “[t]he Fed…believes the establishment of clearly defined safe harbors may be appropriate in implementing the law and that the statute should clarify that the rule rule-writing writing agency has sufficient flexibility for this purpose.” She reportedly also “urged House lawmakers…to carefully tailor legislation to avoid redundancies with HOEPA [the Home Ownership and Equity Protection Act regulations scheduled to take effect in fall 2009].” (Banking Daily, 3/27/09) – The Congressional Oversight Panel strongly recommended mortgage lending reform and claimed that “[f]airness should have been addressed though better regulation of consumer financial products. If the excesses in mortgage lending had been curbed by even the most minimal consumer protection laws, the loans that were fed into the mortgage backed securities would have been choked off at the source and there would have been no “toxic assets” to threaten the global economy.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Oversight Protecting Consumers and Ensuring Stability,” January 2009) – Fed Governor Elizabeth Duke: “While the expansion of the subprime mortgage market over the past decade increased consumers' access to credit, too many homeowners and communities are g today y because of lax underwriting g standards and other unfair or deceptive p p practices that suffering resulted in unsustainable loans.” (Testimony before the House Financial Services Committee, 3/20/09)
Consumer Protection
f “Protecting Consumers and Investors” is one element of Treasury’s proposal for regulatory reform
In the wake of escalating reports of subprime mortgage and credit card predatory abuse, consumer and investor protection is a key area of focus for regulators and the political climate supports significant regulatory reform in this arena
Representative Barney Frank (Chairman of the House Financial Services Committee) – Determined to “bring back, strengthen and quickly pass through the House reforms that failed to reach enactment in the last Congress that would beef up consumer protections in areas like mortgage lending, credit cards and overdraft.” (American Banker, 3/6/09)
SEC Commissioner Mary Schapiro – “[F]ocus on investor protection and securities regulation as part of a reconsideration of the financial regulatory regime is timely and critically important…. If there were ever a time when investors need and deserve a strong voice and a forceful advocate in the federal government, that time is now. Individual investors may not be the strongest political force…. These investors expect and deserve a strong and independent regulator dedicated to providing for fair financial dealings, timely and meaningful disclosure of information and protection from unscrupulous actors.” (Testimony before the Senate Banking Committee, 3/26/09)
Other supporters of consumer protection reform include Federal Reserve Chairman Ben Bernanke Bernanke, FDIC Chairman Sheila Bair, Senator Christopher Dodd and Michael Barr of the White House National Economic Council
23
Consumer Protection (cont.) f Ongoing tension between federal and state regulators
The Congressional Oversight Panel recommended “eliminating federal pre-emption of application of state consumer laws to national banks.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009) However, reportedly Solicitor General Elena Kagan recently filed a brief urging the Supreme Court “to bar…states from enforcing their fair-lending and other consumerprotection laws against federally chartered banks banks.” (Bloomberg, (Bloomberg 3/26/09)
50 state attorneys general sent a letter to President Obama asking the administration to restore states’ authority to regulate national bank lending, credit cards and banking rules. (Banking Daily, 3/17/09)
Comptroller C ll off the h C Currency JJohn h D Dugan h has supported d ffederal d l mortgage llending di fforms, ““rather h than h having 50 new state laws.” (New York Times Op-Ed, 3/15/09)
FDIC Chairman Sheila Bair has encouraged federal cooperation with state attorneys general, saying that “[i]f [i]f ever there were a time for the states and the ‘feds’ feds to work together, that time is right here, right now. The last thing we need is to preempt each other.” (Speech before the National Association of Attorneys General, 3/3/09)
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Consumer Protection (cont.) f Financial Product Safety Regulator
Key Bill: S.566 (Financial Product Safety Commission Act) – Modeled after Consumer Safety Product Commission. Establishes the Financial Products Safety Commission to: (1) promulgate consumer financial product safety rules; (2) establish a best practices guide for all providers of consumer financial products; (3) conduct continuing studies and investigations of consumer financial products industry practices; (4) award grants or enter into contracts for the conduct of such studies and investigations; (5) assist public and private organizations or groups of consumer financial product providers, administratively and technically, in the development of safety standards or guidelines that would assist them in complying with any Commission rule; (6) comment on selected agency rulemakings affecting consumer financial products; and (7) establish a consumer financial product customer hotline.
Status: – Referred to Senate Banking g Committee. Introduced by y Senator Richard Durbin and cosponsored by Senators Charles Schumer and Ted Kennedy. – Companion bill (H.R. 1705) referred to House Financial Services Committee. Introduced by Representative Bill Delahunt and co-sponsored by Representative Brad Miller.
Comments – When asked, Treasury Secretary Geithner said the concept of a financial product regulator was “interesting” but did not take a position in his Congressional testimony on regulatory restructuring. (Testimony before the House Financial Services Committee, 3/26/09) – The Congressional Oversight Panel recommended “creat[ing] a single federal regulator for consumer co su e ccredit ed t p products,” oducts, arguing a gu g that t at “[w]ithout [ ] t out a uniform u o set of o minimum u standards, sta da ds, regulatory egu ato y arbitrage among state—and federal—regulators will continue. and no regulator or agency will have the authority and responsibility to protect consumers.” The Panel suggested that such a regulator could be an independent agency or placed within the Federal Reserve. (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009)
25
Consumer Protection (cont.) f Credit Cards
Regulatory action by Federal Reserve, Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA) – On December 18, 2008, the agencies jointly released rules under the Federal Trade Commission (FTC) Act to prohibit unfair and deceptive practices in credit card lending, including a rule that bars credit card issuers from raising interest rates during the first year of the account unless the potential rate hike or the fact that the APR is tied to an index was disclosed when the account was opened, cardholder is 30 days delinquent or the cardholder fails to honor a workout arrangement. The rules would also define common practices such as double-billing and universal default as “unfair” or “deceptive.” – Th The Federal F d l Reserve R also l released l d a rule l under d the th Truth T th iin L Lending di A Actt (TILA) th thatt requires i greater disclosure by credit card issuers regarding the true terms and costs of the accounts. – Status: Effective July 2010 and not retroactive in effect.
H.R. 627 (Credit (C C Card Holders Bill off Rights Act off 2009)) – Amends TILA to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, including various limits on marketing & billing practices. – Status: Passed in the House Financial Services Committee (4/22). Proceeding to House vote next week. Sponsored by Representative Carolyn Maloney, with 81 co-sponsors.
26
Consumer Protection (cont.) f Credit Cards (cont.)
S.414 (Credit Card Accountability, Responsibility & Disclosure Act) – Amends the Consumer Credit Protection Act, to ban abusive credit practices, enhance consumer disclosures, protect underage consumers. Proposed protections include (i) protection of consumers from “any time, any reason” interest rate increases and account changes; (ii) prohibition of unfair application of card payments; (iii) protection of cardholders who pay on time; (iv) limitations on fees and penalties penalties, including a ban on charging interest on fees fees, a prohibition on fees to pay bills and a restriction on over-the-limit charges; (v) ensuring that cardholders are informed of the terms of their account; and (vi) protects young consumers from credit card solicitations. – Status: Passed in the Senate Banking Committee Committee. Sponsored by Senator Christopher Dodd Dodd, with 18 co-sponsors.
Comments – Obama is scheduled to meet with the credit card divisions at 14 major banks to tell them to supportt the th legislation l i l ti tto curb b llending di abuses b and d tto crack kd down on such h practices ti as arbitrarily bit il raising interest rates on existing balances, charging late fees without enough time given and charging interest on debt that was paid on time. (Washington Post, April 21, 2009) – Congressional Oversight Panel: “Although mortgage documents include a raft of legally-required di l disclosures, th those di disclosures l are a llong way ffrom a meaningful i f l understanding d t di off th the lloan transaction—and a much longer distance from supporting competitive markets. Many of the same points can be made for credit cards and other consumer financial products. In all of these cases consumers have little access to the key information they need to make responsible decisions. The result is a market in which p people p fail to assess risks p properly, p y, over-pay p y and g get into financial trouble.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009) 27
Consumer Protection (cont.) f Other Consumer Protection Measures
S.257 (Consumer Credit Fairness Act) – Amends Title 11 of the United States Code (the Bankruptcy Code) to disallow certain claims resulting from high cost credit debts. Offers Chapter 7 access to consumers forced into bankruptcy by high interest loans, exempts consumers with any debts that have excessive rates from the means test requirement and makes all such consumers eligible for discharge of their debt under Chapter 7. Targets a wide spectrum of abusive consumer loans, including credit card agreements payday loans, agreements, loans car loans, loans overdraft loans and layaway plans plans. Sets a reasonable and self-adjusting definition of “high interest rate” as anything higher than 15% plus the current yield on the 30-year Treasury bond. Prevents lenders from instituting back-door interest rates by including disclosure of an “applicable interest rate” that includes an annualized calculation of all penalty fees and charges. – Status: Referred to the Senate Committee on the Judiciary. Sponsored by Senator Sheldon Whitehouse and co-sponsored by Senators Richard Durbin and Bernard Sanders. – Comments: • Senator Durbin: “Poor p people p have a life sentence [[with credit card debt that]] theyy can never get out from under…Credit card companies have gone way too far because we have not been watching.” (Banking Daily, 3/25/09) • American Bankers Association: “The market response would be simply to restrict credit, raise interest and fees or both.” (Washington Post, 3/24/09)
H.R. 1214 (Payday Loan Reform Act of 2009) – Amends the Truth in Lending Act to establish additional payday loan disclosure requirements and other protections for consumers – Status: Referred to the House Financial Services Committee. Sponsored p by y Representative p Luis Gutierrez with 16 cosponsors.
