ACTION ON LEGISLATIONM
Bankruptcy Reform
S 220, HR 333
Bankruptcy overhaul legislation is stalled in a political dispute after clearing the House and Senate last month. Senate Republicans and Democrats cannot agree on the composition of the House-Senate conference committee that will reconcile the two versions of the bill. Some Senate supporters hope to bypass a conference by having the House take up the Senate version of the measure. House leaders are opposed to the plan.
The Senate approved the bill March 15 by a vote of 83-15. A similar bill cleared the House on March 1 by a vote of 306-108.
Among other provisions, both the House and Senate bills would establish a "means test" to determine whether people should be allowed to file for protection under Chapter 7 of the federal Bankruptcy Code, which discharges filers from credit card and other unsecured debts. It would make more debtors file under Chapter 13, which requires debtors to pay off most or all of their debts.
Among Senate-added amendments that lobbyists have deemed troublesome is one regarding Chapter 12 bankruptcies. The changes would make it easier for farmers to qualify for more lenient Chapter 12 terms by lowering the amount of a filer's income that comes from farming operations to 50%, from 80%, and by doubling the maximum debt to $3 million.
Another is one that would require debtors to pay for luxury goods worth more than $750 that they bought on a credit card within 90 days of filing for bankruptcy. The industry prefers the House version of the amendment, which would require repayment of items worth more than $250.
Estate Tax
S 275, HR 8
The House on April 4 approved a 10-year phaseout of estate taxes, the portion of President Bush's $1.62 trillion tax cut package most favored by bankers.
The $185 billion bill, which cleared the House 274-154 after its estimated cost was lowered by $7.3 billion, would reduce the top rate, of 55%, to 39% in 2010. The measure would allow the value of an estate to be "stepped up" - or taxed at the market value at the time the assets are inherited - during the phase-out decade. After that, the first $1.3 million of an estate's value would be stepped up, which in effect would exempt that portion from capital gains taxes. The legislation would allow a surviving spouse to exempt another $3 million. The remainder of the estate would be taxed based on the original cost of the assets.
Bankers say calculating the original cost would be very difficult, and in some cases impossible, because inherited assets are often purchased many decades earlier.
In the Senate, momentum is building for a proposal sponsored by Sen. Jon Kyl, R-Ariz., to defray the cost by charging capital gains taxes on the increase in value of inherited assets. The Kyl bill, however, would shield from such taxes the original cost, or "basis," of assets, and the first $2.8 million of growth.
Interest on Business Checking S 229, S 524, S 601, HR 974, HR 100
The House approved legislation by a voice-vote on April 3 that would let banks pay interest on business checking accounts as soon as 2003, temporarily expand sweep accounts, and let the Federal Reserve Board pay interest on bank reserves. The measure cleared the House Financial Services Committee March 28.
The business checking portion of the bill, sponsored by Rep. Pat Toomey, R-Pa., would repeal, in two years, a prohibition on interest-bearing commercial checking accounts. Committee Chairman Michael G. Oxley successfully offered an amendment to double the phase-in period to two years.
The interest-bearing check account bill was combined with a measure sponsored by Rep. Sue Kelly, R-N.Y., that would quadruple the number of times banks could sweep funds from non-interest-bearing commercial checking accounts into interest-bearing ones, to 24 a month. The bill also would authorize the government to pay interest on required and excess reserves that banks and thrifts deposit with the Fed, and it would let the central bank adjust the level of required reserves.
Sen. Chuck Hagel, R-Neb., introduced a similar bill on Jan. 31. Others have offered narrower bills. Sen. Richard Shelby, R-Ala., introduced a competing bill March 22 that would lift the ban on paying interest to business checking customers by Sept. 1, 2002. If the bill is enacted before then, banks could make 24 "sweeps" per month during the interim. Sen. Charles Schumer, D-NY, on March 13 introduced a narrower bill that would let banks make 24 sweeps per month and receive interest on the reserves they are required to keep at the Fed.
Senate Banking Committee Chairman Phil Gramm has said he expects the Senate to approve some form of the legislation by folding it into a larger end-of-session bill, either at the end of this year or the end of next year.
NEW LEGISLATION
Deposit Insurance
S 128, S 227, HR 746, HR 1293, HR 135
Rep. Bob Ney, R-Ohio, introduced the Deposit Insurance Stabilization Act on March 29. The bill would merge the Bank Insurance Fund and the Savings Association Insurance Fund, allow the Federal Deposit Insurance Corp. to charge a special assessment on fast-growing institutions, and provide more flexibility when the ratio of federal reserves to insured deposits falls below the statutory minimum of 1.25%. However, a companion bill has not been introduced in the Senate.
