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# Legislative Bulletin..................................................November 7, 2005

**Contents:**

> **H.R. \_\_-- Deficit Reduction Act -- Title IV**

**Title IV -- Committee on Financial Services**

**[Background]{.underline}**: Under the budget resolution (H. Con. Res.
95), the House authorizing committees were instructed to find savings to
reduce the growth in mandatory spending. The House Financial Services
Committee was originally tasked with finding \$470 million in savings as
part of a \$35 billion package of savings over five years. Once the
Republican Conference adopted the more ambitious goal of \$50 billion in
savings over five years, the authorizing committees were expected to
find additional savings. However, the Financial Services Committee found
no additional savings.

**[Savings to Taxpayers]{.underline}**: According to CBO, Title IV would
reduce federal spending by \$470 million over five years (see Table 1).
Such savings amount to 0.9% of the \$53.9 billion deficit reduction
package.

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**Table 1. Savings/Spending, Outlays In Millions**

  ----------------------------------------------- ------------- -------------
  **Committee on Financial Services**             **2006**      **2006-10**

  Deposit Insurance Reform                        0             -200

  *Increase FDIC Limits*                          *(0)*         *(400)*

  *Changes to FDIC & NCUA Generating Premiums*    *(0)*         *(-600)*

  Federal Housing Administration (FHA) to         -30           -270
  Discretionary                                                 

  **Total Savings**                               **-30**       **-470**
  ----------------------------------------------- ------------- -------------

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**[Committee Action]{.underline}**: On October 27, 2005, the House
Financial Services Committee reported its submissions to the House
Budget Committee to be compiled into one reconciliation package along
with the submissions of the other authorizing committees. On November
3^rd^, the Budget Committee reported the package, the Deficit Reduction
Act, for consideration by the full House of Representatives.

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***[Subtitle A: Deposit Insurance Reform]{.underline}***

***[NOTE]{.underline}: This subtitle is the same as H.R. 1185, which
passed the House on May 4, 2005, by a vote of 413-10:
<http://clerk.house.gov/evs/2005/roll157.xml>.***

This subtitle would make the following changes to federal deposit
insurance:

-   Increases the standard maximum deposit insurance limit from
    \$100,000 to \$130,000, and indexes it every five years for
    inflation beginning on April 1, 2007 (future inflation adjustments
    would take place on the first day of the appropriate calendar year).
    This new coverage level is doubled for certain retirement accounts
    to \$260,000 (and subsequently adjusted for inflation). **Note: The
    Administration and Federal Reserve Chairman Greenspan have opposed
    these provisions in the past**.

-   Merges the two insurance funds through which federal deposit
    insurance is provided, the Bank Insurance Fund (BIF) and the Savings
    Association Insurance Fund (SAIF), into a new Deposit Insurance Fund
    (DIF).

-   Prohibits an insured depository institution that is not well
    capitalized or adequately capitalized (defined in the bill) from
    accepting employee benefit plan deposits. The Federal Deposit
    Insurance Corporation (FDIC) would have to provide pass-through
    deposit insurance for the deposits of any employee benefit plan.

-   Increases the insurance coverage amount for in-state municipal
    deposits to the lesser of \$2 million or "the sum of the standard
    maximum deposit insurance amount and 80 percent of the amount of any
    deposits in excess of the standard maximum deposit insurance
    amount." States could not prevent depository institutions from
    accepting, or municipal depositors from making, such covered
    deposits.

-   Allows the FDIC to charge risk-based premium assessments, but
    provides that no depository institution could be barred from the
    lowest-risk category solely because of its size. In addition, the
    legislation eliminates the existing restrictions on the FDIC's
    authority to levy assessments on any institution above amounts
    needed to achieve and maintain the existing ratio (of reserves to
    estimated insured deposits) of 1.25%.

-   Provides for a 50% discount in the assessment rate for deposits
    attributable to "lifeline" deposit accounts (accounts aimed at
    helping poor communities with limited financial resources) and
    repeals the requirement that credits for such accounts be funded
    from congressional appropriations.

-   Authorizes the FDIC to set the ratio of reserves to estimated
    insured deposits in the DIF within a range of 1.15% to 1.40% (using
    certain named factors), replacing the 1.25% "hard target" mandated
    by current law.

-   Directs the FDIC to collect information from all appropriate sources
    in determining risk of losses to the DIF, without imposing
    additional record-keeping requirements on insured depository
    institutions.

