Compliance & Regulation

The Federal Deposit Insurance Corp. has loosened its moratorium on industrial loan company applications, allowing General Motors to move ahead with the sale of its financial services unit to private investors.The FDIC approved a change-in-control notice involving GMAC Automotive Bank, an industrial loan company based in Midvale, Utah. The depository is part of General Motors Acceptance Corp., a 51% stake of which is being sold to Cerberus Capital Management and other investors for $14 billion. "The FDIC board decided to act on this notice during the moratorium on ILC applications to avoid potential interference with a major restructuring by General Motors Corp.," FDIC Chairman Sheila Bair said. The sale is expected to close by year-end. On July 28, the FDIC placed a six-month moratorium on the approval of Wal-Mart's ILC application along with all other applications for FDIC-insured industrial loan companies. The FDIC is currently under pressure to extend the moratorium.

The Federal Deposit Insurance Corp. has concluded that two banks engaged in discriminatory mortgage lending practices, and the agency has referred their cases to the Department of Justice for further action.In the fall of 2005, the FDIC targeted special examinations of 47 banks whose Home Mortgage Disclosure Act showed the largest loan pricing disparities. The agency has completed 33 of the HMDA "outliers" examinations, and two other institutions face possible referrals to the DOJ, according to an FDIC official. A DOJ official recently said the Civil Rights Division has received HMDA-related referrals from federal banking regulators. But he declined to say how many, or what agencies made the referrals. Skadden Arps attorney Andrew Sandler told a Consumer Bankers Association fair-lending conference that all federal banking regulators have ongoing HMDA-related investigations, but that the FDIC has been the most aggressive.

If a key home price index declines, the Office of Federal Housing Enterprise Oversight says it will leave the $417,000 conforming loan limit unchanged in 2007 to avoid any possible pipeline disruption."If house prices fall, loan limits should reflect that, but we need to ensure an orderly and transparent process for any downward adjustment," OFHEO Director James Lockhart said. OFHEO will set the Fannie Mae and Freddie Mac conforming loan limit after the Federal Housing Finance Board releases its October home price index on Nov. 28. If the October 2005 to October 2006 index shows an increase in house prices, OFHEO will increase the conforming loan limit. If the index shows a decline in home prices, "this year's decrease would be netted against any increase next year in determining the 2008 limits," OFHEO said. Fannie and Freddie cannot purchase loans with a principal amount above the conforming loan limit.

Three "housing hot spots" in Ohio are among the five U.S. markets deemed most at risk for increased levels of mortgage fraud over the next 18 months, according to CoreLogic, a Sacramento, Calif.-based provider of fraud prevention technology and services to the mortgage industry.The five major metropolitan statistical areas most at risk, according to the Core Mortgage Risk Monitor, are Akron, Ohio; Dayton, Ohio; Detroit-Livonia-Dearborn, Mich.; Memphis, Tenn.-Miss.-Ark.; and Cleveland-Elyria-Mentor, Ohio. Although mortgage risk levels "remain relatively high," CoreLogic's chief economist, Mark Fleming, said the company is "seeing a stabilizing housing market characterized by decreasing house price appreciation and a slower increase in the risk index." The index measures collateral risk, which is risk related to the accuracy of a residential property valuation and "the sustainability of that valuation over the life of the mortgage due to the unique characteristics of the property, market, and mortgage contract participants," CoreLogic said. The company can be found on the Web at http://www.corelogic.com.

Federal banking regulators are discussing ways to supplement their nontraditional mortgage guidance so that the underwriting standards apply to 2/28 adjustable-rate mortgages, which also carry the risk of payment shock after the initial two-year rate expires.Sheila Bair, chairman of the Federal Deposit Insurance Corp., said 2/28 ARMs are "technically" not covered by the guidance issued in September by federal regulators. "We have been thinking in terms of maybe doing some kind of an advisory to complement the guidance," she told a Women in Housing and Finance luncheon in Washington. The Center for Responsible Lending, Durham, N.C., calls 2/28s "exploding ARMs." The consumer group has urged the regulators to act because 2/28s are generally underwritten based on teaser rates, and many borrowers cannot afford the fully indexed rate. Similar issues with interest-only and payment-option ARMs prompted the regulators to issue the nontraditional mortgage guidance. "We are very concerned about the increased reliance in the subprime market on loans that have a built-in payment shock," said CRL vice president Josh Nassar.