Consumer Protection (cont.) f Other Consumer Protection Measures (cont.)
Proposed interest rate ceilings – S.582 S 582 (Interest Rate Reduction Act) • Amends TILA to protect consumers from usury, including a national annual percentage rate of interest ceiling applicable to any extension of credit not to exceed 15% on unpaid balances, inclusive of all finance charges. Imposes penalties for charging higher rates. • Status: Referred to Senate Banking Committee. Committee Sponsored by Senator Sheldon Whitehouse with 5 co-sponsors. – S. 500 (Protecting Consumers from Unreasonable Credit Rates Act of 2009) • Amends TILA to establish a national usury rate for consumer credit transactions. M d t th Mandates thatt no creditor dit may make k an extension t i off credit dit with ith respectt tto which hi h th the ffee and interest rate exceeds 36%. • Status: Referred to Senate Banking Committee. Sponsored by Senator Richard Durbin and co-sponsored by Senator Sheldon Whitehouse.
H R 1456 (Consumer H.R. (C O Overdraft d ft Protection P t ti Fair F i Practices P ti Act) A t) – Extends TILA protections to overdraft protection programs and services provided by depository institutions, to require customer consent before a depository institution may initiate overdraft protection services and fees, to enhance the information made available to consumers relating to overdraft protection services and fees, to prohibit systematic manipulation in the posting of checks and other debits to a depository account for the purpose of generating overdraft protection fees and for other purposes. – Status: House Financial Services Subcommittee on Financial Institutions and Consumer Credit hearings held. Sponsored by Representative Carolyn Maloney, with 7 co-sponsors including R Representative t ti B Brad d Mill Miller.
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Financial Fraud f A focal point for legislators and regulators alike in light of the Madoff scandal and potential for TARP-related fraud
SEC: “We We have a number of people who are now taking the certified fraud examiner program program, as well as, enhancing dramatically our internal training programs. And we are actively seeking new skill sets, including in financial analysis fronts, like accounting, trading and other areas, so that we are better able to keep up with what's going on and what the fraudsters are up to.”
House Financial Services Committee Chairman Barney Frank: “Perhaps most importantly, the A American i public bli h has th the right i ht tto kknow what h t enforcement f t actions ti are contemplated t l t d against i t th those irresponsible and, in some cases, criminal actions that lead to the current situation.” (Press Release, 3/5/09)
SIGTARP (Special Inspector General of TARP) Neil Barofsky: “We’re looking at a potential $300 billion in fraud [related to TARP] TARP], in these days not an unrealistic number number...II do have subpoena authority if I need it.” (Banking Daily, 3/6/09)
Rita Glavin, Acting Attorney General for the Criminal Division of the Department of Justice: “The department is well aware that when large investments of taxpayer money are doled out over a short period of time, p p people p will try y to exploit p the system y and criminally yp profit.” ((Testimony y before the Financial Services Committee Hearing 3/20/09 as reported by Reuters)
f S.386 (Fraud Enforcement and Recovery Act of 2009)
Improves enforcement of mortgage fraud, fraud securities fraud, fraud financial institution fraud and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds.
Status: Introduced to Senate Committee on the Judiciary. Sponsored by Senator Patrick Leahy with 4 co-sponsors.
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Financial Fraud (cont.) f Mortgage Fraud
Mortgage fraud jumped by 26% in 2008, despite the fact fewer loans were issued (Mortgage Asset Research Institute)
Coordinated Effort to Target Mortgage Loan Modification Fraud and Foreclosure Rescue Scams – Joint effort amongst Treasury, DoJ, HUD, Federal Trade Commission and Attorney General of Illinois, as well as state and local governments and private sector to protect homeowners seeking assistance – Effort is supposed to coordinate information and resources to maximize targeting and efficiency in fraud investigations investigations, alert financial institutions to emerging schemes schemes, increase enforcement actions and educate consumers – Initiative will encourage state and federal coordination in battling foreclosure scams and fraud through civil enforcement cases, state enforcement actions, and alerts to financial institutions
H.R. 1106 (“Helping Families Save Their Homes Act”) – Included a provision for a “Nationwide Mortgage Fraud Taskforce,” to be staffed by the Attorney General. – Status: St t Passed P d in i the th House, H currently tl stalled t ll d in i the th S Senate t Banking B ki C Committee. itt
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Financial Fraud (cont.) f Mortgage Fraud (cont.)
Responsible Homeowners Act – Reportedly will include a provision to “[d]irect the FBI, Department of Justice, FHA and other government housing agencies to step up efforts to combat mortgage fraud and authorize additional resources to investigate and prosecute such cases” (Press Release by Representative Eric Cantor) – Status: To be introduced to the House by House Minority Whip Eric Cantor.
H.R. 1105 (Omnibus Appropriations Act) – Section 626 of the Omnibus Appropriations Act directs the Federal Trade Commission (FTC) to initiate a rulemaking proceeding with respect to mortgage loans and grants state attorney generals new authority to enforce any FTC mortgage rules – Status: Signed into law.
Comments – FDIC chairman Sheila Bair said “[c]racking down on mortgage fraud in particular is a safety and soundness issue for both the banking industry and the housing markets…Mortgage fraud is now a very big priority for us.” She also said that “[a]s a bank regulator, I see each and every state attorneys general as an essential partner in answering the call.” (Speech before the National A Association i ti off Attorneys Att General, G l 3/3/09)
Executive Compensation f The Congressional Oversight Panel listed as an action item “Regulators should consider requiring executive pay contracts to provide for clawbacks of bonus compensation for executives of failing institutions institutions.” (Congressional (C i l Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009)
f H.R. 1664 (Grayson Grayson-Himes Himes Pay for Performance Act of 2009) Restrictions: – Prohibition on paying: – “unreasonable unreasonable or excessive excessive” compensation, compensation or – non-performance-based bonus, retention or other supplemental payments. – Treasury to establish standards within 30 days of enactment.
Covered Institutions: – Institutions with outstanding TARP assistance. – Fannie Mae and Freddie Mac. – Federal home loan banks. – No standard for application to affiliates as yet.
Covered Individuals: Executives and employees. Status: Passed by y the House on April p 1,, 2009.
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Executive Compensation (cont.) f H.R. 1586 (To Impose an Additional Tax on Bonuses Received from Certain TARP recipients) – Imposes a 90% additional income tax on certain compensation paid to employees or former employees of “covered TARP recipients after December 31, 2008. – Status: Passed the House on March 19, 2009. Sponsored by Representative Charles Rangel. – Prospects: appear poor – Comments • Harvard Law Professor Laurence Tribe was one of the first experts to go on record that H.R. 1586 would be constitutional, but later reversed his position saying “I have growing d bt about doubts b t the th constitutionality tit ti lit off H.R. H R 1586’s 1586’ 90% AIG b bonus clawback l b k ttax…The Th whole h l point of the Constitution’s various separation of power previsions – including the bill of attainder clause – is to make sure that…you don’t have trial by legislature.” (Tax Analysts, 3/24/09)
f S. 651 (Compensation Fairness Act of 2009)
Amends the Internal Revenue Code to impose an excise tax on excessive bonuses paid by federal emergency economic assistance recipients to their employees (including directors or officers). Sets the overall rate of such tax at 70% of the amount of such bonuses, 35% payable by federal emergency economic assistance recipients and 35% payable by the employees of such recipients.
Status: Placed on Senate Legislative Calendar under General Orders. Sponsored by Senator Max Baucus with 11 co-sponsors. Bachus has vowed to move ahead.
Executive Compensation (cont.) f Obama proposal
Status: Outlines expected to be unveiled this week. Restrictions: – May impose greater requirements on boards to tie compensation more closely to corporate performance. – May permit government to cancel outstanding bonus contracts contracts.
Covered Institutions: – All financial institutions. – May also be applied to all publicly traded companies companies.
Covered Individuals: Unclear. Prospects: Unclear.
Executive Compensation (cont.) f Other Legislation
Though no one can say for sure, executive compensation restrictions are less likely to follow the Rangel/Baucus approach of retroactively taxing bonuses and more likely to follow the Frank approach of prohibiting “unreasonable or excessive” compensation and non-performance bonuses, with Treasury setting the standards.
