Summary of TARP Reform and Accountability Act of 2009 (H.R. 384)

On January 9, 2009, Chairman Barney Frank introduced the “TARP Reform and Accountability Act of 2009” (H.R. 384), a bill that conditions the Treasury’s receipt of additional EESA funds on inclusion of mortgage foreclosure initiatives, improved oversight of bailout funds, stricter executive compensation limits, among a variety of other measures in the extensive plan comprised of seven titles and spanning more than seventy pages.[1] Just one business day after the bill was introduced and in his last week in office, President George Bush submitted his formal written request under Section 115(a)(3) of EESA for the Treasury’s next draw-down of $350 billion of EESA funds.[2] It is anticipated that Congress will move quickly in passing H.R. 384 or comparable legislation before the remaining $350 billion is released.

The following is a summary of key provisions of H.R. 384, including (1) foreclosure relief (2) safe harbor for loan servicers (3) oversight of TARP funds (4) executive compensation limits and (5) clarification of TARP authority for additional purposes.

1. Foreclosure Relief and Loan Modification Plans

A centerpiece of the bill is the Title II requirement that Treasury dedicate at least $40 billion and not more than $100 billion of EESA funds to foreclosure relief measures. The firm provision comes after months of complaints from Congress that Treasury had done little so far to improve the bleak state of foreclosure rates across the nation. Specifically, the bill requires Treasury to implement mortgage workout plans, after consulting with FDIC and HUD, and receiving approval from the Board, by combining any or all of the following elements:

1) A guarantee program for qualifying loan modifications under a systematic plan, which may be delegated to the FDIC or other contractor;

2) Bringing costs of Hope for Homeowner loans down either through coverage of fee, purchasing H4H mortgages to ensure affordable rates, or both;

3) A program for loans to pay down second lien mortgages that are impeding a loan modification subject to any write-down by existing lender Treasury may require;

4) Servicer incentives/assistance - payments to servicers in connection with implementation of qualifying loan modifications;

5) Purchase of whole loans for the purpose of modifying or refinancing the loans (with authorization to delegate to FDIC).[3]

The bill further requires Treasury to determine that any modifications to an initial plan are necessary to achieve the purposes of the bill or that modifications to component programs of the plan are necessary to maximize prevention of foreclosure and minimize costs to the taxpayers.

2. Safe Harbor for Loan Servicers

To encourage loan workout plans, the bill provides an explicit safe harbor for loan servicers that enter into loan workout plans for at-risk homeowners, regardless of any provisions in a servicing agreement that provide for liability. To qualify, the loan servicer must: (1) act in a manner consistent with the duty established in Homeowner Emergency Relief Act to maximize the net present value (NPV) of pooled mortgages to all investors as a whole; (2) engage in loan modifications for mortgages that are in default or for which default is reasonably foreseeable; (3) the property must be owner-occupied; and (4) the anticipated recovery on the modification would exceed, on an NPV basis, the anticipated recovery through foreclosure.[4]

3. Oversight of TARP Funds

The bill requires that TARP recipients disclose on at least a quarterly basis how the funds received are allocated with the company, whether total lending has increased or decreased, including reports on use of funds for recapitalization and prohibition on use of funds for acquisitions of healthy companies.

Notably, institutions receiving TARP funds are prohibited from using the taxpayer bailout assistance for purposes that are inappropriate – such as to acquire other healthy financial institutions institutions. The bill requires that Treasury to review any acquisition of another depository institution to ensure that that the acquisition 1) reduces the risk to taxpayers or 2) could have been accomplished without funds provided under the TARP.

4. Executive Compensation Limits

The bill strengthens Treasury’s oversight of executive compensation of companies receiving TARP funds. Among the new non-tax executive compensation limits provided in the bill are: 1) prohibition from paying or accruing any bonus or incentive compensation to the 25 most highly compensated employees; 2) prohibition of any compensation plan that would encourage manipulation of earnings to enhance compensation; and 3.) requirement for divestment of private aircraft or leases. [5]

The more stringent rules may be applied retroactively, as the bill provides authority to Treasury to apply these expanded executive compensation provisions retroactively to existing recipients of direct assistance.

5. Clarification of TARP Authority for Additional Uses

Title IV of the bill provides clarification on the Treasury’s authority to use EESA funds for a number of purposes, including:

Consumer loans – The bill clarifies Treasury’s authority to establish facilities to support the availability of consumer loans, such as student loans, and auto and other vehicle loans. Such support may include the purchase of asset-backed securities, directly or through the Federal Reserve.

Commercial Real Estate Loans and MBS – The bill clarifies Treasury’s authority to provide support for commercial real estate loans and mortgage-backed securities.

Municipal securities – The bill clarifies Treasury’s authority to provide support to issuers of municipal securities, including through the direct purchase of municipal securities or the provision of credit enhancements in connection with any Federal Reserve facility to finance the purchase of municipal securities.[6]

Notably, this is only an abbreviated summary noting a few of the highlights, as the bill spans over seventy pages and includes seven titles on other measures not discussed above relating to auto financing plans, Hope for Homeowners improvements, homebuyer stimulus, permanent increases in FDIC limits, among other numerous provisions. Further, the contents of the legislation may change as amendments are added and sections are struck out during the legislative process following introduction of the bill.