Compliance & Regulation

The Senate has approved an amendment by Sen. Christopher S. Bond, R-Mo., that requires lenders to provide better consumer disclosures on adjustable-rate mortgages with teaser rates. ARMs with teaser rates "played a large role in our current subprime mortgage crisis," Sen. Bond said recently during debate on a housing reform and foreclosure rescue bill. The new Truth in Lending Act disclosure would require mortgage lenders or brokers to disclose how high the mortgage payments would go once the teaser rate expires. In addition, they would have to disclose that there is "no guarantee" that the borrower will be able to refinance the loan before the initial low rate ends. "Many potential borrowers either did not understand what they were getting into or were falsely assured [that they could refinance and] everything would be OK," Mr. Bond said. The Senate approved the Bond amendment to the housing bill by unanimous consent on June 25.

The Financial Services Roundtable is urging the Federal Deposit Insurance Corp. to follow the European model and relax its mortgage underwriting standards if it wants to jump-start a market for U.S. covered bonds. Specifically, the Roundtable is urging the FDIC to drop the conservative eligibility requirements for mortgages that can be used as collateral for covered bonds and provide more flexibility to use existing whole mortgages and mortgage-backed securities. Otherwise, it would take years for banks and thrifts to build mortgage portfolios that meet the eligibility requirements, and the fledging U.S. covered bond market would "wither," FSR president and chief executive Steve Bartlett says in a comment letter. The comment period on the FDIC's interim policy statement on covered bonds ended June 23, and many community banks expressed concerns that the agency might impose a deposit insurance surcharge on covered bonds and other secured liabilities like Federal Home Loan Bank advances. The Independent Community Bankers of America generally supports the policy statement, but "strongly disagrees with including any secured liabilities and particularly FHLBank advances as part of an institution's assessment base," the trade group says.

Senate Banking Committee leaders are urging federal banking regulators to "wake up" and revamp their appraisal standards, instead of complaining about the changes Fannie Mae and Freddie Mac have agreed to implement under a settlement with New York Attorney General Andrew Cuomo. The bank agencies have a role in setting appraisal standards for lenders, committee Chairman Christopher J. Dodd, D-Conn., said during debate on a major housing reform bill. "However, the appraisal fraud over the past couple of years, and the attorney general's action, should serve as a wake-up call to the regulators that their appraisal standards must be revamped and their enforcement stepped up," Sen. Dodd said. Sen. Richard C. Shelby, R-Ala., also urged the regulators to revamp their standards to strengthen appraisal independence. The senators made the comments as Sen. Elizabeth Dole, R-N.C., withdrew an industry-supported amendment to quash the New York attorney general's appraisal standards. Under the standards, Fannie and Freddie could not buy mortgages from banks and mortgage companies that use in-house appraisers or affiliated appraisal firms. The standards also prohibit mortgage brokers from ordering appraisals. The Dole amendment would have directed Fannie's and Freddie's regulator to establish appraisal standards for the two government-sponsored enterprises.

As senators go home for the Fourth of July recess, supporters of a housing reform and foreclosure rescue bill remain optimistic that the Senate will pass the measure shortly after they return and that a final bill will land on the president's desk before August. "All signs indicate that they will finish the housing legislation before the August recess," said Mike House, executive director of FM Policy Focus. Republicans succeeded in blocking a final vote on the housing bill before the recess, which starts June 28. But test votes show that at least 80 of the 100 senators support the landmark housing bill that would authorize the Federal Housing Administration to refinance 400,000 at-risk homeowners to prevent foreclosures and strengthen regulation of the housing government-sponsored enterprises. The House has passed a similar bill, and observers expect that the House and Senate banking committee leaders will be able to resolve any differences relatively quickly. Meanwhile, President Bush is moving away from previous veto threats. Now he is calling on lawmakers to complete their work on the housing bill when they return to Washington on July 7. "The Congress needs to come together and pass responsible housing legislation to help more Americans keep their homes," Mr. Bush said.

Sen. Charles E. Schumer, D-N.Y., has sent a letter to banking and thrift regulators questioning the financial viability of IndyMac Bancorp -- the nation's 11th-largest mortgage lender -- but some observers in Washington are wondering about his timing. IndyMac's shares have been trading for less than $2 since May (82 cents at deadline time), and the thrift has received several downgrades from analysts and rating agencies. A spokesman for the Office of Thrift Supervision told MortgageWire that, "We receive a lot of letters from members of Congress, but not many about specific institutions." He declined to comment further. Jaret Seiberg, an analyst with the Washington Research Group, said the letters could actually cause a run on IndyMac's deposits "and cause a failure, which is what the senator is trying to avoid." Sen. Schumer's office did not return a telephone call about the letters, which he sent to the heads of the Federal Deposit Insurance Corp. and the Office of Thrift Supervision. In the letters, he said IndyMac's "financial deterioration poses significant risks to both taxpayers and borrowers" and questioned its use of brokered deposits. A source close to the company said management at IndyMac was caught off guard by the letters, adding that, "I guess IndyMac is getting picked on" because it's in the mortgage business. The source also said IndyMac is actually reducing its use of brokered deposits. "Some of the senator's information is just wrong," the source said. IndyMac had no official comment.

