Compliance & Regulation

House Financial Services Committee members have come very close to reaching a bipartisan agreement on predatory lending legislation, and they plan to circulate a draft of the bill soon for discussion purposes and to set the stage for committee action next year."I think we are awfully close [to an agreement]," Rep. Spencer Bachus, R-Ala, told reporters. The chairman of the financial institutions subcommittee acknowledged that the bill would impose a suitability standard on lenders making mortgage loans, but declined to provide other details. Rep. Barney Frank, D-Mass., noted that some conservative Republicans have problems with the bill. But he said mainstream Republicans on the committee are "ready to make the deal." In separate interviews, Reps. Bachus and Frank said that no matter which political party controls the House after the November elections, a predatory lending bill will be on the committee's agenda next year.

A high-ranking Treasury official has signaled again that the department is preparing to take administrative actions if Congress does not pass a GSE reform bill that addresses potential risks to the financial system posed by Fannie Mae's and Freddie Mac's giant mortgage portfolios.The Treasury Department continues to work with congressional leaders to find a legislative solution to the portfolio issue, Assistant Secretary Emil Henry told a National Association of Federal Credit Unions legislative conference. "The Treasury will remain engaged on this important principled issue and is reviewing options in the event there is no legislation before Congress lets out prior to the November elections," he said. Treasury officials made it well known this summer that they are developing a debt approval process for housing government-sponsored enterprises that would allow the Treasury secretary to stop Fannie Mae and Freddie Mac from financing the growth of their portfolios. It also appears that the Treasury and the White House want to develop other ways to remind Fannie and Freddie that they are government-chartered and government-regulated entities.

Federal banking regulators told a Senate panel Wednesday that they will issue final guidance on interest-only and payment-option mortgages in the next few weeks.Late last year, regulators issued proposals to enhance underwriting standards and consumer disclosures, but never finalized guidance because they were hung up on the treatment of negative amortization on payment-option adjustable-rate mortgages. The original proposal requires a lender to assume that the borrower will make only the minimum payment possible, calculating the potential negative amortization. The lender must then add that figure to the loan amount for purposes of qualifying a borrower. Industry groups complained loudly about this underwriting requirement, contending that there is no evidence to support such an assumption. Bank and thrift regulators have collected data showing that 70% of option ARM borrowers make the minimum monthly payment possible. Regulators conceded that defaults on exotics are not much higher than those on traditional loans, but noted that the product is unseasoned and that many outstanding loans have yet to reset.

Federal regulators on Wednesday criticized the residential finance industry for aggressively marketing "exotic" mortgages without making full disclosures on the payment shock associated with some of the loans.At a jam-packed hearing before the Senate Banking subcommittee on housing, Sandra Thompson of the Federal Deposit Insurance Corp. told elected officials that in the monthly mortgage statements they send out, some lenders encourage borrowers "to make the minimum payment," adding that payment-option adjustable-rate mortgage customers "are not getting enough information" early in the application process. Also on Wednesday, the Government Accountability Office issued a report on "alternative mortgage products" (exotics), saying that some recent borrowers now lack sufficient equity in their homes to refinance out of the loans. The report notes that in their advertisements, "some lenders and brokers emphasize the benefits of AMPs without explaining the risks associated." According to exclusive survey figures compiled by National Mortgage News and Alternative Products Quarterly Data Report, mortgage bankers funded $264 billion in option ARMs and interest-only loans in the second quarter, or 31% of all mortgages funded.

The risk that mortgage fraud will have an economic impact in vulnerable markets continues to rise at "an unprecedented rate," according to CoreLogic, a Sacramento, Calif.-based provider of mortgage risk assessment and fraud prevention systems.CoreLogic said its recently developed Core Mortgage Risk Monitor, which forecasts the most likely locations of fraud "hot spots" over the next 12 to 18 months, rose by 5% in the second quarter. The five U.S. markets currently most at risk are Detroit-Livonia-Dearborn, Mich.; Memphis; Dayton, Ohio; Akron, Ohio; and Gary, Ind. CoreLogic can be found on the Web at http://www.corelogic.com.

