The Federal Reserve played an important role in the public debates leading up to enactment of the Housing and Economic Recovery Act of 2008 (HERA) and the Emergency Economic Stabilization Act of 2008 (EESA). Each of these laws provided the U.S. government with important new tools--utilized during 2008--to help address the causes and consequences of the recent and ongoing turmoil in the financial markets.
Although the following summaries are not comprehensive reviews of these laws, they highlight some of the key provisions, including those that affect Federal Reserve System functions.
This report also describes the Higher Education Opportunity Act of 2008 (HEOA), legislation that modified the disclosure requirements for private educational loans under the Truth in Lending Act, which is administered by the Board.
On July 30, 2008, President Bush signed into law the Housing and Economic Recovery Act of 2008 (HERA) (Pub. L. No. 110-289), which substantially revises the supervisory and regulatory framework for housing-related government-sponsored enterprises (GSEs), specifically, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Banks (FHLBs). Among other things, HERA establishes a new, independent agency, the Federal Housing Finance Agency (FHFA) to succeed to (i) the supervisory and regulatory responsibilities of the Office of Federal Housing Enterprise Oversight (OFHEO) with respect to Fannie Mae and Freddie Mac (collectively, the enterprises) and of the Federal Housing Finance Board with respect to the FHLBs, and (ii) the authority of the Secretary of the Department of Housing and Urban Development (HUD) with respect to housing goals and new program approval requirements for the enterprises.
To help stabilize and maintain confidence in the enterprises, the Act also provides the Department of Treasury with temporary authority to acquire obligations of the GSEs, as well as other securities of the enterprises. In addition, HERA includes provisions to
As strains in financial markets intensified in 2008, investors became increasingly worried that the capital of Fannie Mae and Freddie Mac would be insufficient to absorb current and expected losses on their mortgage portfolios. In light of the important role that the GSEs play in the housing finance markets and the financial system, Treasury requested and Congress passed changes as part of HERA that granted temporary authority to Treasury to purchase obligations of the GSEs and other securities (including equity capital) issued by Fannie Mae and Freddie Mac, on such terms and in such amounts as the Treasury determines. The statute requires that the Treasury secretary determine that any such purchases are necessary to provide stability to the financial markets, prevent disruptions in the availability of mortgage finance, and protect the taxpayer. The Treasury's authority to purchase such obligations or securities expires on December 31, 2009; however, the statute expressly permits the Treasury, after December 31, 2009, to retain (and exercise any rights associated with) any obligations or securities acquired by such date.
On September 7, 2008, FHFA, after consulting with Treasury Secretary Henry M. Paulson and Federal Reserve Board Chairman Ben S. Bernanke, appointed itself conservator for Fannie Mae and Freddie Mac in accordance with the conservatorship and consultation provisions of HERA (described in "Prompt Corrective Action and Conservatorship and Receivership" and "Required Consultations"later in this section). In conjunction with this action, the Treasury, utilizing the new purchase authority granted under HERA, entered into stock purchase agreements with Fannie Mae and Freddie Mac pursuant to which Treasury acquired preferred shares of each enterprise. Pursuant to these stock purchase agreements, Treasury agreed to provide up to $100 billion to each enterprise to ensure that the enterprise maintains a positive net worth. In connection with these actions, Treasury also established a temporary secured lending credit facility for Fannie Mae, Freddie Mac, and the FHLBs, and initiated a temporary program to purchase mortgage-backed securities guaranteed as to principal and interest by Fannie Mae and Freddie Mac. The actions taken by FHFA and Treasury helped to stabilize the GSEs, as investors became more confident of the government's support for the GSEs.
Title I of HERA significantly reforms the supervisory and regulatory framework for the GSEs, representing the culmination of almost a decade of work by Congress and other relevant parties. For several years prior to the enactment of HERA, the Board had supported legislative changes to improve the supervisory and regulatory framework of the GSEs and to address the systemic risks posed by the retained mortgage portfolios of Fannie Mae and Freddie Mac. For example, the Board had urged the Congress to
The supervisory and regulatory changes enacted under HERA include provisions that address each of these elements. As a general matter, HERA allows the FHFA director to oversee the prudential operations of the GSEs and to ensure that each GSE operates in a safe and sound manner by, among other means, maintaining adequate capital and establishing adequate internal controls.
