Banking Law Prof Blog

Let's Not Be Hasty

An interesting article in the American Banker for April 26, 2008, is entitled "Financial Execs Urge Rapid Regulatory Reform." Well, let's see what this is about!  Representatives of the Financial Services Roundtable (with membership comprising the 100 largest integrated U.S. financial firms) say they would like to see a single federal regulator as an option for financial firms AND a regulatory system based on broad principles and prudential oversight.  The article suggests that the Bear Stearns collapse has triggered these proposals, that they will enable regulators to respond to similar crises more expeditiously, and that they should be adopted post haste. 

Wait a minute:  The Financial Services Roundtable was arguing for a single regulator and more flexible, principles-based regulation long before now.  And most observers believe that we will see Congressional response to the subprime mortgage and financial markets crisis.  Those of us who have seen how heavy-handed Congressional response to crisis can be hope not to see reforms that are rushed through.

(ag) March 27, 2008, in Federal Banking Agencies/Subprime Lending

Points to Ponder Regarding the Subprime Mortgage Market Collapse

My conclusions:

   1. There’s blame enough to go around.
   2. Those who do not remember the past are condemned to repeat it.
   3. If it sounds too good to be true, it probably is.
   4. If you don’t understand it, don’t invest in it.
   5. What goes around comes around.
   6. It’s still good to be the little pig who built his house of brick.
      
"It's sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end." - Warren Buffett, commenting on banks and investment banks that designed and marketed complex investments that have since gone sour, as reported by Reuters News.

(ag) March 25, 2008, in Subprime

Mayor of Baltimore Sues Wells Fargo

Here's a novel approach:  The Mayor and City Council of Baltimore filed suit in the U.S. District Court for the District of Maryland, Baltimore Division, against Wells Fargo Bank, N.A. and Wells Fargo Financial Leasing, Inc., claiming that "reverse redlining" that targeted Baltimore's underserved and vulnerable, primarily African-American, neighorhoods has resulted in a foreclosure crisis and substantial and irreparable damage to the neighborhoods and to the City of Baltimore.  The suit is brought under the Fair Housing Act

Link to Complaint for Declaratory and Injunctive Relief and Damages:  http://www.aba.com/aba/documents/GeneralCounsel/BankingDocket/Baltimore.pdf

(ag) Jan. 9, 2008, in Predatory Lending

The Fed's New HOEPA Regs Are Out for Comment

The Federal Reserve Board today announced that the long-awaited regulations Congress has pushed for to address predatory lending are out for public comment.  The proposed regulations will amend Regulation Z (Truth in Lending) for the purpose of protecting consumers from unfair or deceptive home mortgage lending and advertising practices.

I'll have more to say about this tomorrow after I've had a chance to look at the proposed regulations in  greater detail.

LInk:  http://www.federalreserve.gov/newsevents/press/bcreg/20071218a.htm

(ag) Dec. 18, 2007, in FRB, Predatory Lending

New Agreement to Assist Subprime Borrowers

Treasury Secretary Henry Paulson and other financial institution regulators yesterday announced the new plan for assistance to subprime borrowers.   More commentary to follow . . .

Here's a link to the White House Fact Sheet:  http://www.whitehouse.gov/news/releases/2007/12/20071206-7.html

(ag) Dec. 7, 2007, in Subprime Lending

Bernanke's Congressional Testimony

Yesterday, Federal Reserve Chairman Ben Bernanke testified before the Joint Economic Committee of the U.S. Congress on "The Economic Outlook".  His last appearance before this committee was in March.  In the meantime, many unpleasant repercussions have hit the fan in the subprime lending market.

Chairman Bernanke began his testimony with the good news:  "Real gross domestic product (GDP) grew at an average pace of nearly 4 percent over the second and third quarters despite the ongoing correction in the housing market.  Core inflation has improved modestly, although recent increases in energy prices will likely lead overall inflation to rise for a time."

