Impact OF H.R. 4314 On The Banking Community As presently drafted, HR 4314 would impose a fifty percent excise tax on banks that make secured loans pursuant to blanket security agreements to individuals who presently have or subsequently acquire the right to receive structured settlement payment rights. A blanket security agreement is a commonly used devise to secure a loan to an individual or entity. In a nutshell, it says that the loan made by the lending institution is secured by all property (both tangible and intangible) which the borrower presently owns or subsequently acquires. Thus, despite the fact that a lender may not know of the existence of a structured settlement, they will be liable for the tax. Simply states, a blanket security agreement is a pledge and encumbrance of one's assets, including, where they exist, structured settlement payment rights. Hence, the tax is triggered. Effect On Capital Markets Structured settlement purchases are financed through the use of asset backed securitizations. By way of simplification, these financing transactions involve the conveyance of assets to a trust and the re-sale of interests in those trusts (typically in the form of a bond backed by the assets in the trust) to major banks, investment houses and, ironically, insurance companies. As presently drafted, an overly zealous IRS could argue that a tax is triggered at various steps in such transactions including the subsequent trading of the asset backed bonds. The relevant sections of HR 4314 follow: "Sec. 5891 STRUCTURED SETTLEMENT FACTORING TRANSACTIONS. "(a) IMPOSITION OF TAX..-- There is hereby imposed on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction a tax equal to 50 percent of the factoring discount as determined under subsection (c)(4) with respect to such factoring transaction. "(3)STRUCTURED SETTLEMENT FACTORING TRANSACTION. - The term `structured settlement factoring transaction' means a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale assignment, pledge, or other form of encumbrance or alienation for consideration. Related articles: Annuitys & Structured Settlements: The Controversy Of Selling Payments Impact OF H.R. 4314 On The Banking Community Myths and Reality of H.R. 4314 House Ways and Means Commitee Back to the Breaking News Page
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