You don’t have to be a geologist to find the fault lines reflected in the comment letters responding to the Federal Reserve Board’s proposed expansion of the rules protecting mortgage borrowers from abusive lending practices.
You need only count the responses (about 5,000 of them) and note that the operative word in most of the comments from financial industry representatives is “but” (as in, “We support the goals but…”) to anticipate the battle to come as the Fed moves to finalize its proposal sometime this summer.
Financial industry trade groups differed on some of the particulars but agreed generally that the proposal captures too many mortgages, the penalties are too severe, and the rules risk increasing costs for all borrowers and restricting credit for those who rely on subprime loans. Consumer advocates disagreed on all points, arguing that the rules should be broader, not narrower in scope, the penalties should be harsher, and the protections for consumers more expansive than the Fed has proposed.
The one point on which lenders and consumers advocates agreed, more or less, is that the proposal properly targets and restricts the yield spread premiums (YSPs) lender pay mortgage brokers for originating above-market-rate loans – a point on which the mortgage brokers themselves disagreed, to say the least. The proposed restrictions on YSPs are “deeply flawed, unworkable, and “would hurt, not help consumers,” the National Association of Mortgage Brokers said in its comment letter. In addition to practical problems, such as requiring disclosure before brokers can reasonably estimate their fee, the trade group argued, the rule discriminates unfairly between the YSP charged by brokers and the “service release premiums” charged by lenders. The only difference, NAMB contends, is that the YSP is disclosed and the SRP is not.
“[The Fed] fails to acknowledge, let alone explain, why it views compensation paid by lenders to brokers as uniquely problematic…[and fails to demonstrate how it helps consumers] by creating a systemic preference for originators who are not required to disclose their compensation over those who are required to disclose.”
Other industry trade groups said they could support the proposed limits on YSPs, as long as the rules make it clear that lenders are not liable if brokers fail to comply. The rules should specify that creditors “can rely on the face of the brokers’ compensation agreement,” the ABA said.
Consumer groups also approved the regulatory focus on YSPs, but said they shouldn’t just be disclosed – they should be prohibited entirely. If allowed at all, the National Community Reinvestment Coalition said, YSPs should be permitted only if they provide significant and tangible benefits to consumers. “YSPs need to substantially reduce if not eliminate broker fees and other third party fees,” John Taylor, president and CEO of that advocacy group, said. “YSPs that do not reduce fees in this manner should be defined as unfair and deceptive, since they serve a double-dipping function of saddling consumer with high fees and with high interest rates.”
REVERSE MORTGAGE CONCERNS
Most of the comments on the Fed’s HOEPA revisions (see above) focused, understandably, on the requirements the rules would impose, but a few targeted areas the rules would not cover – specifically reverse mortgages. Interestingly, it was not consumer groups but bank regulators (the Council of State Bank Supervisors and the Federal Deposit Insurance Corporation) and an industry trade association (the Independent Community Bankers Association) that expressed concern about the Fed’s omission of these loans. The Fed said it had not identified “significant abuses” in the reverse mortgage market that warrant regulatory attention, but state regulators view the market as “ripe for fraud and consumer abuse,” the CSBS said. The ICBA agreed, noting that the rapid growth of this market requires “proactive monitoring…to help prevent predatory lending practices before problems become widespread.”
FDIC Chairman Sheila Bair said there is plenty of evidence already that “significant’ abuses exist in the reverse mortgage market “and are on the rise. The loans are becoming increasingly popular with older borrowers Bair noted, and “unscrupulous lenders are taking advantage of that fact by promoting products that are not always in their best interests. This is reminiscent of the behavior or unprincipled subprime and nontraditional mortgage lenders as those products gained in popularity,” she noted, suggesting that the Fed should address these concerns “sooner rather than later.” If the agency does not include reverse loans in its pending HOEPA proposal, she said, “ it should “at the very least quickly analyze the abuses associated with [the loans] and provide timely regulations and guidance so that it can curtail those abuses before they become widespread.”
STATES AREN’T WAITING
Congress is considering a raft of proposals to assist homeowners struggling with subprime or other unaffordable loans, but with an estimated 1 in 33 borrowers expected to face foreclosure threats over the next two years, state legislatures aren’t waiting to see how Republicans, Democrats and the Bush Administration resolve their policy and partisan differences. A recent report by the Pew Charitable Trusts credits states with taking the lead in developing assistance programs for their residents.