Importantly, HERA grants the FHFA director broad new authority to set and adjust the capital requirements for the GSEs. For example, HERA provides the director a free hand to establish, by regulation, risk-based capital requirements for the enterprises to ensure that the enterprises operate in a safe and sound manner and maintain sufficient capital and reserves to support the risks that arise in the operations and management of the enterprises. Previously, federal law specified, in many respects, the type of risk-based capital standards that had to be applied to the enterprises, thus greatly constraining the ability of the supervisor of the enterprises to alter or modify these standards to improve their risk sensitivity or take account of financial developments or improvements in methodologies for assessing regulatory capital adequacy.
HERA also authorizes the FHFA director to raise, by regulation, the minimum capital level for Fannie Mae and Freddie Mac under statute (generally, core capital equal to at least 2.5 percent of on-balance-sheet assets plus 0.45 percent of mortgage-backed securities guaranteed by the enterprise and other off-balance-sheet obligations) or by the FHLBs (generally, total capital equal to at least 5 percent of total assets). Specifically, the director is permitted to raise a GSE's minimum capital level to the extent needed to ensure its safe and sound operation. The director also must periodically review GSE capital levels, and may increase, by order, the minimum capital levels for the enterprises or FHLBs on a temporary basis, if necessary, and consistent with the prudential regulation and the safe and sound operation of the GSE.
HERA requires that the FHFA director establish, by regulation, criteria governing the portfolio holdings of Fannie Mae and Freddie Mac to ensure that the holdings are backed by sufficient capital and consistent with the mission and the safe and sound operations of the enterprises. In establishing such criteria, the director must consider (i) the ability of the enterprises to provide a liquid secondary market through securitization activities, (ii) the portfolio holdings of the enterprises in relation to the overall mortgage market, and (iii) the enterprise's adherence to the prudential management and operation standards established by the director under HERA and described below (see "Prudential Management and Operation Standards"). Additionally, the director is authorized, by order, to make temporary adjustments to these portfolio criteria, such as during times of economic distress or market disruption, and to make an enterprise dispose of or acquire any asset if the director determines that such action is consistent with the purposes of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended, or consistent with the authorizing statutes for the enterprises. Prompt Corrective.
HERA significantly alters the statutory provisions governing the supervisory actions that may or must be taken against a GSE as its regulatory capital levels decline, and addresses the manner in which a troubled or failing GSE's condition may be resolved. As a general matter, HERA modifies the prompt corrective action framework applicable to a troubled GSE in a manner more closely tracking a similar regime used with a troubled insured depository institution under the Federal Deposit Insurance Act (FDIA). In addition, HERA establishes a process for placing a troubled GSE into conservatorship or receivership and for managing such a conservatorship or receivership broadly similar in nature to those used with insured depository institutions under the FDIA. However, because GSEs, unlike insured depository institutions, do not offer federally insured deposits, the provisions under FDIA related to insured deposits (e.g., depositor preferences) and the FDIC's deposit insurance fund (e.g., least-cost resolution and related requirements) do not apply in the case of the resolution of a GSE.
For example, HERA modifies the existing prompt corrective action regime for Fannie Mae and Freddie Mac to
HERA also applied the prompt corrective action regime governing the enterprises (as modified) to FHLBs.
HERA also allows, or requires, the FHFA director to place a GSE into conservatorship or receivership for reasons other than critical undercapitalization. Specifically, HERA authorizes the director to establish a conservatorship or a receivership for a GSE if the director finds that any of 11 other separate conditions are met. These conditions include, among others, that
HERA also requires that the FHFA director place a GSE (even one then operating in a conservatorship) into a receivership if the director determines in writing that
If a GSE is placed into either conservatorship or receivership, HERA authorizes the FHFA to take over the business and operations of the troubled GSE and change management of the GSE. In the case of a conservatorship, the FHFA is directed to seek to rehabilitate the troubled entity for the benefit of its shareholders and creditors by preserving the entity's assets and improving its business operations in order to restore the entity to a sound and solvent condition. In contrast, in the case of a receivership, the FHFA must place the GSE into liquidation, and it has the ability to determine claims of creditors against the GSE.
HERA allows FHFA, as receiver, to establish a "bridge" entity to assume the assets and liabilities of an FHLB in receivership. HERA also requires the FHFA director to organize a bridge entity (referred to in HERA as a limited-life regulated entity) if Fannie Mae or Freddie Mac are placed into a receivership. HERA provides that a bridge entity established for Fannie Mae or Freddie Mac would immediately, and by operation of law, succeed to the charter of Fannie Mae or Freddie Mac, as relevant. Moreover, HERA specifically provides that the amount of assets transferred from a failed enterprise to the bridge entity must exceed the amount of liabilities transferred to the bridge entity. Together, these provisions help ensure that, if an enterprise were to be placed into a receivership, a new, solvent entity would be established that could continue to fulfill the enterprises' important mission in accordance accordance with the enterprises' governing charter.
