On Friday, Jan. 9, 2009, House Financial Services Committee Chairman Barney Frank (D-Mass.) introduced H.R. 384, the TARP Reform and Accountability Act of 2009. This legislation, already becoming known as TARP II, is designed to enhance restrictions and reporting requirements placed on institutions receiving funds under the provisions of the Emergency Economic Stabilization Act (EESA), increase foreclosure mitigation efforts, and clarify the Treasury Secretary's authority to assist automotive manufacturers, municipalities, and consumer credit providers. Much of the legislation is drawn from the Committee's oversight work in late 2008 and issues raised throughout that process. Chairman Frank has repeatedly called for additional restrictions on TARP participants and enhanced disclosure requirements, and has drawn many of the components of this proposal from Committee Member recommendations during oversight hearings held in late 2008. The Committee will hold a hearing on this legislative proposal tomorrow afternoon (Jan. 13), and the legislation could be voted on by the House later in the week.

As a parallel to Chairman Frank's legislation, Treasury Secretary Designee Tim Geithner released details Friday for a series of proposed amendments to the TARP. Though he has yet to release full details on the Treasury Plan, Geithner's proposal would use TARP funds to prevent foreclosures, and further attempt to free credit in those markets that that finance loans to consumers, small businesses and municipalities. The Geithner proposals would also create a new bureau within Treasury to manage the TARP.

H.R. 384

Chairman Frank's proposed TARP legislation focuses on seven discrete areas:

Modifications to TARP and TARP Oversight:

  • Establishes quarterly reporting on the use of TARP funding by participating institutions; including the amount of increased (or decreased) lending and related activities.
  • Each financial institution receiving TARP funds, in consultation with Treasury, will agree on use of funds and required benchmarks.
  • Prohibits acquisition of "healthy institutions" with TARP funds.
  • Provides for stricter executive comp limitations, derived from automotive bailout legislation drafted in 2008, will now apply (including retroactively) to nearly every funds recipient. This would include a prohibition on paying or accruing bonus or incentive comp to 25 most highly compensated employees; and divestment of private aircraft/leases.
  • Authorizes Treasury to have an observer at board or board-committee meetings of TARP recipient companies.
  • Directs Treasury to expand fund availability to smaller community institutions, including S-corps.
  • Requires Treasury to obtain warrants equal to at least 15 percent of any financing provided.  

Foreclosure Relief

  • Requires use of at least $40 billion for foreclosure mitigation, with implementation of such a plan no later than April 1, 2009.
  • Requires inclusion of loan modification guarantee program, purchasing whole loans and/or Hope for Homeowner loans, and incentive payments to loan servicers for successful refinancing of mortgages.
  • Provides safe harbor to servicers from liability for loan modifications, regardless of their existing servicing agreement. Prevailing parties would receive legal fees.  

Auto Industry Financing and Restructuring

  • Clarifies and confirms Treasury authorization to assist auto manufacturers, and their financing arms.  

Clarification of Authority

  • Clarifies Treasury's authority to establish facilities to support:
    • Consumer loans;
    • Student loans;
    • Auto and other vehicle loans.
    • Commercial real estate loans;
    • Mortgage backed securities.
    • Municipal securities for new issuance, or remarketing of existing auction rate securities.  

Hope for Homeowners Program Improvements

  • Modifies Hope for Homeowners Program to reduce premiums, raise LTVs, eliminate government profit sharing of appreciation, authorizes payments to servicers for successful refinancing, and streamlines administrative requirements.  

Home Buyer Stimulus

  • Requires Treasury to develop, outside of the TARP, a program to stimulate demand for home purchases by ensuring availability of affordable mortgage rates. Includes purchase of mortgages and MBS using funding under the Homeowner Emergency Relief Act.  

FDIC Provisions

  • Makes permanent the increase in deposit insurance coverage to $250,000, includes inflation adjustment for future coverage.
  • Increases FDIC's borrowing authority from $30 billion to $100 billion, with a mechanism for greater funding if necessary.
  • Allows FDIC to charge systemic risk special assessments by rulemaking, on both insured depository institutions and depository institution holding companies.  

Legislative Outlook

The House Financial Services Committee has scheduled a hearing on H.R. 384 for Tuesday, Jan. 13, and it is expected that the House could consider the legislation later this week. The plan for consideration of any EESA/TARP reform initiatives in the Senate is less clear. Following a rare Sunday session, Senate Banking Committee Chairman Chris Dodd (D-Conn.) indicated that a vote on releasing the next tranche of TARP funds could come as early as Friday in the Senate, and further that he expected that the Bush Administration would formally request release of those funds in short order. Nevertheless, Dodd has yet to announce his impressions of the Frank bill or his Committee's plan for consideration of TARP reform legislation. With the bulk of the first $350 billion available to the Treasury nearly expended and congressional authorization required to disperse the second $350 billion tranche, the 111th Congress will undoubtedly act quickly on TARP legislation. As the first proposal introduced, H.R. 384 could well become the baseline for any reforms to the original program.