The Heat Is On
By David Floreen
It’s summertime, and the living is easy, or so goes the old song. It may be summer, but from a legislative standpoint the living is not so easy. Since our last overview in mid-spring, the Massachusetts Legislature has been very busy and Congress has been very active working on a number of key concerns to the banking community.
Although the state Legislature got off to a very slow start due to a major overhaul in its committee structure and the resulting delay in assigning bills, the standing committees have been conducting public hearings on bills at a rate of 300-400 per week, to the point where now close to two-thirds of all 6,000 bills filed this session have had a public hearing. Some committees have nearly finished their schedule of public hearings, while others are just beginning.
The Committee on Financial Services has held five hearings thus far, covering about 30 percent of the 350 bills pending before it. With a vastly expanded agenda, including most banking-related matters, along with all insurance bills including health, auto and property, plus a number of securities-related matters, the Financial Services Committee has set tentative hearing dates into November.
Two of the five hearings focused on banking issues dealing with mortgages, credit unions and bank fees.
The first committee hearing considered a number of mortgage-related bills including S. 624, reforming the mortgage discharge process; S. 588 requiring mortgage originators to obtain a license and S. 562 extending the state Community Reinvestment Act law to mortgage companies and brokers. The Senate Chair of the Financial Services Committee, Sen. Andrea Nuciforo, D-Pittsfield, has indicated that reform of the mortgage discharge process is long overdue and that he anticipates action on S. 624 this year. Extending CRA to mortgage companies is a bit more problematical given the strong opposition voiced by mortgage companies and brokers.
It is far too early to speculate about the fate of the credit union and bank fee bills, as they were just heard in late June and the committee does not plan to hold an executive session on any of these matters until early fall. It has been gratifying to see so many committee members attend hearings and ask good questions of witnesses.
A second major series of issues heard this spring focused on identity theft, security breaches, credit file freezes and related matters. The deluge of negative press over security breaches across the nation has generated considerable legislative action in many other states, with at least a dozen enacting some form of legislation in the first six months of 2005. In late June, the new Committee on Consumer Protection and Professional Licensure held a public hearing packed with legislators, advocates, identity theft victims, businesses, bankers and the media, all of whom had an opinion on how to combat the assaults on individual financial privacy and personal identification.
There is considerable sentiment to enact new state laws to stiffen fines and penalties for those convicted of committing identity theft, and impose new notification requirements on any entity (banks, governments, universities, retailers, third-party vendors, etc.) that determine that a breach of a customer’s personal information has occurred. The debate surrounds what defines a breach, when a notice must be delivered and in what form. There is no consensus at this point on what to do about consumer-initiated file freezes at credit reporting agencies. Congress may actually help resolve this issue.
The third notable issue facing banks this spring was the effort by Gov. Mitt Romney and the Department of Revenue to convince the Legislature to enact another major corporate tax loophole-closing bill. Included in the initial bill were a number of provisions that would have been very harmful to banks and the business community, especially new provisions granting the commissioner of revenue broad discretionary authority to reallocate income from subsidiary companies.
The governor’s legislation also included significant changes to the bank match program that would have forced all financial institutions in Massachusetts (banks, credit unions, mutual funds, brokers, etc.) to turn over to the DOR the names, addresses and social security numbers of all their customers.
Currently, financial institutions have the option of receiving a tape from the DOR of just those names and entities that are delinquent in state tax or child support payments and running that list against the bank’s customer file. Fortunately, the Association was successful in convincing key legislators that for privacy and data security reasons, sending millions of names to the DOR was not a good idea, and they agreed.
The Legislature also developed and sent to Gov. Romney, on time, a state budget for FY 2006, which began July 1. Although state tax revenues continue to pour in more than 7 percent above last year, the FY ’06 budget is still balanced by the use of close to $600 million in one-time revenues, most of which will be replenished by the surplus from FY ’05. Nevertheless, the commonwealth is still impacted by higher housing costs and job growth numbers that are below the national averages.
What’s ahead? Over the summer, legislative committees will be busy reviewing the testimony presented on bills heard this spring and will prepare background information on bills scheduled for the fall. The House leadership in particular is absolutely committed to reviving the committee process of hearing and fully vetting ideas at the committee level – a bottom-up rather than a top-down model that had been prevalent under former Speaker Thomas Finneran. From a banking perspective, the key issues for the fall, in addition to the items highlighted above, likely will include MBA’s corporate governance reforms, efforts to change the conversion process for mutual institutions, automobile and homeowners insurance reforms and efforts to stimulate the Massachusetts economy through streamlined permitting, recapitalizing brownfields funds and other initiatives.
Washington, D.C., is one of the hottest places in the nation during the summer and the political heat often exceeds the thermal heat index. As previously reported, the Republican-dominated Congress got off to a much faster start this year, particularly with respect to banking issues. Two major priorities for banking became law early in 2005: bankruptcy reform and class action reform. The major issues now generating the most attention are reform of the government-sponsored enterprises (GSEs), the epidemic of reports on security breaches, the potential for a review of expanding CRA to credit unions and an examination of the competition in the realty business.
While the power struggles between the Democrats, Republicans and the White House persist over cabinet and judicial appointments, members of Congress are working diligently on a number of issues. The full House is expected to pass a GSE bill before the summer recess. The administration continues to advocate for strict lending limits.
As mentioned earlier, security breaches have stimulated considerable activity and at least four Congressional committees are working on comprehensive bills. This is a non-partisan issue, one that does not cost the government much money to address, at least not on the surface, and demonstrates a prompt and substantive response to a definable problem that is well-covered by the media – surely a politician’s delight! It’s not inconceivable that a bill could emerge and pass before August, but the fall is more realistic.
Office of the Comptroller of the Currency preemption, real estate brokerage, deposit insurance reform, interest on business checking, regulatory burden reform and credit union fairness have a reasonable chance of moving forward later in 2005.
Finally, the regulatory agencies continue to move ahead with a number of initiatives. The release of new Home Mortgage Disclosure Act data will generate further scrutiny of bank lending practices. The Federal Trade Commission and federal banking agencies still must finalize language on a few remaining portions of the FACT Act. The Securities and Exchange Commission (SEC) is scheduled to release in September final regulations to implement the bank broker-dealer provisions that will impact bank trust departments and those banks with third-party relationships that assist in the sale of securities and mutual funds. It’s unclear how the resignation of former chair William Donaldson and the nomination by President Bush of his successor, Congressman Christopher Cox of California, may impact this and other SEC decisions. Banking regulatory agencies are not expected to advance revisions to the Real Estate Settlement Procedures Act requirements or address regulatory burden relief in the immediate future. Other potential regulatory issues include: expanding the small bank CRA test and expanded use of the FTC Unfair and Deceptive Acts and Practices Rule and Financial Accounting Standards Board’s proposed capital treatment for mutual mergers.
2005 is turning out to be a very busy year for the banking community in both Boston and Washington. Banking involvement in the political process remains essential.
David Floreen is senior vice president at the MBA. He can be reached at firstname.lastname@example.org