Banking Law Prof Blog

OCC's Views on FHA Housing Stabilization & Homeownership Retention Act of 2008

Comptroller John Dugan presented the agency's views on the FHA Housing Stabilization and Homeownership Act of 2008 before Congress today.  This is basically a voluntary loan workout program with the lender taking a write-down and the borrower getting a refinanced FHA-guaranteed loan at the reduced principal amount. 

Link:  http://www.occ.gov/ftp/release/2008-38.htm

(ag) April 9, 2008, in Congress/Lending Issues

Warren Buffett Comments on the Subprime Mortgage Lending Crisis

Excerpt from Warren Buffett's current Letter to Berkshire Hathaway Shareholders: 

"Some major financial institutions have, however, experienced staggering problems because they engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”

You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More
Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.

As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight."

Link:  http://www.berkshirehathaway.com/letters/2007ltr.pdf

(ag) April 2, 2008, in Lending Issues

Commercial Real Estate Concentrations - The Next Problem Loan Category?

FDIC has issued a Financial Institution Letter (FIL 22-208, March 17, 2008) reemphasizing the importance of risk management strategies and strong capital to back Commercial Real Estate and Construction & Development concentrations. As our economy edges toward recession, losses in these loan concentrations will undoubtedly increase.  The Federal Banking Agencies are trying to give advance guidance in this arena.

Link:  http://www.fdic.gov/news/news/financial/2008/fil08022.html

(ag) March 25, 2008, in Lending Issues

It's Not Sexy But It's Still an Examination Concern

Flood Insurance continues to be a bank examination issue.  It may not have the pizzazz of complex financial issues, but for those banks doing a traditional lending business and for borrowers seeking plain vanilla home mortgages, it's still important.

The Federal Banking Agencies have issued a Revised Q&A (updated from the 1997 version) to aid compliance.

Link:  http://www.occ.gov/ftp/bulletin/2008-7.html

(ag) March 24, 2008, in Lending Issues/Federal Banking Agencies

Getting Back To That Community Bank Lending Perspective

FDIC kicks off its two-year pilot project to identify best practices in affordable small-dollar loan programs. Thirty banks, headquartered in 17 states and ranging in assets size from $20 Million to $10 Billion will participate.

Key characteristics of a small loan program under this program include:

• Loans under $1,000
• Installment payments
• Interest rate less than 36%
• Low or no origination fees
• No prepayment penalties
• May include an automatic savings component
• Streamlined applications
• Financial education

Here's a link to the list of participating banks: http://www.fdic.gov/news/news/press/2008/pr08010.html

(ag) Feb. 19, 2008, in FDIC/Lending Issues

Sheila Bair Makes the Case for Loan Modification

FDIC Chairman Sheila is no free-market advocate when it comes to consumer issues, so it comes as no surprise that she makes the case for loan modification for borrowers who are at risk of default as a result of rate resets and other problems related to the current mortgage industry crisis.

Here's a link to her article, which appears in the FDIC's Quarterly Banking Profile for the third quarter 2007, posted to the FDIC website on Jan. 9, 2008:

Link:  http://www.fdic.gov/bank/analytical/quarterly/index.html

(ag) Jan. 10, 2008

Microlending Here We Come!

FDIC plans to introduce a two-year pilot program for very small loans up to $1,000.  FDIC is seeking applications and will select 20 to 40 financial institutions to begin this pilot program.  Of course, these loans will qualify for favorable CRA treatment, and FDIC says they may help banks tap new markets.  The idea is to identify best practices for affordable small-dollar lending.

Link:  http://www.fdic.gov/smalldollarloans/

Banks Continue to Lower Underwriting Standards

The OCC today released survey results showing that banks continue to "ease" underwriting standards.  This survey deals with commercial and retail loans, rather than consumer loans or mortgage loans, but it still seems like this is a trend in the wrong direction.

Link to survey announcement:  http://www.occ.gov/ftp/release/2007-108.htm

(ag) Oct. 4, 2007, in Lending Practices

Explaining How FDIC Uses HMDA Data as a Fair Lending Enforcement Tool

Congress definitely has an interest in fair lending and consumer protection.  The federal banking agencies have an interest in explaining how they're right on top of the predatory lending problems.  Here's a link to FDIC's Director of Consumer Protection Sandra Thompson's Congressional testimony:  http://www.fdic.gov/news/news/speeches/chairman/spjul2507.html

(ag) July 31, 2007, in FDIC/Lending Issues

Federal Banking Agencies - Still on the Carpet

The Office of the Comptroller (OCC) provided testimony to the House Financial Services Committee Subcommittee on Oversight and Investigations.  Director of Compliance Calvin Hagins told the Subcommittee that OCC is committed to ensuring compliance with fair lending laws.