The rest of the testimony painted a not-so-bright picture, outlining problems in the subprime markets and the Federal Reserve's response.  With respect to the many cries for help from distressed borrowers, Chairman Bernanke stressed mitigation (loan workout) efforts by lenders.  He also praised the efforts of community-based organizations to help consumers, including NeighborWorks America, and foreclosure prevention programs, such as the Home Ownership Preservation Initiative, a program of the Federal Reserve Bank of Chicago. 

In discussing possible Congressional response to the subprime mortgage crisis, Chairman Bernanke sees an expanded role for the Federal Housing Administration (FHA).  After much prodding by Congress, the Federal Reserve finally plans to use its authority under the Home Ownership and Equity Protection Act (HOEPA), to propose rules by the end of this year to address unfair or deceptive mortgage lending practices.  These rules would apply to subprime loans offered by any mortgage lender. 

So,  about those rules . . .   I'm reminded of that fifties song fragment:  Just a wishin' and hopin' and thinkin' and prayin' . . .    We'll see when they get here.

Link to testimony:  http://www.federalreserve.gov/newsevents/testimony/bernanke20071108a.htm

(ag) Nov. 9, 2007, in Subprime Lending

College Towns and the Subprime Meltdown

Here's a bit of good news:  College towns appear to be escaping many of the housing market issues stemming from the subprime mortgage mess.  Thanks to Dale Duhan for forwarding this New York Times article. 

Link:  Download college_towns_escape_the_pain.doc

(ag) Nov. 6, 2007, in Subprime Lending

HR 3915 - The Mortgage Reform & Anti-Predatory Lending Act of 2007

This week, Representatives Brad Miller (D-NC), Mel Watt (D-NC) and Barney Frank (D-MA) introduced HR 3915, "The Mortgage Reform and Anti-Predatory Lending Act of 2007".  This bill is intended as comprehensive legislation to combat abuses in the mortgage lending market and to provide protections for mortgage consumers and investors.

The bill covers the following major areas:  1.  Establishing a federal duty of care in mortgage lending, prohibiting "steering" borrowers to higher priced loan products if they can qualify for a lower priced, more favorable loan, and setting up a new system for licensing and registration of mortgage originators, including brokers and bank loan officers; 2.  Requiring, as a minimum underwriting standard for mortgage loans, that the borrower must have a reasonable ability to repay; 3.  Attaching limited liability to secondary market securitizers of home mortgage loans that do not meet these new standards; 4.  Expanding consumer protections for "high cost home loans" under HOEPA and including protections for renters of foreclosed homes.

My take:  The subprime mortgage debacle demonstrates the need for better underwriting standards.  The public is crying for new protections.  So, just introducing this bill is a popular palliative move, but the bill itself will generate such controversy that delay is certain and passage very uncertain.

(ag) Oct. 25, 2007, in Consumer Protection, Predatory/Subprime Lending

Consumer Information for Subprime Lending - Please Send Comments by Oct. 15

Very Important Opportunity to Comment:  The Federal Banking Agencies have jointly published Proposed Illustrations of Consumer Information for Subprime Lending.  The comment period ends Oct. 15, 2007, and the agencies have received only three -- count 'em, three -- comments.  The proposal is only 6 pages & it's easy to comment online.  You can even look at the three comments received, if you need something to start your thinking about this.  Consumers as well as financial institutions should review and comment on this proposal.  Please comment.  You can make a difference.

Link: http://www.ots.gov/CL.CFM?DON=73374&AN=1&catNumber=67

(ag) Oct. 11, 2007, in Subprime Lending

Avoiding Foreclosure: Consumer Resources

The ultimate downside of subprime lending -- for consumers and financial institutions -- is foreclosure.  Here is a concise listing of helpful resources for consumers seeking to avoid foreclosure.

