Compliance & Regulation

Congress has passed a bill to promote competition in the credit rating industry and set the ground rules for the Securities and Exchange Commission to approve new firms as Nationally Recognized Statistical Rating Organizations."Creating a clear, defined, and accountable registration process for credit ratings firms will reduce prices and anti-competitive practices, improve credit ratings quality, and provide better information for investors," said Rep. Michael Fitzpatrick, the sponsor of the House version of the credit rating agency bill. The credit rating industry is now dominated by Standard & Poor's, Moody's Investors Service, and Fitch Ratings. The Senate passed its rating agency bill (S. 3850) on Sept. 22 by unanimous consent, and the House approved the Senate's version by voice vote Sept. 27. The bill now goes to the president for his signature.

The Office of Thrift Supervision Director John Reich has decided to bring the agency's Community Reinvestment Act requirements back in line with those of the other federal banking regulators, and the OTS will start a rulemaking process soon.Under former Director James Gilleran, the OTS expanded the small-bank CRA exemption to $1 billion and relaxed the community investment and services tests for larger institutions. The other banking regulators responded by creating a community development test to reduce the CRA burden on institutions with $250 million to $1 billion in assets. But they did not weaken the investment and services tests for larger banks. "Since joining OTS, I have come to appreciate that, in addition to effective community lending, thrifts continue to make investments and services that promote community development in all markets, particularly low- and moderate-income areas," Mr. Reich said. "Regardless of the rules, thrifts will continue to be leaders in key CRA activities."

Mortgage fraud resulted in losses of $545.9 million during the first half, and the losses are on track to outpace last year's total, according to newly released government figures.According to the Federal Bureau of Investigation, mortgage fraud losses totaled $1 billion in fiscal 2005, more than double that of the year before. Financial institutions engaged in mortgage activity filed close to 17,000 suspicious activity reports with the FBI during the first half. In 2005, 21,994 SARs were filed. (For more details, see the Oct. 2 issue of National Mortgage News.)

SouthStar Funding LLC has agreed to pay $500,000 to settle a complaint that its restrictive policies on funding row house loans discriminated against blacks and Hispanics.The Atlanta-based wholesaler has agreed, as part of the settlement worked out by HUD, to drop its policy of not funding loans on row houses in Baltimore and not funding row house loans in other areas when the property value is under $100,000. "SouthStar is pleased that it has reached a settlement with NCRC regarding the complaint [and] looks forward to working with NCRC to promote fair housing policies nationwide," said Toni Ward, SouthStar's vice president for compliance. The Department of Housing and Urban Development, which investigated the complaint filed by the National Community Reinvestment Coalition in March, is urging leaders to review their row house policies. "Our hope is that other mortgage companies will take note and examine their policies that impose similar restrictions," said HUD's assistant secretary for fair housing, Kim Kendrick. The NCRC has filed similar complaints against three other lenders with restrictive row house policies. SouthStar will pay $500,000 over four years to fund the NCRC's efforts to combat discrimination and educate housing counselors.

Two Washington consultants are predicting that federal banking regulators will issue final guidance on interest-only and payment-option adjustable-rate mortgages "pretty much" as originally proposed back in December, despite industry opposition to the proposal.Karen Shaw Petrou and Basil Petrou, managing partners of Federal Financial Analytics, told a Bank of America mortgage conference that the final nontraditional mortgage guidance will be out by mid-October. "Importantly, it will cover not only originations, but also sales to the secondary market -- a boon, we think, for Fannie Mae and Freddie Mac's declining market share, since lenders will return to more conventional, conforming loans," Ms. Petrou said. The new guidance also frowns on piggyback mortgages, "especially when the second is layered into a high-risk mortgage product," she said. In addition, banks and thrifts should expect to see strong enforcement of the new underwriting and disclosure guidance, according to the FFA partners.