H.R. 1575 (End Government Reimbursement of Excessive Executive Disbursements (End GREED) Act) – Authorizes the Attorney General to limit or recover excessive compensation paid or payable by entities that have received Federal financial assistance on or after September 1, 2008. – Status: Placed on the Union Calendar; introduced to the House Judiciary Committee. S Sponsored by Representative John Conyers C with 1 14 co-sponsors.
Comments – House Financial Services Committee Chairman Barney Frank: “Given the legislative process and the Administration’s Administration s desire to get this bill done before the recess to speed funds into the economy, Congress made a mistake. We have, fortunately, a process for correcting mistakes which is subsequent legislation. We have now acted very promptly and if this bill passes the House and the Senate then the mistake will have had no effect.” (HSFC Press Release, 3/26/09)
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Other Regulatory Restructuring Proposals f Merger of SEC and CFTC?
U.S. is the only country that splits the regulation of securities and commodities, despite market d developments l t since i th the 1970 1970s th thatt make k th the di distinction ti ti artificial tifi i l – Concerns that Congressional and regulatory turf battles impede financial innovation
Key question: Will CFTC become more like SEC, or vice versa? – CFTC: small, nimble, “principles based,” “responsive” to industry – SEC: bureaucratic, “rules based,” enforcement-oriented
Unlikely to occur any time soon, soon due to continuing turf battles and other concerns
f Merger of OCC and OTS?
Likely to occur – Thrift charter guarantees the industry has concentrated exposure to real estate – OTS has lost credibility during this crisis, e.g. due to developments at AIG and Washington Mutual
Obstacle: turf battles and policy to “expand the American dream”
HR 1754 and S 664 both propose OTS/OCC merger
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Other Regulatory Restructuring Proposals (cont.) f Hedge Fund & Investment Adviser Regulation
Treasury proposal for regulatory reform mandates SEC registration for hedge funds, private equity firms and venture capitalists with assets under management above a certain threshold and also subjects them to enhanced disclosure and reporting requirements – Treasury has left open the possibility that certain hedge fund advisers would be considered systemically important
SEC Chairman Mary Schapiro is “considering asking for legislation that would require registration of investment advisers and possibly the hedge funds themselves.” (Testimony before the Senate Banking Committee, 3/26/09)
S.344 (Hedge Fund Transparency Act ) – Requires hedge funds to register with the SEC. – Status: Referred to Senate Banking Committee. Sponsored by Senator Chuck Grassley and cosponsored by Senator Carl Levin.
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Other Regulatory Restructuring Proposals (cont.) f Glass-Steagall’s “Specter”
Comment by Former Fed Chairman Paul Volcker sparked a debate over the potential return of GlassSteagall – Volcker proposed a partial return to Glass-Steagall’s separation of commercial and investment banking, allowing commercial banks to engage in securities underwriting and M&A but not more risky activities, such as proprietary trading. (Bloomberg, 3/10/09)
Goldman CEO Lloyd Blankfein noted that a return to Glass-Steagall would be difficult to resurrect saying, “its hard to turn back the clock” (Bloomberg, 3/27/09)
f GSE reform
Potential bill from House Financial Services Committee Chairman Barney Frank – Frank said he hopes to introduce legislation later this year to restructure government-backed mortgage investors Fannie Mae and Freddie Mac. “The current model is broken” Frank said in an interview. One possibility, he said, is to separate the companies into entities serving two functions: one that would ensure adequate funding for the home-mortgage market as a whole and another that would provide government subsidies for housing low-income people. (WSJ, 3/18/09)
Other Regulatory Restructuring Proposals (cont.) f Municipal Bond Regulation
SEC Chairman Mary Schapiro may request authority to regulate municipal securities – “It is time for those who buy the municipal securities that are critical to state and local funding initiatives to have access to the same quality and quantity of information as those who buy corporate securities. I will lead the [SEC] to continue to focus efforts in this area in 2009.” (Testimony before the Senate Banking Committee, 3/26/09)
Major House Bill reportedly in the works – Reportedly the House Financial Services Committee is drafting a three-pronged bill that would allow federal guarantees for new muni general obligation debt, create a reinsurance program to bolster monoline bond insurers underwriting new business and provide a liquidity backstop for variable-rate i bl d demand d obligations. bli i (B (Bond dB Buyer, 3/13/09) – Reportedly “House Financial Services Committee chairman Barney Frank is exploring the idea of including a provision…that would require the federal regulation of financial or investment advisers in the municipal market that are not currently regulated.” (Bond Buyer, 3/18/09)
H.R. 1669 (Federal Municipal Bond Marketing Support and Securitization Act of 2009) – Requires the Secretary of the Treasury to establish a market for municipal securities, to require cooperation between the Secretary and the Chairman of the Board of Governors of the Federal Reserve System y in addressing g the municipal p securities market situation including g through g the establishment of municipal securities funding facilities and for other purposes. – Status: Referred to the House Financial Services Committee. Sponsored by Representative Gerry Connolly.
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Other Hot Topics f Credit Rating Agencies
The SEC has pledged to reform the credit rating agencies. The SEC held a roundtable to examine the role of credit rating agencies on April 15 15, “where where much of the attention was focused on ways to minimize potential conflicts of interest…some participants suggested all firms should switch to the investor-paid model, while at least one person suggested fees be paid out of the rated bonds’ interest payments.” (Wall Street Journal, 4/16/2009)
f G-20 G 20 / IInternational t ti lC Cooperation ti
Secretary Geithner noted, the need for a more effective “globally coordinated approach to the resolution of globally active firms” is an imperative. The risk of inaction is that, as Chairman Bair recently testified, “[i]n this environment, ring-fencing—also known as every man for himself—may simply be the only rational response.”
f Capital requirements
Fed delays y implementation of new capital rules Treasury regulatory reform proposals – Treasury’s proposal calls for more “conservative” and “robust” capital requirements for systemically important firms than for other financial firms, in order “to be effective in a wider range of deeply adverse economic scenarios than is typically required required.” Treasury also suggested that the capital requirements be “less pro-cyclical” so that systemically important firms build “substantial” capital buffers during economic upturns to “avoid deleveraging in cyclical downturns.”
Dynamic provisioning debate
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Financial Crisis Fallout: Legislative and Regulatory Action f Federal Assistance Initiatives f Current Legislative Proposals f On the Horizon: Possible Upcoming Initiatives
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On The Horizon: Possible Upcoming Initiatives f Future Bailouts?
Further Insurance Bailout? – Insurers holding federally chartered banks or thrifts were given access to TARP the Capital Purchase Program, and the deadline to apply has passed. – No word on potential for future insurance bailout beyond those that qualified for the Capital Purchase Program.
Further auto bailout? – P Pursuant to the h A Automotive i IIndustry d Fi Financing i Program P (December (D b 2008), 2008) G Generall M Motors and d Chrysler were required to submit detailed restructuring plans to Treasury by February 17 – President Obama has created a Presidential Task Force on Autos to oversee restructuring and has announced that a government-backed government backed bankruptcy remains a viable option – The Obama administration announced an “auto suppliers bailout” on March 17, 2009 – Obama administration rejected Chrysler’s and GM’s restructuring plans on March 30, 2009. Ch l was give Chrysler i one month, th GM ttwo months, th tto restructure t t or be b forced f d into i t bankruptcy b k t – The Obama administration is considering converting GM’s loans into equity
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On The Horizon: Possible Upcoming Initiatives f Potential Shift from State Regulation to Federal Regulation?
