With Michael DeFors
MCUL Regulatory Affairs Director
When the Emergency Economic Stabilization Act was signed into law on Oct. 3, it found solid support from 60 percent of the members of the U.S. House of Representatives – on both sides of the aisle. While program details are still being developed and detractors continue to rail against any federal government intervention, most would argue this legislation was sorely needed to inject capital, restore liquidity and create stability to the financial markets.
Many are asking the question, “What’s in it for me?” Depending on one’s perspective, the answer comes out differently. For the nine largest financial institutions in America, it has meant an immediate infusion of $125 billion in new capital. For every other financial institution, including credit unions and community banks, there will be similar benefits on a smaller scale, along with the availability of the Troubled Asset Relief Program (TARP). For borrowers, there are new programs that offer assistance and counseling with respect to troubled mortgage loans and a continuation of favorable tax treatment of discharged debt. For depositors, there are higher levels of share and deposit insurance protection from $100,000 to $250,000. For taxpayers, there are protections in the form of steady oversight of programs, returns on the federal government’s investments by the financial institutions that benefit and key restrictions on senior executive compensation for those same institutions.
The Act’s many provisions are too long to include in this article, and many details have yet to be determined – so this will focus specifically on TARP.
TARP Program Multi-Agency Effort (§101). TARP will be implemented by the secretary of the treasury through the new Office of Financial Stability located within the Treasury Department. In developing TARP, the secretary must consult with the Federal Reserve, the Comptroller of the Currency, the FDIC, OTS and HUD.
Purchase Authority (§101). The Act stipulates that TARP will “purchase, and make and fund commitments to purchase,” troubled assets from any financial institution, including credit unions, on terms and conditions determined by the secretary and the designated agencies cited above. Program details will include mechanisms for purchasing troubled assets, methods for pricing and valuing troubled assets, procedures for selecting asset managers and criteria for identifying troubled assets for purchase. Treasury is expected to issue program details by the end of November. “Troubled assets” are defined as residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the secretary determines promotes financial market stability.
Guarantee Authority (§102). This section permits TARP to guarantee troubled assets, including mortgage backed securities. Premiums will be charged to support the guarantees and deposited into the Troubled Assets Insurance Financing Fund.
Program Planning Considerations (§103). In shaping TARP, the secretary must take into consideration many factors, several of which are of interest to credit unions as financial institutions: 1) ensuring that all financial institutions are eligible to participate; 2) ensuring financial assistance to financial institutions, including those serving low-and-moderate-income populations and other underserved communities, and that have assets less than $1 billion, that were well-or-adequately-capitalized as of June 30, 2008, and that as a result of the devaluation of the preferred GSA stock will drop one or more capital levels, in a manner sufficient to restore the financial institutions to at least an adequately-capitalized level; 3) in determining whether to engage in a direct purchase from an individual financial institution, the long-term viability of that financial institution in determining whether the purchase represents the most efficient use of funds; 4) protecting the retirement security of Americans by purchasing troubled assets held by or on behalf of an eligible retirement plan under the IRS; and 5) the utility of purchasing other real estate owned and instruments backed by mortgages on multi-family properties.
Asset Management Authority (§106). The secretary has been given authority to exercise any rights in connection with troubled assets purchased under the Act, and the power to manage the assets including the revenues and portfolio risks as well.
Mitigating Foreclosures (§109). There is also emphasis in the Act on efforts to mitigate foreclosures, which to the extent that the secretary acquires mortgages, mortgage backed securities and other assets secured by residential real estate, including multifamily housing, the secretary must implement a plan that seeks to maximize assistance for homeowners and encourage servicers to take advantage of the HOPE for Homeowners Program (section 257 of the National Housing Act) or other available programs to minimize foreclosures. The secretary may also use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.
Assistance to Homeowners (§110). With respect to residential mortgage loans, the secretary must implement a plan that seeks to maximize assistance to homeowners including use of loan modifications with rate reductions, loan principal reductions and other similar modifications. Where a Federal property manager is not the owner of a residential mortgage loan, but holds an interest in obligations or pools of obligations secured by residential mortgage loans, the Federal property manager must 1) encourage implementation by the loan servicers of loan modifications, and 2) assist in facilitating any such modifications to the extent possible.
Executive Compensation Provisions (§111). Financial institutions that sell troubled assets to the secretary under the Act will be subject to the executive compensation requirements of the Act and the IRS Code as applicable. Executives include “senior executive officers” defined as an individual who is one of the top 5 highly paid executives of a public company, whose compensation is required to be disclosed pursuant to the Securities and Exchange Act of 1934, and any related regulations and non-public company counterparts, which we assume will include any credit union that benefits from participating in TARP.
Expiration of Authority for Certain Parts (§120). Finally, it should be noted that authority under the troubled assets purchase and insurance sections in the Act (§101 and §102) will expire under this section as of Dec. 31, 2009.
TARP is a well-ordered response to the current financial crisis with many features and benefits to those that elect to participate. But like all government programs, it does come with many conditions and restrictions, and only time will determine its success. We expect more details to come, and the MCUL will keep members apprised as they develop.
For more information on the Act, the MCUL has established a Web page dedicated to the Emergency Economic Stabilization Act and various related resources. As items are posted, notices will be placed in Monitor. It can be reached under the Hot Topics section on the MCUL homepage.