Link:  http://www.occ.treas.gov/ftp/release/2007-78.htm

(ag) July 27, 2007, in Lending Issues

The Fed's Testimony on HMDA

Sandra Braunstein, FRB Consumer & Community Affairs Director, testified before the House Financial Services Committee's Subcommittee on Oversight and Investigations.  Her testimony addressed Fair Lending and the Home Mortgage Disclosure Act (HMDA).

Braunstein acknowledged that HMDA data highlights racial and ethnic gaps in the availability and price of mortgage credit. The hearing was triggered by concerns that credit gaps may result in part from illegal discrimination.  The testimony presented was FRB's explanation about their efforts to enforce fair lending laws.  This continues to be a hot topic.  It's clear that Congress wants to see results. 

Link:  http://www.federalreserve.gov/boarddocs/testimony/2007/20070725/default.htm

(ag) July 25, 2007, in Lending Issues

Members of Congress Concerned About Reg B

Three members of Congress -- Melvin Watt (D-NC), Chairman of the House Financial Services Subcommittee on Oversight and Investigations; Carolyn Maloney (D-NY), Chairman of the Subcommittee on Financial Institutions & Consumer Credit; and Barney Frank (D-MA), Chairman of the House Financial Services Committee -- have sent a letter to the Government Accountability Office expressing their concern that the Federal Reserve has decided not to amend Regulation B, which implements the Equal Credit Opportunity Act (ECOA). 

In fact, they're so concerned that they are asking the GAO to conduct its own study of the impact of removing Reg B's prohibition on collecting and publicly reporting of race and gender data for non-mortgage credit. 

Link to letter:  http://www.house.gov/apps/list/press/financialsvcs_dem/press2071707.shtml

(ag) July 18, 2007, in Congress, Consumer Protection, Federal Reserve, Lending Issues

PSAs for Delinquent Borrowers

Comptroller John Dugan announces that the OCC has two new Public Service Announcements designed to help delinquent borrowers.  In light of the fact that the worst thing a borrower can do is to ignore the problem and hope it goes away, these announcements may encourage a more proactive approach.  The OCC continues to prompt banks to work with their delinquent borrowers to avoid mortgage foreclosure.  These announcements address the other half of the equation.

Link to Press Release:  http://www.occ.treas.gov/ftp/release/2007-61.htm

(ag) July 11, 2007, in Lending Issues/Subprime Lending

OCC's Interim Rule Allows National Banks to Use State Lending Limits

The OCC has published an Interim Rule that allows national banks to use a higher state law lending limits for residential real estate, small business, and small farm loans -- with OCC's prior approval.  This Interim Rule merely extends the authority under a Pilot Program that has been in effect since 2001.  OCC finds that allowing national banks to follow higher state lending limits permits them to better serve their customers and that banks in the Pilot Program have used this new authority in a safe and sound manner.  National banks that were approved under the Pilot Program are not required to submit a new application.

Link:  http://www.occ.treas.gov/fr/fedregister/72fr31441.pdf

(ag) July 3, 2007, in Lending Issues

Foreclosure Prevention Strategies - Best Practices

The OCC announces publication of "Foreclosure Prevention: Improving Contact with Borrowers".  While much of this guidance may seem like basic good lending and followup procedures, there are some excellent suggestions and helpful reminders.  As foreclosures increase, with attendant harm both to borrowers and lenders, any good advice is welcome.

Link:  http://www.occ.treas.gov/cdd/Foreclosure_Prevention_Insights.pdf

(ag) June 27, 2007, in Lending Issues

Mortgage Scam

Here's a new one:  A direct mail solicitation encouraging consumers to take out a home equity loan -- with false promises that consumers are entitled to "CRA Cash Grants" and that the Federal Reserve endorses the product.  Link to FRB Consumer Fraud Alert:  http://www.federalreserve.gov/boarddocs/press/other/2007/20070216/default.htm

(ag) Feb. 19, 2007, in Lending Issues/Predatory Lending

Banking the Unbanked

Two items: 

1. OTS will host a Northwest Regional Conference on Reaching Unbanked People on Tuesday, March 27, 2007, in Seattle.  See the OTS website for more info.

