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Treasury Department Releases Reports on “Troubled Asset Relief” and “Making Home Affordable” Programs
On March 10, the Treasury Department (Treasury) released the February 2017 edition of its Monthly Report to Congress on the status of its Troubled Asset Relief Program (TARP). Among other things, the report provides updates on TARP programs such as the Capital Purchase Program and the Community Development Capital Initiative, as well as administration obligations and expenditures, insurance contracts, and transaction reports.
That same day, Treasury also published its fourth quarter 2016 “Making Home Affordable” Program Performance Report. According to the report, the housing market has made "significant progress" towards recovery since the beginning of the financial crisis. From 2009 through 2016, the number of homeowners who are 30-plus days delinquent on mortgage loans decreased from 6.1 million to 2.7 million, and the number of reported homeowners underwater also dropped significantly from 10.2 million to 3.2 million. A decline was also seen in the number of initiated foreclosures. To date, “approximately 10 million homeowners have received help through government programs and additional private sector efforts,” and “more than 2.8 million Homeowner Assistance Actions have taken place under Making Home Affordable programs.” Also provided in the report are fourth quarter 2016 servicer assessment results.
President Trump Releases Budget Plan Proposal; HUD and Treasury Among Many Who Would Face Significant Cuts
On March 16, the White House released its budget blueprint America First: A Budget Blueprint to Make America Great Again, which sets forth the President’s discretionary funding proposals in advance of the “full Budget”—scheduled for release later this spring. Among the many agencies and programs that would experience substantial cuts under the President’s budget are both the Department of Housing and Urban Development and the Department of the Treasury.
Department of Housing and Urban Development (“HUD”). For HUD, the President’s 2018 budget requests $40.7 billion in gross discretionary funding for HUD, which is a $6.2 billion or 13.2 percent decrease from the 2017 annualized continuing resolution level. The White House budget also proposes that: (i) funding be eliminated or redirected to the State and Local level for the Community Development Block Grant program, which the White House estimates would save $3 billion from 2017 levels; (ii) funding be eliminated for “lower priority programs,” which the White House says include “the HOME Investment Partnerships Program, Choice Neighborhoods, and the Self-help Homeownership Opportunity Program”; (iii) funding be eliminated or redirected to the State and Local level for Section 4 Capacity Building for Community Development and Affordable Housing (at an estimated savings of $35 million from 2017 levels); (iv) support be provided for “homeownership through provision of Federal Housing Administration mortgage insurance programs.”
Dept. of the Treasury. And, as for Treasury, the White House is proposing that the Department be granted $12.1 billion in discretionary resources. This proposal represents a $519 million or 4.1 percent decrease from the 2017 levels. Specifically, the White House’s budget proposes to, among other things: (i) preserve key operations of the Internal Revenue Service (“IRS”) to ensure that “the IRS can continue to combat identity theft, prevent fraud, and reduce the deficit through the effective enforcement and administration of tax laws,” while diverting resources away from “antiquated operations” that still rely on paper-based reviews; (ii) “strengthen cybersecurity in a Department-wide plan to strategically enhance existing security systems and preempt fragmentation of information technology management across the bureaus”; (iii) “prioritize funding for Treasury’s array of economic enforcement tools”; (iv) “eliminate funding for Community Development Financial Institutions Fund grants”; (v) “empower the Treasury Secretary, as Chairperson of the Financial Stability Oversight Council, to ‘end taxpayer bailouts and foster economic growth by advancing financial regulatory reforms that promote market discipline and ensure the accountability of financial regulators;’” and (vi) “shrink the Federal workforce” while increasing its efficiency by redirecting resources away from "duplicative" policy offices.
In response to the proposed budget, Treasury Secretary Steven T. Mnuchin released the following statement:
"President Trump’s discretionary budget plan released today focuses Treasury on our core missions of collecting revenue, managing the nation’s debt, protecting the financial system from threats, and combating financial crime and terrorism financing. It will ensure that we have the resources we need to enforce the nation’s tax laws, while investing in cybersecurity and prioritizing resources on initiatives that promote technology, efficiency and modernization across the agency."
On March 2, Treasury Secretary Steven T. Mnuchin, convened an executive session meeting of the Financial Stability Oversight Council (FSOC), to receive updates on global economic and market developments and initial staff work on the Council’s 2017 annual report. The agenda also included discussions on the “ongoing annual reevaluation of [the Council’s] designation of a nonbank financial company, including the review of materials submitted by the company and engagement with the company.”