Treasury proposal for “eliminating gaps in regulatory structure”
Federal Insurance Regulation? – Likelihood of federal insurance regulator? Optional federal charter? • If systemic regulator, Fed does not want to be full functional insurance regulator – Federal guarantee / insolvency regime? • AIG would ld be b subject bj to 20 state solvency l regimes i – current process would ld create systemic risk • State guarantee funds: unfunded / pay-as-you-go and limited coverage – Treasury Secretary Geithner said “there is a good case for introducing an optional federal charter for insurance companies” (Testimony before the House Financial Services Committee, 3/26/09)
Federal Mortgage Regulator? – The Mortgage Bankers Association sent a letter to House and Senate Banking Committee leaders proposing the creation of a “Federal Mortgage Regulatory Agency” that “regardless of charter or license…[would] implement standards and oversee all mortgage bankers and brokers.” The p proposed p agency g y would include both state and federal regulators g on its board of directors. (National Mortgage News, 3/25/09) 44
On The Horizon: Possible Upcoming Initiatives f Corporate Governance
Proxy access: permit shareholders to nominate directors through the company's own proxy statement
Elimination of broker discretionary voting: disallow brokers from voting on election of directors without specific instructions from shareholders
Expanded disclosure of directors' directors backgrounds in a company's company s proxy statement
Advisory vote on executive compensation (say on pay): allow shareholders to vote on the disclosure of executive compensation
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Donald S. Bernstein Davis Polk & Wardwell April 2009
Financial Crisis Fallout: Legislative and Regulatory Action f Federal Assistance Initiatives f Current Legislative Proposals f On the Horizon: Possible Upcoming Initiatives
2
Overview of Troubled Assets Relief Program (TARP) f Approved by Congress in October 2008, the Emergency Economic Stabilization Act authorized Treasury access to $700 Bn
The first $350 Bn of the funds (TARP I) were released to the Bush administration in October 2008
The remaining $350 Bn (TARP II) were released to the Obama administration in January 2009
f TARP I programs included: i l d d
The Capital Purchase Program (CPP)
The Systematically Significant Failing Institutions Program (SSFIP), used for AIG
The Targeted Investment Program (TIP), used for Citigroup and Bank of America
The Automotive Industry Financing Program, used for General Motors and Chrysler
The Term Asset-Backed Lending Facility (TALF), done in conjunction with the New York Federal Reserve
3
TARP II- The Financial Stability Plan f Thus far, TARP II programs include:
Capital Assistance Program (CAP) and associated stress testing
Preferred to common equity conversion for Citigroup
Public-Private Investment Program (PPIP)
f Other Government Relief Programs
FDIC – Temporary increase in deposit insurance to $250,000 – Temporary Liquidity Guarantee Program (TLGP) • Transaction Account Guarantee • Debt Guarantee Program
Federal Reserve – Primary Dealer Credit Facility (PDCF) – Term Auction Facility (TAF) – Temporary Securities Lending Facility (TSLF) – Commercial Paper Funding Facility (CPFF) – Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) – Money o ey Market a et Investor esto Funding u d g Facility ac ty ((MMIFF))
Federal Assistance Initiatives ($Bn)
21 97.6
30
310
1250 125
241 200 269 200
Total Spent: ~$2.5 trillion
200 7
1000
600
1000 500
Federal Reserve Treasury FDIC C di Coordinated d
PPIP
5
Overview of Obama Administration Proposals f Capital Assistance Program (CAP), with associated stress testing and balance sheet transparency initiatives
Status: Several major banks have undergone mandatory stress testing and some are now contemplating repaying funds received under TARP I. Results of the tests will be released on May 4 after first quarter earnings reports - and regulators will publish a report on April 24 detailing their testing methods. The Obama administration has said that strong banks may be able to repay funds “only if such a move passes a test to determine whether it is in the national economic interest.” (Financial Times, 4/20/2009)
f Public-Private Investment Program (PPIP)
Status: Treasury announced more details on PPIP on March 23, 2009, which includes a securities purchase program, designed to remedy the illiquidity in the secondary markets for certain mortgagebacked securities, and a loan purchase program, designed to create a market for troubled loans on bank and thrift balance sheets. The FDIC will administer “toxic asset” auctions and is expected to release details of the auction process soon. The Special Inspector General for TARP notes that there are fraud and money laundering concerns with the new programs that will need to be addressed (SIGTarp Quarterly Report to Congress, April 21, 2009)
f “A New Era of Transparency, Accountability, Monitoring and Conditions”
Status: Embedded in various proposals, including Treasury’s proposal for regulatory restructuring.
6
Overview of Obama Administration Proposals (cont.) f Consumer and Business Lending Initiative (CBLI)
Status: As announced on March 3, 2009, the CBLI is being executed under the first stage of the Federal Reserve Reserve’s s Term Asset Asset-Backed Backed Loan Facility (TALF) (TALF). In the first round of TALF financing (March 17-19), $4.7 Bn of TALF loans were requested.
f Homeowner Affordability & Stability Plan
Status: President Obama announced the details of this $275 Bn plan on February 18, 2009, which includes $75 Bn to be spent on mortgage modifications according to guidelines announced on March 4, 2009, relaxed Fannie Mae and Freddie Mac restrictions on refinancing of “underwater” mortgages and an additional $200 Bn for Treasury’s existing GSE backstop.
f Small Business & Community Lending Initiative
Status: As announced on March 16, 2009, the SBI will purchase up to $15 billion in securities backed by SBA loans. loans
Overview of Obama Administration Proposals (cont.) f Obama’s Plan for Regulatory Restructuring
Status: Recent proposal focuses first on systemic risk regulation with details on the remaining prongs to come.
Systemic Risk Regulation – A single independent regulator with responsibility over systematically important firms and critical payment and settlement systems, including a prompt corrective action regime – Higher standards on capital and risk management for systematically important firms – Resolution authority, separate from the Bankruptcy Code, to protect against the failure of financial institutions that may pose systemic risks – Regulation of hedge funds and other private funds, including mandatory registration with the SEC for advisers with assets under management over a certain threshold, disclosure to the SEC of investors and trading partners and confidential disclosures to the SEC to determine whether a fund is “systemically important” – Regulation of credit default swaps (CDS) and other over-the-counter (OTC) derivatives, including mandatory use of central counterparties for all “standardized” OTC derivatives, encouraging exchange trading and deeming all OTC dealers as “systemically important” and subjecting them to capital and other restrictions – New requirements for money market funds to reduce the risk of rapid withdrawals
Protecting Consumers & Investors Eliminating Gaps in Our Regulatory Structure F t i International Fostering I t ti l Coordination C di ti 8
Regulatory Restructuring f Treasury Proposal: Systemic Risk Regulator
Who will be regulated? – Consolidated supervision of “systemically important” firms • Treasury does not provide any specific criteria, but only general factors to consider, including: • the financial system’s interdependence with the firm; firm’s size, leverage and degree of reliance on short-term funding; and the firm’s importance as a source of credit for households, businesses and governments and, of liquidity for the financial system • In I particular, ti l all ll dealers d l iin OTC d derivative i ti markets k t are systemically t i ll iimportant t t fi firms – “Broad and clear” authority over systemically important payment and settlement systems and activities
Who will be the regulator? – Treasury does not express a view on who ought to be the systemic regulator – Scope of the systemic risk regulator’s authority • “Appropriate checks and balances”: the systemic risk regulator should consult and coordinate with the existing federal regulators • It should have primary authority to supervise, examine and set prudential standards for at least certain systemically important firms
Other legislative proposals: HR 1754 and S 664 both would create a financial stability council to regulate systemically important institutions 9
Regulatory Restructuring (cont.) f Resolution authority over systemically important financial companies
Currently, there is no single uniform Federal law governing the restructuring or liquidation of diversified US financial g groups p such as AIG
Would cover financial institutions that may pose systemic risks – Bank or thrift holding companies, holding companies of an SEC-registered broker-dealer, an insurance company or a futures commission merchant or commodity pool operator and certain subsidiaries
Systemic risk determination – Positive recommendations by the Federal Reserve Board and the appropriate federal regulatory agency, such as the FDIC, the SEC or the CFTC – Treasury, T in i consultation lt ti with ith th the P President, id t would ld make k a ttriggering i i d determination t i ti
The FDIC, with the approval of Treasury, may provide a covered financial company with various forms of financial assistance or put it into conservatorship or receivership
Modeled on the statutory framework of the Federal Deposit Insurance Act, the FDIC, as conservator or receiver, i h has b broad d powers, iincluding l di th the power tto: – sell or transfer assets or liabilities of the company; – renegotiate or repudiate the company’s “burdensome” contracts; and – replace the board of directors and senior officers of the company company.
Funding mechanism – Automatic appropriation to the FDIC from the general funds of Treasury and a scheme of special assessment on all financial companies to recoup the expenditures Status: Hearing before the House Financial Services Committee Committee, Frank and Dodd promise action by end of 2009 2009.
Status: Barney Frank has promised combined legislation creating the resolution authority and systemic risk regulator by the end of 2009
Treasury Initiatives: Glossary f Automotive Industry Financing Program (Auto)
The objective of this program is to prevent a significant disruption of the American automotive industry and auto supplier industry that pose a systemic risk to financial market stability and will have a negative effect on the real economy of the United States. The program required both General Motors and Chrysler to submit restructuring proposals in return for TARP funds.
f Capital Assistance Program (CAP)
A financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse worse-than-expected than expected economic environment.
Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
f Capital Purchase Program (CPP)
Capital injection of up to $250 Bn in eligible institutions in exchange for preferred stock. The first $125 b was earmarked bn k d ffor nine i systemically t i ll iimportant t t fi financial i l iinstitutions tit ti whose h participation ti i ti was effectively mandatory.
To date, $197 Bn has been invested in 511 institutions (Wall Street Journal, March 23, 2009)
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Treasury Initiatives: Glossary (cont.) f Systematically Significant Failing Institutions Program (SSFIP)
Unlike the broad-based Capital Purchase Program (CPP), financial Institutions (as defined in EESA) will be considered for participation in the SSFI Program on a case-by-case basis. The primary objective of this program is to provide stability and prevent disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings and retirement security from the failure of a systemically significant institution.
To date, only AIG has participated in this program.
f Targeted Investment Program (TIP)
Capital injections in important financial institutions to foster financial market stability.
