Compliance & Regulation

To crack down on abusive lending, Sen. Hillary Rodham Clinton, D-N.Y., wants upfront disclosures of a mortgage broker's compensation and a ban on prepayment penalties, along with a requirement that all subprime mortgages have escrow accounts."We need to put an end to fly-night-night mortgage brokers peddling loans to unqualified applicants based on inflated appraisals," the Democratic presidential candidate said in a speech outlining legislative proposals she intends to introduce when Congress returns in September. Her legislation will also provide $1 billion to assist state-sponsored foreclosure rescue funds and expand Fannie Mae's and Freddie Mac's mission to include helping at-risk homeowners avoid foreclosure. "If I were president, I would address abuses across the mortgage industry with a plan to curb unfair lending practices and hold brokers and lenders accountable, give families the support they need to avoid foreclosure, and increase the supply of affordable housing," the New York senator said.

First American Credco, a provider of specialty credit (and part of First Advantage Corp.), and First American CoreLogic have announced the introduction of ThirdParty Manager and Professional Screening Services as part of a line of mortgage lender origination and channel management tools.First American CoreLogic said its ThirdParty Manager streamlines the submission of broker data, as well as the due diligence, management, and monitoring of wholesale channel brokers via an online wizard. It also provides integrated due-diligence data and management tools for lenders to manage their overall broker relationships. First American Credco's Professional Screening Services, which includes broker and third-party screening and license monitoring, has been integrated with ThirdParty Manager. These services enable lenders to certify new originators, recertify third-party contractors, and perform a complete audit on their broker base as needed. "The integration of First Advantage's due diligence management capabilities and First American's solutions helps effectively manage risk and mortgage fraud, a growing issue affecting our lender customers, as well as the consumer," said Kathy Manzione, president of First American Credco. The companies can be found online at http://www.credco.com and http://www.facorelogic.com.

Two bond market associations are urging the Federal Reserve Board to be careful in writing new rules to stop abusive subprime lending practices and to ensure that any violations of its Home Ownership and Equity Protection Act regulation do not trigger assignee liability for mortgage investors."At a minimum, we request that, in any proposed and final regulations under Section 129, the Board explicitly confirm that violations of new substantive regulations may not be asserted against an assignee (unless the related loan is a high cost loan)," says a joint comment letter by the American Securitization Forum and the Securities Industry and Financial Markets Association. (The vast majority of subprime mortgages are not "high-cost loans" as defined by HOEPA.) The ASF and SIFMA also urge the Fed to concentrate on improving mortgage disclosures as the best way to protect consumers, as opposed to restricting prepayment penalties or requiring escrow accounts on subprime loans. "In our view, the Board should focus its efforts on preventing unfair and deceptive lending practices in connection with HOEPA loans through creating uniform mortgage disclosures for borrowers, and not prohibiting products or features that are not inherently unfair or deceptive."

The Office of Thrift Supervision is seeking public comment on what approach it should take in issuing a regulation that addresses "unfair and deceptive" subprime lending practices.The 22-page advance notice of proposed rulemaking contains a list of "targeted practices," such as loan flipping and overages that the OTS might prohibit as part of a regulation on unfair and deceptive acts and practices (UDAP). The OTS also points out that the regulation could take a principles-based approach or prohibit specific practices (as the North Carolina predatory-lending law does). "The ANPR reviews OTS legal authority for issuing a UDAP regulation and discusses various approaches that the agency could take, either individually or in conjunction with other initiatives, in issuing a regulation," the agency said. The OTS is issuing the proposal for a 90-day comment period. OTS Director John Reich directed his staff to draft the UDAP proposal after concluding that Congress wants the regulators to exercise all their authorities to stop abusive lending practices.

Federal Reserve Board nominees Elizabeth Duke and Larry Klane said they support the Fed's efforts to draft a rule that would provide better consumer protections for subprime borrowers and ban certain unfair lending practices."If confirmed, I will put my full energy" into using "all the arrows in the regulatory quiver to protect consumers under the Home Ownership and Equity Protection Act," Mr. Klane told the Senate Banking Committee during a confirmation hearing. The Fed is expected to issue a proposed HOEPA rule before the end of the year. Ms. Duke is a Virginia community banker, and Mr. Klane is a top executive at the credit company Capital One, which has a mortgage subsidiary that makes prime and alternative-A loans. President Bush nominated the two bankers to fill two vacancies on the Federal Reserve Board. The Fed can be found online at http://www.federalreserve.gov.

