TARP Accountability
On January 21, the House passed the TARP Reform and Accountability Act, H.R. 384. This bill amends the Troubled Assets Relief Program (TARP) provisions of the Emergency Economic Stabilization Act of 2008 (EESA). The legislation will strengthen accountability, close loopholes, increase transparency, and require Treasury to take significant steps on foreclosure mitigation.
Background:
Last fall, Congress enacted an emergency financial rescue package to stabilize the financial markets, but the Bush Administration has failed to adhere to and enforce many Congressional accountability measures.
The Bush Administration’s Treasury Department has failed to follow Congressional intent on the spending of these financial rescue funds, and has not satisfactorily tracked or explained how $350 billion of taxpayer money was spent. They have failed to stem the tide of foreclosures and refused to enforce any lending obligations on institutions.
To remedy this failure, the House will consider H.R. 384, a tough accountability measure to overhaul the Troubled Assets Relief Program. This will ensure that funds will be spent responsibly and transparently to help stabilize our economy and get credit flowing again to families and businesses. The bill will:
- strengthen accountability, close loopholes, increase transparency -- forcing banks to report how government funds are being spent;
- require Treasury to take significant steps on foreclosure mitigation, calling for spending $100 billion (with a minimum of $40 billion) of TARP funds to help homeowners;
- affirm that TARP should be used to benefit small financial institutions, consumer lending, auto companies, and municipalities; and
- limit bonuses for executives of firms participating in TARP.
The incoming Obama Administration has set out a restructuring plan of similarly tough standards for accountability and transparency in a letter to Congress, including:
- Easing credit and lending for small businesses, consumers and municipalities;
- Strengthening oversight of the program;
- Launching “a sweeping effort to address the foreclosure crisis”; and
- Limiting compensation for executives at firms that receive government funds, banning most dividend payments and limiting stock buybacks and acquisitions of financially healthy companies.
As President-elect Obama has said, “My commitment is that we are going to fundamentally change some of the practices in using this next phase of the program. We're going to focus on housing foreclosures, we're going to focus on small businesses, we're going to focus on what's required to make sure that credit is flowing to consumers and businesses." [Reuters, 1/12/09]
These fundamental changes are needed before any funds to stabilize the financial system are released in a crucial effort to strengthen the American economy.
Overview of the bill:
Strengthen Accountability and Oversight
- Requires banks to tell Congress how money received from the government is being used -- mandating quarterly public reporting for any institution using TARP funds. FDIC-insured depository institutions must report on any change in lending levels and any activity related to TARP funding.
- Requires the Treasury, TARP participants and the institutions’ regulators to agree on how the funds are to be used and set benchmarks to achieve the goal of making credit more available to consumers. Requires regulators to examine fund usage and program compliance.
- Requires Treasury and the regulators to approve the acquisition of another bank by any TARP-funded financial institution.
- Directs Treasury to immediately make TARP funds available to smaller local institutions/community banks, which have been shut out so far, on the same terms as the large institutions already receiving funds.
Tough, Sensible Restrictions on Executive Compensation
- For any new recipient of TARP funds (except small financial institutions), applies stringent executive compensation restrictions:
- Requires Treasury to prohibit incentives that encourage excessive risk-taking,
- Recovers bonuses paid to executives who promise gains that later turn out to be false or inaccurate,
- Prohibits multi-million dollar golden parachutes (this would apply to all institutions; under current law, does not apply to those with under $300 million in assets)
- Extends the executive compensation requirements from the auto bill to any new receipt of TARP funds:
- No bonuses for the 25 most highly paid employees at each company,
- No compensation plan that would encourage manipulation of earnings to enhance compensation; and
- Treasury can apply these expanded executive compensation provisions for previous TARP assistance, and must apply them to new assistance, even if an institution has already received funding.
Helping Americans to Stay In their Homes
- Calls on Treasury to immediately commit up to $100 billion (with a mandatory minimum of $40 billion) of the second $350 billion TARP funding on a comprehensive foreclosure mitigation plan (to be developed by Treasury by March 15 and implemented by April 1).
- Protects mortgage servicers who modify loan to stem foreclosures against lawsuits that are impeding modifications; servicers must report to the Treasury on modification activities.
- Mandates that the foreclosure mitigation plan include at least $20 billion for a systematic program to guarantee loan modifications to help families in danger of losing their homes, which may be run by the FDIC, and some combination of the following:
- lowering the cost of Hope for Homeowners loans to encourage more lender to refinance home loans;
- create a loan program to pay down certain second mortgages;
- assistance to loan servicers who implement effective loan modifications;
- government purchases of loans to modify or refinance mortgages.
- Makes changes to the Hope for Homeowners refinancing program to encourage more lenders to refinance home loans for borrowers at risk of losing their homes. It eliminates the 3 percent up-front premium lenders must pay on home loans; reduces the amount of principal that the lender must write down; reduces the borrowers’ insurance premium; and eliminates government profit sharing of home appreciation at the time of refinancing.
- Requires Treasury to develop a program outside of TARP to ensure the availability of affordable mortgages by purchasing mortgages and mortgage-backed securities.
- Requires the TARP’s congressional oversight panel to report to Congress by July 1 on actions taken by the Treasury to mitigate foreclosures.
Strengthen Economic Impact of TARP by Expanding Benefit to Consumers, Cities
- Clarifies Treasury’s authority to:
- Provide assistance to auto manufacturers under TARP;
- Establish facilities to purchase asset-backed securities and otherwise increase the availability of consumer loans;
- Provide support for commercial real estate loans and mortgage-based securities and
- Assist cities and other tax-exempt issuers who are having a hard time finding investors for their tax exempt bonds needed to finance longer term projects such as building emergency rooms or repairing highways.
- Makes permanent the increase in FDIC deposit insurance limit to $250,000 per account.