Compliance & Regulation

In setting standards for bank securitizations, the Federal Deposit Insurance Corp. is seeking comment on changing the way residential servicers are compensated and suggesting that depositories should not be obligated to make more than three advances to cover delinquent monthly payments by homeowners. In terms of compensation, the FDIC is asking if servicers should be paid incentives to modify loans as well as actual expenses. The FDIC's proposal also notes that loss mitigation has been a "significant cause of friction" between servicers and RMBS investors. "For RMBS, should contractual provisions in the servicing agreement provide for the authority to modify loans to address reasonably foreseeable defaults and to take such action as necessary or required to maximize the value and minimize losses on securitized financial assets?" the FDIC asks in its advance notice of proposed rulemaking. The receiver of failed banks contends the misalignment of interests in the securitization process has caused significant losses to the Deposit Insurance Fund. The agency wants to fix what it calls these "defects." The proposal is being issued for a 45-day comment period.

In setting standards for bank securitizations, the Federal Deposit Insurance Corp. is seeking comment on changing the way residential servicers are compensated and suggesting that depositories should not be obligated to make more than three advances to cover delinquent monthly payments by homeowners. In terms of compensation, FDIC is asking if servicers should be paid incentives to modify loans as well as actual expenses. The FDIC's proposal also notes that loss mitigation has been a "significant cause of friction" between servicers and RMBS investors. "For RMBS, should contractual provisions in the servicing agreement provide for the authority to modify loans to address reasonably foreseeable defaults and to take such action as necessary or required to maximize the value and minimize losses on securitized financial assets?" FDIC asks in its advance notice of proposed rulemaking. The receiver of failed banks contends the misalignment of interests in the securitization process has caused significant losses to the Deposit Insurance Fund. The agency wants to fix what it calls these "defects." The proposal is being issued for a 45-day comment period.

Federal regulators are giving banks a one-year transition period to deal with the risk-based capital implications of moving certain mortgage securitizations onto their balance sheets due to recent accounting rules changes that go into effect Jan. 1. The Federal Deposit Insurance Corp. and the other regulators realize that affected banks and thrifts are going to see their assets balloon as they consolidate private-label MBS and commercial securities onto their books. A final rule adopted by the FDIC board of directors allows banks to exclude the consolidated assets from risk-based capital calculations during the first two quarters of 2010. Over the third and fourth quarters, banks only have to count 50% of the consolidated assets for RBC purposes. Banks can adopt these transition options voluntarily starting Jan. 1. FDIC-insured institutions also will see an increase in their allowance for loan losses due to the implementation of Financial Accounting Standard 166 and FAS 167. Regulators are relaxing restrictions on including loan loss allowances in Tier 2 capital for two quarters. FDIC chairman Sheila Bair said banks are already under capital pressure and the transition period is appropriate. "It is temporary and by 2011 banks will need to be fully compliant," Ms. Bair said at an FDIC board meeting. She also noted the transition relief does not apply to leverage capital ratios. "We have always followed GAAP accounting for the leverage ratio so there will be no transition there," she said.

The Department of Housing and Urban Development has issued a proposed rule that sets minimum standards for state licensing of loan officers and mortgage brokers. Congress directed HUD to set minimum licensing requirements for states under the Secure and Fair Enforcement Mortgage Licensing Act of 2008. If HUD determines a state does not meet the minimum standards, the department is charged with administering a licensing system for the state. "By introducing nationwide standards of uniform licensing for loan originators, the SAFE Act is taking an important step in returning integrity and accountability to the residential mortgage loan market," said HUD assistant secretary David Stevens. The public comment period on the proposed SAFE rule ends in 60 days.

The Federal Housing Finance Agency may ask the U.S Treasury before the end of the year for an increase in the $400 billion lifeline provided to Fannie Mae and Freddie Mac, according to Bloomberg. The news agency quoted people familiar with the talks between Treasury and FHFA. A spokeswoman for the GSE regulator would not comment.

The Federal Deposit Insurance Corp. has issued a proposed rule on securitization standards that include a 5% risk retention requirement on newly issued MBS by depositories. The new standards are part of the agency's revision of "safe harbor" policies with regard to receivership assets. The current safe harbor assures MBS investors that FDIC will not seize the underlying mortgages of MBS sold by a bank that later fails. The regulator is making the proposal because of recent changes in accounting rules and wants to set a securitization requirement as a way to revive the private-label MBS market. FDIC wants to move quickly on the new policies. Chairman Sheila Bair says securitization standards are compatible with current House and Senate legislative efforts. However, at an FDIC board meeting Tuesday, Comptroller of the Currency John Dugan raised objections and is forcing FDIC to move more deliberately. "A rigid minimum retention requirement risks closing down securitization markets," he said.