2.  Bank of America apparently stepped on a land mine with its proposal to offer credit cards to people without social security numbers.  This idea definitely has pros and cons.  Pro:  it may bring unbanked people into the banking system.  It allows access to credit (even if only $500), which is often the first step in reaching for the American dream. Con: Many saw this program as encouraging illegal immigrants & others are concerned that this might have predatory overtones.  See Tuesday's Wall Street Journal.

(ag) Feb. 14, 2007, in Lending Issues

Chevy Chase Takes a Hit - TILA Violations in Option ARMs

Here's an item referred to me by fellow blogger Benjamin Barros, Associate Professor of Law at Widener University Law School and Editor of the PropertyProf Blog:

Class Certified, Summary Judgment to Plaintiffs in Option ARM Case

Ben Barros says: "I've posted before about the potential for sales-practices litigation arising out of the sale of Option-ARMs and other specialized mortgages.  Yesterday, a federal judge issued an order in Andrews v. Chevy Chase Bank certifying a class and granting plaintiffs summary judgment on their Truth in Lending Act disclosure claims.  The judge's order is here; the disclosure statement is here.  The judge also ruled that the plaintiffs were entitled to rescission.  I wouldn't be surprised to see an appeal, but the District Court's opinion seems to be well reasoned.  If duplicated in other cases, the District Court's general approach to the Truth in Lending Act -- the TLA is a remedial statute, and disclosures have to be crystal clear to protect lenders -- could spell trouble for a lot of lenders.  As I observed in my first post on the subject (follow the link above), mediocre disclosure is not going to offer much protection in the consumer context."  -- Ben Barros

Plaintiffs' Counsel's Press Release:

"A Federal Judge has certified a class action and ruled on summary judgment that the Chevy Chase Bank, FSB violated the Truth in Lending Act in connection with its “option” ARM loans.  The Judge has ruled that several thousand class members will be able to rescind their loans, a remedy whereby the bank will be ordered to return all of the wrongfully collected interest and closing costs it has received on the loans, and will be ordered to pay the plaintiffs’ attorneys fees.  The case has been pending for nearly two years. 

The loans at issue in the case are “option” mortgages, whereby the borrowers’ minimum payments were fixed during the first five years, but the actual interest rates being charged on the loans adjusted every month, beginning in the 2nd month of the loan program. 

In issuing Summary Judgment of liability in favor of the Plaintiff Class Members, the Judge ruled that Chevy Chase failed to properly disclose the payment schedule on the loans, failed to properly disclose the cost of the loans as an annual percentage rate, and failed to disclose the variable rate feature in the first 5 years of the loans.  The Judge further ruled that the bank inserted in their disclosures misleading  “teaser” rates that were only available for one month, and language directly above suggesting the loans were “5 year fixed.”

The Court has requested that the parties submit a suitable proposed notice to all class members."

Kevin Demet and Donal Demet of the law firm of Demet & Demet SC, Milwaukee, are representing the class members; they can be reached by telephone at (414) 291-0800 or by email at KDemet@Demetlaw.com or DDemet@Demetlaw.com.

Thanks to Ben for calling this item to my attention.  Check out Ben's Blog:  http://lawprofessors.typepad.com/property/

(ag) Jan. 17, 2007, in Lending Issues/NonTraditional Mortgages

Enterprise Risk Management - Especially Non-Traditional Mortgage Lending

Federal Reserve Governor Susan Schmidt Bies delivered remarks on "Enterprise Risk Management and Mortgage Lending" on January 11, 2007, to NCUA's Risk Mitigation Summit. 

Dr. Bies points out the mortgage lending is only one area in which Enterprise Risk Management (ERM) has application.  Financial institutions should also be concerned with ERM with regard to information security, credit derivatives, and overall portfolio management.  She recognizes that ERM must be tailored to the size and complexity of the institution.

Dr. Bies defines ERM as "a process that enables management to deal effectively with uncertainty and the associated risk and opportunity, enhancing the capacity to build stakeholder value."  She references the ERM framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  She discusses specific ERM issues in mortgage lending, especially in nontraditional mortgage products and subprime lending.