To date, only Bank of America and Citigroup have participated in this program.
Federal Reserve Initiatives: Glossary f Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
Under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Federal Reserve makes non-recourse loans to eligible institutions to finance their purchases of highquality asset-backed commercial paper from money market mutual funds.
f Commercial Paper Funding Facility (CPFF)
The Federal Reserve created the Commercial Paper Funding Facility (CPFF) to provide a liquidity backstop p to U.S. issuers of commercial p paper. p The CPFF is intended to improve p liquidity q y in short-term funding markets and thereby contribute to greater availability of credit for businesses and households.
Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of highly-rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers.
f Purchases from Government Sponsored Enterprises (GSE debt & GSE MBS)
The Federal Reserve is purchasing up to $200 Bn in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to reduce the cost and increase the availability of credit for the purchase of houses and purchasing up to $1.25 trillion in mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginny Mae, to be conducted by asset managers.
Federal Reserve Initiatives: Glossary (cont.) f Primary Dealer Credit Facility (PDCF)
The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that provides funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.
f Term Asset-Backed Securities Loan Facility (TALF)
The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF) to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration (SBA).
f Term Auction Facility (TAF)
The Term Auction Facility allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction for a term up to three months.
f Term Securities Lending Facility (TSLF)
Provides Treasury general collateral financing through the Term Securities Lending Facility (TSLF) and TSLF Options Program (TOP) to promote liquidity in Treasury and other collateral markets and thus foster the functioning of financial markets more generally.
FDIC Initiatives: Glossary f Temporary Liquidity Guarantee Program (TLGP)
Debt Guarantee. Guarantee of certain senior unsecured debt issued by participating institutions.
Transaction Account Guarantee. In addition to the increase in deposit insurance, the FDIC also introduced a transaction account guarantee under the Temporary Liquidity Guarantee Program to provide full deposit insurance coverage for certain deposit transaction accounts regardless of the dollar amount.
15
Coordinated Initiatives: Glossary f AIG
Non-recourse loan and other Fed assistance to fund purchase of residential mortgage-backed securities from Air's Air s U U.S. S securities lending collateral portfolio and to fund the purchase of multi-sector collateralized debt obligations on which AIG has written credit default swap contracts.
f Public-Private Investment Program (PPIP)
Working together in partnership with the FDIC and the Federal Reserve, Treasury has initiated a Public-Private Investment Program that takes a new approach to removing toxic assets from financial institutions’ balance sheets.
This new program is designed with a public public-private private financing component, component which involves putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
Financial Crisis Fallout: Legislative and Regulatory Action f Federal Assistance Initiatives f Current Legislative Proposals f On the Horizon: Possible Upcoming Initiatives
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Housing / Foreclosure Relief f Bankruptcy Cramdown
“Cramdown” = judicial modification of mortgage terms in bankruptcy court Key bill: H.R. H R 1106 (Helping Families Save Their Homes Act) – Amends Chapter 13 of the federal Bankruptcy Code (adjustment of debts of an individual with regular income) – Excludes from computation of debts the secured or unsecured portions of: (1) debts secured by the debtor's principal residence if the value of the residence as of the date of the order for relief is less than the applicable maximum amount of noncontingent, liquidated, secured debts; or (2) debts secured or formerly secured by the debtor's principal residence that was either sold in foreclosure or surrendered to the creditor, if the property's value as of the date of the order for relief was also less than the applicable maximum amount of noncontingent, liquidated, secured debts. debts – H.R. 1106 also contains language to codify other portions of President Obama’s Homeowner Affordability & Stability Plan.
Status: Passed the House on March 5, 2009, but currently stalled in the Senate. “Senate Democrats are scaling back legislation that would let bankruptcy judges alter mortgage terms because lawmakers don’t have enough votes for passage, a spokesman for Senate Majority Whip Richard Durbin said.” (Bloomberg, April 16, 2009)
Comments – P President id t Ob Obama endorsed d db bankruptcy k t cramdowns d b by iincluding l di a provision i i ffor jjudicial di i l modification of home mortgages during bankruptcy in his Homeowner Affordability & Stability Plan, but such a provision would require Congressional approval. – Senators Richard Durbin and Charles Schumer, key proponents of the legislation, are reportedly in d discussions scuss o s with industry dus y representatives ep ese a es who oa are e lobbying obby g to o limit the e scope o of ccramdowns. a do s (Washington Post, 3/13/09) 18
Housing / Foreclosure Relief (cont.) f Mortgage Modifications
Treasury released the guidelines for mortgage modifications contemplated under President Obama’s Homeowner Affordability & Stability Plan on March 4, 4 2009. 2009 – Guidelines include temporary reduction of interest rates, lengthened payment periods and other modifications designed to bring monthly payments down to a housing-to-income ratio of 31%, which may result from a combination of servicer modifications and government funding. The guidelines also include various financial incentives for servicers to participate and borrowers to make timely payments. – Status: H.R. 1106 (Helping Families Save Their Homes Act) attempts to codify aspects of the Obama plan, but is currently stalled in the Senate Banking Committee. Portions that do not req ire Congressional Approval require Appro al are ccurrently rrentl underway. nder a
Servicer Safe Harbor? – A key concern for mortgage servicers is the potential for lawsuits by securitization investors and b k arising banks i i ffrom modification difi ti off mortgage t tterms according di tto T Treasury guidelines. id li – Although the Obama plan did not include such a provision, H.R. 1106 includes a servicer safe harbor in line with previously proposed legislation. The H.R. 1106 servicer safe harbor (i) insulates servicers from any liability they may otherwise have to securitization investors and (ii) invalidates contractual provisions between a servicer and any securitization vehicle or investor that would limit the servicer’s ability to modify mortgages or require the servicer to repurchase loans or otherwise compensate the securitization vehicle on account of any modification, workout or loss mitigation plan. This safe harbor would only apply if the servicer complied with Treasury’s guidelines and would not apply to modifications made after January 1, 2012.
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Housing / Foreclosure Relief (cont.) f Mortgage Modifications (cont.)
The Congressional Oversight Panel claimed that because of inadequate data on mortgage modifications, “legislators, regulators and market participants are flying blind” – “The Obama housing plan and other programs designed to stem the foreclosure crisis will likely be impeded by a lack of hard data on rising mortgage defaults and why prior loan modifications have not been working working…. No federal agency has the ability to track delinquencies delinquencies, foreclosures and loan workout efforts for the entire U.S. mortgage market…. Existing data is plagued by inconsistent collection and reporting methodologies among government agencies and is often times simply unverifiable." (Congressional Oversight Panel, “Foreclosure Crisis: Working Toward a Solution,” March 6, 2009)
Housing / Foreclosure Relief (cont.) f Mortgage Lending Reform
Key Bill: H.R. 1728 (The Mortgage and Anti-Predatory Lending Act of 2009) – H.R. 1728 aims to amend the Truth in Lending Act to reform consumer mortgage practices and provide accountability for such practices, to provide certain minimum standards for consumer mortgage loans and for other purposes, through various measures including: (i) requiring lenders to retain 5% of the credit risk on subprime loans that are securitized; (ii) addressing mortgage broker compensation issues by banning certain types of yield yield-spread spread premium (YSP) payments payments, i.e., compensation based on a loan’s interest rate and terms; (iii) requiring proof of net tangible benefit for any refinancing and (iv) subjecting licensed and registered mortgage originators to a federal duty of care, obligating them to only make loans the customer can afford.
Status: St t U d debate Under d b t – referred f d to t the th House H Financial Fi i lS Services i C Committee. itt H Hearing i may b be h held ld before proceeding to mark-up and vote. The bill is co-sponsored by Representatives Barney Frank, Brad Miller and Mel Watt. – H.R. 1728 is reportedly “a tougher version of the anti-predatory lending measure that passed the H House iin 2007 2007, b butt stalled t ll d iin th the S Senate.” t ” (B (Banking ki D Daily, il 3/27/09) N No relevant l tS Senate t version i of the bill has been introduced to date.
State Legislators – The Washington Post reports “state legislators concerned with [unethical] behavior by mortgage brokers have approved regulations to crack down on the industry this year.” Legislators expressed a concern that “a lot of people were getting into foreclosures because they had dealt with unethical brokers who had steered them into high risk loans.” (Washington Post, 3/5/09)
21
Housing / Foreclosure Relief (cont.) f Mortgage Lending Reform (cont.)
