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Making Tough Choices

By David Floreen

Governing is much more difficult than campaigning or serving as the minority party. Democrats on both Beacon Hill and Capitol Hill are fully aware of that dictum as their leaders are now attempting to translate their new power into forging new policies for Massachusetts and the nation. For 16 years, Massachusetts had a Republican governor and a Legislature where Democrats held nearly an 8-1 margin over Republicans, while for the first time since 1994, and the only time since George W. Bush has been president, both Houses of Congress are now controlled by Democrats.
For more than a decade, Republicans held key positions and could set the agenda, and in Washington at least, control the agenda. Now the political landscape has changed dramatically and the ability to force a consensus on some of the most challenging issues – Iraq, social issues, immigration, education and transportation spending, to name a few – remain elusive.
Just before Town Meeting in my community, the chair of the school committee summed up the situation best: “Most of the community demands more and better programs but few are willing to pay for them.” Making tough choices with limited resources is the overriding pressure on public officials everywhere. How they respond affects many of the issues impacting banks and bankers as well. 
The recent adoption of the fiscal year 2008 state budget, with relatively little controversy and far fewer vetoes than under former Gov. Mitt Romney, is indicative of the delicate balancing act facing Gov. Deval Patrick and the Legislature: With little extra money, most spending decisions for now are to continue the status quo.

