By David Floreen
There’s a rhythm for every season: In springtime the snow and cold are gone, leaves are sprouting, golf courses are open and the Legislature begins hearing thousands of bills filed in the depths of winter. In Washington, led by the Democratic takeover of the House and Senate, Congress has taken on many more issues early in the session than in several years, while the pace on Beacon Hill has been a bit more reserved.
An unexpected development, at least with respect to its timing, was the resignation last month by Robert Travaglini as Senate president and the ascension of Therese Murray, D-Plymouth, as the new Senate president. President Murray most recently served as the chair of the Senate Committee on Ways and Means, the key fiscal and budget committee through which all major issues must flow in the Senate.
Deval Patrick swept into the governor’s office with a groundswell of goodwill and enthusiasm not seen in years. Yet after two months in office, the governor has had to modify his approach and be more sensitive to the realities of “governing.” Compounding his challenge is the reality of quickly developing and selling a new state budget within several weeks in the face of a $1.2 billion gap – a difficult task anytime, but especially troublesome when you campaigned on a platform of doing more for those who have less.
To help close the budget gap, Patrick proposed legislation closing a series of “corporate tax loopholes” that collectively were projected to generate $300 million to $500 million in new revenue. Much of the business community strongly objected to this tax change, especially since most of the plan was nearly identical to one submitted, then withdrawn, by former Gov. Mitt Romney in 2005.
Late last month, Speaker of the House Salvatore DiMasi, D-Boston, and Murray both publicly raised doubts on how the tax changes would negatively impact the Massachusetts business climate and affirmed their intent to put aside inclusion of any tax changes in the development of the fiscal year 2008 state budget, which will be debated in the House the last week of April.
In Washington, Democrats have used their new majority status to generate considerable visibility on high-profile issues, such as the Iraq war, forced resignations of U.S. attorneys and increasing the minimum wage. Rapidly emerging as the two top attention-getters in both Washington and the State House are the widespread fallout from the subprime and exotic mortgage scandal and the escalating developments resulting from the TJX data breach (see cover story page 20). Both of these issues will consume much of the Massachusetts Bankers Association’s energy and will remain high-profile issues for several months.
Not to be outdone by the early shifts on Beacon Hill, in a move that did not surprise many Congressional observers, Congressman Marty Meehan, D-Lowell, quietly indicated that he would be interested in returning to Lowell as the chancellor of the University of Massachusetts at Lowell campus, should the search committee be interested. It was, and last month he was selected as the new chancellor, effective about July 1. Once he officially submits his resignation, a special election must be held within 160 days (sometime this fall). Already, a number of local political officials and others have announced they’re running or expressed interest in doing so.
Beacon Hill Report
Although the state constitution established three co-equal branches of government – executive, legislative and judicial – in many respects, the three legs of the policy-making stool are the Senate, House and the corner office (governor). When Deval Patrick was elected as the first Democratic governor in 16 years, many observers suggested that the balance of power would shift to the corner office and there would be great synergy among the Senate, House and governor now that the Democrats controlled everything by wide margins.
Forgotten in those analyses was (and is) the inherent struggle for pre-eminence that exists between the House and Senate and a desire for power and control over the purse strings. After all, it really is all about money! Witness the reaction from legislators and dozens of interest groups over the several recommendations by Patrick in his budget to consolidate numerous line items in the budget into a single broad appropriation authorizing the executive branch to allocate resources as it sees fit. This concept is totally counter to long-standing legislative practice of earmarking specific appropriations to projects, programs or services that are easily identifiable to constituents or interest groups for whom the legislators are responding. Many of these interest groups are the same groups that strongly supported Patrick in his election campaign.
Coupled with the challenge of eliminating a $1.2 billion budget gap, expanding aid to cities and towns, coping with continuing double digit percentage increases in health care costs and doing it without any new revenues from so-called corporate tax loophole-closing measures, the dialogue on Beacon Hill will rise faster than the spring temperatures.
Implementation of the sweeping health care reform package signed by Romney one year ago remains a dominant concern as employers, uninsured individuals and health care organizations gear up for the implementation of new affordable health insurance products and mechanisms to market and administer the individual insurance mandate that takes effect July 1. To allow individuals, businesses and others to prepare for the implementation, late last month the Health Care Connector Authority (the agency responsible for implementing the health care reform law) voted to postpone the implementation of some of the features until Jan. 1, 2009.
