The Year Ahead
By David Floreen
Many legislative bodies, including the Massachusetts Legislature and the U. S. Congress, now run on a two-year cycle. The first year is primarily devoted to conducting hearings on the thousands of bills filed, passing a budget and addressing any super-critical issues that command immediate attention. During the second year, legislative committees complete their review processes and determine which bills deserve action on the House or Senate floors.
Beacon Hill Report
When formal sessions on Beacon Hill for 2005 ended in mid-November, several high-priority matters were sent to conference committees for resolution: a major expansion of health care coverage and financing reform, an economic development package, welfare reform and a major supplemental budget.
As of this writing, none of these matters had been settled, but are expected to be resolved by early 2006. The health care package clearly remains the most contentious as the House and Senate plans differ significantly over how to fund expanded health coverage and control health care costs. The House plan requires many employers that do not offer health insurance coverage to pay a payroll tax of 5 percent to 7 percent while the Senate proposal contains a more modest expansion of benefits and no payroll tax. With a deadline looming to produce a health care package, and the potential for a bruising universal health care ballot initiative next November, the stakes remain very high. The economic development package will include at least $30 million more funding for brownfields redevelopment and other environmental improvements – a key banking priority.
We are extremely pleased that the Legislature enacted and Gov. Romney signed into law the Massachusetts Principal and Income Act, as Chapter 129 of the Acts of 2005. Sponsored by the association and the Boston Bar Association, Chapter 129 provides extensive guidance to trustees on how to manage and distribute income and principal to beneficiaries of trusts. The top priority of bank trust departments, the Principal and Income Act provides long-overdue reform of trust investment procedures and expands investment options for many beneficiaries. It took effect Jan. 1.
In early December, the Legislature enacted corporate tax legislation that was based on a bill introduced by Gov. Romney last January. Thanks to extensive lobbying by the association and many other business groups, the new law, Chapter 163 of the Acts of 2005, did not include any changes to the bank match program, authorization for the Department of Revenue to require businesses to restructure their tax filings or any mandates for banks and businesses to file a unitary tax return.
After much public outcry, the final tax package did rectify the effective date of changes in the capital gains tax rate from Jan. 1, 2002 to Jan. 1, 2003, thus negating a retroactive tax bite exceeding $250 million on nearly 50,000 individual taxpayers. Chapter 163 also changes the reference to the IRS Code for Massachusetts purposes to the Jan. 1, 2005 Code, thus, among many other changes, permitting Massachusetts residents to deduct contributions to health savings accounts on their Massachusetts personal income taxes as well as their federal tax returns.
As we begin 2006, most legislative committees will be very busy gearing up for March 15. Under legislative rules, all standing committees must report out all bills referred to them by the third Wednesday in March, which this year is the Ides of March. Many committees, including the Committee on Financial Services, still have to conduct hearings on dozens of matters such as MBA’s bills on restricting the improper use of a bank’s name, updating state EFT and check return laws, corporate governance simplification, several regulatory reporting procedures as well as bills filed by others to revise the bank merger and acquisition processes. We anticipate that these bills will be heard sometime in late January or February. The committee is still wrestling over whether or how to reform the state’s auto insurance laws and address ongoing concerns regarding the price and availability of homeowners insurance in exposed flood plain areas, especially Cape Cod and the Islands.
Within weeks, we anticipate that the House will approve and Gov. Romney will act on a bill, S. 2278, already endorsed by the Senate that will substantially reform the state’s mortgage recording and discharge laws. The result of extensive negotiations during much of 2005, this legislation will clarify many features of the discharge process and impose a fine of $2,500 on any person who fails to properly cause to be recorded a mortgage discharge within 45 days.
The Committee on Consumer Protection continues to review a number of bills dealing with identity theft, data breaches and allowing consumers to place a freeze on access to their credit reporting files. Other proposals pending action include severe restrictions on fees that may be charged on overdrafts, a car buyer’s bill of rights, changes to the gift-card laws and restricting the promotion of credit cards on college campuses.