Comments – Comptroller of the Currency John Dugan “call[ed] for a national standard for all mortgages” and said “[r]ather than having 50 new state laws address mortgage lending practices, Congress should enact a single uniform standard that applies to all mortgages in the country, wherever they are originated. And that law should require effective and comparable enforcement by g , even where originators g are not banks.” ((New York Times Op-Ed, p , federal and state regulators, 3/15/09) – Sandra Braunstein, a representative of the Federal Reserve testifying before the House Financial Services Committee on March 11, 2009, supported mortgage lending reform but said “[t]he Fed…believes the establishment of clearly defined safe harbors may be appropriate in implementing the law and that the statute should clarify that the rule rule-writing writing agency has sufficient flexibility for this purpose.” She reportedly also “urged House lawmakers…to carefully tailor legislation to avoid redundancies with HOEPA [the Home Ownership and Equity Protection Act regulations scheduled to take effect in fall 2009].” (Banking Daily, 3/27/09) – The Congressional Oversight Panel strongly recommended mortgage lending reform and claimed that “[f]airness should have been addressed though better regulation of consumer financial products. If the excesses in mortgage lending had been curbed by even the most minimal consumer protection laws, the loans that were fed into the mortgage backed securities would have been choked off at the source and there would have been no “toxic assets” to threaten the global economy.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Oversight Protecting Consumers and Ensuring Stability,” January 2009) – Fed Governor Elizabeth Duke: “While the expansion of the subprime mortgage market over the past decade increased consumers' access to credit, too many homeowners and communities are g today y because of lax underwriting g standards and other unfair or deceptive p p practices that suffering resulted in unsustainable loans.” (Testimony before the House Financial Services Committee, 3/20/09)
Consumer Protection
f “Protecting Consumers and Investors” is one element of Treasury’s proposal for regulatory reform
In the wake of escalating reports of subprime mortgage and credit card predatory abuse, consumer and investor protection is a key area of focus for regulators and the political climate supports significant regulatory reform in this arena
Representative Barney Frank (Chairman of the House Financial Services Committee) – Determined to “bring back, strengthen and quickly pass through the House reforms that failed to reach enactment in the last Congress that would beef up consumer protections in areas like mortgage lending, credit cards and overdraft.” (American Banker, 3/6/09)
SEC Commissioner Mary Schapiro – “[F]ocus on investor protection and securities regulation as part of a reconsideration of the financial regulatory regime is timely and critically important…. If there were ever a time when investors need and deserve a strong voice and a forceful advocate in the federal government, that time is now. Individual investors may not be the strongest political force…. These investors expect and deserve a strong and independent regulator dedicated to providing for fair financial dealings, timely and meaningful disclosure of information and protection from unscrupulous actors.” (Testimony before the Senate Banking Committee, 3/26/09)
Other supporters of consumer protection reform include Federal Reserve Chairman Ben Bernanke Bernanke, FDIC Chairman Sheila Bair, Senator Christopher Dodd and Michael Barr of the White House National Economic Council
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Consumer Protection (cont.) f Ongoing tension between federal and state regulators
The Congressional Oversight Panel recommended “eliminating federal pre-emption of application of state consumer laws to national banks.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009) However, reportedly Solicitor General Elena Kagan recently filed a brief urging the Supreme Court “to bar…states from enforcing their fair-lending and other consumerprotection laws against federally chartered banks banks.” (Bloomberg, (Bloomberg 3/26/09)
50 state attorneys general sent a letter to President Obama asking the administration to restore states’ authority to regulate national bank lending, credit cards and banking rules. (Banking Daily, 3/17/09)
Comptroller C ll off the h C Currency JJohn h D Dugan h has supported d ffederal d l mortgage llending di fforms, ““rather h than h having 50 new state laws.” (New York Times Op-Ed, 3/15/09)
FDIC Chairman Sheila Bair has encouraged federal cooperation with state attorneys general, saying that “[i]f [i]f ever there were a time for the states and the ‘feds’ feds to work together, that time is right here, right now. The last thing we need is to preempt each other.” (Speech before the National Association of Attorneys General, 3/3/09)
24
Consumer Protection (cont.) f Financial Product Safety Regulator
Key Bill: S.566 (Financial Product Safety Commission Act) – Modeled after Consumer Safety Product Commission. Establishes the Financial Products Safety Commission to: (1) promulgate consumer financial product safety rules; (2) establish a best practices guide for all providers of consumer financial products; (3) conduct continuing studies and investigations of consumer financial products industry practices; (4) award grants or enter into contracts for the conduct of such studies and investigations; (5) assist public and private organizations or groups of consumer financial product providers, administratively and technically, in the development of safety standards or guidelines that would assist them in complying with any Commission rule; (6) comment on selected agency rulemakings affecting consumer financial products; and (7) establish a consumer financial product customer hotline.
Status: – Referred to Senate Banking g Committee. Introduced by y Senator Richard Durbin and cosponsored by Senators Charles Schumer and Ted Kennedy. – Companion bill (H.R. 1705) referred to House Financial Services Committee. Introduced by Representative Bill Delahunt and co-sponsored by Representative Brad Miller.
Comments – When asked, Treasury Secretary Geithner said the concept of a financial product regulator was “interesting” but did not take a position in his Congressional testimony on regulatory restructuring. (Testimony before the House Financial Services Committee, 3/26/09) – The Congressional Oversight Panel recommended “creat[ing] a single federal regulator for consumer co su e ccredit ed t p products,” oducts, arguing a gu g that t at “[w]ithout [ ] t out a uniform u o set of o minimum u standards, sta da ds, regulatory egu ato y arbitrage among state—and federal—regulators will continue. and no regulator or agency will have the authority and responsibility to protect consumers.” The Panel suggested that such a regulator could be an independent agency or placed within the Federal Reserve. (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009)
25
Consumer Protection (cont.) f Credit Cards
Regulatory action by Federal Reserve, Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA) – On December 18, 2008, the agencies jointly released rules under the Federal Trade Commission (FTC) Act to prohibit unfair and deceptive practices in credit card lending, including a rule that bars credit card issuers from raising interest rates during the first year of the account unless the potential rate hike or the fact that the APR is tied to an index was disclosed when the account was opened, cardholder is 30 days delinquent or the cardholder fails to honor a workout arrangement. The rules would also define common practices such as double-billing and universal default as “unfair” or “deceptive.” – Th The Federal F d l Reserve R also l released l d a rule l under d the th Truth T th iin L Lending di A Actt (TILA) th thatt requires i greater disclosure by credit card issuers regarding the true terms and costs of the accounts. – Status: Effective July 2010 and not retroactive in effect.
H.R. 627 (Credit (C C Card Holders Bill off Rights Act off 2009)) – Amends TILA to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, including various limits on marketing & billing practices. – Status: Passed in the House Financial Services Committee (4/22). Proceeding to House vote next week. Sponsored by Representative Carolyn Maloney, with 81 co-sponsors.
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Consumer Protection (cont.) f Credit Cards (cont.)
S.414 (Credit Card Accountability, Responsibility & Disclosure Act) – Amends the Consumer Credit Protection Act, to ban abusive credit practices, enhance consumer disclosures, protect underage consumers. Proposed protections include (i) protection of consumers from “any time, any reason” interest rate increases and account changes; (ii) prohibition of unfair application of card payments; (iii) protection of cardholders who pay on time; (iv) limitations on fees and penalties penalties, including a ban on charging interest on fees fees, a prohibition on fees to pay bills and a restriction on over-the-limit charges; (v) ensuring that cardholders are informed of the terms of their account; and (vi) protects young consumers from credit card solicitations. – Status: Passed in the Senate Banking Committee Committee. Sponsored by Senator Christopher Dodd Dodd, with 18 co-sponsors.
Comments – Obama is scheduled to meet with the credit card divisions at 14 major banks to tell them to supportt the th legislation l i l ti tto curb b llending di abuses b and d tto crack kd down on such h practices ti as arbitrarily bit il raising interest rates on existing balances, charging late fees without enough time given and charging interest on debt that was paid on time. (Washington Post, April 21, 2009) – Congressional Oversight Panel: “Although mortgage documents include a raft of legally-required di l disclosures, th those di disclosures l are a llong way ffrom a meaningful i f l understanding d t di off th the lloan transaction—and a much longer distance from supporting competitive markets. Many of the same points can be made for credit cards and other consumer financial products. In all of these cases consumers have little access to the key information they need to make responsible decisions. The result is a market in which p people p fail to assess risks p properly, p y, over-pay p y and g get into financial trouble.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009) 27
Consumer Protection (cont.) f Other Consumer Protection Measures
S.257 (Consumer Credit Fairness Act) – Amends Title 11 of the United States Code (the Bankruptcy Code) to disallow certain claims resulting from high cost credit debts. Offers Chapter 7 access to consumers forced into bankruptcy by high interest loans, exempts consumers with any debts that have excessive rates from the means test requirement and makes all such consumers eligible for discharge of their debt under Chapter 7. Targets a wide spectrum of abusive consumer loans, including credit card agreements payday loans, agreements, loans car loans, loans overdraft loans and layaway plans plans. Sets a reasonable and self-adjusting definition of “high interest rate” as anything higher than 15% plus the current yield on the 30-year Treasury bond. Prevents lenders from instituting back-door interest rates by including disclosure of an “applicable interest rate” that includes an annualized calculation of all penalty fees and charges. – Status: Referred to the Senate Committee on the Judiciary. Sponsored by Senator Sheldon Whitehouse and co-sponsored by Senators Richard Durbin and Bernard Sanders. – Comments: • Senator Durbin: “Poor p people p have a life sentence [[with credit card debt that]] theyy can never get out from under…Credit card companies have gone way too far because we have not been watching.” (Banking Daily, 3/25/09) • American Bankers Association: “The market response would be simply to restrict credit, raise interest and fees or both.” (Washington Post, 3/24/09)
H.R. 1214 (Payday Loan Reform Act of 2009) – Amends the Truth in Lending Act to establish additional payday loan disclosure requirements and other protections for consumers – Status: Referred to the House Financial Services Committee. Sponsored p by y Representative p Luis Gutierrez with 16 cosponsors.
