Compliance & Regulation

Federal banking regulators are seeking comment on whether the largest banks in the United States should have the option of adopting a "standardized," or less complex, Basel II risk-based capital standard.During the summer, several banks and their trade groups urged the regulators to give U.S. banks the option of adopting the standardized approach, which is more advanced than the current Basel I standard and includes more risk buckets for mortgages and other assets. The standardized approach also takes into account securitization risks and wholesale lending commitments, and encourages banks to obtain guarantees and derivatives to mitigate credit risk. Comptroller of the Currency John Dugan noted that the largest foreign banks have the option of implementing the standardized approach or the Basel II approach, which is based on internal risk models. "To ensure that all the interested parties have an opportunity to comment on this fundamentally important issue, the agencies added the question to the Basel II preamble," Mr. Dugan told a Federal Deposit Insurance Corp. board meeting. The FDIC board voted 5-0 to issue the Basel II proposal with the standardization question for a 120-day comment period.

The National Association of Realtors is urging the U.S. Supreme Court to stop the Office of the Comptroller of the Currency from blocking the states from regulating the mortgage subsidiaries of national banks.The comptroller's actions are "unlawful" because they pre-empt state authorities from regulating operating subsidiaries that are incorporated under state law, the NAR says in a brief filed with the Supreme Court. The high court is slated to hear arguments this fall in a case (Watters v. Wachovia Bank) in which the Michigan banking commissioner Linda Watters has been blocked by federal courts from regulating and examining Wachovia Mortgage Corp., which operates in Michigan as a subsidiary of Wachovia Bank NA, Charlotte, N.C. The OCC contends that operating subsidiaries can engage in the same activities as the parent national bank and are exempt from state licensing and consumer protection regulations. But the Realtors argue that the OCC has "overstepped its boundaries" to give national banks a competitive advantage over state-licensed lenders. The NAR has been lobbying Congress for several years to keep national banks from entering the real estate brokerage business.

Cities and urban counties used 27% of their Community Development Block Grants directly for housing projects in fiscal year 2005, while smaller communities used only 17% of their allotment for housing, according to a Government Accountability Office report.The GAO shows that the cities and urban counties spent 24% of their CDBG funds on public improvements (such as water lines and street improvements) and 17% on administration and planning. They also used the funds to a lesser extent for public services, acquisition of property, and economic development, which is supposed to benefit low- to moderate-income people. Smaller communities used 54% of their CDBG funds for public improvements and 15% for economic development. Congress provided $4.2 billion in CDBG spending in fiscal 2005 and fiscal 2006, not including special funding provided to Gulf Coast states for housing and community development projects in the aftermath of hurricanes Katrina, Rita, and Wilma. Congress is likely to approve $4.2 billion for fiscal 2007, even though the Bush administration has requested a $1.2 billion cut.

Home prices rose 1.17% in the second quarter, the slowest growth rate since the end of 1999, according to figures released by the Office of Federal Housing Enterprise Oversight.Based on the second-quarter reading, house prices grew at an annualized rate of 4.68%. OFHEO Director James Lockhart said in a statement that the housing market "is cooling in a very significant way." Compared with those of a year earlier, home prices grew at a 10.06% rate. Greenwich Capital analyst Stephen Stanley said, "Looking ahead, home price appreciation will undoubtedly continue to slow, and we would not be shocked to see a quarter or two where the annualized growth rate is measly or even flattish."

Interthinx, an Agoura Hills, Calif.-based ISO business that provides fraud detection and compliance tools for the mortgage industry, has announced ISO's acquisition of the Domus System, which provides automated compliance services to the affordable housing industry.The terms of the transaction were not disclosed. The Domus System collects, maintains, and reports on resident and property data electronically. "The affordable housing industry has a tremendous need for accurate and timely compliance reporting," said KC West, president of Domus Systems Inc. "Combining the fraud detection capabilities of Interthinx with the electronic data collection services of the Domus System will deliver a more robust automated compliance and reporting tool to our customers." ISO, Jersey City, N.J., is a provider of products and services that help measure, manage, and reduce risk. The companies can be found online at http://www.interthinx.com, http://www.iso.com, and http://www.domussystems.com.

