Posted by Patricio Perez on Tuesday, February 14th, 2012

A recent posting on this blog outlined some basic details about the Foreign Account Tax Compliance Act (FATCA). As mentioned in this previous posting, the goal of FATCA is to prevent and deter tax evasion by U.S. taxpayers who hold investments in offshore accounts. Earlier this month, a few developments that further this effort occurred and warrant attention.

On February 7, 2012, Senators Carl Levin and Kent Conrad introduced the “Cut Unjustified Tax Loopholes Act.” A complete summary of this bill can be read on Senator Levin’s website. Only a day later, the Internal Revenue Service (IRS) issued a press release titled Treasury, IRS Issue Proposed Regulations for FATCA Implementation.

The bill proposed on February 7 notes an express purpose to strengthen FATCA and focuses on deterring offshore tax abuses, closing loopholes that encourage corporations to move jobs offshore and ending a corporate practice that allows corporations to claim a stock option tax deduction that is greater than the stock option expense shown on their books.

While the controversy surrounding FATCA continues to fuel debates, the IRS has made clear that foreign financial institutions (FFIs) are required to register accounts by January 1, 2013. FFIs that do not register will be subject to withholdings by the IRS on “certain types of payments relating to U.S. investments.”

To highlight a few other areas of the “Cut Unjustified Tax Loopholes Act” bill that illustrate what the repercussions might be for FFIs, consider these excerpts from the summary provided on Senator Levin’s website:

• Authorize special measures to stop offshore tax abuse (Section 101) by allowing Treasury to take specified steps against foreign jurisdictions or financial institutions that impede U.S. tax enforcement, including prohibiting U.S. financial institutions from doing business with a designated foreign jurisdiction or foreign bank.
• Strengthen FATCA (Section 102) by clarifying when under FATCA, foreign financial institutions and U.S. persons must report foreign financial accounts to the IRS.
• Strengthen detection of offshore activities (Section 104) by requiring U.S. financial institutions that open accounts for foreign entities controlled by U.S. clients or open foreign accounts in non-FATCA institutions for U.S. clients to report the accounts to the IRS.
• Combat hidden foreign financial accounts (Section 116) by allowing IRS use of tax return information to evaluate foreign financial account reports, simplifying penalty calculations for unreported foreign accounts, and facilitating use of suspicious activity reports in civil tax enforcement.

Stay tuned for more developments.

Posted by Ed Bambauer on Tuesday, February 14th, 2012

Among the numerous proposals in President Obama’s recent State of the Union Address was one of interest to the banking community. The president proposed that larger banks (more than $50 billion in assets) pay a fee to fund a plan that would help homeowners refinance existing mortgages at historically low interest rates. The plan is designed to reduce homeowners’ monthly mortgage payments, thus putting money back into many consumers’ pockets, and to boost the slow housing market. This proposal would cover all homeowners, not just those in distressed situations.

Not so fast.

First, would such a program really address the immediate need? Those who have not been badly affected by the economic downturn and who are not already having trouble paying their mortgages likely already have refinanced to take advantage of the historically low rates. Such a program may allow them to whittle their rate even lower, but the additional savings are not likely to be a meaningful amount to them.

For those that are in trouble, whatever savings the proposed refinancing program may generate may not be enough, or the right kind, of help. In many cases, they can’t make their mortgage payments because one or both wage earners in the household are out of work or are now making substantially less than they did when they bought their homes. If the government wants to make a difference, they need to establish a program that helps people in such situations retain their homes by lowering payments under a government guaranty program and allowing for loans to be refinanced over a longer period. This could provide relief until the employment picture improves and homeowners affected by unemployment are back to work.

In either case, it isn’t just the benefit to homeowners that must be considered – it’s also the affect on banks.

Loan forgiveness in its various guises is great for the government to offer, but any bank involved takes an immediate hit to its ALL and its capital. Interest earning assets are how banks make money. When rates are reduced, banks tend to have lower earnings, and are, thus, less able to lend money. It’s one thing to expect banks to compete in the low-interest environment that is the natural result of the current economic cycle, but if the government wishes to push rates even lower through direct intervention, it must not only consider the benefit to borrowers, it must also consider the impact on community banks. Such a program will need to include some method, whether through taxes, loan loss provisions or some other device, to offset the affect of reduced interest rates, deferred payments and other actions on the banks that will bear the brunt of making the program work.

For any such program to work, banks need to be incented to retain the mortgages they have, but without a negative impact on capital, which reduces their ability to extend new loans/mortgages. Having a government guaranty program that insures banks against loss, using the fees mentioned in the president’s address to fund such insurance, would do more to help distressed homeowners than a blanket refinancing opportunity that will likely most benefit those that don’t currently need the help.

All of that being said, the probability of any such program passing into law during this election year is slight at best. However, after the election, should either the administration or congress wish to consider programs to assist homeowners, they must also ensure that they don’t weaken banks in the process.