July 30, 2014

Is Bank Regulatory Relief Gaining Momentum?

Banks have been pleading with Congress for regulatory relief for as long as I can recall.  (For example, before the ink on the Dodd-Frank Act was dry, bankers were warning of the harmful effects of the cumulative regulatory burdens attributable to the Act.)  It appears bankers' advocacy efforts may now be closer to achieving results.
The House Financial Services Committee approved three regulatory reform bills this week.
  • The "Community Bank Mortgage Servicing Asset Capital Requirements Study Act of 2014," H.R. 4042, would delay the implementation of the Basel III rules that relate to capital requirements for mortgage servicing assets until a study is completed. 
  • The the "Access to Affordable Mortgages Act of 2014,'' H.R. 5148, would amend the Truth in Lending Act to exempt from certain appraisal standards certain "high-risk" mortgages of $250,000 or less if the loan stays on the balance sheet of the lender for three years. The act also would exempt certain individuals from penalties for failure to make reports regarding certain appraisers.
  • The "Regulation D Study Act," H.R. 3240, would require the Government Accountability Office (GAO) to study the impact of the Fed’s reserve requirements on depository institutions and consumers.
Other bills introduced in Congress would provide further relief if they can get the momentum to pass:
  • The "Portfolio Lending and Mortgage Access Act," H.R. 2673,  would amend the Truth in Lending Act by deeming any residential mortgage to be a "qualified mortgage" for as long as it remains on a bank's balance sheet.
  • The "Community Institution Mortgage Relief Act of 2014," H.R. 4521, would expand the CFPB’s small servicers exception to include servicers of 20,000 mortgage loans or fewer.  It would also exclude loans secured by a first lien on a dwelling that are held by creditors with assets of $10 billion or less.
  • The "Financial Regulatory Clarity Act of 2014," H.R. 4466, would require the federal banking agencies to consider whether any new regulation proposed is inconsistent with, or duplicative of, existing regulations. 
Whether any of these bills will make it to the Senate, much less the President's desk, is difficult to predict.

July 21, 2014

New N.C. Statute Gives Lenders More Options When Developers Default


Lenders now have a bit more to think about when making a loan to a developer of a planned community. 
 
A few days ago, the General Assembly enacted, and the Governor signed into law, important amendments to the Planned Community Act regarding the transfer of the declarant's rights and the liability of the declarant's successor in interest.  The legislation is House Bill 330 / Session Law 2014-57 (titled "An Act Amending the North Carolina Planned Community Act regarding the Transfer of Special Declarant Rights"). 
 
By way of reminder, a "declarant" is almost always a developer of a planned community or condominium who creates restrictions on the use of the property which are described in a "declaration."  That developer has the opportunity to reserve certain rights to itself as the "declarant." Although there is no requirement that a developer reserve declarant rights for itself, it is common to do so, and it would be very unusual for a planned community or condominium developer to not to name itself the declarant.  (For more information on declarants, see this article by my law partner Sam Franck.)
 
So, what happens when a lender must forclose on a developer who is a declarant of a planned community?  Does the lender become the declarant?
 
The new Act says (basically) that unless the deed of trust provides otherwise, a creditor who acquires property through foreclosure acquires all "special declarant rights" related to the property, if the creditor files in the county records an "instrument" that "requests" those rights.  (The deed of trust is not required to state that special declarant rights will be transferred, but the judgment or instrument that conveys the titled must.)  The definition of "special declarant rights" in GS 47F-1-102(28) is as follows:   
"Special declarant rights" means rights reserved for the benefit of a declarant including, without limitation, any right (i) to complete improvements indicated on plats and plans filed with the declaration; (ii) to exercise any development right; (iii) to maintain sales offices, management offices, signs advertising the planned community, and models; (iv) to use easements through the common elements for the purpose of making improvements within the planned community or within real estate which may be added to the planned community; (v) to make the planned community part of a larger planned community or group of planned communities; (vi) to make the planned community subject to a master association; or (vii) to appoint or remove any officer or executive board member of the association or any master association during any period of declarant control."
As I read the Act, the creditor is free to assume some--but not all--of the special declarant rights, if it wishes.  Furthermore, the Act says that a creditor can state in the recorded instrument that it intends only to hold special declarant rights to transfer them to a third party, in which case the creditor cannot exercise any special declarant rights, but will avoid the liabilities or obligations of the declarant. 
 