“State lawmakers who have shown they understand the high stakes involved in the nation’s foreclosure crisis — including the impact on state and local economies — deserve a lot of credit,” Susan Urahn, managing director of the Pew Center on the States, said in a press release. “We hope some of the promising practices highlighted in this report can inform federal efforts and inspire others to take action.”
The report, “Defaulting on the Dream: States Respond to America’s Foreclosure Crisis,” surveys all 50 states to identify successful efforts both to deal with current problems and to prevent a similar lending crisis in the future. Highlighting laws and regulations tightening underwriting guidelines and targeting abusive lending practices, the report cautions that federal efforts should “complement” the work being done in the states, not undermine it. “Stronger standards from federal policy makers could have helped avert this crisis,” Shelley Hearne, Managing Director of Pew’s Health and Human Services Program, said. “Let’s make certain federal laws build upon, rather than preempt the strong and smart state efforts already under way and ensure that states retain flexibility to respond to local circumstances.”
TARGETING THE UNBANKED
The Treasury Department and the Federal Deposit Insurance Corporation (FDIC) have launched separate initiatives seeking strategies for expanding financial services to “unbanked” households.
Credit unions and banks in eight communities will participate in Treasury’s “Community Financial Access Pilot,” which will identify low-income households using non-mainstream alternatives, such as payday lenders and check-cashing outlets, and educate them about the availability of more affordable products and services. The program will target households “who need access to basic financial services, so they can paying outrageous fees just to cash a check or pay a bill,” Charles Schwab, chairman of the Advisory Council on Financial Literacy, said. The program will also give these households access to the basic financial education they need “to build a better future,” he added.
Separately, the FDIC announced plans to conduct a nationwide survey of FDIC-insured depository institutions to assess their efforts to serve unbanked and underbanked individuals and families. Described as the first such comprehensive review of its kind, the survey will ask banks to provide information about their financial education and outreach strategies, the deposit, payment and credit products they offer “entry-level” customers, and other programs targeting lower-income and possibly unbanked households. The FDIC will send the voluntary mail-in survey to approximately 1,300 institutions and develop more in-depth case studies of a limited number of institutions, highlighting the programs they have developed to serve unbanked households. The study is designed to identify both effective strategies and obstacles institutions face in developing these programs.
“The FDIC is strongly committed to developing more and better data about unbanked and Underbanked households, as well as the barriers that maybe preventing them from using products and services that insured institutions provide,” the FDIC said in announcing the survey. The project “should yield significant new insights about the opportunities for banks to meet the diverse financial needs of U.S. households,” the agency noted.
The survey results are to be included in a report to Congress and released to the public later this year.
ROBBERIES ON THE RISE
Financial institutions are having a tough time these days, what with mounting losses, constricted credit markets and a sagging economy. But bank robbers have been making out like – well, like bandits.
The Federal Bureau of Investigation (FBI) tallied more than 1,500 robberies in the third quarter of last year, netting perpetrators nearly $20 million. Law enforcement agencies recovered about 10 percent of that amount ($2.2 million).
Commercial banks were the prime targets, accounting for 370 of the robberies. Credit unions were a distant second at 116, ahead of both mutual savings banks (27) and savings and loans (27). Most of the facilities hit had alarm systems (1,512), surveillance cameras (1,551) and “bait” money; fewer (438) had tear gas/dye packs and fewer still (83) had guards. Most of the robberies (1,103) occurred in commercial business districts and branch offices (1,505) were the favored targets.
By region, the South claimed the largest number of robberies (583) and the Northeast (266) the fewest. Of the 106 robberies reported by New England financial institutions, 56 were in Massachusetts, followed by Connecticut (34), Rhode Island (8), and New Hampshire (5), with only 2 robberies reported in Vermont and 1 in Maine.
Robbery risks are apparently greatest on Mondays and Fridays, which accounted for 321 and 319 incidents, respectively. Hardly any robberies occurred on Sunday, and relatively few (116) on Saturday. Mornings are prime time for robberies but not too early – 430 incidents occurred between 9 and 11 a.m., only 47 before 6 in the morning and just 51 after 6 in the evening, according to the FBI report.
Most of the perpetrators used oral or written demands, supplemented by firearms in 400 of the incidents. Another 600 of the perpetrators threatened the use of a weapon that wasn’t displayed. Acts of violence were committed in 54 of the incidents, resulting in 31 injuries and 3 deaths. All of the individuals killed were perpetrators of the crime, the FBI noted.