The whopping housing bill that President Bush signed into law last week does far more than merely address the nation's real estate woes. Some sections have raised serious privacy concerns.
Tucked in near the end of the Housing and Economic Recovery Act is a requirement that banks and online payment networks annually collect and report to the IRS electronic payments made to online merchants. It takes effect in 2011, and will affect what information companies like PayPal collect from their sellers and could raise privacy and auditing complications.
The housing bill also finalized the SAFE Mortgage Licensing Act. As CNET News.com previously reported, the provision creates a national fingerprint registry of "loan originators"--essentially anyone involved in the mortgage industry. While intended to curb predatory lending, the measure has come under fire for being potentially ineffective and unnecessarily invasive.
A safe electronic payment provision?
The electronic payment provision calls for "payment settlement entities"--banks and online payment networks--to provide the IRS with the name, address, and Tax Identification Number (TIN) of merchants who made more than $20,000 with 200 or more transactions in a year. It does not require each receipt to be accounted for, but the "gross amount of the reportable payment transactions." The provision is expected to raise $9.8 billion over 10 years by collecting taxes that usually don't get paid. (See our coverage from 2007 for more details on the origin of the proposal.)
According to David Sohn, senior policy counsel for the Center for Democracy and Technology, turning in the TIN for small merchants could create a security risk because many small vendors use their Social Security numbers as their TIN. "When banks issue merchants credit card accounts, they may have to get a TIN initially but they don't keep it, which is a sound privacy practice," Sohn said. "Only collect the data you need, and only keep the data as long as you need it.
"We've seen this constant stream of data breaches where various kinds of businesses and institutions suffer some kind of data intrusion or lost files. The Social Security number in particular is found to be the most important piece of information for an identity thief."
An aide to Sen. Max Baucus, chairman of the Finance Committee, said both the banks and the IRS have privacy and security rules they follow to protect confidential information.
Sohn said the federal government has been encouraging its agencies to stop using Social Security numbers as a means of organizing data and that the housing bill provision "goes contrary to the whole effort to limit relying on it."
Michael Oldenburg, a spokesman for PayPal, which is owned by eBay, said, "Our top priority is the safety and security of our customers." He said that since the legislation does not take effect until 2011, PayPal will "work closely with our merchants and figure out a way to make (reporting the necessary data) pretty seamless."
As Ken Swab, senior federal government relations officer at PayPal, noted Tuesday on the PayPal blog, eBay worked closely with Congress to influence the legislation. "We're happy with the way it turned out," Oldenburg said. "Originally legislation was looking like it was going to be targeted at casual sellers" who took in more than $600 in electronic payments per year.
While the legislation may not effect the smallest vendors on sites like eBay, Sohn says it could negatively effect small vendors who share an account for receiving credit card payments. "The aggregate amount of sales reported to the IRS isn't going to match the individual sellers' tax returns," Sohn explained. This could make the vendors more vulnerable to audits or prompt the IRS to request even further information from intermediary companies, he said. "Once we establish this precedent, there could be other governmental purposes where it could be appealing to try and force private intermediaries to track their customers' behavior."
Curbing bad loans with a fingerprint database
The bill also creates the Nationwide Mortgage Licensing System and Registry, which requires "loan originators" to furnish their fingerprints to the FBI. A loan originator is defined in the bill as a person who "takes a residential mortgage loan application."
Sharon Reuss, a spokeswoman for the Center for Responsible Lending, said the measure "reflects that borrowers' loans are significantly more expensive if they go through a broker in the subprime market than if they had gone directly to a lender." She added, "We think addressing the broker issue is very significant."
However, Tyler Belong, founder of the Mortgage Accountability Association, argues that the measure will have little impact. "It is not going to stop borrowers from being duped into signing onto a loan (or loans) that they don't understand," he has said. "These practices will continue, in substantially the same volume, regardless of whether the FBI has fingerprints."
Meanwhile, groups such as the American Conservative Union, the American Civil Liberties Union, the Competitive Enterprise Institute, and the U.S. Bill of Rights Foundation have opposed the measure. "Identity theft involving fingerprints is becoming a major concern among data security professionals," the groups said in a letter to the Senate.
The ramifications of the data collection provisions could be as extensive as the more than 600-page bill itself, privacy advocates speculate. "We wonder really just how much information collection this is going to lead to," Sohn said.
A housing bailout bill that would also create a national fingerprint registry is facing some unexpected delays in the U.S. Senate and may not be voted on until next month.
We wrote about the proposed law last month after it had been approved by the Senate Banking Committee. After that, it was supposed to be on the fast track to President Bush's desk, but a fuss over an amendment for renewable-energy tax credits--which, of course, have nothing to do with foreclosures and the bursting of the housing bubble--is creating the delay.
The legislation would require any mortgage "loan originator" to furnish "fingerprints for submission to the Federal Bureau of Investigation" and a wealth of other unnamed government agencies. There are no explicit privacy protections, and a Nationwide Mortgage Licensing System and Registry would be created to provide "increased accountability and tracking of loan originators," implying a permanent database of fingerprints.