On February 28, the National Association of Federally-Insured Credit Unions (NAFCU) sent a letter to Treasury Secretary Steven Mnuchin urging him to use his position as chairman of the Financial Stability Oversight Counsel to alleviate the CFPB's “burdensome” regulatory impact on credit unions. The letter, among other things, urges the Secretary and FSOC to use the Counsel’s authority to set aside CFPB regulations as leverage to “spur renewed dialogue between the Bureau and the federal banking agencies regarding rules that may actually pose systemic risk to the financial sector.” The NAFCU attached an appendix to the letter listing 10 CFPB rules that the group finds “ripe for further review.” The letter was sent a day before FSOC’s March 2 executive session—its first under Secretary Mnuchin. Separately, the CUNA is holding its annual governmental affairs conference in Washington this week, bringing in 5,000 credit union advocates from around the country.
On February 21, the U.S. Court of Appeals for the District of Columbia Circuit held that stockholders of Fannie Mae and Freddie Mac (the Companies) could not challenge dividend-allocating terms that FHFA negotiated on behalf of the Companies because the Housing and Economic Recovery Act (HERA) strictly limits judicial review of actions authorized thereunder. Perry Capital LLC v. Mnuchin, No. 14-5243, 2017 WL 677589 (D.C. Cir. Feb. 21, 2017).
In 2008, Fannie and Freddie were placed into conservatorship with FHFA, which then entered into a stock purchase agreement with Treasury to obtain emergency capital for Fannie and Freddie. In exchange, Treasury received preferred shares of stock from Fannie and Freddie that provided for a quarterly dividend of 10 percent of the total funds drawn from Treasury. After Fannie and Freddie began routinely borrowing from Treasury to pay the dividends, FHFA and Treasury amended the stock purchase agreement in 2012 so that repayment would be based on the Companies’ profits rather than mandatory dividends. The stockholder-plaintiffs in this action sought to challenge the 2012 amendment–in particular, arguing that the 2012 amendment exceeded the authority granted to FHFA under HERA and constituted “arbitrary and capricious conduct” in violation of the Administrative Procedure Act. One class of stockholders also argued that the amendment constituted a breach of fiduciary duty and certain terms and covenants of the Companies’ stock certificates. The district court had dismissed both complaints on the motions of FHFA and Treasury.
The D.C. Circuit opinion noted that Section 4617(f) of HERA expressly states that “no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.” The court interpreted this language to prohibit any court from “wielding [its] equitable relief to second-guess either the dividend-allocating terms . . . or FHFA’s business judgment.” And although an exception to this bar on judicial review has been recognized where an agency is found to have exceeded or violated its statutory powers or functions, the court determined that FHFA’s actions were within its statutory powers or functions.
Although the majority of the stockholders’ claims were rejected, the stockholders’ contract-based claims regarding liquidation preferences and dividend rights were remanded to the district court for further proceedings.
On February 17, Fannie Mae announced that it had reported net income of $5 billion for the fourth quarter of 2016 and $12.3 billion for fiscal year 2016. These figures exceeded previous earnings of $3.2 billion for the third quarter of 2016 and $11.0 billion for fiscal year 2015. According to a company statement, “fair value gains in the fourth quarter of 2016 were due primarily to increases in longer-term interest rates positively impacting the value of the company’s risk management and mortgage commitment derivatives.” The fourth quarter 2016 net income, while higher than in the third quarter, was “partially offset by a shift to a provision for credit losses in the fourth quarter compared with a benefit for credit losses in the third quarter.” Fannie attributed its year-over-year net income increase to “a higher benefit for credit losses and lower foreclosed property expense” and “[l]ower fair value losses in 2016 compared to 2015.”
Following the strong results, Fannie said it would pay a $5.5 billion dividend to the U.S. Treasury in March, bringing its total dividend payments to $159.9 billion since it entered federal conservatorship in 2008.
Treasury secretary nominee Steven Mnuchin told members of the Senate Finance Committee that he supports rethinking regulatory requirements for regional banks in written responses following his confirmation hearing last week. Mr. Mnuchin, a former regional bank chief executive, strongly endorsed efforts to provide regulatory relief for regional, midsize and community banks, stating: “It is important that we have a regulatory environment that supports credit flows to all aspects of our economy, particularly in rural and less populated areas, and that small- and mid-sized institutions are not suffering from an inappropriate regulatory burden.” Mnuchin also questioned “whether it is appropriate for financial institutions that engage almost exclusively in traditional banking activities with consumers and businesses to be subject to measures intended for our largest and most complex financial institutions.” Moreover, when asked his thoughts concerning the Dodd-Frank Act, the nominee stated that he would focus on “addressing regulatory issues that limit banks' abilities to lend to small and medium-sized business that will create economic growth and create more jobs.”