Link:  http://www.federalreserve.gov/boarddocs/speeches/2007/20070111/default.htm

(ag) Jan. 11, 2007, in Lending Issues

An Alternative to Pay Day Loans - Appropriate Terms for Small Loans to Military Personnel

FDIC has posted a description or template for small loans to military personnel.  The objective is to cut down on predatory lending.  In December, 2006, FDIC hosted a symposium on "Affordable, Responsible Loans for the Military".  If you are counseling a bank near a military base, this information could be the road to some good PR.

Link to Template and Speeches, including one by Congressman Barney Frank.  In this new Congress, his opinions are well worth attention:  http://www.fdic.gov/news/conferences/militaryloans/Military_Small_Dollar_Loan_Template.pdf

(ag) Jan. 8, in Lending Issues/Predatory Lending

Reg O Revisions

The Federal Reserve has adopted an Interim Rule, eliminating some Regulation O (loans to insiders) reporting requirements.  The Interim Rule is effective immediately upon Federal Register Publication -- but FRB seek comments for 30 days.  This Interim Rule does not change substantive Reg O requirements, but merely fulfills the statutory mandate of the Reg Relief Act to reduce regulatory burden on banks.

Link to Dec. 6, 2006, Press Release:  http://www.federalreserve.gov/BoardDocs/press/bcreg/2006/200612062/default.htm

(ag) Dec. 8, 2006, in FRB/Lending Issues/Reg Relief

Commercial Real Estate Concentrations - Final Guidance

The FDIC, FRB, and OCC issued Final Guidance on Concentrations in Real Estate Lending Concentrations - Sound Risk Management Practices.

Link to Dec. 6, 2006, Interagency Announcement:  http://www.fdic.gov/news/news/press/2006/pr06114.html

OTS also issued Final CRE Guidelines, but did not include specific thresholds defining high concentrations of commercial real estate loans.  http://www.ots.treas.gov/docs/7/776055.html

(ag) Dec. 6, 2006, in Lending Practices

Want to Know About the SBA's 504 CDC Loan Program?

The OCC is hosting a web and telephone seminar Jan. 31, 2007.  The cost in nominal & the content looks great.  Topics include:  How the SBA 504 Certified Development Company Loan Program works; Why Banks & Their Small Business Customers Should Be Interested; Key Risks & Regulatory Concerns; How the Secondary Market for 504 Loans Can Provide Liquidity for Banks; and the CRA Benefits of 504 Loans.

Link:  http://www.occ.treas.gov/SBA_Brochure_(1119).pdf

(ag) Dec. 4, 2006, in CRA/Lending Issues

FDIC Uses HMDA Data to Identify Likely Discrimination

Striking information about potential illegal discrimination in lending is contained in a recently issued report by FDIC's Office of Inspector General.  This internal audit investigated FDIC Bank Examiner Use of HMDA Data to Identify Potential Discrimination.  Standing alone, HMDA data does not establish discrimination.  FDIC uses HMDA reports to prepare for compliance examinations, identifying what they call "outliers" -- banks with the highest loan pricing for racial, ethnic, or gender groups.

Here's the disturbing news:  FDIC identified 47 "outliers", based on 2004 HMDA data.  To provide a breakdown by region, Atlanta had 16 of these "outliers"; Dallas had 20;  Kansas City had 1; Chicago had 6; New York had 4.  After further investigation by examiners as of July 25, 2006, 23 of these instances had been resolved.  For 18 of the 23, no violations were found.  Regarding the remaining 5 of 23, these had merged or changed charters without FDIC review -- although their new primary regulators were advised of the investigation.  Nine reviews were in progress as of the end of July and the rest will be initiated by year end.  Of the reviews in progress, two banks out of the Atlanta Region and three out of the Dallas Region have been identified as having potential discrimination violations.

Link to Audit Report:  http://www.fdicig.gov/reports06/06-023.pdf

(ag) Nov. 15, 2006, in Federal Banking Agencies - FDIC, Lending Issues, Predatory Lending

Environmental Risk Program Guidelines

Commercial Real Estate (CRE) loans carry the very real risk of environmental contamination issues for lenders.  FDIC's FIL-98-2006, issued Nov. 13, 2006, contains Updated Guidelines for An Environmental Risk Program. 

One of the key reasons for updating these guidelines is the EPA's "All Appropriate Inquiry" Rule, which became effective Nov. 1, 2006. This rule sets out standards and practices sufficient to demonstrate adequate inquiry into prior ownership and uses of a property.

