NCRC Analysis: The Emergency Economic Stabilization Act of 2008 and the Taxpayer
The United States House of Representatives voted on the Emergency Economic Stabilization Act of 2008 (H.R. 3997) and it failed to pass, with a vote of 228 opposed and 205 in favor. The United States Senate is expected to vote on concurring legislation as soon as Wednesday, October 1, 2008. H.R. 3997 provides up to $700 billion to the Secretary of the United States Department of Treasury (“Secretary”) to purchase mortgages and other assets (“troubled assets”) from any financial institution under the establishment of the Troubled Asset Relief Program (“TARP”). If, after five years, the program results in a net loss to the government, the President of the United States must submit legislation to recoup the loss from the financial industry.
The legislation states that its purpose is to provide the Secretary with the authority to restore liquidity and stability to the United States financial system and to ensure the economic well-being of Americans. However, H.R. 3997 only immediately addresses financial liquidity and fails to adequately address the core problem underlying the financial crisis: home foreclosures. The provisions in the legislation that were inserted to “ensure the economic well-being of Americans” are an ineffective use of taxpayer money, and lack substantial and specific language to prevent foreclosure and provide strong regulatory oversight.
Specific Provisions of the Emergency Economic Stabilization Act of 2008:
The Purchase of Troubled Assets
The Secretary is authorized to establish a TARP to purchase troubled assets from any financial institution on terms and conditions as determined by the Secretary. In doing so, Treasury must first utilize “market mechanisms” such as auction and reverse auctions. If the Secretary determines that market mechanisms are not feasible or appropriate, the Treasury may engage in direct purchase of troubled assets.
The legislation requires the publication of TARP guidelines that must include (1) mechanisms for purchasing troubled assets; (2) methods for pricing and valuing troubled assets; (3) procedures for selecting asset managers; and (4) criteria for identifying troubled assets for purchase.
NCRC Analysis:
These provisions are troubling. Currently, Treasury is given the latitude to determine the final purchase price of the assets and no Congressional oversight is required to modify Treasury’s approach to purchase failed assets. Moreover, there are no defined and tested mechanisms in place for purchasing the assets, and more importantly, there are no methods for pricing or valuing the troubled assets.
Insurance of Troubled Assets
If the Secretary establishes the TARP, the Secretary must establish an insurance program or a program to guarantee troubled assets of financial institutions. Moreover, the Secretary is required to establish risk-based premiums for such guarantees sufficient to cover anticipated claims. This insurance program will be subject to some of the same basic requirements and guidelines as the TARP and details, such as premium amounts, are delegated to the Secretary.
NCRC Analysis:
The insurance provisions will evolve in the coming weeks or months. Its impact on the legislation is unclear at this point. We will revisit the insurance program if it is a part of the legislation that will be reviewed by the Senate.
Foreclosure Mitigation Efforts and Assistance to Homeowners
With respect to assets acquired through the TARP, the Secretary is required to implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. The legislation requires federal entities that hold mortgages and mortgage-backed securities to develop plans to minimize foreclosures and it requires them to work with servicers to encourage loan modifications.
NCRC Analysis:
This language is vague and unclear. There is currently no plan to mitigate foreclosures in this legislation and the Secretary and federal entities are only mandated to encourage servicers to modify loans. Furthermore, although the legislation gives the Treasury the authority to modify at least some home loans acquired by the government, it does not guarantee meaningful loan modifications of the scope necessary. And finally, there is no extension of the tax break to home equity loans. Therefore, taxpayers are expected to provide $700 billion to help the financial markets stabilize, but there is nothing in the legislation to guarantee immediate help to homeowners who face foreclosure.
Oversight
The measure establishes an oversight board, the Financial Stability Oversight Board, to review and make recommendations regarding the Treasury’s use of authority granted under the bill. In addition, the Board must ensure that the policies implemented by the Secretary protect taxpayers, are in the economic interests of the United States, and are in accordance with the bill.
Moreover, the legislation establishes the Office of the Inspector General for the TARP. The office is charged with the responsibility of conducting, supervising, and coordinating audits and investigations of actions undertaken by the Secretary.
The legislation also requires the Comptroller General of the United States to conduct ongoing oversight of the activities and performance of TARP and to report to Congress every 60 days. The subject of such oversight includes performance particularly involving (1) foreclosure mitigation; (2) cost reduction; (3) whether the program has provided stability and prevented disruption to the financial markets; and (4) whether taxpayers have been protected.