Political outsiders always seek out new ideas, new personnel and new approaches to governing. Gov. Patrick has sought to utilize that approach more than anyone in recent history with the use of blogs, the Internet, a series of recent town meetings across the state and encouraging others to become engaged in the political process. Several of the governor’s braintrust continue to urge him to build on this political base through greater use of grassroots contacts with local legislators to generate support for the governor’s priorities. How successful this initiative becomes and how the legislative leadership responds to such “direct to the people” campaigns remains unclear.
The Senate president and Speaker of the House will need to adjust to working with a governor from the same party who may not share their views on how government should operate. And senators, let alone the House speaker and the governor, must adjust to the new Senate president – the first woman leader of either part of the legislative branch and the first senator from outside Boston since 1978.
There are new faces on several legislative committees, although far fewer than in 2005, when the entire committee structure was realigned for the first time in 35 years. Sen. Stephen Buoniconti, D-West Springfield, is the new Senate chair of the Committee on Financial Services, succeeding former Sen. Andrea Nuciforo of Pittsfield who did not run for re-election and is now the register of deeds for Central Berkshire. Rep. Ronald Mariano, D-Quincy, returns as the House chair and key leader of the committee. Other new members of the financial services committee include: Sens. Benjamin Downing, D-Pittsfield; Michael Knapik, R-Westfield; Reps. Robert Nyman, D-Hanover; Thomas Stanley, D-Waltham; Sarah Peake, D-Provincetown; Stephen Smith, D-Everett; and Lewis Evangelidis, R-Holden.
Not all change is confined to the Legislature. Patrick has realigned his cabinet, shifted the responsibilities of some agencies and appointed a number of new officials. While no official confirmation has been made, it appears that Commissioner of Banks Steven Antonakes will continue in his post. However, the governor did appoint a former judge, Nonnie Burnes, as the new commissioner of insurance.
So how do all these developments impact banking and its agenda for 2007? The Legislature’s standing committees received all the bills assigned to their jurisdiction in mid-March and are now analyzing all the bills and finalizing public hearing schedules. Hearings should begin in earnest in early May, after the House completes its debate on the budget, and will continue into the fall.
For 2007, the Massachusetts Bankers Association leadership has refocused its agenda on fewer matters and, as anticipated, will devote considerable resources to two major issues mentioned earlier: the fallout from the subprime mortgage lending foreclosure issue and the data breach/identity theft concerns crystallized by the TJX data breach which continues to evolve almost each week. The association has introduced three new proposals designed to counteract various intrusions on banks and/or their customers which are often perceived as invasions of a customer’s privacy. They include:
H. 3925: Restrict the use of so- called credit triggers by consumer reporting agencies;
H. 213: Impose financial responsibility on third parties that cause data breaches to assume part of the costs of reissuing debit cards and fraud losses that result from a breach; and
H. 962: Establish standards for industrial loan companies to operate a branch bank in Massachusetts. (Modeled after similar laws enacted in Maryland and four other states, this bill would prohibit any corporation from establishing a branch on the same premise as its affiliates, if the affiliate engages in commercial activities. Similar bills are advancing in several other states this year.)
Notably, H. 213, filed by Rep. Michael Costello, D-Newburyport, was submitted a week before the TJX breach was reported, and has generated national and international attention as one credible response to stimulate enhanced merchant compliance with data protection standards.
Another top association priority is legislation to expand the definition of armed bank robbery. The legislation would also make the use of ATM skimmers a felony, and strengthen the penalties for committing, or attempting to commit, bank robbery and passing bad checks. Given the recent situation with skimmers at several Stop & Shop stores, the new anti-skimmer language is quite timely. Bank fraud is on the rise and this proposal is aimed at curbing some of the problems. The MBA has also filed bills to refine the 18/65 bank fee statute; to update mutual bank holding company laws to facilitate merger transactions; and to update trust investment management and trust tax laws to facilitate client retention and attract new clients.
What other issues are lurking on the legislative horizon affecting banks? While we will have a much clearer sense in late spring, in addition to mortgage foreclosure and data breaches, here are just a few that will be on our radar screen: Community Reinvestment Act for mortgage companies; licensing mortgage originators and updating debt collection practices; overdraft protection plans; bank fees; expanded credit union powers; housing finance incentives; reforming property insurance in storm-sensitive areas; overhaul of local zoning laws; a major study of the entire corporate tax code; restoring key procedural powers to the Department of Environmental Protection for Chapter 91 Waterways developments; and many more yet to be fleshed out.
We need to keep a watch on bills that may affect the charging of interchange fees and other efforts by third parties to revise access to, or the processing of, electronic payments. And, of course, we must remain vigilant on any efforts to further revisit bank taxation issues. Stay tuned and check the weekly Beacon Hill Report for the latest information.