Three out of every 10 loan originators who have taken the national mortgage licensing test required under the SAFE Act have failed what is characterized as an "entry level" exam. The pass rate is better on the state-specific portion of the exam, but not by much. More than one in four applicants who have taken the tests so far have failed to achieve a passing grade, according to statistics released by the Conference of State Bank Regulators. The CSBS figures do not break out pass-fail rates by occupation. But Roy DeLoach of the National Association of Mortgage Brokers is certain his members have better scores than loan officers working directly for mortgage bankers or state-chartered financial institutions. (Although representatives of those groups may disagree.) "It's not brokers (who are failing), I guarantee you that," NAMB's executive vice president told National Mortgage News. "If you parse that out, I'm betting that the pass rate is tremendously higher" among brokers. Bill Matthews, president of the State Regulatory Registry, the CSBS subsidiary which owns and operates the National Mortgage Licensing System, said its "hard to tell" who is passing the entry-level exams at this point because testing only began on July 30. During the four-month span between July 30 and Nov. 30, according to the CSBS tally, 10,421 mortgage loan originators took the national test but just 7,219 passed, a failure rate of 31%. Of the 6,097 originators who took the tests specific to the state or states where they want to be licensed, 4,461 earned the 75% score needed to pass, a failure rate of 27%. The figures include first-time test takers as well as those licensing candidates who took the exams again. When testing began on July 30, 11 unique state tests were available. In October, seven more state tests were released, bringing the total to 18 as on Nov. 30.

Equitable Trust Mortgage Corp. has agreed to pay a $277,000 fine and reimburse 37 FHA borrowers as a part of a settlement with the Department of Housing and Urban Development. The agreement means the Baltimore-based nonbank is once again allowed to originate government-backed loans. The agency suspended ETM on Dec. 7 for improperly charging 37 borrowers excessive loan origination fees. However, in settling, the company did not admit fault or liability. In addition to paying the civil money penalty, ETM has agreed to refund the overcharges to the 37 borrowers. The individuals will receive refunds ranging from $500 to $9,135. The total amount repaid to borrowers will be $147,589, HUD said. "The settlement agreement imposes a significant penalty on ETM for violating HUD requirements, but also provides the wronged borrowers relief in these tough economic times," said FHA commissioner David Stevens.

To protect seniors for fraudulent reverse mortgage schemes, the House of Representatives approved an amendment for the proposed Consumer Financial Protection Agency to monitor and regulate the practices of reverse mortgage lenders. "Many seniors are turning to reverse mortgages," said Rep. Jan Schakowsky, D-Ill., in offering her reverse mortgage amendment during debate on the Wall Street Reform and Consumer Protection bill (H.R. 4173). "We must do everything in our power to ensure the fidelity of the system and shield our parents and grandparents from being cheated or misled," she said. As proposed, the CFPA would be an independent regulatory agency that sets mortgage lending standards for all residential originators and has the power to enforce those standards. Rep. Schakowsky's amendment gives the CFPA explicit authority to regulate reverse lending practices. The House passed her amendment by a 277-149 vote. During debate, the Illinois lawmaker noted that CFPA should work with the Federal Housing Administration, which insures a reverse mortgage product called Home Equity Conversion Mortgages, in developing its reverse mortgage regulations.

The House of Representatives on Friday passed a massive regulatory reform bill that, among other things, creates a new consumer protection agency with authority to set mortgage lending standards for all residential originators. The House passed the "Wall Street Reform and Consumer Protection Act" (H.R. 4173) by a 223-202 vote. The accepted language creates the Consumer Financial Protection Agency, a Washington regulatory body that would set industrywide rules for mortgage lending and take over enforcement responsibilities from the federal banking agencies. An industry-backed amendment to gut the CFPA and turn it into a consumer protection council representing 12 regulatory agencies failed by a close vote of 223-208. The American Bankers Association said it opposes several sections of the 1,200-page bill, including the CFPA. "The breadth of authority granted to the director of the proposed new consumer financial regulator is unprecedented," said ABA president Ed Yingling. "This new regulator would not be responsible for considering institutional safety and soundness along with consumer protection." (ABA believes it's essential that the same regulatory body perform safety and soundness and consumer protection oversight.) The Mortgage Bankers Association also has issues with CFPA. But MBA and other industry groups were glad to see a bankruptcy cramdown amendment defeated by a 241-188 vote. "We are gratified that the House saw fit to vote down the bankruptcy cramdown amendment," said MBA chairman Robert Story. Earlier this year, the House passed a bill that would allow bankruptcy judges to cram down or reduce the principal amount of a homeowner's mortgage. The Senate rejected the cramdown bill.