Consumer Protection (cont.) f Other Consumer Protection Measures (cont.)
Proposed interest rate ceilings – S.582 S 582 (Interest Rate Reduction Act) • Amends TILA to protect consumers from usury, including a national annual percentage rate of interest ceiling applicable to any extension of credit not to exceed 15% on unpaid balances, inclusive of all finance charges. Imposes penalties for charging higher rates. • Status: Referred to Senate Banking Committee. Committee Sponsored by Senator Sheldon Whitehouse with 5 co-sponsors. – S. 500 (Protecting Consumers from Unreasonable Credit Rates Act of 2009) • Amends TILA to establish a national usury rate for consumer credit transactions. M d t th Mandates thatt no creditor dit may make k an extension t i off credit dit with ith respectt tto which hi h th the ffee and interest rate exceeds 36%. • Status: Referred to Senate Banking Committee. Sponsored by Senator Richard Durbin and co-sponsored by Senator Sheldon Whitehouse.
H R 1456 (Consumer H.R. (C O Overdraft d ft Protection P t ti Fair F i Practices P ti Act) A t) – Extends TILA protections to overdraft protection programs and services provided by depository institutions, to require customer consent before a depository institution may initiate overdraft protection services and fees, to enhance the information made available to consumers relating to overdraft protection services and fees, to prohibit systematic manipulation in the posting of checks and other debits to a depository account for the purpose of generating overdraft protection fees and for other purposes. – Status: House Financial Services Subcommittee on Financial Institutions and Consumer Credit hearings held. Sponsored by Representative Carolyn Maloney, with 7 co-sponsors including R Representative t ti B Brad d Mill Miller.
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Financial Fraud f A focal point for legislators and regulators alike in light of the Madoff scandal and potential for TARP-related fraud
SEC: “We We have a number of people who are now taking the certified fraud examiner program program, as well as, enhancing dramatically our internal training programs. And we are actively seeking new skill sets, including in financial analysis fronts, like accounting, trading and other areas, so that we are better able to keep up with what's going on and what the fraudsters are up to.”
House Financial Services Committee Chairman Barney Frank: “Perhaps most importantly, the A American i public bli h has th the right i ht tto kknow what h t enforcement f t actions ti are contemplated t l t d against i t th those irresponsible and, in some cases, criminal actions that lead to the current situation.” (Press Release, 3/5/09)
SIGTARP (Special Inspector General of TARP) Neil Barofsky: “We’re looking at a potential $300 billion in fraud [related to TARP] TARP], in these days not an unrealistic number number...II do have subpoena authority if I need it.” (Banking Daily, 3/6/09)
Rita Glavin, Acting Attorney General for the Criminal Division of the Department of Justice: “The department is well aware that when large investments of taxpayer money are doled out over a short period of time, p p people p will try y to exploit p the system y and criminally yp profit.” ((Testimony y before the Financial Services Committee Hearing 3/20/09 as reported by Reuters)
f S.386 (Fraud Enforcement and Recovery Act of 2009)
Improves enforcement of mortgage fraud, fraud securities fraud, fraud financial institution fraud and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds.
Status: Introduced to Senate Committee on the Judiciary. Sponsored by Senator Patrick Leahy with 4 co-sponsors.
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Financial Fraud (cont.) f Mortgage Fraud
Mortgage fraud jumped by 26% in 2008, despite the fact fewer loans were issued (Mortgage Asset Research Institute)
Coordinated Effort to Target Mortgage Loan Modification Fraud and Foreclosure Rescue Scams – Joint effort amongst Treasury, DoJ, HUD, Federal Trade Commission and Attorney General of Illinois, as well as state and local governments and private sector to protect homeowners seeking assistance – Effort is supposed to coordinate information and resources to maximize targeting and efficiency in fraud investigations investigations, alert financial institutions to emerging schemes schemes, increase enforcement actions and educate consumers – Initiative will encourage state and federal coordination in battling foreclosure scams and fraud through civil enforcement cases, state enforcement actions, and alerts to financial institutions
H.R. 1106 (“Helping Families Save Their Homes Act”) – Included a provision for a “Nationwide Mortgage Fraud Taskforce,” to be staffed by the Attorney General. – Status: St t Passed P d in i the th House, H currently tl stalled t ll d in i the th S Senate t Banking B ki C Committee. itt
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Financial Fraud (cont.) f Mortgage Fraud (cont.)
Responsible Homeowners Act – Reportedly will include a provision to “[d]irect the FBI, Department of Justice, FHA and other government housing agencies to step up efforts to combat mortgage fraud and authorize additional resources to investigate and prosecute such cases” (Press Release by Representative Eric Cantor) – Status: To be introduced to the House by House Minority Whip Eric Cantor.
H.R. 1105 (Omnibus Appropriations Act) – Section 626 of the Omnibus Appropriations Act directs the Federal Trade Commission (FTC) to initiate a rulemaking proceeding with respect to mortgage loans and grants state attorney generals new authority to enforce any FTC mortgage rules – Status: Signed into law.
Comments – FDIC chairman Sheila Bair said “[c]racking down on mortgage fraud in particular is a safety and soundness issue for both the banking industry and the housing markets…Mortgage fraud is now a very big priority for us.” She also said that “[a]s a bank regulator, I see each and every state attorneys general as an essential partner in answering the call.” (Speech before the National A Association i ti off Attorneys Att General, G l 3/3/09)
Executive Compensation f The Congressional Oversight Panel listed as an action item “Regulators should consider requiring executive pay contracts to provide for clawbacks of bonus compensation for executives of failing institutions institutions.” (Congressional (C i l Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009)
f H.R. 1664 (Grayson Grayson-Himes Himes Pay for Performance Act of 2009) Restrictions: – Prohibition on paying: – “unreasonable unreasonable or excessive excessive” compensation, compensation or – non-performance-based bonus, retention or other supplemental payments. – Treasury to establish standards within 30 days of enactment.
Covered Institutions: – Institutions with outstanding TARP assistance. – Fannie Mae and Freddie Mac. – Federal home loan banks. – No standard for application to affiliates as yet.
Covered Individuals: Executives and employees. Status: Passed by y the House on April p 1,, 2009.
33
Executive Compensation (cont.) f H.R. 1586 (To Impose an Additional Tax on Bonuses Received from Certain TARP recipients) – Imposes a 90% additional income tax on certain compensation paid to employees or former employees of “covered TARP recipients after December 31, 2008. – Status: Passed the House on March 19, 2009. Sponsored by Representative Charles Rangel. – Prospects: appear poor – Comments • Harvard Law Professor Laurence Tribe was one of the first experts to go on record that H.R. 1586 would be constitutional, but later reversed his position saying “I have growing d bt about doubts b t the th constitutionality tit ti lit off H.R. H R 1586’s 1586’ 90% AIG b bonus clawback l b k ttax…The Th whole h l point of the Constitution’s various separation of power previsions – including the bill of attainder clause – is to make sure that…you don’t have trial by legislature.” (Tax Analysts, 3/24/09)
f S. 651 (Compensation Fairness Act of 2009)
Amends the Internal Revenue Code to impose an excise tax on excessive bonuses paid by federal emergency economic assistance recipients to their employees (including directors or officers). Sets the overall rate of such tax at 70% of the amount of such bonuses, 35% payable by federal emergency economic assistance recipients and 35% payable by the employees of such recipients.
Status: Placed on Senate Legislative Calendar under General Orders. Sponsored by Senator Max Baucus with 11 co-sponsors. Bachus has vowed to move ahead.
Executive Compensation (cont.) f Obama proposal
Status: Outlines expected to be unveiled this week. Restrictions: – May impose greater requirements on boards to tie compensation more closely to corporate performance. – May permit government to cancel outstanding bonus contracts contracts.
Covered Institutions: – All financial institutions. – May also be applied to all publicly traded companies companies.
Covered Individuals: Unclear. Prospects: Unclear.
Executive Compensation (cont.) f Other Legislation
Though no one can say for sure, executive compensation restrictions are less likely to follow the Rangel/Baucus approach of retroactively taxing bonuses and more likely to follow the Frank approach of prohibiting “unreasonable or excessive” compensation and non-performance bonuses, with Treasury setting the standards.