Link to FIL-98-2006:  http://www.fdic.gov/news/news/financial/2006/fil06098.html

Link to EPA's All Appropriate Inquiry Rule:  http://www.epa.gov/brownfields/regneg.htm

(ag) Nov. 14, 2006, in Lending Issues

Mortgage Fraud Increasing

On Nov. 3, 2006, FinCEN released an analysis of Suspicious Activity Reports (SARs) filed between Apr. 1, 1996 and Mar. 31, 2006.  This study has the effect of warning banks about increasing mortgage fraud, with secondary identifying characteristics of "false statements" and "identity theft".  FinCEN could also be engaged in a bit of justification for the burden SARs impose -- just look at the value generated!

Link to Mortgage Loan Fraud Assessment:  www.fincen.gov/MortgageLoanFraud.pdf

(ag) Nov. 6, 2006, in Lending Issues

How Much is My Monthly Payment?

Judge Barry S. Schermer, chief federal bankruptcy judge for the U.S. Bankruptcy Appellate Panel for the Eighth Circuit, offered the following comment about U.S. consumers today:  "Our society has become one of not 'How much does it cost?' but 'What's my monthly payment?'

Schermer finds this to be one reason for the rise in personal bankruptcies.  Of course, for bankers, more bankruptcies mean more defaults and loan losses.

Here's an interesting study: "The Rise in Personal Bankruptcy:  Causes, Comparisons, Correctives" by Thomas A. Garrett, Federal Bank of St. Louis (Oct. 2006).

www.stlouisfed.org/community/assets/pdf/bankruptcy.pdf

(ag) Nov. 2, 2006, in Lending Issues

Bernanke Talks About CDFIs as a Solution to Market Failures

Fed Chairman Ben Bernanke delivered remarks today to the Opportunity Finance Network's Annual Conference in Washington, D.C.  He stressed the positive contributions of Community Development Financial Institutions (CDFIs) in lending to the otherwise underserved and in promoting homeownership.  When Bernanke talks about CDFIs as a Solution to Market Failures, he is speaking as an economist.  Here's how he explains it: 

"Standard economic analysis tells us that when competitive conditions prevail in a market, the resulting prices induce firms and individuals to allocate resources in a manner that tends to maximize social welfare.  However, economimsts also recognize that various deviations from idealized market conditions, termed market failures, can inhibit the efficient allocation of resources."

For us non-economists, he's saying that low-income people can't always get standard loans -- and that may not be optimal for our economy.  CDFIs concentrate on making loans to underserved borrowers and neighborhoods -- and with that focus, they can be good at what they do.  Bernanke notes in his speech, that loan losses for CDFIs approximates that for commercial banks.

For banks:  Remember that loans to and investments in CDFIs count for CRA purposes!

Link to Speech:  http://www.federalreserve.gov/boarddocs/speeches/2006/20061101/default.htm

If you need more information about CDFIs and what they are, here's a link:  http://www.cdfi.org/whatare.asp

Link to Information about the Treasury Department's CDFI Fund created pursuant to the Reigle Neal Act:  http://www.cdfifund.gov/who_we_are/about_us.asp

(ag) Nov. 1, 2006, in Consumer Protection, Federal Banking Agencies - FRB, Lending & CRA

SALO - Payday Loan Alternative

Here's a product I had not heard about:  SALO (Salary Advance Loan).  This powerpoint description is available on the FDIC website.

Link:  [MS POWERPOINT] The Supply Side of SALOs
... The argument that mainstream banks and thrifts cannot create an affordable & profitable
alternative payday loan product is patent nonsense! Michael A. Stegman. ...
www.fdic.gov/news/conferences/affordable/stegman.ppt - 2006-02-08 - Text Version

(ag) Oct. 24, 2006, in Lending Issues/Predatory Lending

He Said, She Said -- FDIC and OTS Differ on CRE Guidance?

Last week, agency heads for both OTS and FDIC addressed America's Community Bankers.  Commercial Real Estate (CRE) issues are important to both agencies, although they appear to have a somewhat different take on the January 2006 Proposed Joint Agency Guidance on Commercial Real Estate.