Link:  http://www.federalreserve.gov/pubs/foreclosure/default.htm

(ag) Oct. 8, 2007, in Subprime Lending

States Address Subprime Lending

Attorneys general and banking regulators from ten states have formed a task force aimed at pursuading mortgage-servicing companies and investors to restructure troubled subprime loans. The task force, led by Iowa Attorney General Tom Miller, has invited a dozen of the nation's largest subprime-mortgage-servicing companies to meet in Chicago.

Link:  http://www.law.columbia.edu/center_program/ag/predatorylend

Link:  http://www.state.ia.us/government/ag/latest_news/releases/sept_2007/Foreclosure_Hotline.html

Kansas Attorney General Paul Morrison today announced the creation of a state task force to examine mortgage foreclosures and the underlying causes, including mortgage fraud and subprime lending.  State Bank Commissioner Tom Thull will chair the new task force, which will include representatives from the lending and real estate industries, as well as consumer advocates.

Link:  http://cjonline.com/stories/092807/sta_203542402.shtml

New Mexico Governor Bill Richardson has established a Governor's Task Force on Mortgage Lending, composed of representatives of the banking, finance, and mortgage industry, the real estate industry, homebuilders, lawyers, New Mexico government and the general public.  The purpose of the Task Force is to examine the consequences of subprime mortgage lending in New Mexico, to review the Home Loan Protection Act, NMSA 1978, §§ 51-21A-1 et seq., homebuyer counseling, financial literacy education, and licensing requirements for originators, and to consider the effectiveness of plain language underwriting and more detailed disclosure requirements.  A report is due by Oct. 31, 2007.

(ag) Sept. 28, 2007, in Subprime Lending

Bernanke's Testimony to the House Financial Services Committee

Federal Reserve Chairman Ben Bernanke testified today before the House Financial Services Committee on "Subprime Mortgage Lending and Mitigating Foreclosures".  This is one of the clearest, most succinct summaries of the evolution of subprime mortgage lending -- benefits and downsides -- as well as securitization of these mortgages and the effect that has had on lenders, investors, and the financial markets. 

Chairman Bernanke also discusses potential regulatory and Congressional responses.  One of the key recommendations has to do with more even regulation of ALL lenders.

Link:  http://www.federalreserve.gov/newsevents/testimony/bernanke20070920a.htm

(ag) Sept. 20, in Subprime Lending

President Bush Announces His Plan for a New FHA Program

President Bush today announced a new FHA program for homeowners with good credit to refinance into more affordable loans.  The new program will be called FHA-Secure.  Another proposed reform deals with eliminating the tax imposed on debt forgiveness currently treated as income when a borrower cannot repay a home loan. 

Here's the link to the announcement:  http://www.whitehouse.gov/news/releases/2007/08/20070831-5.html

(ag) Aug. 31, 2007, in Subprime Lending

Foreclosure Resources

The Federal Reserve has assembled an information page with links to agencies and organizations that may be able to help consumers facing foreclosure.

Link:  http://www.federalreserve.gov/pubs/foreclosure/default.htm

(ag) Aug. 23, in Consumer Protection/Predatory Lending/Subprime Lending

Subprime Mortgages Threaten to Sink All Boats -- Countrywide In Particular

Everybody is watching Countrywide struggle for its life, as it exhausts its credit lines and liquidity becomes a critical issue.  Forbes.com has run an excellent series of articles on the subject.

(ag) Aug. 20, 2007, in Subprime Lending

It's Only a Pilot Program, But It's a Start

The Federal Reserve Board today announced the kick-off of a pilot program to conduct consumer protection examinations of non-depository mortgage lenders that are subsidiaries of banks and thrift holding companies and independent mortgage brokers doing business with these bank-related entities.  The focus of this pilot program is selected mortgage lenders with significant subprime mortgage operations.  State regulators participating in the program will bring in coordinated review of state-licensed subprime mortgage lenders and brokers.

This collaborative effort, which will involve information sharing, includes the Federal Reserve Board, the Office of Thrift Supervision, the Federal Trade Commission, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators.