According to a January 17 blog post by CFPB Student Loan Ombudsman Seth Frotman, the CFPB has released an updated student loan Payback Playbook prototype, incorporating changes that the Bureau implemented after reviewing thousands of public comments submitted by student loan borrowers, consumer advocates, and other industry members. According to Mr. Frotman, the Bureau worked together with the Departments of Education and Treasury to develop “prototype disclosures” that “outline a path to affordable payments for struggling borrowers who are trying to avoid student debt distress.” The CFPB reports that it has shared the Payback Playbook prototype and the underlying consumer feedback data with the Department of Education. The joint efforts are part of a broader Department of Education initiative branded “A New Vision for Serving Student Loan Borrowers.”
On January 11, the GAO announced the release of its report providing an update on the status and condition of Treasury’s TARP-funded housing programs as of October 31, 2016. According to the report, Treasury had disbursed nearly 60 percent or $22.6 billion of the $37.51 billion assigned to TARP for the purpose of helping struggling homeowners avoid foreclosure. The report also notes that the GAO’s latest review yielded no new recommendations and that only five of the 29 recommendations GAO has previously made related to the TARP-funded housing programs remain open or not fully implemented. The report states that the GAO will continue to monitor and assess the status of these recommendations.
On December 20, the House Financial Services Committee’s Task Force to Investigate Terrorism Financing announced the release of a report detailing the results of its two-year investigation into terror financing. The report, entitled Stopping Terror Finance: Securing the U.S. Financial Sector, is intended to “serve as a useful summary of the key points illuminated by Task Force hearings regarding the terrorist financing threat, the necessary components of an effective strategy to address such financing activity, and current efforts to combat it.
Among other things, the Task Force took a more granular look at some less well-publicized terrorist financing methodologies, including: (i) the use of trade-based money laundering; (ii) the use of individual and corporate charitable foundations; (iii) the plundering of arts and antiquities by terrorists, especially by Islamic State of Iraq and Syria (ISIS); and even (iv) drug trafficking.
Moreover, as explained by Task Force Chairman Mike Fitzpatrick (R-Penn), the task force “discovered highly critical vulnerabilities” for which it presented several recommendations and called for further Congressional attention. Among other things, the report highlighted a need for:
- Better interagency coordination and resource allocation;
- Better use of and access to information that can identify illicit finance;
- Adding more overseas Treasury attachés;
- Continued attention to helping developing countries fight illicit finance;
- A greater domestic and international focus on stopping trade-based money laundering;
- Development of a harmonized regulatory and examination procedure for nonbank financial institutions – primarily money service businesses (MSB) but also emerging value transfer technologies – to squeeze out illicit finance and provide banks the comfort necessary for them to again widely offer MSB retail account services;
- Development of a whole-of-government strategy to combat terror finance and other forms of financial crimes; Beneficial ownership of corporate entities; and
- Re-animation of the interagency Terrorist Financing Working Group.
Notably, members of the Task Force have already introduced several bipartisan bills aimed at addressing some of the concerns identified in the report, including:
- H.R. 5594, the “National Strategy for Combatting Terrorists, Underground, and Other Illicit Financing Act,” which passed the House on July 11, 2016 by voice vote, and requires the President, acting through the Treasury Secretary, to develop and publish an annual whole-of-government strategy to combat money laundering and terrorist financing.
- H.R. 5602, which passed the House on July 11, 2016 by a vote of 356-47, requiring more detailed information to be reported to the Treasury regarding certain types of transactions in a specific area for a limited amount of time.
- H.R. 5607, the “Enhancing Treasury’s Anti-Terror Tools Act,” which passed the House on July 11, 2016 by a vote of 362-45, enhancing Treasury’s anti-illicit finance tools by addressing issues that came up repeatedly in Task Force Hearings.
- H.R. 5603, the “Kleptocracy Asset Recovery Act,” which is sponsored by Ranking Member Stephen Lynch (D-MA), and seeks to establish a reward program aimed at helping the U.S. identify, freeze, and, if appropriate, repatriate assets linked to foreign government corruption, which is often an enabler of terrorism.
- H.R. 5606, the “Anti-Terrorism Information Sharing Is Truth Act,” which is sponsored by Task Force Vice Chairman Pittenger (R-NC) and which seeks to refine “safe harbors” for the sharing of anti-terror information, reaffirming Congressional intent in existing statute to encourage government sharing of terror methodologies with banks to help them better recognize such activity.