On Oct. 15, 2006, OTS Director John Reich noted that the January 2006 Guidance was developed in response to the dramatic increase in CRE lending by banks between $100M and $10B, which he termed small-to-mid-sized community and regional financial institutions.  Acknowledging industry complaints about regulatory burden and the perception of "hard limits" on CRE loans, Reich said that, in his view, the Interagency Guidance is only a "reference" for financial institutions and examiners, not a limit or threshold above which CRE lending is "suspect or barred".  He further said that he "remains uncomfortable with the particular numerical thresholds set forth in the proposed guidance".

On Oct. 17, 2006, FDIC Chairman Sheila Bair also acknowledged that the Interagency Guidance contains "benchmarks, not caps".  However, her remarks focused more sharply on CRE as a lending area that warrants examiner scrutiny.  She said, " Portfolio concentrations in CRE assets have been increasing.  At the end of June, over 1,700 insured banks and thrifts -- almost 20 percent of the industry -- reported both construction and development loans that exceeded their roral capital and commercial real estate loans that exceeded 300 percent of total capital. Construction loan growth has been very high, almost 32 percent over the past year.  These trends have caused the regulators to take a close look at risk management practices in this type of lending."

From these speeches, it appears that the Federal Banking Agencies have a ways to go before they achieve agreement sufficient to issue the Final CRE Guidance.

Link to Reich Speech:  www.ots.treas.gov/docs/8/87125.pdf

Link to Bair Speech:  www.fdic.gov/news/news/speeches/chairman/spoct1706.html

Link to Proposed Interagency CRE Guidance:  http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/06-340.pdf

(ag) Oct. 23, 2006, in Lending Issues/Federal Banking Agencies/FDIC/OTS

More Warnings to Banks About Loan Underwriting Standards

Comptroller of the Currency John Dugan joins other regulators in cautioning banks about the need to maintain responsible credit underwriting standards.  The publication this week of the Interagency Shared National Credit Review and the OCC's 2006 Underwriting Survey are prompting all the federal banking agencies to issue reminders to banks.  Banking is definitely cyclical.  Over the past few years, low interest rates and a booming housing market may have masked weaknesses in lending standards.  As interest rates rise and the housing market peaks, home loans may be particularly vulnerable. 

Home equity loans are a regulatory focus, although regulators extend their warnings about underwriting to commercial loans as well.

Loan loss reserves are another OCC focus.  Banks are reminded that one of the keys to surviving and flourshing in tougher economic times is maintaining strong loan loss reserves.  Expect this to be an examination attention item.

Link to Press Release:  http://www.occ.treas.gov/toolkit/newsrelease.aspx?Doc=S6LR4YMW.xml

For another note published on this blog, see "Back to the Bad Old Days?" - Oct. 18, 2006.

Hint for using this blog site:  To access all blogs relating to "Lending Issues", Click on "Topical Archives" on the Right Side Toolbar.  To access prior blogs, go to "Recent Posts" or, for access to every posting back to the beginning of this blog on Sept. 26, 2006, go to "Weekly Archives".

(ag) Oct. 20, 2006, in Lending Issues

Back to the Bad Old Days? Maybe Not Yet, But Banks Are Cautioned About Loosening Credit Standards

The OCC today released its annual Survey of Credit Underwriting Practices.  For the third consecutive year, underwriting standards for commercial and retail loans have "eased".  The OCC attributes this to competition among lenders. The Survey indicates that underwriting standards for commercial real estate loans are loosening at the same time concentrations in CRE loans are increasing.  Stopping short of identifying this as a recipe for disaster, Deputy Comptroller for Credit and Market Risk, Kathryn Dick said that,  "OCC will continue to focus supervisory attention and resources to ensure that credit risk in national banks is appropriately identified and that credit risk management practices are commensurate with risk levels assumed."

Link to Press Release:  http://www.occ.treas.gov/toolkit/newsrelease.aspx?Doc=HMN5BE1G.xml

Link to Survey:  http://www.occ.treas.gov/2006Underwriting/CreditUnderwriting2006.htm

(ag) Oct. 18, 2006, in Lending Issues

Good Guy Finishes First - Grameen Bank and Its Founder Win Nobel Peace Prize

Grameen Bank and its founder, Bangladeshi economist Muhammad Yunus, share the Nobel Peace Prize for 2006.  Yunus developed the concept of "micro-lending". 

As the Norwegian Nobel Committee's Oct. 13, 2006, press release indicates:  "Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty.  Micro-credit is one such means.  Development from below also serves to advance democracy and human rights."