Banks and thrifts holding fairly conservative one- to four-family mortgages would see their risk-based capital requirement jump from a 35% to a 100% risk weighting if the borrower missed three monthly payments under an RBC proposal federal banking regulators call the Basel II "standardized approach." Riskier residential mortgages with higher loan-to-value ratios or stand-alone home equity loans that become 90 days or more past due could end up with a 150% risk weighting, according to Federal Deposit Insurance Corp. officials. The FDIC board has approved the issuance of the proposed standardized approach for a 90-day comment period. The Federal Reserve Board was slated to meet June 26 to consider the notice of proposed rulemaking. The regulators have decided to scrap a Basel Ia RBC rule and move toward the standardized approach that could be adopted by most FDIC-insured institutions. The 11 largest U.S. banking organizations are required to implement the more advanced Basel II approach. The standardized approach incorporates the more risk-sensitive risk weightings for mortgage loans in Basel Ia and adds a surcharge for operational risk based on 15% of net interest income. It also imposes a capital surcharge on nontraditional mortgages to address risks associated with negative amortization. Restructured single-family loans would generally fall into a 100% risk weighting.

The Federal Open Market Committee has left the target federal funds rate unchanged as expected, marking the first time in recent months that it has not decided to cut rates. The FOMC, the monetary policy-making committee of the Federal Reserve Board, said June 25 that it remains concerned about "tight credit conditions, the ongoing housing contraction, and the rise in energy prices," which "are likely to weigh on economic growth over the next few quarters," but it is also concerned about inflation. "In light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high," the committee said. The federal funds rate is the interest rate banks charge each other for overnight loans.

Citing a desire to help the mortgage industry combat fraud, Agoura Hills, Calif.-based Interthinx Inc. has announced its integration with MERS, the electronic registry for tracking ownership of mortgage loans and servicing rights. Data from MERS will be integrated into Interthinx's FraudGuard scoring system to detect undisclosed properties, reveal investors claiming owner occupancy, and uncover recently closed loans that could indicate a borrower's intent to commit mortgage fraud. The new feature allows FraudGuard users to automatically access the MERS database of registered real estate transactions to conduct automated searches (during the FraudGuard scoring process) for potential fraud before funding a loan. Interthinx is a provider of risk mitigation, mortgage fraud prevention, and regulatory compliance tools. The companies can be found on the Web at http://www.iterthinx.com and http://www.mersinc.org.

The Illinois attorney general has sued Countrywide Financial Corp. and its chairman Angelo Mozilo for engaging in allegedly unfair and deceptive lending practices that placed borrowers into risky subprime and payment-option mortgages they could not afford. "Countrywide used egregious unfair and deceptive lending practices to steer borrowers into loans that were destined to fail," AG Lisa Madigan said. The lawsuit alleges that Countrywide weakened its lending standards and pushed reduced document loans to qualify more borrowers and increase its loan production. "Through the investigation, we have learned the larger story of how Countrywide created and implemented a corporate strategy that resulted in widespread loan failures," Ms. Madigan said. Countrywide, which is being acquired by Bank of America, had not responded to a request for comment by deadline time. The Illinois AG wants the Cook County Circuit Court to order the Calabasas, Calif.-based lender to rescind or restructure all the loans it originated using the allegedly unfair and deceptive practices.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators have announced that six more states will begin using their Web-based mortgage licensing system on July 1, bringing the total to 14. The new additions to the Nationwide Mortgage Licensing System are Connecticut, Louisiana, Mississippi, North Carolina, New Hampshire, and Vermont. The system is designed to automate and streamline state licensing of mortgage lenders and brokers. The states already using the system are Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, Rhode Island, and Washington. More than 5,000 companies and nearly 17,000 loan officers are being managed by the system, the organizations said. "This unprecedented adoption rate is the result of hard work begun several years ago by state regulators as we envisioned a new regulatory framework that would begin to address some of the gaps we experienced in state and federal oversight of the mortgage industry," said Gavin Gee, Idaho's director of finance and chairman of State Regulatory Registry LLC, the CSBS subsidiary that developed and operates the online registry. CSBS can be found online at http://www.csbs.org.