Title I of HERA requires the FHFA director to consult with, and consider the views of, the Chairman of the Board of Governors of the Federal Reserve System with respect to the risks posed by the GSEs to the financial system prior to issuing any proposed or final regulations, orders, or guidelines regarding prudential management and operations standards, safe and sound operations of, and capital requirements and portfolio standards applicable to, the GSEs. The Act also requires the director to consult with the chairman regarding any decision to place a GSE into conservatorship or receivership. These consultation requirements expire on December 31, 2009. As noted above, FHFA Director James Lockhart consulted with Federal Reserve Board Chairman Bernanke prior to placing Fannie Mae and Freddie Mac into separate conservatorships on September 7, 2008.
HERA also requires that the FHFA director establish standards for the GSEs related to, among other things, the management of interest rate risk exposure; management of market risk; adequacy and maintenance of liquidity and reserves; management of asset and investment portfolio growth; investments and acquisitions of assets; overall risk-management processes; and such other operational and management standards as the director deems appropriate.
HERA also permanently increases the Fannie Mae and Freddie Mac conforming-loan limits, which are the maximum dollar size of a mortgage that may be purchased by the enterprises. Earlier in 2008, the Economic Stimulus Act of 2008 increased, until December 31, 2008, the conforming-loan limit for mortgages on single-family residences to the greater of $417,000, or 125 percent of the relevant area median home price (not to exceed $729,500). Effective January 1, 2009, HERA allows Fannie Mae and Freddie Mac to purchase single-family mortgages with a maximum origination balance of up to the greater of $417,000, or the lesser of 115 percent of the area median price or $625,500. Adjustments also were made to the conforming-loan limits for two-to-four-family residences.
Under HERA, Fannie Mae and Freddie Mac must obtain the FHFA director's prior approval before offering any new product. In considering a request, the director must determine that the product is consistent with the enterprise's statutory authority, is consistent with the safety and soundness of the enterprise or the mortgage finance system, and is in the public interest. The director also must request public comment on any new product approval request for 30 days. The statute includes certain exclusions from the definition of a new product to avoid unduly interfering with the development of loan underwriting systems and mortgage products offered by the enterprises.
HERA also includes the FHA Modernization Act of 2008, which makes several several modifications to the National Housing Act to improve the mortgage insurance programs of the FHA. Similar to the conforming-loan limits of Fannie Mae and Freddie Mac, FHA conforming-loan limits were increased by the Economic Stimulus Act of 2008 and HERA. Effective January 1, 2009, the maximum size of a single-family mortgage eligible for FHA insurance is the greater of $417,000, or the lesser of 115 percent of the area median price or $625,500. In addition, HERA
As noted above, HERA also establishes the HOPE for Homeowners Program (H4H Program), which is a voluntary program designed to allow qualified, at-risk mortgage borrowers to refinance their existing mortgages into new mortgage loans guaranteed by the FHA, subject to certain conditions and restrictions. FHA may insure eligible mortgages under the H4H Program commencing no earlier than October 1, 2008, and the authority to insure new mortgages expires on September 30, 2011. The Emergency Economic Stabilization Act of 2008, enacted on October 3, 2008, modified the H4H Program in several respects. The following outlines the key elements of the H4H Program as amended.
To be eligible for the H4H Program, a borrower must have a debt-to-income ratio of at least 31 percent before applying for a H4H Program mortgage. The borrower must occupy the property as his or her primary residence, and the borrower may not have an ownership interest in another residential property. Accordingly, investors and investor properties are not eligible for the program. Additionally, to be eligible for the H4H Program, a borrower must certify that he or she did not intentionally default on the existing mortgage or any other debt, and has not knowingly or willfully furnished material information known to be false for the purpose of obtaining the existing mortgage. Mortgagors that have been convicted under federal or state law for fraud in the past 10 years also are not eligible for this program.