This pilot program obviously responds to Congressional criticism of the Fed's failure to act.  But will the pilot program include subsidiaries and affiliates of national banks?  One can only wonder how meaningful this effort can be if they are not.  The OCC and FDIC are NOT parties to this pilot program.

(ag) July 17, 2007, in Subprime Lending 

Neighborworks Center for Foreclosure Prevention

The federal banking agencies are talking more about helping borrowers facing mortgage delinquencies.  This is new territory for bank regulators, necessitated by the real estate downturn and the staggering repricing problems with adjustable rate mortgages.  Check out this week's press release from FDIC following Monday's meeting of the Alliance for Economic Inclusion.  The press release discusses a new entity called Neighborworks Center for Foreclosure Prevention.

Link:  http://www.fdic.gov/news/news/press/2007/pr07059.html

(ag) July 17, 2007, in FDIC/Subprime Lending

Subprime Mortgages - FDIC's Got Questions; Who's Got Answers?

FDIC is hosting a meeting Monday, July 16, 2007, of its Advisory Committee on Economic Inclusion.  The topic is:  The Subprime Mortgage Situation - How Did We Get Here and What Can We Do?

Link:  http://www.fdic.gov/news/news/press/2007/pr07058.html

(ag) July 14, 2007, in Subprime Lending

Julie Williams Talks About the Watters Decision, Subprime Lending, and Consumer Protection

OCC's First Deputy Comptroller and Chief Counsel Julie Williams spoke to the New York Bankers Association this week. 

First, she addressed the Supreme Court decision in Watters v. Wachovia.  She says it's not new news.  She also says "move on". 

With respect to mortgage lending through subsidiaries of national banks, the OCC now clearly has responsibility to police predatory lending & deal with consumer protection issues. 

Ms. Williams calls for cooperation between state and federal regulators.

LInk:  http://www.occ.treas.gov/ftp/release/2007-72a.pdf

(ag) July 13, 2007, in Consumer Protection/Predatory Lending/Preemption

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

Check Out These Two New Predatory Lending Related Articles

University of Florida Law Professor Christopher Peterson has authored two new articles which are well worth your consideration:

"Predatory Structured Finance", 28 CARDOZO L. REV. 2185 (2007); and

"Preemption, Agency Cost Theory, and Predatory Lending by Banking Agents:  Are Federal Regulators Biting Off More Than They Can Chew?", 56 AMERICAN U. L. REV. 515 (2007).

(ag) July 2, 2007, in Predatory Lending/Subprime Lending

Interagency Statement on Subprime Lending

In a Joint Final Statement on Subprime Mortgage Lending issued June 29, 2007, the federal banking agencies addressed concerns about the growing use of Adjustable Rate Mortgages (ARMs) and attendant risks.  The Final Statement incorporates 137 public comments received in response to the Proposed Statement issued in March.

While clarifying that subprime loans are not necessarily predatory, the Final Statement emphasizes that qualifying consumers based on a low introductory payment does not provide a realistic assessment of a borrower's ability to repay the loan according to its terms. Acceptable lending standards must include a credible analysis of the borrower's ability to repay a loan after the initial teaser rate. 

The Final Statement also recognizes that "verifying income is critical to conducting a credible analysis of borrowers' repayment capacity, particularly in connection with loans to subprime borrowers."  Stated income and reduced documentation should be accepted only if there are mitigating factors that clearly minimize the need for verification of repayment capacity.

There is a specific section addressing Workout Arrangements -- and how they should be conducted to protect borrowers and lenders.  Consumer Protection Principles cover:  Prepayment Penalties and Consumer Disclosures.  For lenders, the Statement covers Control Systems and Supervisory Review.

