Compliance & Regulation

Washington state regulator Chuck Cross, who exposed Household International's abusive lending practices several years ago, has joined the Conference of State Bank Supervisors to be in charge of special projects.As chief of enforcement at the Washington Department of Financial Institutions, Mr. Cross conducted an investigation of Household's mortgage lending practices that led to a $484 million multistate settlement with the company in 2002. He was also a key negotiator in the settlement talks. HSBC North American Holdings later acquired Household. As director of special projects, Mr. Cross will support the conference's mortgage and nondepository regulatory initiatives, according to CSBS president and chief executive Neil Milner. "Chuck's extensive experience in regulating nondepository institutions as well as his background in training examiners and law enforcement bring a new dimension to the CSBS team," Mr. Milner said.

Federal Reserve officials were becoming warier about the downturn in housing and the possible spillover effects on consumer spending as of mid-December, "especially if house prices were to decline significantly."The minutes of the Dec. 12 Federal Open Market Committee note that there is "considerable uncertainty regarding the ultimate extent of the housing market correction." House price appreciation slowed in the third quarter and "some price measures showed outright declines," according to the FOMC minutes. Meanwhile, the issuance of new housing permits is at a 10-year low and the FOMC members indicated that they expect the ongoing adjustment in the homebuilding industry to continue in the near term. "Even if home purchases had begun to level off, residential investment was likely to fall further in coming quarters as homebuilders … reduce their backlogs of unsold homes," the minutes say. The Fed can be found online at http://www.federalreserve.gov.

The House should be able to pass a GSE regulatory reform bill by April 2 when Congress leaves for its spring recess, according to Rep. Barney Frank, D-Mass.The new chairman of the House Finance Services Committee said the bill will tighten regulation of Fannie Mae and Freddie Mac but won't mandate a cut in their giant mortgage portfolios. The House bill will require the two government-sponsored enterprises to contribute the equivalent of 5% of their profits to affordable housing, Rep. Frank told reporters after speaking at the National Press Club. And it will include an increase in the GSE loan limit so Fannie and Freddie can purchase mortgages in high-cost areas of California and Massachusetts. As the new chairman, Rep. Frank said affordable housing is his top priority and that he is looking for ways to buy out apartment owners to preserve existing affordable rental housing.

Doral Financial Corp., the troubled mortgage lender based in San Juan, Puerto Rico, has reported a net loss of $28.7 million ($0.34 per share) for the third quarter, bringing itself current on its reporting obligations to the Securities and Exchange Commission.Doral said its net loss for the first three quarters of 2006 total $62.5 million ($0.81 per share). The company said its "greatest liquidity challenge" is refinancing $625 million of floating-rate senior notes. "Doral Financial will need significant outside financing during 2007, principally for the refinancing of these notes that mature in July 2007 and to meet certain other working capital and contractual needs of the holding company," the company said. In September, Doral announced an agreement with the SEC to pay a $25 million civil penalty in connection with a probe of Doral's restatement of financial results for 2000-2004. The restatement slashed $694.4 million from its retained earnings through the end of 2004 to correct the accounting for certain mortgage loan sales and the valuation of its interest-only strips. Doral can be found online at http://www.doralfinancial.com.

Top executives at LandAmerica Financial Group approved the use of "personal information" about a Colorado insurance regulator to undermine her investigation of the title insurance company's payments to builders and lenders through captive reinsurance arrangements, according to a House Financial Services Committee report.Colorado Deputy Insurance Commissioner Erin Toll was also involved in negotiating a multistate captive reinsurance settlement with LandAmerica, which the title insurer was resisting in late 2005 and early 2006. "The company had personal information regarding Ms. Toll's family background and relationships and raised it with several other state insurance regulators, threatening to 'go public' and get 'real stinky real quick' if Ms. Toll continued her efforts," the committee report says. The information was supposed to show that Ms. Toll had conflicts of interest and was biased against LandAmerica because two sisters and an ex-husband had worked for the title insurer. At an April 26 committee hearing, Ms. Toll testified that she felt "threatened" by LandAmerica's actions, and the committee chairman launched an investigation. The committee report describes captive reinsurance arrangements as sophisticated "kickback" schemes. "LandAmerica appeared more interested in discrediting a state regulator than in addressing legitimate concerns about its business practices," the report concluded. LandAmerica officials could not be reached for comment by MortgageWire's deadline.