Fannie Mae has agreed to pay its former chief executive officer and chairman Franklin Raines $2.6 million as part of a settlement tied to his early "retirement" in December 2004.In September of last year Mr. Raines -- a key figure in the government-sponsored enterprise's $11 billion accounting scandal -- initiated arbitration proceedings against the company, citing a clause in his employment contract that he provide Fannie with six months notice prior to retiring. Officially, Mr. Raines retired in December 2004, but essentially Fannie's board forced him out of the company as regulators began to question its accounting practices. Mr. Raines has other pending contract-related claims against the company. Fannie's regulator, the Office of Federal Housing Enterprise Oversight, has said publicly that it may sue to recover past bonus money paid to certain current and former executives because it believes accounting rules were violated to meet earnings-per-share bonus targets. A few months ago the Justice Department confirmed that it would not bring criminal charges against the company relating to its accounting scandal.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators are issuing nontraditional mortgage guidance for state-licensed mortgage bankers and brokers that is consistent with federal guidelines on originating interest-only and payment-option ARMs."At this stage of the game, it is very important to provide consistent guidance to all providers in the industry," said CSBS vice president Michael Stevens. Individual state regulators are planning to issue the guidance as best practices or regulatory bulletins to get it out quickly. Later the guidance will be translated into regulations or statutes, depending on the state. The state regulators pledged to work with their federal colleagues on improving the guidance if additional consumer protections are needed down the road. "We will do that together in cooperation with federal regulators," Mr. Stevens told reporters. Federal regulators issued guidance on nontraditional mortgages that applies to all federally insured banks and thrifts on Sept. 29.

The federal banking agencies are close to finalizing a new policy statement on allowances for loan losses that is expected to be issued by early December.The new statement replaces a 1993 ALL statement and eliminates the use of "benchmarks" that some institutions improperly adopted, according to Zane Blackburn, chief accountant of the Office of the Comptroller of the Currency. "We included a new section on estimating credit losses," Mr. Blackburn told a banking conference sponsored by the American Institute of Certified Public Accountants. "It discusses how the allowance is measured, including significant judgments made in the process. .... We supplemented this whole statement with interpretive answers to frequently asked questions." The answers cover 16 questions, he said.

The odds of getting a GSE regulatory reform bill passed this year have improved slightly now that the lame-duck Congress is expected to be in session from Dec. 4 until Christmas."Time is not the enemy" of getting a bill on reforming the housing government-sponsored enterprises, said Kurt Pfotenhauer, the Mortgage Bankers Association's top lobbyist. "The question is whether they can come to an agreement on portfolios." There was speculation that the Democrats would insist on a very short lame-duck session. But now that the elections are over, congressional leaders decided to meet for a short session this week and return in December to complete unfinished business. "Everyone is just exhausted," one Washington insider said. However, the election turned the tables on Republicans (and the Bush administration) who wanted to restrict the size of Fannie Mae's and Freddie Mac's mortgage portfolios. Since Democrats won control of both chambers of Congress, Senate Republicans are going to have to come up with portfolio language that Sen. Christopher Dodd, D-Conn., can accept. Sen. Dodd is slated to become the new Senate Banking Committee chairman in January.

Office of Thrift Supervision examiners are continuing to see deterioration in underwriting standards as margins and loan volume decline at federally chartered thrifts, according to OTS Director John Reich."Examiners are digging deeper into loan portfolios to understand the risks institutions are assuming, and they are paying close attention to loan documentation, pricing, loan-to-value ratios, and underwriting standards," Mr. Reich told the New York Bankers Association. He said loan pricing is out of line with credit risk. Thrifts are liberalizing underwriting standards to maintain loan volume, he said. And examiners have identified institutions purchasing loan pools without adequate loan documentation. "Finally, there continues to be excessive dependence on wholesale funding by a number of institutions," the OTS director said.