The Department of Housing and Urban Development has backed off from raising insurance premiums on multifamily mortgages in the face of industry and congressional opposition.HUD had proposed to increase annual Federal Housing Administration insurance premiums from 45 basis points to 77 bps on multifamily construction and rehabilitation mortgages, as well as refinancings. However, HUD received letters from 121 congressmen and 26 senators opposing the premium increase, which the Bush administration had proposed as part of the president's budget. The Mortgage Bankers Association warned the administration that lenders have other options, which means the FHA would lose business and the government would not collect the premiums it expects. "I think that was one of the things that persuaded them, plus there are a lot of good arguments against it," said MBA senior vice president Cheryl Malloy. "It would increase rents by 5% on affordable housing units. That's not something anyone wants to do."

Housing Secretary Alphonso Jackson told key HUD officials and senior staff members to monitor and consider the political affiliation of contract competitors, according to an investigation by the agency's Office of Inspector General.Mr. Jackson also allegedly intervened in the contracting process, suggesting that if a Department of Housing and Urban Development contractor "had strong political affiliations that were not supportive of the president" they would not receive any additional agency contracts. The findings by the IG's office were contained in a letter written by Sen. Patty Murray, D-Wash., to White House Chief of Staff Joshua Bolten. The IG's office would not comment, and has yet to release its findings to the public. Sen. Murray is the ranking member on a subcommittee that oversees HUD. Despite the allegations raised, HUD issued a statement saying the IG's office "found no direct evidence that political favoritism played any role in the awarding of grants or contracts by the Secretary of HUD or any of his subordinates." In her letter to the White House, Sen. Murray said she is "deeply concerned" about Secretary Jackson's "directives to HUD senior staff."

Standard & Poor's has raised the counterparty credit rating of the Federal Home Loan Bank of New York, assigned a negative outlook to the FHLBank of Des Moines, and revised from negative to stable the outlooks for the FHLBanks of Dallas and Pittsburgh.The counterparty credit rating of the FHLBank-NY was raised from AA-plus/A-1-plus to AAA/A-1-plus, S&P reported. The counterparty credit rating of the Des Moines (Iowa) FHLBank was removed from CreditWatch, but its outlook is negative, the rating agency said. The counterparty credit ratings of the Dallas and Pittsburgh FHLBanks were affirmed, in addition to the upward revision of their outlooks. The ratings on the other eight FHLBanks were affirmed, as was the AAA rating on the consolidated obligations of the FHLBank System. In a Sept. 21 letter to stockholders, FHLBank-NY president Alfred A. DelliBovi noted that S&P had lowered its counterparty credit rating in 2003 because of a loss related to the sale of approximately $1 billion of securities collateralized by manufactured housing receivables. The upgrade "reflects the success of [the bank's] strategy to rebuild retained earnings and the continuation of a low-risk profile," he said.

Rep. Spencer Bachus, R-Ala., plans to circulate a draft of a predatory lending bill soon, but he has clarified that the draft is not the product of a bipartisan agreement, although he hopes to reach such an agreement next year."The bill Congressman Bachus is drafting is simply his attempt at the next step in an ongoing process of reaching consensus on subprime lending legislation," a statement issued by Rep. Bachus' office says. The chairman of the financial institutions subcommittee held discussions with key Democratic members of the House Financial Services Committee earlier this year. However, Rep. Bachus issued the clarification after Democrats pointed out that they have not participated in the drafting and don't know what is in his bill. "Rep. Bachus has worked with us in good faith, and I look forward to continuing to do that next year," Rep. Brad Miller, D-N.C., said in an interview with MortgageWire. "But it is not the consensus or compromise bill at this point."

Freddie Mac has expanded its affordable mortgage program to give active-duty soldiers and reservists more purchasing power when they buy a home.Under its Home Possible program, Freddie will purchase low- or zero-downpayment loans with flexible credit underwriting standards. If the borrower receives a gift from relatives or veterans' organization, the initial interest rate can be reduced by 150 basis points in the first year. This buydown of the interest rate effectively increases the soldier's or sailor's home purchasing power "by as much as 30%," Freddie Mac said in announcing its decision to expand the Home Possible program to 1.5 million military personnel. The secondary-market agency acted in response to requests by Sen. Ben Nelson, D-Neb., and the Hispanic War Veterans of America. The reduction in the interest rate is phased out over three years, and the source of the interest rate buydown funds can come from a wide range of sources, Freddie said.