The Act answers a number of questions but will require creditors to give some consideration when the deed of trust is drafted and when the creditor decides to exercise its rights by foreclosure, deed on lieu, or in a bankruptcy proceeding.

The upshot is that lenders now have more control as to which, if any, of the declarant's rights they want to inherit when a developer goes under.
 
You can read the full Act for yourself here.

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July 4, 2014

New Tax Changes in North Carolina

July means the start of a new fiscal year for the State of North Carolina, which means some new changes to the tax code become effective.  Below are brief descriptions of some of the key changes:

Elimination of Back to School (August) Sales Tax Holiday.

N.C. General Statutes Section 105-164.13C provided an exemption for certain items of tangible personal property sold between the first Friday in August and the following Sunday.  It included clothing, footwear, and school supplies of $100 or less per item; school instructional materials of $300 or less per item; sports and recreation equipment of $50 or less per item, computers of $3,500 or less per item; and computer supplies of $250 or less per item will be exempt.  Clothing accessories, jewelry, cosmetics, protective equipment, wallets, furniture, items used in a trade or business, and rentals were never covered by the exemption to begin with.  The elimination of this exemption is expected to yield $14.7 million during  fiscal year 2014-2015.  
 
Elimination of Energy Star Products Tax Holiday
 
N.C.G.S. 105-164.13D provided an exemption from sales and use tax from the first Friday in November through the following Sunday for Energy Star products.  An "Energy Star qualified product" is "a product that meets the energy efficient guidelines set by the [EPA] and the United States Department of Energy and is authorized to carry the Energy Star label."  Items purchased for use in a trade or business and rentals were not covered by the exemption.  This sales tax holiday was enacted in 2008, and eliminating it is expected to bring $1.6 million in FY14-15 . 
 
Elimination of Sales Tax Exemption for Bakery Thrift Stores

A bakery thrift store is a retail outlet of a bakery that sells at wholesale over 90% of the items it makes and sells at the retail outlet day-old bread returned to it by retailers.  The exemption from sales tax was enacted in 2007, and its repeal is expected to result in $3.9 million in revenue in FY14-15.
 
Cap on Sales Tax Refund for Nonprofit Entities

Nonprofits will begin paying sales tax on purchases that exceed $666 million in a fiscal year.   In other words, the exemption is now capped at $45 million annually.   
 
Income Requirement for Farm Equipment Emption 

Farm equipment will continue to be exempt from sales tax, but only if the farm has a certificate showing annual gross income from farming operations of $10,000.   More than 40,000 farm exemption certificates are currently outstanding.  North Carolina has more than 52,000 farms, according to the 2007 USDA Census of Agriculture.  There are a number of issues that remain to be addressed in connection with this change.  The change in this exemption is expected to result in $16.5 million in revenue for FY14-15. 
 
Sales Tax on Energy

State sales tax will now be due on electricity and piped natural gas at the combined general rate.  The combined general rate is the State's general rate of tax plus the sum of the rates of the local sales taxes authorized for all counties. The current combined general rate is 7%.  A number of other taxes on electricy and natural gas are repealed in connection with this change, including the following:
  • Franchise taxes on electric power, water, and public sewerage companies (G.S. 105-116). 
  • Distribution of electric power company franchise tax to cities (G.S. 105-116.1). 
  • The 3% sales tax discount for municipalities that sell electricity (G.S. 105-164.21A). 
  • Payments in lieu of franchise taxes required of electric cities and joint power agencies (G.S. 159B-27(b) through (e)).





  

July 2, 2014

Opposition to Operation Choke Point Grows

image by skambalu foter.com
Opposition to Operation Choke Point continues to mount.
 