Federal banking regulators have revised a consumer handbook on adjustable-rate mortgages to heighten awareness of the "payment-shock" risks that prospective borrowers face if they take out an interest-only or payment-option ARM.The consumer handbook has examples indicating that the monthly payments on a $200,000 5/1 interest-only ARM can jump from $666 in the first year to $1,288 in the sixth year and $1,536 in the seventh year. On a $200,000 option ARM, borrowers making the minimum $739 monthly payment for the first five years can see their payment jump to $1,603 in the sixth year and $1,708 in the seventh year. "The main point is that, depending on the terms and conditions of your mortgage and changes in interest rates, ARM payments can change quite a bit over the life of a loan -- so while you could save money in the first few years of an ARM, you could also face much higher payments in the future," says the section on payment shock. Lenders can order 100 free copies of the newly revised handbook from the Federal Reserve Board.

Federal banking regulators have finally published the Basel Ia capital rule for public comment, and the comment period on the more advanced Basel II rule has been extended to create overlapping comment periods that end March 26."The agencies believe it's important that interested parties be able to compare the risk-based capital requirements in the Basel II and Basel Ia notices of proposed rulemaking," says a Federal Register notice. Basel II is designed for the very largest of U.S. banks that have internal risk models. Basel Ia is less sophisticated than Basel II, but more risk-sensitive than the current RBC standard. Regulators want overlapping comment periods to ensure that the RBC proposals don't give the largest banks a competitive advantage over midsize Basel Ia banks. Sheila Bair, chairman of the Federal Deposit Insurance Corp., has also suggested that Basel Ia can be modified to suit the largest banks. "Basel Ia is an important improvement to the risk sensitivity of our capital requirements," Ms. Bair said at a Dec. 5 FDIC board meeting. "I am particularly interested in comments on whether this approach or a variation of it should be available to any U.S. bank."

Housing Secretary Alphonso Jackson is planning to stay on as head of the Department of Housing and Urban Development, according to news reports.Since the November elections, rumors have been circulating that Secretary Jackson would resign to avoid facing hostile questioning by Democrats who now control Congress and the committees that oversee HUD. However, Mr. Jackson told Reuters that he has no plans to resign and expects to have good relations with the Democrats on the House Financial Services Committee, including the incoming chairman, Rep. Barney Frank, D-Mass.

The Federal Housing Finance Board is allowing the 25 public interest directors still serving on the boards of the Federal Home Loan Banks to serve another 12 months.The Finance Board approved the appointments at a Dec. 22 meeting after coming under pressure from Democrats on the House Financial Services Committee to act quickly. But there are still 57 PID vacancies, and Chairman Ronald Rosenfeld instructed his staff to come up with a plan for the appointment of additional directors. For the past three years, the Bush administration has blocked the appointments of these outside directors while it pressured Congress to pass legislation to strengthen supervision of the housing government-sponsored enterprises. It appears that Mr. Rosenfeld has finally gotten clearance from the White House to make the appointments after Democrats threatened to hold a committee hearing on the FHFB's failure to meet its statutory duty. Diane Casey-Landry, president of America's Community Bankers, noted that the outside directors play an important role in the governance of the FHLBanks. "We are encouraged that the Finance Board filled one-third of the public interest director vacancies, and will consider ways in the near future to fill the remaining vacancies," she said.

The Federal Housing Finance Board has ditched a controversial capital proposal that would have required Federal Home Loan Banks to cut dividends by 50% if they did not meet a high level of retained earnings.Finance Board Chairman Ronald Rosenfeld agreed with critics that the proposal was "flawed" and said he is now committed to working on a way to tie the level of retained earnings to the risk profile of the individual FHLBanks. As originally proposed last March, FHLBanks had to maintain retained earnings of a least $50 million plus 1% of non-advance assets, which created widespread opposition from banking trade groups and the FHLBank community. Board members Allan Mendelowitz and Geoff Bacino said they are committed to strengthening retained earnings, but not in a way that restricts dividends. "Whatever route we choose, it is this board member's opinion that the Finance Board should use dividend limitations only in extreme circumstances," Mr. Bacino said at a Dec. 22 board meeting. The Finance Board did approve a watered-down capital rule at the meeting. The final rule simply prohibits FHLBanks from paying dividends in the form of stock if they have excess stock that exceeds 1% of their assets. This rule will affect only the Cincinnati FHLBank, one FHFB staffer said.