Loan-to-value and maximum loan amount. The new FHA-insured mortgage refinances an eligible borrower's existing mortgage at a potentially significant write-down from its current principal balance and, thus, may significantly benefit borrowers who are "underwater"--that is, owe more on their current mortgage than the value of their home. HERA prohibits the new FHA-insured mortgage loan from exceeding 90 percent (or such higher percentage as the oversight board for the program determines to be appropriate) of the appraised value of the property serving as security for the mortgage. The new FHA-insured refinancing loan also may not exceed 132 percent of the conforming-loan limit for Fannie Mae that was in effect for 2007 for a property of applicable size.
Premiums. HERA requires that HUD collect an amount equal to 3 percent of the principal balance of the new H4H mortgage as an upfront insurance premium. This amount is paid by the existing lender through a reduction in the amount paid to the lender upon refinancing. The Act also requires borrowers that refinance into an H4H Program mortgage to pay to HUD an annual premium equal to 1.5 percent of the amount of the outstanding mortgage balance.
Release of previous mortgage liens. Participation in the H4H Program by borrowers, mortgagees, servicers, and investors is voluntary. However, all holders of outstanding mortgage liens on a property to be refinanced under the H4H Program must agree to accept the proceeds of the new FHA-insured refinancing loan as payment in full for their existing mortgages on the property and release all liens on the property. In addition, all prepayment penalties and fees associated with default or delinquency must be waived in order for an existing mortgage to be refinanced into a new H4H Program mortgage. HERA also limits the ability of a person with a H4H Program mortgage to take a second lien on the mortgaged property during the first five years of the new H4H mortgage term.
Loan term. HERA mandates that an H4H Program mortgage may have a term of not less than 30 years and must bear a single rate of interest that is fixed for the entire term of the mortgage, thereby eliminating the potential for future payment shocks on the mortgage.
First payment default. HERA prohibits HUD from paying insurance benefits on any mortgage where the borrower fails to make the first payment on the new H4H Program mortgage.
HERA also requires borrowers that refinance into an H4H Program mortgage to share any newly created equity and future appreciation in the property with HUD. Specifically, under HERA, borrowers are required to share with HUD a portion of any new equity in the home created as a result of the H4H Program. Mortgagors also are required to share with HUD 50 percent of any future property appreciation upon sale or disposition of the property. HUD is authorized to offer subordinate mortgage lien holders on the property, in exchange for releasing their lien, either (1) a share of HUD's 50 percent interest in future appreciation of the mortgaged property or (2) an upfront payment in lieu of the right to receive a portion of HUD's interest in the property's future appreciation, if any.
HERA also establishes a Board of Directors (Oversight Board) to oversee the H4H Program. The Oversight Board is composed of the secretary of Housing and Urban Development, the Treasury secretary, the Federal Reserve Board chairman, and the chairperson of the Board of Directors of the Federal Deposit Insurance Corporation, or the respective designee of each such person. HERA further requires the Board to, among other things, establish requirements and standards for the H4H Program and prescribe regulations and guidelines as may be necessary or appropriate to implement such requirements and standards. The Oversight Board published rules to implement the H4H Program in the Federal Register on October 6, 2008, and January 7, 2009.
HERA also requires the Oversight Board to conduct a study of the need for, and efficacy of, an auction or bulk-refinancing mechanism to facilitate the refinancing of existing residential mortgages that are at risk for foreclosure into mortgages insured under the H4H Program. The study must identify and examine various options for mechanisms under which lenders and servicers of such mortgages may make bids for forward commitments for such insurance in an expedited manner. As required by HERA, the Oversight Board submitted the study of auction or bulk-refinancing mechanisms to Congress on September 29, 2008.
Another part of HERA--the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act)--provides for the establishment of a nationwide mortgage licensing system and registry for the residential mortgage industry. The registry is intended to improve the flow of information between regulators, increase industry accountability, enhance consumer protections and information, and establish a means by which residential mortgage loan originators would be required, to the extent possible, to act in the best interests of consumers.
The statute requires all states to develop and maintain a system for licensing and registering individuals engaged in mortgage loan originations. Pursuant to the S.A.F.E. Act, these state licensing and registering systems must interact with the Nationwide Mortgage Licensing System and Registry (NMLSR), which is to be developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. In addition, the S.A.F.E. Act requires the federal banking agencies, along with the Federal Financial Institutions Examination Council and the Farm Credit Administration, to jointly develop and maintain a system for registering employees of depository institutions, or regulated subsidiaries of depository institutions, as loan originators with the NMLSR. Such a system must be implemented within one year after the date of enactment of the S.A.F.E. Act, and is to take into consideration, as may be appropriate, the same exceptions and requirements set forth below for state-licensed loan originators. If by the end of a one-year period (or in limited cases a two-year period) the secretary of HUD determines a state does not have an adequate system of licensing and registration, the S.A.F.E. Act requires the secretary to establish and maintain a system for that state.