Fannie Mae and Freddie Mac should expect to be the subject of special and targeted exams as the Office of Federal Housing Enterprise Oversight looks for emerging problems and continues to monitor the GSEs' efforts to put their houses in order, according to OFHEO's proposed strategic plan.OFHEO plans to "perform targeted examinations that explore areas of concern in a more-in-depth and focused way, pursuing higher risk issues arising from ongoing examinations," the proposed plan says. The comment period ends Sept. 13. The 24-page strategic plan also puts special emphasis on validating the information OFHEO receives from the two government-sponsored enterprises and developing a meaningful risk-based capital standard -- along with "additional measures of capital adequacy, which may require legislation." OFHEO Director James Lockhart also wants the agency's researchers and analysts to focus on key policy issues, such as the implications of loan-limit changes and GSE market share.

GMAC-RFC has picked LoanIQ from First American Real Estate Solutions as its collateral risk-mitigation tool.LoanIQ deals with collateral fraud, considered the most damaging form because it creates actual dollar losses. Using a predictive model based on actual "bad loan" cases, LoanIQ provides two scores to help GMAC-RFC and other lenders fast-track low-risk loans through the system while flagging high-risk loans for further examination, First American RES said. FBI statistics show that mortgage fraud losses more than doubled in 2005, from $429 million in 2004 to more than $1 billion, the company reported. GMAC-RFC will incorporate LoanIQ into its existing collateral risk-mitigation system. The companies can be found online at http://www.gmacrfc.com and http://www.firstamres.com.

Despite real efforts by servicers of U.S. residential mortgage-backed securities, complying with the minimum servicing requirements of Regulation AB will "remain a challenge" in the first year of the law, according to a report by Fitch Ratings.Each party in the servicing function is required to provide, by March 31, 2007, both an assessment report on its compliance with Reg AB and an attestation report from a public accounting firm to concur with the servicer's assessment. More parties are now subject to reporting on "previously untested" Reg AB servicing criteria, which could cause delays and restatement of noncompliant servicer reports, according to Thomas Crowe, a Fitch director. "Many servicers are still developing the attestation programs for themselves and other relevant parties, and determining additional reporting requirements," Mr. Crowe said, adding that many are still consulting with accounting and law firms on the requirements. Fitch can be found online at website at http://www.fitchratings.com.

House Financial Services Committee Chairman Michael Oxley, R-Ohio, is urging the new Treasury secretary to make a last-ditch effort to secure a compromise that will speed passage of GSE regulatory reform in the Senate.In a letter to Secretary Henry Paulson, the committee chairman stresses that time is quickly running out for legislative action this year and that there has been no news of progress on the Senate side. "I would urge you to continue to seek a strong compromise and Senate action," Rep. Oxley says in the Aug. 30 letter. The House passed a bill to create a new regulatory agency to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks last fall. "It is the strongest reform legislation that will ever pass the House, absent a conference report," Rep. Oxley said, signaling that he is willing to consider changes passed by the Senate. Congress returns Sept. 5 for a short legislative session before the lawmakers adjourn for the mid-term elections.

Tighter underwriting standards on subprime loans could have a greater impact on reducing foreclosures than banning prepayment penalties and balloon loans and other so-called predatory lending practices, according to a study by the Office of the Comptroller of the Currency.OCC researchers discovered a strong correlation between high foreclosures and refinanced loans with no- and low-document features, which they equated with "loose" lending practices. The study of foreclosures in Chicago did not find the same correlation on subprime loans with balloons or prepayment penalties (36 months or longer) or on no- or low-doc purchase loans. The OCC researchers maintain that underwriting practices that ensure borrowers can repay their loan represent a more effective approach to preventing foreclosures than "blanket" prohibitions on certain lending practices. This approach is also consistent with the proposed guidance on interest-only and payment-option mortgages, according to the study. Federal banking regulators are expected to finalize the guidance this fall.