The Washington Scene
For the first time in 14 years, the Democrats control both houses of Congress, and what a difference it has been so far. Several members of the Massachusetts delegation gained key committee or subcommittee chairmanships, which lead to greater influence in setting policies and agendas. In many instances, at least in the short term, power has shifted back to the east and north from the south and west. Given the overwhelming demographic trends, however, the south and west continue to grow at a far greater pace than the Northeast, impairing long-term political clout.
As highlighted in our last column, Congressman Barney Frank, D-Newton, has taken a strong leadership role as the new chair of the House Financial Services Committee, which has jurisdiction over a wide range of banking, insurance, housing and securities issues. He has introduced H.R. 698 to prohibit commercial firms from acquiring or chartering industrial loan companies (ILCs) by commercial entities. The bill now has over 100 cosponsors, including seven of the 10 members of the Massachusetts delegation. Even though Wal-Mart withdrew its ILC application before the FDIC in March, many in the financial services community remain very confident that this move is only a temporary development, and that Wal-Mart and other large commercial entities remain committed to gaining further inroads into the banking business.
Frank has also voiced support for conducting a thorough review of how credit unions are serving the needs of their low- and moderate-income customers. A recent General Accountability Office study reported that local banks did a much better job in serving these needs than did comparable community credit unions. And last month, the Internal Revenue Service ruled that some of the non-traditional income generated by state-chartered credit unions should be subject to the corporate income tax. A third issue of common interest is in reducing regulatory burdens on banks. Frank has supported the banking industry in its efforts to eliminate the filing of Currency Transaction Reports for seasoned customers. We are working very closely with him on these issues and appreciate his interest in advancing them in the legislative process.
The shift to Democratic control also significantly improves the likelihood of action on more consumer-related bills, especially a comprehensive data security, identity theft and credit freeze bill that could well include language reinforcing the ability of states to impose additional provisions on consumer protection laws. Chairman Frank has been outspoken in supporting efforts to make merchants and card processors assume more responsibility in ensuring their processing systems are compliant with the latest in card association and other data security standards.
Federal pre-emption and how far the bank regulatory agencies, particularly the Office of the Comptroller of the Currency, can go in overruling various state laws and regulations applicable to national banks and any of their subsidiaries is one of the most sensitive and potentially far-reaching issues affecting banks. Later this spring, the U.S. Supreme Court is expected to rule on a case involving Wachovia Bank and to what extent, if at all, state laws apply to its subsidiaries. The outcome could have an impact on certain legislation here in Massachusetts, depending on its scope.
Dynamics in the Senate have changed as well, although with a margin of just 51-49 and the generally more collegial environment in the Senate, it is readily apparent that the Senate is very interested in shedding much greater light, if not immediately endorsing legislation, on hot issues such as credit card practices and the national spike in foreclosures. Already, presidential candidate Sen. Chris Dodd, D-Connecticut, in his role as the new chair of the Senate Banking Committee, has held a series of hearings on mortgage foreclosure and bank credit card practices and more are anticipated this spring.
Holding widely publicized public hearings on pro-consumer issues is a long-standing way to generate good publicity and generate visibility and momentum for one’s causes, without actually advancing legislation. Already several credit card companies have announced major changes in their billing and fee assessment practices, achieving some of Dodd’s objectives.
Estate tax repeal, a hot button for Republicans, almost assuredly will not be taken up with Democrats in control of Congress. Government-sponsored enterprise reform is creeping forward, given the fallout over exotic mortgages and Chairman Frank’s interest in housing issues, especially adjusting the conforming loan limits for borrowers in high-cost areas such as New England and the West Coast. Bankers continue to vigorously oppose new legislation that would double credit unions’ abilities to make riskier commercial loans while simultaneously lowering credit union capital requirements.
On the regulatory front, Chairman of the FDIC Sheila Bair delayed any action by the FDIC until January 2008 on the ILC applications by Wal-Mart, Home Depot and others. Bankers are continuing to implement the recently finalized “regulatory guidance” pertaining to commercial real estate. While a significant improvement over the initial proposal, three of the federal agencies recommended 100 percent and 300 percent thresholds for categories of real estate investment that, while stated as guidance, often can become an informal cap strongly recommended by local examiners. Other regulatory issues on the front burner include implementing the new FDIC insurance regulations and premium schedule and the Department of Defense military lending rules.
The year 2007 is turning out to be a very busy year. As always, the active involvement by local bankers in the political process will be essential.
David Floreen is senior vice president at the MBA. He can be reached at: firstname.lastname@example.org