by Ann vom EigenThe 107th Congress began optimistically in calender year 2000 with a new Republican administration downtown, a Republican House of Representatives, and with Vice President Dick Cheney's vote, a Republican Senate. It began with consideration of an administration- proposed tax bill that gave every American a $600 tax refund and American business, a better tax environment. However, because of the events of September 11, 2001, the Congress turned its attention to dealing with the new threat to the American way of life. Since that time, Congress has dealt with response to the terrorist threat, both with respect to changes to national security to protect the American public, as suggested by the Homeland Security Act, and the business response to the event, expressed through airline bailout legislation and the Terrorism Insurance Act. Congress even found itself focusing on the economic security of our nation as represented by the Enron debacle and the Sarbanes-Oxley corporate accountability act. This article reviews the changes in federal law and regulations over the last two years that have the most effect on our industry from a real estate and insurance perspective.
USA Patriot Act
Immediately after the September 11, 2001, terrorist actions, Congress enacted, and the President signed, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Pub. L. No.107-56). This act is commonly known as the USA Patriot Act. It requires financial institutions, including insurance companies and, through applicability of a section applying to bank holding companies, "persons performing real estate settlements," to establish compliance programs to identify terrorists. As Title News goes to press, the Treasury Department has issued interim rules applicable to banks, effective April 24, 2003, and some rules applicable to insurance company investment products. As part of the war against terrorism, President Bush had issued Executive Order 13224, effective September 2001, prohibiting transactions with individuals and organizations on the list of "Specially Designated Nationals," published by the Office of Foreign Assets Control of the Department of the Treasury. In order to comply with Executive Order 13224, real estate settlement providers must check the names of all relevant parties in a real estate transaction against the individuals and organizations on the List to ensure that the real estate settlement provider is not engaging in such a prohibited transaction or dealing. ALTA® has established a searchable link on its Web site to the Treasury Department list to facilitate our members' ability to comply with this requirement. This interface initiates a search on a document published and maintained by the U.S. Treasury Department on its Web site. Rules applicable to real estate settlement persons have been deferred, and it is expected that the Treasury Department will issue an advance notice of proposed rulemaking by January 2003.
Changes in Tax Policy
The Economic Growth and Tax Relief Reconciliation Act of 2001, President Bush's centerpiece tax bill, had no provisions directly applicable to real estate. However, the economic stimulus package and its eventual effect, in combination with Federal Reserve policy on interest rates, facilitated a healthy housing market. On a more discrete level, two changes in tax policy implemented by the IRS will have significant effects on the title insurance industry. Both of these changes, reproposed rules on reporting of fees to attorneys, and final regulations on middlemen, minimize the administrative burden of Filings of IRS Form 1099s.
Attorney Fee Reporting
The IRS and the Treasury Department amended and reproposed regulations implementing the Taxpayers Relief Act of 1997 requiring reporting on payments to attorneys. The regulations are to become effective during the first calendar year that begins at least two months after the date of publication of the final regulations in the Federal Register. It is expected that the regulations will become effective no earlier than 2005. [May 17, 2002 REG-126024-01] The new proposed regulations contain several factual examples explaining the application of the reproposed regulations, and have several significant features as follows: New Real Estate Exception. There is no reporting required for payments made to an attorney in the attorney's capacity as the person responsible for closing a real estate transaction. New De Minimis Threshold. In order to reduce the compliance burden associated with the reporting requirement, the proposed regulations adopt a $600 annual threshold for reporting payments to an attorney. Corporate Reporting Required. Reporting is required even for attorneys who are incorporated. In the case of a payment by check, the attorney must be named as a sole, joint, or alternative payee for the payment to be reportable.
Under the Internal Revenue Code, Section 6041, final regulations provide more consistent guidance for payments involving a middleman— where a person makes a payment on behalf of another person. Title companies performing closing and escrow functions would be considered middlemen. The IRS finally issued middleman regulations that describe information reporting requirements (Form 1099-Misc) on disbursements by middlemen. The regulations do contain several relevant examples, three of which are most on point. One example (Example 1) replaces a revenue ruling that was issued in 1993 and describes reporting requirements for construction escrow disbursements. We believe it provides a bright line test of when closing agents don't have to report. Another example (Example 3) describes a situation in which settlement agents are not required to report because they (1) do not perform management or oversight function and (2) do not have a significant economic interest in the payments. A further example (Example 4) modifies Example 3 to have the settlement agent hire a contractor. Therefore, the settlement agent performs management and oversight functions and must report.