"Operation Choke Point" is an ongoing program of the U.S. Department of Justice under which it investigates banks' relationships with payment processors, so-called "payday lenders," and other companies believed to be at higher risk for violations of law. Bankers report being pressured to terminate relationships with these businesses even if no malfeasance is identified. Operation Choke Point is controversial because it has the potential to penalize banks and other lawful businesses simply because an agency of the executive branch disfavors certain types of businesses. Industries that have reportedly been targeted by Operation Choke Point include the following:
  • Ammunition Sales
  • Coin Dealers
  • Credit Repair Services
  • Dating Services
  • Firearms Sales
  • Fireworks Sales
  • Government Grants
  • Home-Based Charities
  • Life-Time Guarantees
  • Life-Time Memberships
  • Money Transfer Networks
  • Online Gambling
  • Payday Loans
  • Pharmaceutical Sales
  • Ponzi Schemes
  • Pornography
  • Multi-Level Marketing
  • Surveillance Equipment
  • Telemarketing
  • Tobacco Sales
  • Travel Clubs

A bill has recently been introduced in Congress to prevent federal banking regulators from exerting similar pressure. The bill would prohibit bank regulators from using their "safety and soundness" authority over banks to discourage banks from serving customers engaged in legal activities. Banks would benefit from a safe harbor with respect to business customers that are licensed, registered as a money services business, or have obtained a reasoned legal opinion confirming the legality of the business.

The bill was introduced by Representative Blaine Luetkemeyer (R-MO). Luetkemeyer explained that the legislation "would ensure that existing laws are interpreted as intended, overzealous and inappropriate use of regulatory and enforcement tools is curbed, and financial institutions have the security and ability to return to the business of offering products and services to a variety of industries including ammunition sales, fireworks sales and pharmaceutical sales." He went on to write that "[i]n an effort to drive legally-operating, licensed and regulated companies out of business, federal banking regulators in cahoots with the Department of Justice are placing so much regulatory pressure on financial institutions that certain businesses not viewed favorably by the Attorney General and the Administration are eventually choked-off from the financial services they need to survive. That notion goes against the very nature of our free market system. It is time to stop these backdoor attempts by government bureaucrats to blackmail and threaten businesses simply because they morally object to entire sectors of our economy.”

The bill was referred to the House Committee on Financial Services last week. 

At least one group has taken the litigation route. An association of consumer lending companies (Community Financial Services Association of America) filed a lawsuit against the federal financial regulators in early June, claiming that through Operation Choke Point, the FDIC, the Fed, and the OCC have informally pressured banks to cut off consumer lenders' access to banking services, which "exceeds the agencies’ statutory authority." You can read the Complaint here.


image material by martialartsnomad.com via foter
It remains to be seen whether legislation or litigation will force the Operation Choke Point to "tap out."




July 1, 2014

We can FINALLY remove those pesky IRS Circular 230 disclosures from our email messages!



If you've received an email from an attorney, accountant, or tax preparer in the past several years, it almost certainly included some barely-comprehensible fine print about tax advice, often with the caption "IRS Circular 230 Notice." The number of trees killed as a direct result of the extra pages of printed email messages resulting from these notices probably numbers in the millions.

Section 330 of title 31 of the U.S. Code authorizes the Secretary of the Treasury to regulate professionals who practice before the Treasury Department, such as attorneys and accountants. The Secretary published regulations governing practice before the IRS in 31 CFR part 10 and reprinted the regulations as "Treasury Department Circular No. 230."   Circular 230 says that regulated professionals must meet certain standards of conduct with respect to written tax advice or face suspension or disbarment.   In layman's terms, the IRS said "if you provide tax advice to your clients that we don't like, we will take away your livelihood."  The warning was an over-reaction a reaction to the tax avoidance schemes of the 1990s.  The language of Circular 230 was so broad, and the fear of the IRS's wrath so widespread, that regulated professionals started putting a disclaimer on every single email message--automatically.  Everything from friendly jokes, to emails scheduling appointments, to actual tax advice bore the disclaimer that "this does not constitute tax advice upon which you can rely."

Mercifully, those days are now behind us.  New rules issued by the IRS in June include this statement: “Treasury and the IRS expect that these amendments will eliminate the use of a Circular 230 disclaimer in e-mail and other writings.”