UPDATE 2-US Rep Frank proposes TARP bailout rules crackdown

Fri Jan 9, 2009 6:32pm GMT

(Adds Frank comments, details of bill, background)

By Kevin Drawbaugh

WASHINGTON Jan 9 (Reuters) - A senior Democrat proposed legislation on Friday to tighten the rules of the government's $700-billion financial bailout program and channel a large portion of it to home foreclosure prevention.

With Congress growing increasingly concerned about fixing the bailout program and stabilizing the financial system, House Financial Services Committee Chairman Barney Frank said he will hold a hearing on Tuesday on the bill he is proposing, with a House floor vote possible on Wednesday or Thursday.

Known as the Troubled Asset Relief Program, or TARP, the Treasury Department's bailout has so far devoted about $350 billion to capital injections into major banks and smaller amounts to aiding automakers and a major insurer.

Approved in October, the program's focus has shifted repeatedly under the direction of Treasury Secretary Henry Paulson, raising concerns among lawmakers about its future.

Under the original TARP legislation, the White House must ask Congress for the next $350 billion of program funding. Frank's bill would set conditions for release of that money, which would impose tougher standards for the bailout.

"We are Reaganites, we intend to trust but verify," Frank, a Massachusetts Democrat, told reporters.

The bill is still being finalized, but was drafted after consultation with officials in the Bush administration and the incoming administration of President-elect Barack Obama. Obama will take over the White House on Jan. 20.

At a House hearing, Frank called for rapid progress on a major economic stimulus package and "the release of the second $350 billion of the TARP, provided that we can agree on appropriate measures to govern the allocation of those funds."

Under his bill, Treasury would have to devote at least $40 billion to reducing home foreclosures via a plan that it must develop by March 15 and start funding by April 1.

Treasury would also have to give small banks more access to the TARP and require quarterly disclosure by TARP participants about their use of TARP funding. [ID:nN09486527].

Other provisions of the draft bill would constrain the use of TARP funds in bank buyouts. TARP fund recipients could not buy other depository institutions without a Treasury finding that a deal "reduces the risk to taxpayers or ... could have been accomplished without funds provided under the TARP."

The bill would standardize limits on the pay of executives employed by TARP recipients, regardless of what sort of aid received under the program. It would also make wider pay provisions retroactive to existing program participants.

"If they don't like it, they can give the money back," Frank said, referring to the retroactive limits on pay.

In an attempt to encourage more modification of troubled mortgages to help distressed homeowners, the bill would give a legal safe harbor to mortgage servicing companies seeking to modify loans under their supervision.

The Frank bill would require Treasury to develop a program outside the TARP to stimulate home buyer demand and urges this be done by ensuring affordable mortgage rates.

Finally, the bill would clarify that Treasury can use the TARP to support consumer, student, vehicle and commercial real estate loans, as well as markets for mortgage-backed securities, municipal bonds and auction-rate securities. (Editing by Andre Grenon)