Beacon Hill Update
We’re halfway through the first year of the two-year legislative cycle, so what trends and priorities have emerged and what’s on the horizon? After a somewhat slow start, Gov. Patrick made several significant changes to his senior staff in mid-April, and has nearly finalized appointments for all commissioners of key agencies. At a series of well-publicized events, Gov. Patrick laid out key elements of his four-year agenda: A $1 billion life sciences/stem cell research initiative; a major reform of the state’s K-12 and college education program; and an extension of the commuter rail to the South Coast area top the ever-expanding priority list. While generally well-received as bold and desirable initiatives, notably absent from these initiatives is any substantive outline on how to pay for them.
Last March, the governor unveiled his plan to close corporate tax “loopholes” that purportedly would raise $300 million to $500 million in additional annual revenues. The legislative response was underwhelming, especially from Speaker of the House Salvatore DiMasi. As an alternative, the speaker suggested the creation of a special commission to evaluate the equity and fairness of the entire state corporate tax system.
On April 30, the governor, the speaker of the House and the Senate president reached a consensus on the role and scope for this special commission and each appointed five individuals to serve on it. In mid-June, the commission offered initial recommendations that would eliminate the option for certain corporations to choose what form of corporate structure they prefer for state tax purposes; a change that, if enacted by the Legislature, could generate up to $170 million per year in additional tax revenue.
By Jan. 1, 2008, the commission is expected to provide a much more comprehensive assessment and series of proposals to make the Massachusetts corporate tax system more fair and equitable. It remains to be seen how aggressive this commission will be in recommending restructuring, but it has the potential to have a profound impact on the future of Massachusetts for the next 10 years, or it could amount to little or nothing – stay tuned!
Without a doubt, the most high-profile legislative action for the first six months was the vote on June 14 by the Legislature acting in constitutional convention to reject a proposed amendment to the state constitution to ban gay marriages. Supporters of the amendment needed 50 votes to place the petition on the November 2008 ballot and they fell five votes short, as the vote was 151 No to 45 Yes. Last Jan. 2, the previous Legislature voted 135 No to 62 Yes to advance the petition. In order to place a proposed amendment on the general election ballot, at least 50 legislators in two successive Legislatures must approve a petition to amend the state constitution. 
Unlike last year, when former Gov. Romney and former Senate President Robert Travaglini supported placing the gay marriage amendment on the ballot, Gov. Patrick and newly elected Senate President Therese Murray strongly supported the 2004 Supreme Judicial Court decision and actively worked to encourage legislators to oppose placing the petition to ban gay marriage on the November 2008 ballot. Gov. Patrick and legislative leaders feared that if a constitutional amendment to ban gay marriage was on the November 2008 ballot, Beacon Hill would become embroiled in an intense national debate over gay marriage and would significantly impair the ability of the Legislature to deal with many other significant issues.   
Regardless of one’s view on gay marriage, politically this was a big win for Gov. Patrick and Speaker DiMasi, and may embolden the governor to capitalize on this victory and step up in a leadership role on other high-profile issues.
With the gay marriage logjam removed, legislative leaders began to focus their attention on other vexing issues such as shifting local government employees to the state health insurance plan, mandating that underperforming local government pension plans join the state pension system, and discussing how to handle the casino gaming plans sought by the two American Indian tribes recognized by the federal government.  
From a banking perspective, two issues have dominated, and will continue to dominate legislative and executive branch attention for months to come: the mortgage lending and foreclosure issue and the near-final approval of state data breach/identity theft legislation.   Both the Committee on Housing and the Committee on Financial Services have held hearings on a series of bills that would expand the state Community Reinvestment Act law to include mortgage companies, and also require the licensing of mortgage originators, and add a number of other changes to mortgage lending laws. 
Gov. Patrick and Attorney General Martha Coakley have filed legislation and taken action to clamp down on foreclosure rescue schemes, impose stiffer penalties for mortgage fraud and address other related issues. The Division of Banks has asked for comment on amendments to stiffen regulations increasing net worth and educational requirements for mortgage lenders and brokers. Attorney General Coakley also sought comment on significant revisions to the mortgage disclosure regulations issued by her office. Exactly what language the Legislature will ultimately endorse and when any action will occur remains unclear. Late July is a possibility, but mid-fall seems more realistic. 
Earlier this month, Massachusetts became the 36th state to enact comprehensive data breach/security file-freeze legislation. The final language reflects considerable input by the MBA and many other groups and is a reasonable balance between those who sought rigid data breach notice and disclosure rules and those who favored a more measured approach that was consistent with the laws enacted in many other states. Fortunately, the new law is closer to the recommendations urged by the association and other financial organizations on the key points, such as allowing financial institutions to comply with the notice provisions under Gramm-Leach-Bliley and the Interagency Guidelines, the definition of a breach, what triggers a notice, and to whom it must be provided. 
The Office of Consumer Affairs and Business Regulation is also directed to issue regulations implementing the new law, including provisions mandating commercial entities to develop, implement and maintain appropriate internal controls on data security.  The data breach law does not include the language in H. 213 filed by Rep. Michael Costello (D-Newburyport) that would have mandated an entity that was determined to be responsible for a data breach to reimburse a financial institution for direct and indirect costs it incurred in replacing consumers’ debit and credit cards along with any fraud associated with that breach. While not unsympathetic to bankers’ frustration over ongoing data breaches, legislative leaders indicated that they felt the dispute between the banking and retail industry should be initially addressed through civil litigation, which the MBA TJX litigation seeks to resolve.
Interestingly, many consumer advocates devoted almost as much energy on the security freeze provisions of this law as the data breach language. Beginning in late October, Massachusetts consumers will be able to place a freeze on their credit reports for a fee of $5, thus denying access by anyone to those personal credit files, unless provided by law, such as existing creditors and other specified purposes. Consumers can also unfreeze their file for a fee of $5.   
Action on all other banking-related matters has been delayed until the fall. The Committee on Financial Services has not yet released its fall schedule, but we anticipate that it will hold a hearing on all 40 or so banking matters by mid-fall. These bills would include several proposals limiting various bank fees; restrictions on overdraft protection plans; MBA bills to control the ownership and operation of bank branches by industrial loan companies; simplifying the 18/65 fee law; and expanding investment options for bank trust departments. 
We are hopeful that the Committee on Consumer Protection will act favorably on H. 3925, a bill filed by the association to curtail the use of so-called credit triggers. This product, offered by the three major credit reporting agencies, allows a lender to pay a fee to the credit reporting agency to obtain information on certain borrowers who meet specific credit quality thresholds and geographic criteria. Consumers and bankers have raised numerous privacy concerns over this aggressive marketing tactic. Similar bans have been enacted in Connecticut, Minnesota and New Mexico, and are under consideration in other states. 
Other priority matters for the association include bills to expand the definition of and penalty for bank robberies; halting any expansion of credit union powers; implementing a financial literacy curriculum into the K-12 guidelines for local school districts; creating standards for issuing employee wage cards; and efforts to provide broader property and casualty insurance availability in coastal or storm-sensitive areas.