The S.A.F.E. Act also requires that individuals obtain a license from a state, and that they register with either the state or federal registration system, before they may engage in loan originations. In connection with an application for licensing and registration, an individual must, at a minimum, provide information concerning the applicant's identity, including fingerprints and personal history and experience. An individual may not receive a license or registration if the individual fails to satisfy certain criteria outlined in the statute. The S.A.F.E. Act also outlines the minimum competence requirements for the pre-licensing education and testing requirements for loan originators, as well as for renewal of state-licensed loan originators, which includes a continuing education requirement.
In addition to provisions relating to registration and licensing, the S.A.F.E. Act requires the HUD secretary to recommend reforms to the Real Estate Settlement Procedures Act of 1974, and submit a preliminary report on the root causes of defaults and foreclosures of home loans to Congress not later than six months after the date of statute enactment.
Title X of HERA enacts the Mortgage Disclosure Improvement Act (MDIA), which amends, in turn, portions of the Truth in Lending Act (TILA) to help ensure that a consumer is provided with timely and meaningful disclosures in connection with certain extensions of credit secured by the consumer's dwelling. EESA, enacted on October 3, 2008, also includes several amendments to the MDIA.
The MDIA, as amended, includes mortgage refinancings among the types of extensions of credit subject to early disclosures under TILA. The amendments to MDIA also modify the early disclosure requirement of TILA so that creditors must provide certain disclosures to borrowers no later than three days after receiving an application and at least seven days prior to closing. Additional disclosures are required in cases of extensions of credit secured by the dwellings of consumers where the annual rates of interest or schedules of payments are variable. Moreover the MDIA requires that any disclosure statement that no longer accurately reflects the annual percentage rate of interest should be replaced by an accurate statement within three business days before the date of transaction. The statute also provides that consumers must receive the disclosures before paying any fee related to the extension of credit. However, the statute allows a consumer to waive the timing requirement, in case of a bona fide personal financial emergency, by providing a lender with a signed written request outlining such emergency and specifically requesting waiver of the timing requirement.
Some of the disclosure modifications codified in the MDIA were previously required by regulations issued by the Board in July 2008. The Board issued a notice of proposed rulemaking on December 10, 2008, to implement the additional requirements included in the MDIA.
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (EESA) (Pub. L. No. 110-343), which provides the Treasury secretary with important new tools to help restore liquidity and stability to the financial system, and establishes several mechanisms to oversee the implementation of this authority. The central feature of EESA is the establishment of the Troubled Assets Relief Program (TARP), through which the secretary is authorized to purchase troubled assets from qualifying financial institutions to help maintain and promote financial stability.
The EESA also includes several important limitations and conditions designed to protect the interests of taxpayers. For example, EESA generally requires that the secretary obtain warrants or comparable debt instruments from any financial institution from which the TARP acquires troubled assets. In addition, and as described below, section 111 of EESA requires that the secretary develop and impose certain executive compensation restrictions on financial institutions from which the TARP purchases troubled assets. Related provisions of EESA limit the ability of certain financial institutions that participate in TARP to deduct executive compensation expenses for federal tax purposes.
EESA also includes several other provisions affecting financial institutions or the Federal Reserve, including a temporary increase in federal deposit insurance coverage and an acceleration of the effective date of a previously adopted legislative amendment that permits the Federal Reserve to pay interest on balances held at Federal Reserve Banks by depository institutions.
In light of the extraordinary events occurring in the financial markets and the substantial risks such events posed to financial stability and the U.S. economy, Congress passed EESA to immediately provide the Treasury secretary with the authority and facilities to restore liquidity and stability to the U.S. financial system. EESA also provides that the secretary should seek to use such authorities and facilities to
In exercising this authority under EESA, the Treasury secretary must consult with the Federal Reserve Board, the FDIC, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, the Chairman of the National Credit Union Administration Board, and the HUD secretary.