And finally, the legislation provides for a Congressional Oversight Panel to review the current state of the financial markets and to report on a number of issues, including the effectiveness of foreclosure mitigation efforts and the program from the standpoint of minimizing long-term costs to the taxpayer and maximizing the benefits for taxpayers.
NCRC Analysis:
The oversight language in this legislation is necessary but not sufficient. The bill lacks significant judicial review and it is unclear whether or not the oversight entities will have the authority to mandate changes.
Executive Compensation
The legislation provides that Treasury will promulgate executive compensation rules governing financial institutions that sell it troubled assets. Specifically, where the Treasury buys assets directly, the seller must observe standards limiting incentives, allowing clawback and prohibiting golden parachutes. When the Treasury buys assets at auction, an institution that has sold more than $300 million in assets is subject to additional taxes, including a 20% excise tax on golden parachute payments triggered by events other than retirement, and tax deduction limits for compensation limits above $500,000.
NCRC Analysis:
The bill only addresses incentives for executives. There is no language that explicitly limits executive compensation. For example, while an institution that sells more than $300 million in assets would be subject to additional taxes, an executive from this institution who receives a $25 million golden parachute with a 20% excise tax would walk away with a $20 million bonus in the form of additional compensation - paid for by the American taxpayer.
Reports
Monthly Reports: Within 60 days of the first exercise of authority under this Act and every month thereafter, the Secretary is required to report to Congress its activities under TARP, including detailed financial statements.
Tranche Reports: For every $50 billion in assets purchased, the Secretary is required to report to Congress a detailed description of all transactions, a description of the pricing mechanisms used, and justifications for the financial terms of such transactions.
Regulatory Modernization Report: Prior to April 30, 2009, the Secretary is required to submit a report to Congress on the current state of the financial markets, the effectiveness of the financial regulatory system, and to provide any recommendations.
Market Transparency: The Secretary is required, within 2 business days of exercising authority under the bill, to publicly disclose the details of any transaction. This transparency is necessary and an important part of this legislation.
NCRC Analysis:
As currently drafted, the reporting requirements are sufficient. However, the bill needs more oversight requiring Treasury to act on significant deficiencies identified in the reports.
NCRC Recommendations:
Additions and Amendments to the Emergency Economic Stabilization Act of 2008
While the Emergency Economic Recovery Act of 2008 directly addresses financial liquidity, the legislation fails to seriously address the core problem underlying the financial crisis: home foreclosures. NCRC recommends the following additions and amendments to this legislation or any legislation drafted to address the current financial crisis:
Stronger Loan Modification Language
The legislation only requires that loan modifications of loans purchased by the federal government be encouraged and not mandated.
NCRC Recommendation:
The legislation needs to clearly provide a mechanism to systematically modify loans held in securitized pools and it needs to provide guidance as to what loan modifications may be reasonable and desirable. In addition, the legislation needs to address accounting rules or the tax implications that might accompany loan modifications and challenges presented with second mortgages.
Anti-Predatory Lending Provisions
The bill does not contain any provisions that purge unfair and deceptive lending practices from the mortgage market.
NCRC Recommendation:
Provisions must be added to ensure that unfair and deceptive lending practices do not again lead to a future foreclosure crisis.
Bankruptcy Protection Provisions
Current bankruptcy law prevents homeowners in financial trouble from pursuing loan modifications and resuming loan payments as part of bank restructuring. In contrast, wealthy consumers can seek modifications of loans for their second homes, investment properties, family yachts and other non-essential items.
NCRC Recommendation:
The legislation needs to amend bankruptcy law to allow judges to modify the terms of primary mortgages, as is currently allowed for investment properties.
Stronger Protections for Consumers
The legislation does not explicitly provide preservation of claims, defenses, and rights for consumers with respect to consumer funds. It is possible that consumer debts, including credit card debt, student loan debt, and mortgage debt, will be purchased by the government as troubled assets. Language to protect consumer funds is necessary to prevent the government from using such funds to repay the national debt incurred by the purchase of troubled assets.
NCRC Recommendation:
NCRC recommends that language be added to provide consumer preservation of claims, defenses, and rights to protect consumer funds, such as social security and tax rebates.
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The National Community Reinvestment Coalition (NCRC) is an association of more than 600 community-based organizations that promote access to basic banking services, including credit and savings, to create and sustain affordable housing, job development and vibrant communities for America's working families. www.ncrc.org