The House Financial Services Committee has approved a 15-year extension of the federal government's terrorism insurance program along with changes to expand the coverage, which the Bush administration opposes.The bill to extend the Terrorism Risk Insurance Act would require insurance companies to offer coverage for nuclear, biological, chemical, and radiological acts of terrorism for the first time. The TRIA bill (H.R. 2761) also eliminates the distinction between foreign and domestic acts of terrorism. "We strongly oppose this bill," said Treasury Assistant Secretary David Nason. The administration, which wants the TRIA program to remain a temporary federal backstop for private insurers in case of major terrorist attack, would prefer a bill with a two-year extension and no expansion in coverage. Congress extended TRIA in 2005, and it expires at the end of this year.

The combined earnings of the 12 Federal Home Loan Banks fell 2.8% to $628 million in the second quarter from the level recorded a year earlier, according to a preliminary report by the FHLBanks' Office of Finance.The second-quarter report also shows that assets grew by only 2.0%, to $1.02 trillion, and advances were flat, at $640 billion, over the previous four quarters. The FHLBanks are major investors in Fannie Mae and Freddie Mac mortgage-backed securities, and they are allowed to invest in subprime MBS. "Each FHLBank believes it has limited exposure to subprime loans due to its business model, conservative policies pertaining to advances collateral and investments, and low credit risk due to the design of its mortgage loan programs," the Office of Finance said. In the first quarter, the FHLBanks held $75.5 billion in private-label securities, which are generally rated triple-A. A second-quarter update of their private-label MBS holdings is not yet available. The Office of Finance can be found online at http://www.fhlb-of.com.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., says he is "very confident" that committee members will be able reach a consensus and pass a Federal Housing Administration reform bill after Congress returns from its August recess.Sen. Dodd wanted to mark up an FHA bill this week. But he indicated that there was not enough time to complete the negotiations with senators about to leave town for the month-long recess. "There are a number of issues outstanding," he admitted. The committee chairman stressed that FHA reform, flood insurance reform, and an extension of the Terrorism Risk Insurance Act will be his main priorities when Congress reconvenes in September. "I hope to get to flood insurance and TRIA very quickly," Sen. Dodd told reporters. Then he wants to turn to the government-sponsored enterprise reform bill to strengthen regulation of Fannie Mae and Freddie Mac.

By a 45-23 vote, the House Financial Services Committee has approved a housing trust fund bill that could generate over $600 million in grants a year for the construction and rehabilitation of affordable housing for very-low-income families.The government-sponsored enterprises -- Fannie Mae and Freddie Mac -- and the Federal Housing Administration would provide the bulk of the trust funds. The House committee has approved separate bills that require the GSEs and the FHA to make annual contributions to the fund. The Department of Housing and Urban Development would be in charge of awarding and distributing the grants to the states, cities, and Indian reservations, which would have to put up some matching funds. The chairman of the House Financial Services Committee, Rep. Barney Frank, D-Mass., estimates that the trust fund could increase the stock of affordable housing by 1.5 million units before the legislation sunsets after 10 years. "The growing shortage of affordable housing is one of the most serious social and economic problems facing our country," Rep. Frank said.

The National Association of Counties has passed a resolution applauding the contribution of seller-assisted downpayment assistance programs to helping hundreds of thousands of low- to moderate-income families become homeowners.The NAC announced the resolution during its 72nd Annual Conference and Exposition in Richmond, Va. "Housing affordability remains a critical problem in many jurisdictions across the country," said Commissioner Grady Prestage, chair of the Community & Economic Development Steering Committee, which sponsored the resolution. "Eliminating downpayment assistance programs would remove a critical tool for creating homeownership and wealth-building opportunities for low- to middle-income families." In May, the Department of Housing and Urban Development proposed a rule that would ban DPA obtained from a gift, loan, or other payment provided by any donor, including a nonprofit group, individual, or homeseller.