To assist in accomplishing these goals, EESA authorizes the Treasury secretary to establish the TARP and purchase troubled assets from financial institutions on such terms and subject to such conditions as the secretary may establish in accordance with EESA. As a general matter, the term "troubled assets" is defined to include residential and commercial mortgages, and any securities, obligations, or other instruments based on or related to such mortgages, so long as they were issued or originated on or before March 14, 2008. However, EESA also provides that the term "troubled assets" shall also apply to any other financial instrument (including, for example, equity instruments) that the secretary, after consultation with the Federal Reserve Board Chairman and notification to Congress, determines the purchase of which is necessary to promote financial market stability. EESA also generally defines a "financial institution" to mean any institution having significant operations in the United States--including but not limited to banks and other depository institutions--which is established and regulated under U.S. laws, or those of any of its states, territories, or possessions. EESA also provides that, if Treasury purchases troubled assets under the TARP, the secretary must establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. The secretary must collect premiums for any guarantee issued under the program in an amount that the secretary deems necessary to meet the purposes outlined in EESA and provide sufficient reserves, based on an actuarial analysis, to ensure taxpayers are fully protected.
The purchase authority granted to the secretary by EESA terminates on December 31, 2009, although the secretary may extend this date until October 3, 2010, upon submission of a written certification to Congress. However, the authority of the secretary to hold any troubled assets purchased prior to the termination of authority, or to purchase or fund the purchase of troubled assets under a commitment already entered into before the termination date, is not subject to such termination.
EESA authorizes the secretary to purchase or insure up to a maximum of $700 billion in troubled assets. Of this amount, $250 billion was made immediately available for use when EESA was enacted, and the remaining amount was made available in two separate tranches of $100 billion and $350 billion.
As noted above, EESA establishes certain executive compensation restrictions on financial institutions that sell troubled assets to the Treasury under the TARP. Specifically, EESA requires that the secretary impose executive compensation restrictions on a financial institution if the secretary directly (and not through an auction process) purchases troubled assets from the institution, if market prices for the assets are not available, and if the secretary receives a meaningful equity or debt position in the institution as a result of the transaction. These restrictions must
For these purposes, the term "senior executive officer" refers, in the case of a publicly held financial institution, to an individual who is one of the five highest paid executives of the institution as disclosed under regulations issued under the Securities Exchange Act of 1934 and, in the case of a nonpublic company, the counterparts of such individuals.
If assets are purchased through an auction and the total amount of assets acquired from the institution exceeds certain quantitative levels, the secretary must prohibit any new employment contract with a senior executive officer from providing for a golden parachute in the event of the individual's involuntary termination or the institution's bankruptcy filing, insolvency, or receivership.
Title III of EESA modifies the Internal Revenue Code to provide special rules for the tax treatment of compensation (including so-called "golden parachute" payments) paid by TARP recipients to covered executives (as defined in the EESA). Among other things, financial institutions participating in the TARP and selling troubled assets to the TARP (on an aggregate basis) in excess of $300 million are prohibited, for a limited period, from deducting for federal tax purposes any remuneration in excess of $500,000 to any covered executive. In addition, such financial institutions will be subject to a 20 percent tax on certain "golden parachute" payment s provided to covered executives.
EESA provides that, if Treasury acquires mortgages, mortgage-backed securities, and other assets backed by residential real estate under the TARP, the Treasury secretary must implement a plan that seeks to maximize assistance to homeowners and, considering net present value to the taxpayers, encourage the servicers of underlying mortgages to take advantage of the HOPE for Homeowners Program as well as other programs available to minimize foreclosures. In dealing with loan modification requests under existing investment contracts, the secretary, where appropriate and after consideration of net present value to the taxpayer, is directed to consent to reasonable loss-mitigation measures, including rate reductions or principal write-downs. Furthermore, the secretary must coordinate with the FDIC, Board, FHFA, HUD, and other agencies that hold troubled assets to identify opportunities for acquiring different classes of troubled assets, such as mortgage-backed securities, in order to improve the loan modification and restructuring processes and provide protections to bona fide tenants who are current on their rent.
Additionally, EESA requires that designated "federal property managers" develop foreclosure prevention plans for residential mortgages and residential mortgage-backed securities that the managers hold, own, or control. Such plans must seek to maximize assistance for homeowners and, considering net present value to the taxpayers, encourage the servicers of the underlying mortgages to take advantage of the HOPE for Homeowners Program. Generally speaking, a "federal property manager" is defined to include the FHFA, the FDIC, and the Board, assuming that certain specific circumstances are present. The FHFA is deemed to be a federal property manager only in its capacity as conservator for Fannie Mae and Freddie Mac, and the FDIC is considered a federal property manager in cases where residential mortgage loans and mortgage-backed securities are held by a bridge depository institution established by the FDIC in connection with the resolution of a failed insured depository institution. The Board is considered a federal property manager only with respect to any mortgage or mortgage-backed securities held, owned, or controlled by or on behalf of a Reserve Bank, other than when such assets are held, owned, or controlled in connection with openmarket operations under section 14 of the Federal Reserve Act or as collateral for an advance or discount that is not in default.