The Washington Scene It’s been many years since we’ve seen such strident partisan activity in the nation’s capitol. The divide over Iraq, intense controversies over re-authorization of the USA Patriot Act, fallout over the government’s handling of Katrina and Rita relief, the future of the Supreme Court, tax and spending cuts and the looming mid-term elections are just a few of the issues that are fueling the political juices on Capitol Hill. Adding in the turmoil in the Republican leadership, and rank-and-file members’ concerns over this November’s elections make predicting what the agenda will be, and its outcome, risky at best.
Even major financial services issues are deeply intertwined in these events. Just prior to Christmas, both the House and Senate approved a deposit insurance reform package supported by the banking industry after a six-year effort. That’s the good news. However, since it was included in a budget reconciliation package that failed to clear both branches at the close of 2005, it must wait for Congress to resume business in late January. A comprehensive summary of the deposit insurance reform package can be found at www.massbankers.org
Credit unions are now getting on Congress’ radar screen. Last November, the House Committee on Ways and Means held an all-day hearing to gather information on the impact of tax exemption for larger community credit unions and the lack of transparency due to the absence of filing IRS Form 990. Several committee members strongly chastised credit union officials for their lack of openness and implied that if greater transparency was not forthcoming, perhaps it is time to re-examine the role, scrutiny and taxation of larger community credit unions in the near future. While major changes are not imminent, the drumbeat of publicity, such as the DCU naming rights of the Worcester Centrum and aggressive “if you have a pulse” advertisements, is gaining traction among members of Congress and state legislators.
When Congress returns in late January, several committees are expected to begin serious deliberations over data-breach, file-freeze and identity-theft legislation, with the House Financial Services Committee expected to take the lead with H.R. 3997 as the basis for discussion. While there is widespread concern over the need to require banks, retailers, data processors and others to tighten security of data files and report breaches to consumers, there is no real consensus on how far any state pre-emption language should go and whether any bill should permit consumers to impose a file freeze on their consumer reports. Similar bills are pending in Massachusetts and have already become law in 21 states.
Three months ago it appeared that Congress was poised to advance major reform of the government-sponsored enterprises (GSEs). Although in late October the House approved creation of a new regulator for GSEs by a vote of 331 to 90, it now appears that projection of swift action may be exaggerated as GSE reform is bogged down in political squabbles between the White House, the agencies and Congress. A similar prognosis is appropriate for interest on business checking accounts – don’t bet your next mortgage payment on this happening in 2006!
So what will happen of interest to banking in 2006? Regulatory burden relief? A 50-50 chance. Pension reform? Maybe. A comprehensive hurricane relief package that addresses flood insurance coverage? Probably, given the mounting pressure from constituents to get answers on what and where and with what resources they can begin to rebuild. Consumer bills? Other than data security and file freezes, probably not.
Then there are the regulatory agencies. The FDIC is considering a controversial proposal that would pre-empt host state laws for state-chartered banks’ out-of-state branches where a federal court or the OCC has determined that the law is pre-empted for national banks. The FDIC is also awaiting the appointment of a new chairman to replace Donald Powell, who was nominated to manage the federal government’s rebuilding of the Gulf Coast. All eyes will be on the FDIC as well, as it is expected to announce its decision, perhaps by February, on the application by Wal-Mart to charter an industrial loan company (ILC) in Utah. This bears close watching, since despite Wal-Mart’s vociferous denials, many observers speculate that Wal-Mart really wants to establish a nationwide branching network. Notably, in Massachusetts Wal-Mart has applied to the Division of Banks to open 44 check-cashing operations in its stores across the commonwealth. Combined with the FDIC’s state pre-emption powers rule, this could pave the way for significant inroads by Wal-Mart into basic community banking. Your MBA has already begun its opposition.
The bank regulatory agencies also have issued final rules mandating two-factor authentication for online banking programs and issued proposed guidance on alternative, higher-risk mortgage programs – a real concern for some. In addition to regulatory reform, a request for comments on recently proposed Basel IA risk-based capital rules has just ended.(See cover story.)
There is no question that 2006 will generate a lot of heat. But much like spinning tires on snow and ice, there is real doubt as to the amount of forward progress that will be made come spring and summer. Happy New Year!
David Floreen is senior vice president at the MBA. He can be reached at email@example.com