-   Provides for refunds, credits, and dividends for the return of
    excess assessments that insured depository institutions have made
    and/or whenever the DIF's level is considered strong and the
    financial and economic outlook is considered favorable. Dividends
    would be provided to depository institutions whenever the upper
    limit of the designated reserve ratio (1.40%) is exceeded. When the
    DIF exceeds 1.35% and is less than or equal to 1.4%, the FDIC would
    have to provide a cash dividend equal to one-half the difference
    between the actual fund balance and the fund balance required to
    maintain a reserve ratio of 1.35%.

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-   Provides federally chartered credit unions with parity in general
    standard maximum deposit insurance coverage, coverage for retirement
    accounts, and municipal deposits.

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-   Requires the FDIC to develop a "Deposit Insurance Fund Restoration
    Plan" when reserve ratios fall below or are projected within six
    months to fall below designated levels. The goal would be to restore
    the DIF's reserve ratio to the minimum amount within ten years.

-   Directs the Comptroller General to report to Congress on the
    effectiveness of the FDIC's organizational structure and directs the
    FDIC to report to Congress on the feasibility of:

    -   establishing a voluntary deposit insurance system for deposits
        in excess of the maximum amount of deposit insurance for any
        depositor;

    -   privatizing all deposit insurance at insured depository
        institutions and insured credit unions; and

    -   using actual domestic deposits rather than estimated insured
        deposits in calculating reserve ratios.

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-   Directs the FDIC to conduct a bi-annual survey on efforts by insured
    depository institutions to bring the "unbanked" into the
    conventional finance system and report its findings and
    recommendations to Congress.

**[Additional Background]{.underline}**: The FDIC, which insures
deposits in banks and thrift institutions for up to \$100,000 per
account, was created in 1933 in response to the thousands of bank
failures that occurred in the 1920s and early 1930s. The FDIC reports
that since the start of FDIC insurance on January 1, 1934, "no depositor
has lost a single cent" of insured funds as a result of a bank or thrift
institution failure.

To read more about the FDIC, visit this webpage:
<http://www.fdic.gov/about/learn/symbol/index.html>

**[Does this Subtitle Contain Any New State-Government,
Local-Government, or Private-Sector Mandates?]{.underline}**: Yes, as
follows:

**State and Local Government**: States could not prevent depository
institutions from accepting or municipal depositors from making insured,
in-state municipal deposits. \[This would apparently pre-empt New York
State laws that limit savings banks and savings and loan associations
from accepting municipal deposits.\]

**Private Sector**: Most depository institutions would have to pay
higher premiums for federal deposit insurance (mainly because of the
higher amount covered per account). CBO estimates that depository
institutions would pay about \$1.1 billion more in net premiums in
fiscal years 2007 through 2011, relative to current law. The incremental
cost to the industry would depend, in part, on how the FDIC uses its new
discretion under the bill to set premium rates. CBO expects that the
FDIC would begin to collect premiums from banks and savings associations
that are not required to pay premiums under current law.

Because H.R. 1185 also would increase the coverage of insured accounts
for federally insured credit unions, those credit unions would have to
contribute more to the National Credit Union Insurance Fund. CBO
estimates that those additional contributions would total about \$100
million over the 2006-2010 period.

The bill also would prohibit depository institutions that are not well
or adequately capitalized from accepting deposits for employee benefit
plans.

***[Subtitle B: FHA Asset Disposition]{.underline}***

This subtitle would transform the Federal Housing Administration's (FHA)
authority for rehabilitation grants and below-market sales from
mandatory to discretionary for fiscal years 2006 through 2010. During
this period, **[these activities could still be funded]{.underline}**
through the annual appropriations process. After FY2010, these
activities would return to being mandatory spending (using FHA's
permanent funding authority from the General and Special Risk Insurance
Fund liquidating account).

Some conservatives may be concerned that this reform does not achieve
actual dollar-for-dollar savings, because the Committee has shifted what
was a mandatory spending program into a discretionary spending program,
and thus CBO's budget projections rely on the appropriations process
finding \$270 million in savings in the FHA\'s rehabilitation grants and
below-market sales (or elsewhere). Though this provision is scored by
CBO as saving funds for the purpose of reconciliation, it relies on
future action by the appropriations committee and both houses of
Congress. Accordingly, if this provision were not counted, the Committee
would have failed to reach its reconciliation target.

**[Additional Background]{.underline}**: FHA often provides
rehabilitation grants to purchasers when selling defaulted properties.
To preserve a defaulted property as affordable housing, FHA can now sell
that property at below-market rates. This legislation would prevent such
below-market sales, unless Congress appropriates in advance any amounts
to make up for lost revenues (from below-market sales).

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**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-]{.underline}**

**[Sector Mandates]{.underline}?**: No.

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**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718