The EESA imposes several continuing reporting obligations on the Treasury Department with respect to its investments under the TARP. Section 114 of the EESA requires Treasury, within two business days after an investment, to make available to the public, in electronic form, pricing and other information about the investment. In addition, section 105(a) of EESA requires Treasury to issue a tranche report approximately every 30 days, which must provide information on, among other things, its actions taken during the covered period under the TARP and the administrative expenses of the TARP. Finally, for each additional aggregate Treasury investment of $50 billion under the TARP, section 105(b) of the EESA requires the Department to issue a report that describes, among other things, the transactions related to its additional incremental exposure, the pricing mechanism for each relevant transaction, a description of the challenges that remain in the financial system, and an estimate of the additional actions that may be necessary to address such challenges.
EESA also requires that the secretary provide to Congress no later than April 30, 2009, a report that analyzes both the current state of the regulatory system and its effectiveness in overseeing financial market participants. This report must include recommendations for improving the regulatory system.
As an additional measure to increase transparency of TARP-related actions, EESA provides for the establishment of an Office of the Special Inspector General (Special IG) for the TARP, which must, among other things, conduct, supervise, and coordinate audits and investigations of the purchase, guarantee, management, and sale of troubled assets under the TARP. The Special IG must provide certain designated committees of Congress with periodic reports summarizing the activities of the Special IG during the reporting period. The Special IG, appointed by the President by and with the advice and consent of the Senate, also assumes inspector general duties and responsibilities as outlined under the Inspector General Act of 1978.
EESA provides authority to the Comptroller General of the United States to commence ongoing oversight of TARP activities and performance, including examining TARP's efficacy in meeting the purposes of EESA. The comptroller must furnish Congress, as well as the Special IG, with reports at least every 60 days. These reports are required to analyze, among other things
The comptroller must also undertake a study to determine the extent to which leverage and sudden deleveraging of financial institutions served as a factor in the current financial crisis. This study must be provided to Congress no later than June 1, 2009.
EESA also establishes the Financial Stability Oversight Board (FINSOB), a body comprising the Federal Reserve Board chairman; the Treasury secretary; the FHFA director; the Securities and Exchange Commission chairman; and the HUD secretary. The FINSOB is authorized to review the policies implemented by Treasury under TARP and make recommendations, as appropriate, to the Treasury secretary regarding use of EESA authority. Additionally, the FINSOB must report suspected TARP-related fraud, misrepresentations, or malfeasance to the Special IG or the U.S. attorney general.
Furthermore, the FINSOB is authorized to ensure, through appropriate means, that the policies implemented by the Treasury secretary are in accordance with the purposes of EESA, are in the economic interests of the United States, and are consistent with protecting taxpayers. The FINSOB must meet at least monthly and file a quarterly report with certain designated Congressional committees.
EESA also establishes a Congressional Oversight Panel to monitor the TARP and review the current state of the financial markets and the regulatory system. The Oversight Panel consists of five members appointed by members of Congress in the manner specified in section 125 of EESA. The Oversight Panel must submit reports to Congress every 30 days that discuss, among other things, the use by the Treasury secretary of EESA authority, the impact of purchases made by the TARP on the financial markets and financial institutions, the extent to which the information made available on transactions under the program has contributed to market transparency, the effectiveness of foreclosure mitigation efforts, and the effectiveness of the program in minimizing long-term costs and maximizing the benefits to taxpayers. Additionally, EESA requires the Oversight Panel to submit a separate report analyzing the current state of the regulatory system and its effectiveness in providing oversight of financial market participants, including analysis of existing gaps in consumer protections and recommendations for improvement. This separate report was submitted to Congress on January 20, 2009.
Section 128 of EESA accelerated to October 1, 2008, the effective date of an amendment, previously adopted as part of the Financial Services Regulatory Relief Act of 2006, that authorizes the Reserve Banks, in accordance with Board regulations, to pay interest on balances held by or on behalf of depository institutions at a Reserve Bank. EESA also authorized the Board to lower the level of reserve requirements on transaction accounts below the ranges established by the Monetary Control Act of 1980. On October 9, 2008, the Board issued an interim final rule implementing this new authority.
