The $1.73 trillion budget that President Clinton unveiled Monday would boost government-guaranteed lending but kill several tax provisions favorable to banks.
Under the proposal, the loans that the Small Business Administration could support would increase nearly 20%, and the Federal Housing Administration's loan limit would rise to parity with that in the Fannie Mae and Freddie Mac programs.
But the budget would clamp down on real estate investment trusts, impose examination fees on state-chartered banks, restrict corporate-owned life insurance, and make it more expensive to follow in the footsteps of the many community banks that are on the tax rolls as subchapter S corporations.
"Financial services providers are being unfairly singled out to pay for government programs in the budget," complained James E. O'Connor, tax counsel for America's Community Bankers.
The Small Business Administration would be a big winner. After nearly shutting down its guarantee program for general business loans last year, the SBA would boost its guarantees to a record $11 billion in fiscal 1999.
Anthony J. Feraro, senior vice president of the small-business finance division of Zions First National Bank, called the proposed increase "exciting."
"In the current budget environment, anyone who was expecting any more than that was kidding themselves," he said.
More controversial will be the plan to raise the ceiling on home mortgages that qualify for FHA insurance.
FHA limits range from $86,317 to $170,362, depending on the borrower's location. Raising the ceiling to $227,150 nationwide would put FHA on par with Fannie Mae and Freddie Mac, broadening the program to serve more middle-class families, said a spokesman for the Department of Housing and Urban Development, which oversees FHA.
The agency asserted that FHA's share of the mortgage market has plummeted because its maximums have not kept up with rising home values. The expansion will be funded with premiums paid by borrowers.
Marc C. Smith, president of the Mortgage Bankers Association, said the budget proposal would let more than three million additional families over five years get FHA-backed loans.
Objections are expected from bankers, Fannie Mae, and Freddie Mac, which argue that they already serve the market targeted by FHA.
"They are going to take away business from financial institutions that are providing services to higher-income Americans," said Robert R. Davis, ACB's government relations director.
"We have some serious concerns about it," Fannie Mae spokesman David Jeffers said. "We expect that the proposal will have some severe challenges."
Under the REIT proposal, banks would no longer be allowed to own up to 99% of the stock in a trust. The budget proposes limiting investments to 50% of outstanding voting shares for new REITs. Legal experts said they would not expect many banks to create new REITs because they would no longer be assured of controlling the trusts. Banks use REITs to reduce their state tax obligations on mortgage-backed securities.
President Clinton renewed for the fifth year his call to require the Federal Reserve Board and Federal Deposit Insurance Corp. to impose examination fees on holding companies and state-chartered banks. This would exempt state banks with less than $100 million of assets and raise more than $150 million a year.
"There is no public policy justification for this proposal," said Lisa McGreevy, senior vice president at the Conference of State Bank Supervisors. "We are surprised that the administration continues to propose this."
Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America, said the proposal would set a bad precedent and is not needed because the government is forecasting a budget surplus.
The budget also would impose new taxes on corporations with more than $5 million of assets that convert to S corporations. Investors must liquidate the corporation, pay capital gains, and then re-form as an S corporation. Currently they may convert without paying the capital gains tax. More than 560 banks converted to S corporations in 1997 so they could pass income tax-free to investors.
"If you are going to convert, you should do it this year," said John R. Ziegelbauer, senior manager at Grant Thornton. "There will be a very heavy tax burden if it is enacted."
The proposal also would eliminate a favorable tax treatment for banks that buy life insurance policies on their senior executives. Banks, like other corporations, would be required to pay some tax when they borrow against these policies.
Other provisions would:
Tax policy holders whenever they change the makeup of securities in their variable annuities.
Impose restrictions on student lending, reducing their profitability.
Expand the low-income housing tax credit.
Offer tax deductions to small businesses that start 401(k) plans.
Increase funding by 56%, to $125 million, for the Community Development Financial Institutions Fund.
Boost funding to enforce fair-lending laws.
Provide $18 billion for the International Monetary Fund's Asia rescue.