Washington Update
Whether it’s Iraq, immigration reform or industrial loan companies, Congress is wrestling with difficult issues that generate spirited discussion from several sources. While the Democrats have regained control of both the House and Senate, the margin, particularly in the Senate, is so narrow that forging a consensus on the tough issues remains elusive. 
Nevertheless, back in May by a vote of 371-16, the House voted in favor of H.R. 698, prohibiting commercial firms from acquiring or chartering industrial loan companies (ILCs). A companion bill, S. 1356, is now awaiting Senate action. Even though Wal-Mart withdrew its ILC application, many Washington observers believe that action was only temporary. Furthermore, several other applications, such as the one by Home Depot, raise equally troubling concerns for the mixing of banking and commerce. If Congress does not act by the end of the year and the current FDIC moratorium on ILC applications expires, it will be far more difficult to keep commercial firms out of the banking business.
The banking industry continues to mount an aggressive campaign to encourage members of Congress not to become co-sponsors of H.R. 1537, the Credit Union Regulatory Improvement Act. This legislation greatly expands a number of credit union powers, including doubling commercial lending limits while lowering capital requirements. In addition, bankers are also working to oppose efforts by Realtors to enact a permanent prohibition on banks engaging in real estate brokerage activities.
Congress is struggling with subprime mortgage lending and foreclosure issues. On both matters there is considerable consumer pressure on Congress to halt or curtail certain practices, but some legislators and advocates, including the Federal Reserve Board, have urged caution so as to not overreact and cause unwarranted disruption to a fragile housing market. Congressman Barney Frank continues to play a very significant role in crafting appropriate and reasonable policies on these and other key issues.
On a more parochial matter, 5th District Congressman Martin Meehan (D-Lowell) resigned his seat, effective July 1, to assume the presidency of the University of Massachusetts at Lowell. A special primary election will be held on Tuesday, Sept. 4, the day after Labor Day. Five Democrats are running, including: Niki Tsongas, wife of the late Sen. Paul Tsongas; Eileen Donoghue, a Lowell city councilor; and State Reps. Barry Finegold of Andover, James Eldridge of Acton, and James Miceli of Wilmington. James Ogonowski of Dracut is the sole Republican and will face the winner of the Democratic primary on Tuesday, Oct. 16.
The Senate Banking Committee, under its Chairman Chris Dodd (D-Conn), has held hearings on several consumer issues, such as credit card practices and mortgage foreclosures, but with Chairman Dodd away from the Senate due to his presidential campaign and the vice chair, Sen. Tim Johnson (D-South Dakota) still recovering from a severe illness, the Senate Banking Committee does not currently have the votes or leadership to move on a number of priority matters.  
Finally, on the regulatory front, the FDIC has initiated a survey of up to 500 banks nationally and 15 to 20 in Massachusetts to gather information on how overdraft protection programs are marketed, utilized and priced. The Securities and Exchange Commission is about to publish its final Regulation R, governing the practices of broker-dealers by banks and others. The Federal Reserve Board has sent out for comment its long-awaited proposal to revamp Reg Z governing truth-in-lending. 
Many tough choices lie ahead, for legislators, regulators and bankers who continue to face very strong competition in a market where the demographics test the creative savvy of the best of us.

David Floreen is senior vice president at the MBA. He can be reached at:

Posted on Saturday, August 04, 2007 (Archive on Friday, November 02, 2007)
Posted by Scott  Contributed by Scott


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