An alliance of privacy-minded groups, including the American Conservative Union, the American Civil Liberties Union, the Competitive Enterprise Institute, and the U.S. Bill of Rights Foundation, sent a letter to the Senate on Tuesday. It asks that the fingerprint registry be stripped from the housing bailout bill. (CEI has posted a copy of the letter.)
So far, there's been no response. When I talked to John Berlau of CEI this week, he suggested that senators don't seem willing to defend the fingerprinting plan publicly.
In case you're curious, here's the text of the legislation. (Note that if you're using OS X's Preview, it may not open properly; I had to use Adobe Reader.) Here's another link to the underlying bill.
After the Senate gets back from its Fourth of July vacation, it will have had time to resolve the tax credit issue and is likely to hold a vote pretty quickly. Election year pressures predict that the bill will pass: a vote this week to send the measure back to committee failed by an 11-70 vote. (The political urge to be seen voting for a housing bailout is a bipartisan one: both Sens. John McCain and Barack Obama voted to keep the bill alive. President Bush, however, has threatened a veto.)
Bailing out housing speculators may or may not be a good idea. But it would seem reasonable for the Senate Democrats to permit an up-or-down vote on the section creating the fingerprint registry. We know that Obama has previously supported it in a standalone bill -- and then has ducked questions about it from the press since.
An up-or-down vote would let both the Illinois senator and his Republican rival demonstrate whether they think forced fingerprinting should be routinely mandated by the Feds or not. If such a vote does not take place, the explanation is simple: Our esteemed elected leaders are, once again, trying to avoid being accountable to the American public.
The Senate housing bill approved by a committee this week was already drawing fire from fiscal conservatives and financially responsible homeowners opposed to bailing out housing speculators.
Now it may be time to add privacy advocates to the chorus of voices urging President Bush to veto the bill, which could put taxpayers on the hook for billions of bailout dollars in new taxes or deficit spending.
Buried in the text of the revised legislation, approved by the Senate Banking Committee by a 19-2 vote this week, is a plan to create a new national fingerprint registry. It covers just about everyone involved in the mortgage business, including lenders, "loan originators," and some real estate agents.
"We know that today the rules governing mortgage brokers and lenders are inadequate," Sen. Dianne Feinstein (D-Calif.) said in a statement. "There is just a thin patchwork of regulation that varies from state to state. This legislation will create basic minimum standards for states to utilize to protect consumers." Feinstein and Mel Martinez (R-Fla.) wrote a separate bill introduced in February that has been glued onto the revised Senate housing legislation.
What's a little odd is the lack of public discussion about this new fingerprint database. No mention of it appears in the official summary of the revised Senate bill. No fingerprint database requirement is in the House version of the legislation approved earlier this month. No copy of the revised Senate legislation is posted on the Library of Congress' Thomas Web site, which would be the usual procedure.
The feds' new fingerprint database would function like this: Any "loan originator" must furnish "fingerprints for submission to the Federal Bureau of Investigation" and a wealth of other unnamed government agencies. Loan originator is defined as someone who accepts a residential mortgage application, negotiates terms on a mortgage, advises on loan terms, prepares loan packages, or collects information on behalf of the consumer. Real estate agents are covered if they get "compensation" of any sort (including kickbacks) from loan originators.
It's true that some states already have fingerprinting requirements. Colorado requires "mortgage brokers" (a narrower category) to get fingerprinted. So do Kansas, Mississippi, and Montana, for instance.
In the proposed federal system, what remains unclear is what happens to the fingerprints once submitted. The legislation talks about a "background check"--which would imply a one-time use--but also creates a Nationwide Mortgage Licensing System and Registry that "provides increased accountability and tracking of loan originators." Neither Feinstein's nor Martinez's offices returned our phone calls and e-mail messages asking for clarification on Friday morning.
The bill does specify that the registry will be run by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. Those two groups are currently developing a "central repository" of information with document collecting and fingerprinting that "will be accessed through a secure Web site over the Internet."
"I imagine that, yes, a fingerprint registry might stop an ex-con from handling loans, but I doubt it will make even a dent in the lending problems the bill aims to stop," says John Berlau, director of the Center for Entrepreneurship at the free-market Competitive Enterprise Institute. "And I would venture to guess that the vast majority of the problem mortgages were handled by employees with no criminal record. Rather, this seem like another thoughtless idea that lets politicians brag that they are 'getting tough' about a particular problem."
Berlau makes a good point. Creating a database of fingerprints of "loan originators" and a subset of real estate agents might make sense. It might not. But it surely would have been reasonable to have an informed debate on the topic before politicians rushed to enact federal legislation before the Senate's Memorial Day recess, and it would surely be wise to insist on security and privacy protections when the bill goes to the full Senate. Unfortunately, there's little reason to believe either will actually happen.
News.com's Anne Broache contributed to this report.
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