On April 3 Rep. John J. LaFalce of New York, the top Democrat on the House Financial Services Committee, introduced a narrower version of the Ney measure. The LaFalce bill would just merge the BIF and the SAIF.
Subprime Lending
HR 1051-1061
Rep. John J. LaFalce of New York, the top Democrat on the House Financial Services Committee, introduced 10 bills in March to create what he calls a "financial services consumer bill of rights."
One measure would increase the amount of information lenders must report on mortgage applications and denials. The ratio of mortgage debt to the borrower's income, as well as the ratio of the value of the real estate to the principal amount of the loan, are among the types of information consumers would have to be given.
Another would change the thresholds of the Home Ownership Equity and Protection Act, which uses rates and fees to define high-cost loans and trigger additional reporting requirements. It would raise the threshold to interest rates six percentage points higher than the one-year Treasury rate and would reduce the customer-paid points-and-fees threshold to 5%. Currently, the law defines high-cost loans as those that have an annual percentage rate 10 points higher than Treasuries with comparable maturities or customer-paid points and fees that exceed 8% of the loan amount.
A third would limit prepayment fees to 3% of the loan amount and prohibit all balloon payments on mortgages defined as high-cost under the law.
Retirement Savings
S. 742, HR 10
Senate Finance Committee Chairman Charles Grassley and Sen. Max Baucus, D-Mont., introduced legislation on April 6 to expand retirement savings options.
The bill, among other things, would gradually raise the caps on tax-deferred contributions to individual retirement accounts until reaching $5,000 a year in 2004. Similarly, maximum contributions to corporate 401(k) plans would gradually be raised to $15,000, from $10,500.
In the House, Rob Portman, R-Ohio, and Ben Cardin, D-Md., introduced a similar measure March 14. It would raise the cap on Individual Retirement Account contributions to $5,000 a year, from $2,000, and the contribution limit on 401(k) plans to $15,000, from $10,500. It would index the maximum contribution annually in $500 increments, starting in 2004 for IRAs and in 2005 for 401(k) plans.
Though they are the industry's top tax priority, retirement savings tax incentives are not part of the Bush tax-cut plan. The bill is expected to pass the House, but not the Senate. House Ways and Means Committee Chairman William Thomas has said that he may push for tax relief beyond the President's plan. However, Senate Majority Leader Trent Lott and Senate Banking Committee Chairman Phil Gramm have both said the Senate should focus on passing the Bush tax-cut package before taking up IRA and 401(k) issues.
S Corporations
HR 1263
Rep. Scott McInnis, R-Colo., introduced legislation March 28 to allow more small banks to become S corporations, which do not have to pay taxes on earnings before distributing them to shareholders, whose dividends are taxed individually. The bill would double to 150 the number of eligible shareholders an S corporation could have, allow shares of those companies to be held in individual retirement accounts, and clarify that bank investments held for liquidity and safety-and-soundness purposes would not count against limits on passive income.
Individual Development Accounts
S 592, HR 7
Rep. J.C. Watts Jr., R-Okla., on March 29 introduced the Community Solutions Act, which includes a provision to let people making $20,000 or less annually to open low-cost Individual Development Accounts. Sen. Rick Santorum, R-Pa., introduced almost identical legislation in the Senate on March 21.
Under the measures, participating banks must agree to match every dollar deposited, up to $500 a year, in exchange for a tax break. Financial institutions would be reimbursed for all matching funds provided, plus a limited amount of administrative costs incurred. Banks, nonprofit organizations, credit unions, and American Indian tribes would be eligible to participate in the program and get full reimbursement as well as Community Reinvestment Act credits.
The savings could be used for only three purposes: first-time home buying, higher education or job training, or starting or expanding a small business.
A similar provision was included in last year's Community Renewal and New Markets Empowerment Package but was dropped from the final deal.
Community Reinvestment
HR 865
Reps. Thomas M. Barrett, D-Wis., and Luis V. Gutierrez, D-Ill., on March 26 introduced legislation that would repeal many changes to the Community Reinvestment Act made by the Gramm-Leach-Bliley Act of 1999, and would extend CRA requirements to other financial service providers, such as securities firms and insurance companies.
The bill would eliminate Gramm-Leach-Bliley's CRA "sunshine" provision, which requires banks and community groups to report details of CRA-related deals. It would undo some of the law's regulatory relief for small banks, requiring CRA exams to be conducted every two to three years.
The legislation would require banks to report more detailed demographic and geographic data under the Home Mortgage Disclosure Act, and would apply similar reporting requirements to insurance companies and small business and farm lenders.
It would also combat predatory lending by reducing the CRA ratings of financial institutions and their affiliates found to be engaging in the practice.