According to the Grameen Bank website:  The Bank serves the poorest of the poor in Bangladesh under Yunus' philosophy that if financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable, 'these millions of small people with their millions of small pursuits can add up to create the biggest development wonder." 

Other financial institutions that have adopted some form of micro-lending include Citigroup, ABN Amro Holdings and Standard Chartered PLC.

Link to Nobel Committee announcement:  http://nobelpeaceprize.org/eng_lau_announce2006.html

Link to Grameen Bank:  http://www.grameen-info.org/bank/index.html

Pass Bills in Haste, Try to Understand Them Afterward?

Bankers and their lawyers are trying to absorb the full ramifications of at least two bills (and that does not include the Reg Relief Bill) that Congress passed in the waning days of September as they rushed to "get out of Dodge". 

First, the Internet Gambling Bill (which achieved passage by virtue of being attached to a port security bill):  This is another example of using banks to police illegal activity committed by others.  Financial service companies are required to block payments to illegal Internet gambling sites -- but not payments to legal sites.  How will they know with certainty (and without totally invading financial privacy) which payments to block?

Second, the 36% interest rate cap on annual interest rates charged to military borrowers, together with prohibitions against certain "payday lending" tactics:  Senators Jim Talent (R-MO) and Bill Nelson (D-FL) attached this amendment to the 2007 Defense Authorization Bill.  The Pentagon strongly urged the need for Congressional attention to financial abuse of military personnel and families.  This, of course, is only part of the nation-wide debate about payday lending and usury.  Almost everyone expresses distaste for interest rates that, on an annualized basis, run into several hundred percent.  There are serious abuses out there, not just for military personnel but also for the elderly, minorities, the low-income wage-earner living paycheck to paycheck. 

See the Center for Responsible Lending website for extensive information in opposition to payday lending:  http://www.responsiblelending.org

Having recognized the problem, here are some issues with the bill:

*  Predatory payday lending targets more than just the military population.  Why address only this segment?

*  If people who need credit are not being served by reputable lenders, they will go somewhere to meet those credit needs.  Are we driving the problem underground? 

*  What more can be done effectively and nationally in terms of financial education, to teach all sectors of borrowers how to manage their money, how to shop for credit, and how important it is to maintain good credit?

BUT here's the real kicker to this bill.  The Department of Defense gets to write the regulations and could require additional interest-rate disclosures to military personnel, that are different in wording or calculation from the Truth-in-Lending disclosures already required.

Here's another thought:  The announcement of bill passage from the Center for Responsible Lending's website points out that:  "Military bases are like big fishponds to payday lenders -- full of young, financially inexperienced families trying to get by on modest pay . . . ."                            Why don't we pay our enlisted soldiers a living wage?

(ag) Oct. 9, 2006, Congress/Lending Issues/BSA/Predatory Lending/Usury

More on Non-Traditional Mortgage Products & Risk

First, we ask:  Who's Experiencing Risk?

The answer is:  Clearly Consumers who don't understand these new loan types (especially interest-only loans & certain kinds of adjustable rate mortagages).
Lending Institutions themselves also incur risk of default when they fail to accurately underwrite the risk that borrowers lack repayment ability.
The high profile downside of these new products is:  Consumers who lose their home to foreclosure.

Comptroller of the Currency John C. Dugan's Sept. 29, 2006, Press Release, recognizes both the benefits & the risks inherent in these "nontraditional mortgage products".

From the Press Release:
"The marketing and use of nontraditional mortgage products -- particularly, interest-only and payment-option adjustable-rate mortgages -- have expanded rapidly to a wider spectrum of borrowers who may not otherwise qualify for more traditional mortgages of similar size.  These nontraditional loans carry substantial risks, most notably associated with negative amortization and potential payment shock that are not always adequately disclosed or understood by consumers.  Moreover, lenders are increasingly combining these loans with other practices, such as simultaneous second-lien mortgages and reduced documentation that compound the risk to consumers and lenders."

OCC views the Joint Federal Banking Agency "Guidance on Nontraditional Mortgage Product Risk" as instructive and beneficial to both consumers and lenders:
" First, consumers should have the information they need to make informed decisions about these loans.  Second, lenders who originate these types of loans should follow sound underwriting practices that credibly consider the borrower’s repayment capacity and allow lenders to mitigate associated risks."

Editor's Comment:  Now that the "Interagency Guidance" has been published, we'll see what happens in the real world.