Doral Financial Corp., San Juan, Puerto Rico, has announced an agreement with the Securities and Exchange Commission under which the mortgage lender will pay a $25 million civil penalty in connection with the SEC's probe of Doral's restatement of financial results for 2000-2004.Doral said it agreed, without admitting or denying any wrongdoing, to be enjoined from future violations of certain provisions of the securities laws. "This agreement is a major step forward in resolving the legal and regulatory issues facing Doral," said Glen Wakeman, the company's chief executive officer. "We have implemented and will continue implementing improvements in our accounting, financial reporting, and corporate governance." Doral's 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. In March, the company signed consent orders with banking regulators that restrict its payment of dividends and require it to review its mortgage portfolio and submit plans on maintaining capital adequacy and liquidity.

Beleaguered Rep. Bob Ney, R-Ohio, who got caught in a lobbying scandal and could face two years to prison, has resigned as chairman of the House Financial Services subcommittee on housing, effective immediately.The Ohio congressman recently agreed to plead guilty to conspiracy and making false statements regarding the acceptance of gifts and travel from lobbyist Jack Abramoff. Earlier this year, Mr. Abramoff pleaded guilty to conspiracy to bribe public officials. In a Sept. 15 statement, Rep. Ney said he accepts responsibility for his actions and is seeking professional help for a "dependence on alcohol." Rep. Ney is scheduled to plead guilty at an Oct. 13 court hearing, and federal prosecutors are expected to recommend that the congressman serve 27 months in prison.

Differences between the House and the Senate on GSE portfolios and creating an affordable housing fund are not "unbridgeable," and an agreement on GSE regulatory reform is possible, according to House Financial Services Committee Chairman Michael Oxley."It would be shame after all our hard work … if we couldn't get the bill to the president's desk," the Ohio Republican told a National Association of Federal Credit Union legislative conference. It is "encouraging" that the Treasury Department and the White House have moved off their insistence on strict portfolio limits, Rep. Oxley told reporters after his NAFCU speech. And he indicated that negotiations between House and Senate banking committee leaders are continuing. Rep. Paul Kanjorski, D-Pa., also expressed optimism that an agreement on a government-sponsored enterprise bill could be worked out by the end of September so that Congress could come back in November and pass it. "It would be almost sinful not to get a new regulatory regime put together," Rep. Kanjorski said.

The Treasury Department has dropped its insistence on tough portfolio limits on Fannie Mae and Freddie Mac in a last-ditch effort to forge a compromise and pass a GSE regulatory reform bill this year.Treasury's new position would allow the new regulator of housing government-sponsored enterprises to decide (though a public rulemaking process) how large the portfolios should be, based on safety-and-soundness concerns and avoiding system risks, according to a Wall Street Journal report that MortgageWire has confirmed with a Treasury official. "That is real movement by Treasury," said mortgage industry consultant Howard Glaser. But he said the systemic risk language could be "problematic" if it implies that the portfolios should be shrunk. If there is any chance of getting a GSE bill done this year, House and Senate banking committee leaders have to agree on the outlines of a compromise before Congress temporarily adjourns for the elections. That would allow staff and principals to draft a final bill that the Senate could pass when it returns for a lame-duck session and that the House could approve without any changes.

The House Financial Services Committee has sent a letter to Sens. Richard Shelby, R-Ala., and Paul Sarbanes, D-Md., encouraging them to reach a bipartisan compromise on GSE legislation that the Senate could pass before Congress adjourns in early October for the elections."We firmly believe that the outstanding differences in the [government-sponsored enterprise] legislative debate are less than ever before and that final agreement can be reached this session," said a Sept. 14 letter signed by 64 members of the House committee. "This Congress should not close without addressing the serious inadequacies of the current GSE regulatory system." Senate Banking Committee Chairman Shelby, with the support of Treasury Secretary Henry Paulson, is trying to work out a compromise with committee Democrats over the regulation of Fannie Mae's and Freddie Mac's giant mortgage portfolios.