Housing legislation -- even worse than you think

The housing bill in Congress — which has now morphed into a housing-and-Fannie/Freddie-rescue bill — appears likely to become law within days.

The president has dropped his objection to $3.9 billion in largesse to city and state governments to dole out to favored constituencies in exchange for the assurance of a blank check for Fannie and Freddie.  So everybody wins — except the taxpayer/dollar holder.

But wait — it gets worse.  It's not only a boondoggle, it's a major-league privacy threat. 

Two egregious provisions of the bill haven't gotten a lot of coverage, especially since Fannie and Freddie got thrown into the mix, but I assume they'll end up in the final version of the bill: 1) Nearly all credit-card transactions will be tracked and reported to the IRS and 2) Many people in the mortgage and real estate industries must submit to a mandatory fingerprint registry.

Let's start with the credit card (and debit card) provision first.   Former Congressman Dick Armey's Freedomworks organization has led a feeble opposition.  As he explains it:

This is a provision with astonishing reach… Not only does it affect nearly every credit card transaction in America, such as Visa, MasterCard, Discover, and American Express, but the bill specifically targets payment systems like eBay's PayPal, Amazon, and Google Checkout that are used by many small online businesses. The privacy implications for America's small businesses are breathtaking.

To say nothing of America's consumers.   The aim is to curb underreporting of income by businesses to the IRS.  It sure seems odd that this would turn up in a bill championed by Sen. Chris Dodd (D-Connecticut) who poses as a champion of civil liberties, and indeed who took the lead fighting the warrantless wiretapping bill that retroactively cleared the phone companies of breaking the law.

But when it comes to reporting all our credit card transactions to the IRS, Dodd's office says nope, nothing to worry about.

This is not a controversial provision or a new one.  Republicans and Democrats on the Senate Finance Committee have supported it for months, and it has been included in the Administration's budget proposal for years.  This provision simply requires banks–not small businesses–to report sales transactions to the IRS each year and to merchants at the end of each day.  It makes the tax system fair for everyone, without burdening small businesses and without putting consumers' privacy rights at risk.

I guess PayPal, et. al. now qualify as "banks" in Washington.  You can read the official summary of the amendment [.pdf file] and decide for yourself:

The proposal requires information reporting on payment card and third party network transactions. Payment settlement entities, including merchant acquiring banks and third party settlement organizations, or third party payment facilitators acting on their behalf, will be required to report the annual gross amount of reportable transactions to the IRS and to the participating payee. Reportable transactions include any payment card transaction and any third party network transaction. Participating payees include persons who accept a payment card as payment and third party networks who accept payment from a third party settlement organization in settlement of transactions. A payment card means any card issued pursuant to an agreement or arrangement which provides for standards and mechanisms for settling the transactions. Use of an account number or other indicia associated with a payment card will be treated in the same manner as a payment card. A de minimis exception for transactions of $10,000 or less and 200 transactions or less applies to payments by third party settlement organizations. The proposal applies to returns for calendar years beginning after December 31, 2010. Back-up withholding provisions apply to amounts paid after December 31, 2011.

Then there's the fingerprint provision.  As explained by the Competitive Enterprise Institute's John Berlau:

The provision says that "an individual may not engage in the business of a loan originator without first . . . obtaining a unique identifier." To obtain this "identifier," an individual is required to "furnish" to the newly created Nationwide Mortgage Licensing System and Registry "information concerning the applicant's identity, including fingerprints," that will be sent to the FBI and other government agencies.

The bill's definition of "loan originator" could cover a broad swath of employees working for mortgage lenders and brokers and real estate firms, including clerical employees, part-time and seasonal workers. An "originator" is defined as anyone who "takes a residential loan application; and offers or negotiates terms of a residential mortgage loan for compensation or gain." Real estate agents are also covered if they receive any type of compensation from "originators."

The rationale for this new fingerprint registry is thin. Were a significant number of bad loans made by ex-convicts? And how would the targeting of lower-level employees – rather than executives like Countrywide Financial CEO Angelo Mozilo – stem the creation of problematic mortgages?

And so, Congress and the President are about to perform favors for their contributors and constituencies, while ordinary people foot the bill and have their privacy stripped in the process.  Just swell.   

The Daily Reckoning