Link to OCC Press Release NR 2006-108 (Sept. 29, 2006):
http://www.occ.gov/toolkit/newsrelease.aspx?Doc=AUEO7DE.xml

Link to Interagency Guidance on Nontraditional Mortgage Product Risk:
See OCC Press Release NR 2006-107 (Sept. 29, 2006)
http://www.occ.gov/toolkit/newsrelease.aspx?JNR=1&Doc=M3ZM5FQW.xml
Guidance:  http://www.occ.gov/ftp/release/2006-107a(Guidance).pdf

Two mortgage-related documents also issued Sept. 29, 2006:
1.  "Proposed Illustrations of Consumer Information for Nontraditional Mortgage Products" and
2.  Addendum to the May 2005 "Interagency Credit Risk Management Guidance for Home Equity Lending"

(ag) Sept. 30, 2006, Lending Issues/NonTraditional Mortgages

Loan Pricing Analysis from 2005 HMDA Data

The Federal Reserve Bulletin (now published continuously online instead of in its former Quarterly paper version) now contains the Sept. 8, 2006 study, “Higher Priced Home Lending and the 2005 HMDA Data” by Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner.  These authors focus primarily on the loan-pricing aspects of the Home Mortgage Disclosure Act (HMDA) data, which were recently released to the public.  The study “assesses the effects of the changing interest rate situation in 2004 and 2005 on the disclosure of higher-priced lending and on the gap in loan-pricing outcomes among groups of borrowers sorted by their race or ethnicity”.

Link to the Federal Reserve Bulletin and “Higher Priced Lending and the 2005 HMDA Data”:  http://www.federalreserve.gov/pubs/bulletin/default.htm

(ag) Sept. 25, 2006, in Lending Issues

Shared National Credit Data Review issued Sept. 25, 2006

The Federal Banking Agencies have released new data for Shared National Credits.

From the Joint Press Release issued by FRB, FDIC, OCC & OTS:
“[T]he volume of syndicated credits rose rapidly, in part reflecting a rise in merger and acquisition activity over the past year . . . . [Data showed a] small increase in problem credits as a share of commitments in 2006. The bulk of this increase was associated with credits held by nonbank entities while problem loans at regulated institutions, particularly those with insured deposits, grew slightly. Deterioration in exposures to the manufacturing sector, primarily the automotive industry, accounted for most of the softening in asset quality. . . .[M]ost other industries exhibit improved credit quality from peak problem levels experienced only a few years ago. Examiners also found, however, a continued easing of underwriting standards in the syndicated lending market in general, particularly in non-investment grade or leveraged credit facilities.”

Link to Press Release:  http://www.federalreserve.gov/BoardDocs/Press/bcreg/2006/20060925/default.htm

(ag) Sept. 25, 2006, in Lending Issues

Non-Traditional Mortgage Products – Bane or Blessing?

By “non-traditional mortgage products”, regulators and commentators mean residential mortgage loans that have a repayment schedule such as “interest only” – with a balloon payment at the end or interest rate provisions that include variable features like “option-ARMS”.  It is undisputed that these products may make credit more affordable for some borrowers; however, these loans are not simple to understand and may result in a high default rate when required payments are suddenly much larger than previously.

Sandra Braunstein, the Federal Reserve Board’s Director of the Division of Consumer & Community Affairs, presented testimony on Sept. 20, 2006, before two U.S. Senate Subcommittees of the Committee on Banking, Housing, & Urban Affairs: Housing & Transportation and Economic Policy.  The Fed is considering revising disclosures to consumers under Regulation Z, which implements the Truth in Lending Act (TILA).  The Fed staff will also revise the CHARM booklet ("Consumer Handbook on Adjustable Rate Mortgages") and compile a new consumer education brochure:  "Interest-Only Mortgage Payments and Option-Payment ARMs--Are They for You?"
Ms. Braunstein’s testimony references Public Hearings on “Home Equity Lending” which were conducted by the Fed during the summer of 2006.

Link to Testimony:  http://www.federalreserve.gov/boarddocs/testimony/2006/20060920/default.htm

In December 2005, the federal banking and thrift agencies jointly issued proposed guidance on “non-traditional mortgage products”.  This guidance addressed safety & soundness issues as well as consumer protection issues.

Link to Guidance:  http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20051220/default.htm

(ag) Sept. 25, 2006, in Lending Issues/NonTraditional mortgages