WASHINGTON : Aggressive Selling of Home Equity Loans Grabs Legislators’ Attention
The phrase “too smart for their own good” might apply to the aggressive marketers of tax-deductible home equity loans. The pitching of these loans as a substitute for non-deductible consumer lending by the nation’s banks is attracting scrutiny from lawmakers.
For instance, consider a recent newspaper advertisement run by a Virginia bank, which read, “Get a TaxSmart auto loan now . . . And the government could cover at least one of your payments this year. Has the government gone soft? The IRS trying to improve its image? Not exactly. The TaxSmart auto loan is something we came up with all by ourselves.”
Smart might have meant running the ad somewhere other than the nation’s capital, where some members of Congress were already concerned about creative uses for loans in the $100-billion home equity market.
“The marketers of the TaxSmart auto loan have found a loophole,” complains Rep. Frank Guarini (D-N.J.), who has introduced a bill designed to cut auto loans financed through home equity lines of credit. “These loans are secured primarily by the car, which is the true collateral. The home is tagged on as an afterthought. As one advertisement states, appraisals and title exams are not even required.”
The 1986 Tax Reform Act was another attempt by Congress to encourage home ownership. Although tax deductions on other consumer loans, such as for cars and credit cards, were phased out, mortgage payments remained deductible.
The only way to buy a car and deduct the interest on the car loan was to use a home equity loan. Congress tried to restict such uses of home equity loans by putting a $100,000 cap on them a few years later. But the money could still be used for anything from college tuition to vacations.
What bothers many congressmen is that the loans are a way around the policy goal of discouraging consumer borrowing. Along the way, they cost the U.S. Treasury tax revenue through the deductions.
In addition, the loans have split the consumer credit market. People who own homes can use the loans to get lower interest rates and tax deductions. Renters, who are generally less affluent, must borrow at a higher rate and cannot deduct the interest.
Rep. William Coyne (R-Pa.) asked the General Accounting Office this summer to examine the home equity loan market, with special attention on how much volume has increased since the 1986 tax act. He also asked the GAO for a report on the effect of home equity loans on bankruptcies and foreclosures.
Although it is too early to say what Coyne will do with the GAO findings when they come out in a few months, a staff member said Coyne may introduce legislation to restrict their use.
Virginia Stafford, manager of public affairs at the American Bankers Assn., said the ABA would not oppose Guarini’s bill because it is aimed at a specific abuse.
However, she said, further restrictions might bring a different response. “Congress made it a public policy to encourage home ownership, which is a long-term investment,” she said. “Is it fair now to do an about-face and change the rules?”
Plan to Promote Savings, Research
Sen. Phil Gramm (R-Tex.) and Rep. Newt Gingrich (R-Ga.) have introduced companion measures with the wide-ranging goals of stimulating research and development, encouraging savings and promoting home ownership.
The proposals offer a five-year plan to reduce the capital gains tax to a top rate of 19.6% for commercial and residential real estate. They would also provide a tax credit of up to $1,000 for moderate-income families buying their first home and permit tax-free, penalty-free withdrawals from IRA accounts to cover catastrophic medical costs, education and down payments on first homes.
According to Gramm and Gingrich, the bills would be revenue neutral because the changes would generate enough new economic growth during the next five years to offset the proposed $23.3 billion in tax cuts.
“This is a recipe for economic growth that will give housing a big boost, provide much needed savings incentives and help make the overall U.S. economy much more competitive,” said Mark Ellis Tipton, president of the National Assn. of Home Builders.
Bill Would Encourage Magnetic Rail System
House Budget Committee Chairman Leon E. Panetta (D-Carmel Valley) wants California and other states to get on the fast track.
Panetta and fellow committee member Rep. John Kasich (R-Ohio) have introduced legislation (HR 2878) to authorize the use of the Federal Highway Trust Fund to develop technology for a magnetic-levitation, high-speed rail system.
The new technology, commonly known as maglev, is considered an environmentally clean, efficient and safe form of mass transportation. Panetta says it has a “unique potential to reduce significantly our dependence on the automobile.”
Delays caused by highway congestion in major urban areas, such as Los Angeles, cost more than $30 billion a year, equivalent to nearly half the $65 billion spent by all governments for highways in 1987, Panetta says.
The legislation would allow the use of $750 million in federal funds over five years as the federal share of research, development and construction costs for a prototype rail system.
Those dollars would be matched by up to 25% from eligible applicants, such as private businesses, public and private education and research organizations and federal laboratories.
The Senate has adopted a similar measure as part of its version of the highway reauthorization bill.