FDIC Guidance on 3rd-Party Risk Coming Soon

The Federal Deposit Insurance Corp. will issues guidelines next week on managing third-party risks, FDIC Chairman Sheila Bair has told the Conference of State Bank Supervisors' annual meeting. The guidelines will deal, in part, with compensation of mortgage brokers. Until now, the FDIC has been dealing with the issue on a case-by-case basis, Ms. Bair said at the meeting at Amelia Island Plantation in Florida. But in that loan brokers "could steer" consumers into dangerous loans or mortgages they don't fully understand, how state-chartered banks pay third-party originators "deserves closer scrutiny," she added. Ms. Bair also held out hope for her plan to prevent a million foreclosures by reworking "underwater" mortgages. While expansion of the Federal Housing Administration's loan programs will be "extremely helpful" in the long term, her rescue plan would "give borrowers a breather" in the short term, she said. "It's for people who want to stay in their homes and ride out the housing crisis," she told the state banking regulators. Ms. Bair said it's possible that a floor amendment incorporating her proposal would be added to the Senate housing bill as a "nice complement" to FHA expansion. The FDIC chair also urged lenders and regulators to move back to common-sense underwriting. "If I'm going to point to two culprits" for the mortgage market calamity, she said, it would be the failure to underwrite at the fully indexed rate and the ability of borrowers to repay.