H.R. 1575 (End Government Reimbursement of Excessive Executive Disbursements (End GREED) Act) – Authorizes the Attorney General to limit or recover excessive compensation paid or payable by entities that have received Federal financial assistance on or after September 1, 2008. – Status: Placed on the Union Calendar; introduced to the House Judiciary Committee. S Sponsored by Representative John Conyers C with 1 14 co-sponsors.
Comments – House Financial Services Committee Chairman Barney Frank: “Given the legislative process and the Administration’s Administration s desire to get this bill done before the recess to speed funds into the economy, Congress made a mistake. We have, fortunately, a process for correcting mistakes which is subsequent legislation. We have now acted very promptly and if this bill passes the House and the Senate then the mistake will have had no effect.” (HSFC Press Release, 3/26/09)
36
Other Regulatory Restructuring Proposals f Merger of SEC and CFTC?
U.S. is the only country that splits the regulation of securities and commodities, despite market d developments l t since i th the 1970 1970s th thatt make k th the di distinction ti ti artificial tifi i l – Concerns that Congressional and regulatory turf battles impede financial innovation
Key question: Will CFTC become more like SEC, or vice versa? – CFTC: small, nimble, “principles based,” “responsive” to industry – SEC: bureaucratic, “rules based,” enforcement-oriented
Unlikely to occur any time soon, soon due to continuing turf battles and other concerns
f Merger of OCC and OTS?
Likely to occur – Thrift charter guarantees the industry has concentrated exposure to real estate – OTS has lost credibility during this crisis, e.g. due to developments at AIG and Washington Mutual
Obstacle: turf battles and policy to “expand the American dream”
HR 1754 and S 664 both propose OTS/OCC merger
37
Other Regulatory Restructuring Proposals (cont.) f Hedge Fund & Investment Adviser Regulation
Treasury proposal for regulatory reform mandates SEC registration for hedge funds, private equity firms and venture capitalists with assets under management above a certain threshold and also subjects them to enhanced disclosure and reporting requirements – Treasury has left open the possibility that certain hedge fund advisers would be considered systemically important
SEC Chairman Mary Schapiro is “considering asking for legislation that would require registration of investment advisers and possibly the hedge funds themselves.” (Testimony before the Senate Banking Committee, 3/26/09)
S.344 (Hedge Fund Transparency Act ) – Requires hedge funds to register with the SEC. – Status: Referred to Senate Banking Committee. Sponsored by Senator Chuck Grassley and cosponsored by Senator Carl Levin.
38
Other Regulatory Restructuring Proposals (cont.) f Glass-Steagall’s “Specter”
Comment by Former Fed Chairman Paul Volcker sparked a debate over the potential return of GlassSteagall – Volcker proposed a partial return to Glass-Steagall’s separation of commercial and investment banking, allowing commercial banks to engage in securities underwriting and M&A but not more risky activities, such as proprietary trading. (Bloomberg, 3/10/09)
Goldman CEO Lloyd Blankfein noted that a return to Glass-Steagall would be difficult to resurrect saying, “its hard to turn back the clock” (Bloomberg, 3/27/09)
f GSE reform
Potential bill from House Financial Services Committee Chairman Barney Frank – Frank said he hopes to introduce legislation later this year to restructure government-backed mortgage investors Fannie Mae and Freddie Mac. “The current model is broken” Frank said in an interview. One possibility, he said, is to separate the companies into entities serving two functions: one that would ensure adequate funding for the home-mortgage market as a whole and another that would provide government subsidies for housing low-income people. (WSJ, 3/18/09)
Other Regulatory Restructuring Proposals (cont.) f Municipal Bond Regulation
SEC Chairman Mary Schapiro may request authority to regulate municipal securities – “It is time for those who buy the municipal securities that are critical to state and local funding initiatives to have access to the same quality and quantity of information as those who buy corporate securities. I will lead the [SEC] to continue to focus efforts in this area in 2009.” (Testimony before the Senate Banking Committee, 3/26/09)
Major House Bill reportedly in the works – Reportedly the House Financial Services Committee is drafting a three-pronged bill that would allow federal guarantees for new muni general obligation debt, create a reinsurance program to bolster monoline bond insurers underwriting new business and provide a liquidity backstop for variable-rate i bl d demand d obligations. bli i (B (Bond dB Buyer, 3/13/09) – Reportedly “House Financial Services Committee chairman Barney Frank is exploring the idea of including a provision…that would require the federal regulation of financial or investment advisers in the municipal market that are not currently regulated.” (Bond Buyer, 3/18/09)
H.R. 1669 (Federal Municipal Bond Marketing Support and Securitization Act of 2009) – Requires the Secretary of the Treasury to establish a market for municipal securities, to require cooperation between the Secretary and the Chairman of the Board of Governors of the Federal Reserve System y in addressing g the municipal p securities market situation including g through g the establishment of municipal securities funding facilities and for other purposes. – Status: Referred to the House Financial Services Committee. Sponsored by Representative Gerry Connolly.
40
Other Hot Topics f Credit Rating Agencies
The SEC has pledged to reform the credit rating agencies. The SEC held a roundtable to examine the role of credit rating agencies on April 15 15, “where where much of the attention was focused on ways to minimize potential conflicts of interest…some participants suggested all firms should switch to the investor-paid model, while at least one person suggested fees be paid out of the rated bonds’ interest payments.” (Wall Street Journal, 4/16/2009)
f G-20 G 20 / IInternational t ti lC Cooperation ti
Secretary Geithner noted, the need for a more effective “globally coordinated approach to the resolution of globally active firms” is an imperative. The risk of inaction is that, as Chairman Bair recently testified, “[i]n this environment, ring-fencing—also known as every man for himself—may simply be the only rational response.”
f Capital requirements
Fed delays y implementation of new capital rules Treasury regulatory reform proposals – Treasury’s proposal calls for more “conservative” and “robust” capital requirements for systemically important firms than for other financial firms, in order “to be effective in a wider range of deeply adverse economic scenarios than is typically required required.” Treasury also suggested that the capital requirements be “less pro-cyclical” so that systemically important firms build “substantial” capital buffers during economic upturns to “avoid deleveraging in cyclical downturns.”
Dynamic provisioning debate
41
Financial Crisis Fallout: Legislative and Regulatory Action f Federal Assistance Initiatives f Current Legislative Proposals f On the Horizon: Possible Upcoming Initiatives
42
On The Horizon: Possible Upcoming Initiatives f Future Bailouts?
Further Insurance Bailout? – Insurers holding federally chartered banks or thrifts were given access to TARP the Capital Purchase Program, and the deadline to apply has passed. – No word on potential for future insurance bailout beyond those that qualified for the Capital Purchase Program.
Further auto bailout? – P Pursuant to the h A Automotive i IIndustry d Fi Financing i Program P (December (D b 2008), 2008) G Generall M Motors and d Chrysler were required to submit detailed restructuring plans to Treasury by February 17 – President Obama has created a Presidential Task Force on Autos to oversee restructuring and has announced that a government-backed government backed bankruptcy remains a viable option – The Obama administration announced an “auto suppliers bailout” on March 17, 2009 – Obama administration rejected Chrysler’s and GM’s restructuring plans on March 30, 2009. Ch l was give Chrysler i one month, th GM ttwo months, th tto restructure t t or be b forced f d into i t bankruptcy b k t – The Obama administration is considering converting GM’s loans into equity
43
On The Horizon: Possible Upcoming Initiatives f Potential Shift from State Regulation to Federal Regulation?
Treasury proposal for “eliminating gaps in regulatory structure”
Federal Insurance Regulation? – Likelihood of federal insurance regulator? Optional federal charter? • If systemic regulator, Fed does not want to be full functional insurance regulator – Federal guarantee / insolvency regime? • AIG would ld be b subject bj to 20 state solvency l regimes i – current process would ld create systemic risk • State guarantee funds: unfunded / pay-as-you-go and limited coverage – Treasury Secretary Geithner said “there is a good case for introducing an optional federal charter for insurance companies” (Testimony before the House Financial Services Committee, 3/26/09)
Federal Mortgage Regulator? – The Mortgage Bankers Association sent a letter to House and Senate Banking Committee leaders proposing the creation of a “Federal Mortgage Regulatory Agency” that “regardless of charter or license…[would] implement standards and oversee all mortgage bankers and brokers.” The p proposed p agency g y would include both state and federal regulators g on its board of directors. (National Mortgage News, 3/25/09) 44
On The Horizon: Possible Upcoming Initiatives f Corporate Governance
Proxy access: permit shareholders to nominate directors through the company's own proxy statement
Elimination of broker discretionary voting: disallow brokers from voting on election of directors without specific instructions from shareholders
Expanded disclosure of directors' directors backgrounds in a company's company s proxy statement
Advisory vote on executive compensation (say on pay): allow shareholders to vote on the disclosure of executive compensation
45
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