Section 129 of EESA requires that the Board submit a report to designated Congressional committees within seven days of authorizing any loan to an individual, partnership, or corporation under the emergency lending authority of section 13(3) of the Federal Reserve Act. This section of the Federal Reserve Act permits the Federal Reserve to make secured loans to such persons in unusual and exigent circumstances and subject to certain additional conditions. The newly required reports must include the justification for exercising such authority, and discuss the specific terms of the action, as well as any expected cost to taxpayers. In addition, while a loan under section 13(3) is outstanding, the Board must submit periodic updates to designated congressional committees not less than every 60 days. These periodic reports must address the status of the loan, the value of collateral held by the Reserve Bank which initiated the loan, and the projected cost to taxpayers.
Not later than June 1, 2009, the comptroller must complete and submit to designated congressional committees a study regarding the extent to which leverage and sudden deleveraging of financial institutions was a factor behind the financial crisis. The study must include an analysis of the roles and responsibilities of the Board, the SEC, the Treasury secretary, and other federal banking agencies with respect to monitoring these issues, analysis of the authority of the Board to regulate leverage, including to what extent such authority has been used, and an analysis of usage of margin authority by the Board, and any related recommendations.
As noted above, EESA provides for a temporary increase from $100,000 to $250,000 in FDIC deposit insurance coverage for insured depository institutions and NCUA share insurance coverage for insured credit unions. This temporary increase ends on December 31, 2009.
Additionally, EESA allows the FDIC to borrow from the Treasury amounts in excess of that authorized under sections 14(a) and 15(c) of the Federal Deposit Insurance Act and as necessary to carry out this increase in deposit insurance coverage.
EESA authorizes the SEC to suspend application of the mark-to-market provisions embodied in Statement Number 157 of the Financial Accounting Standards Board, if it determines that doing so is necessary or appropriate in the public interest and consistent with the protection of investors. Additionally, the SEC, in consultation with the Federal Reserve Board and the Treasury secretary, must conduct a study to consider (1) the effects of these mark-to-market standards on the balance sheets of a financial institution, (2) the impact of such accounting on bank failures in 2008, (3) the extent to which such standards affect the quality of information available to investors, (4) the process used by FASB in developing such standards, and (5) whether alternative accounting standards would better suit the industry. This study, including legislative and administrative recommendations, was submitted to Congress on December 30, 2008.
On August 14, 2008, President Bush signed the Higher Education Opportunity Act of 2008 (HEOA) (Pub. L. No. 11-315), which includes amendments to the disclosure requirements for private educational loans under TILA. The Federal Reserve Board must adopt regulations implementing HEOA's disclosure provisions, which require creditors to provide a number of new disclosures about the terms and features of private educational loans. Creditors will also have to disclose information about federal student loan programs, which may offer less costly alternatives.
The new disclosures required by the HEOA would be incorporated into the segregated cost disclosures that creditors must provide under TILA. Currently, creditors integrate much of this information in credit agreements, along with other contract terms. HEOA seeks to highlight key information by including it on the TILA disclosure and requiring that the information be disclosed multiple times during the lending process. As a result, the TILA disclosures for private educational loans will become longer and more detailed. HEOA also requires the Board to develop and test model disclosure forms, which the Board would publish to encourage lenders to standardize disclosure format.
HEOA defines "private educational loans" as loans made expressly for post-secondary educational expenses, excluding loans made, insured, or guaranteed by the federal government. Generally, creditors must furnish TILA cost disclosures before credit is extended. Under HEOA, however, creditors will be required to furnish three sets of disclosures for private educational loans. First, creditors must disclose the available loan rates and terms in an application or solicitation for a private educational loan. Creditors must also furnish a second set of disclosures after the borrower has been approved for a loan, and afford the applicant at least 30 days in which to accept the loan. During this period, the creditor may not change the rate or terms (except for changes to a variable interest rate based on an index). If the consumer accepts the loan, the creditor must then furnish a third set of disclosures, after which the consumer has three days in which to cancel the loan. The creditor may not disburse the loan funds until the three-day cancellation period expires.
HEOA also contains restrictions for the marketing of private student loans. It prohibits private creditors from using the name, emblem, or mascot of an educational institution in a way that implies that the institution endorses the creditor's loans. Some schools, however, enter into "preferred lender" arrangements and explicitly agree to endorse that creditor's student loan product. HOEA restricts but does not prohibit this practice.
The Board issued a notice of proposed rulemaking to implement these provisions on March 11, 2009.