Terrorism Insurance Act
After the September 11th terrorist attacks, reinsurance for large commercial property and casualty needs began to disappear from the marketplace. Congress began to work on a terrorism "backstop" for the insurance industry, and President Bush signed into law "The Terrorism Risk Protection Act of 2002" (HR3210) on November 26 (Public Law No: 107-297). The Act provides temporary (three year) federal support for insurance. Under the law, the government would be responsible for 90% of insurance industry losses that exceed a minimum amount for each of three years as follows, $10 billion, $12.5 billion and $15 billion. Property and casualty insurers (but apparently not title insurers,) would have to pick up a portion of initial losses based on their total premium income. The schedule rises from 7% of premiums in 2003 to 15% in 2005. Passage of the act effectively voids preexisting exclusions of coverage without affirmative action by the insured. While the U.S. Department of Housing and Urban Development has indicated that it will not require terrorism coverage on FHA-insured loans, other capital providers may require coverage on large projects or those in areas of "significant risk," such as New York City or Washington, DC. While the price of such insurance is now uncertain, the federal subsidy should at least deepen the market and increase the availability of coverage. With respect to captive insurers, prior to a triggering event, the Secretary of the Treasury may, in consultation with the NAIC or other state regulatory authorities, apply the program to those and other self-insured entities. On November 26, the Department of Treasury issued interim guidance to insurers on the disclosures to policyholders of the premium charged for insured losses covered by the Terrorism Risk Insurance Program. The new law should help revive dormant commercial real estate projects. According to the Real Estate Roundtable, over $15 billion worth of projects have been delayed since September 11 because lenders were unwilling to go forward without terrorism insurance in place. At the bill signing, President Bush noted that the bill addressed systemic wide economic problems, as "commercial construction had reached a six-year low, thousands of hard-hat workers were kept off the job, commercial mortgage-backed securities had seen their bond ratings lowered, and teachers, police officers, and firefighters had lost money in their pension plans." Although we are now nearing the end of the construction season, acquisitions will be able to go forward, and eventually new construction will begin.
Failed to Pass
The 107th Congress made progress on several other measures that would have had a significant effect on the title insurance industry but in the end failed to pass. Although we hope this problem will be resolved by the time Title News arrives in your office, we note that Congress actually failed to reauthorize the federal flood insurance program. The temporary lapse in the authority of the federal government to issue flood insurance, if left unaddressed, could completely halt real estate originations and refinances where flood insurance is required. As Title News goes to press, ALTA® is participating in a real estate coalition to request issuance of a Presidential Executive Order and eventual reauthorization to keep the program running.
Interest on Business Checking
Legislation to allow banks to offer interest to businesses holding checking accounts made some progress in the last Congress. H. R. 1009, the Business Checking Freedom Act that passed the House on April 9, 2002, provides that, two years from the date of enactment, banks will be allowed to pay interest on business checking accounts. The bill may affect bank and title agency escrow relationships, since it would lift the current prohibition against banks paying interest on escrow funds. ALTA® members had voiced concerns that the interest on the business checking bill, which would repeal the current Regulation Q (Federal Reserve) prohibition on banks paying interest, would effectively eliminate certain well-established financial benefits and checking services that large depositors now receive from banks in lieu of interest. These services are provided in accordance with current guidance under Regulation Q. The service we receive in return for the large deposits we make currently subsidize our settlement service operations. ALTA® sought a clear Congressional statement to that effect, which it obtained in the House-passed version of the bill. However, the Senate failed to consider the legislation.
Another piece of legislation that failed to be enacted was H.R. 833, Bankruptcy Reform legislation. This legislation, designed to make it more difficult for individuals to declare bankruptcy, has been passed by both the Senate and the House in several Congressional sessions but never signed into law. This year, because of a controversy over an amendment dealing with civil bankruptcies of individuals convicted of bombing abortion clinics, the bill failed to pass the House of Representatives. Consequently, an ALTA®-sponsored amendment, dealing with a California court decision, failed as well. In McConville, the Ninth Circuit failed to apply Section 549(c) of the Bankruptcy Code to allow perfection of a lender's lien after the borrower filed an undisclosed bankruptcy. The court limited the application of section 549(c) to transfers of fee interests only. The case was appealed to the Supreme Court, and certification was denied. ALTA® consequently sought, and obtained in both the House and Senate bills, amendments to the Bankruptcy Code to clarify that a post-petition transfer is valid and exempt from the automatic stay of bankruptcy.
Federal Regulation of Insurance
Finally, legislation authorizing federal regulation of the insurance industry (H.R. 3766), the Insurance Industry Modernization and Consumer Protection Act, was introduced in the House. Rep. Richard Baker (R-LA) held a number of hearings on the measure, but the bill was never reported out of the House Financial Services Committee. The legislative agenda for the next Congress is developing. Unlike the last session, we expect to see major Congressional action in the following areas, privacy, regulatory burden relief, and Interest on Business Checking. It is unlikely that Congress will take up major RESPA reform while the proposed rule is pending at HUD (see the cover story in this Title News), but some oversight may occur next year. In any case, we can expect that Congress will work on the President's economic package, and the new political landscape—a Republican majority in the House, a marginal Republican majority in the Senate, and a Republican White House—may well have more final results.
Ann vom Eigen is ALTA®'s legislative and regulatory counsel. She can be reached at firstname.lastname@example.org or 1-800-787-2582.