Link:  http://www.fdic.gov/news/news/press/2007/pr07055a.html

(ag) July 2, 2007, in Subprime Lending

The St. Louis Fed's Views on Subprime Lending

• The Federal Bank of St. Louis has published the Summer 2007 edition of its newsletter "Central Banker".   Two key articles are: 
• "Bankers Should Help Customers Look Before They Leap Into a Subprime Mortgage" and
• "Feditorial:  Why Subprime Lending is News - and Will Continue to Be".  There's also a review of Ben Bernanke's First Year as Chairman of the Federal Reserve Board.

Link:  http://stlouisfed.org/publications/cb/2007/b/default.html

(ag) June 21, 2007, in Subprime Lending

Dear Abby's Advice about Predatory Lending

Even Dear Abby has some good advice about how to avoid becoming a victim of predatory lending!

Link:  http://www.uexpress.com/dearabby/?uc_full_date=20070603

(ag) June 15, 2007, in Predatory Lending

Stated Income Loans - Too Much Temptation!

Comptroller of the Currency John Dugan addressed the problems with "stated income loans" - observers call them "liar's loans".  He reiterates the obvious:  When lenders don't verify income, they wink at borrowers who provide the income number necessary to get the loan.  That's bad for borrowers who really can't support the payments that will come with the loan and bad underwriting on the part of lenders, inviting loan defaults and charge-offs.  These blunt comments are actually mine.  If you want to see the Comptroller's more polite version, here's the link: 

http://www.occ.gov/ftp/release/2007-48.htm

(ag) May 29, 2007, in Subprime Lending

Link

Revising Lending Disclosures to Fit Subprime Lending?

Professor Patricia McCoy, University of Connecticut Law School, has recently authored an intriguing article proposing a new look at federal lending disclosures in light of the stratified, risk-based home mortgage loan market. 

Professor McCoy recognizes that the current lending disclosure regime was designed for a world of prime loans only.  As a result, subprime borrowers cannot use these disclosures to engage in meaningful comparison shopping.  Lenders advertise their best rates or teaser rates actually mislead potential borrowers.  Professor McCoy points out that providing more meaningful, stratified information would not require any new Congressional action.  The Federal Reserve Board could use existing authority under the Truth in Lending Act.

Patricia McCoy's article, "Rethinking Disclosure in a World of Risk-Based Pricing", appears in 44 Harvard Journal on Legislation 123 (2007).

(ag) May 26, 2007, in Subprime Lending

Bernanke on the Subprime Mortgage Market

Federal Reserve Board Chairman Ben Bernanke addressed the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition today.  His remarks covered the following important questions:

1.  Why have delinquencies and initiations of foreclosure proceedings risen so sharply?

2.  How have subprime mortgage markets adjusted? 

3.  How have Federal Reserve and other policymakers responded, and what additional actions might be considered? 

4.  How might the problems in the market for subprime mortgages affect housing markets and the economy more broadly?

Basically, Chairman Bernanke is a "free market" guy.  Here's what he said in conclusion:

"Credit market innovations have expanded opportunities for many households.  Markets can overshoot, but, ultimately, market forces also work to rein in excesses.  For some, the self-correcting pullback may seem too late and too severe.  But I believe that, in the long run, markets are better than regulators at allocating credit."

Link to Speech:  http://www.federalreserve.gov/bios/bernanke.htm

(ag) May 17, 2007, in Subprime Lending

HOEPA Hearing

The Federal Reserve will hold a Public Hearing June 14, 2007, to consider using rulemaking authority to curb abusive lending practices in the home mortgage market, including the subprime sector.  This hearing is a followup to three hearings in 2006, which addressed:

1.  Predatory lending and the impact of HOEPA (Home Ownership and Equity Protection Act) rules, and state and local anti-predatory lending laws on the subprime market;

2.  Nontraditional mortgage products such as interest-only mortgage loans and payment option adjustable rate mortgages, and reverse mortgages; and

3.  How consumers select lenders and mortgage products in the subprime mortgage market.

Link to Announcement:  http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070503/default.htm

In the meantime, All Federal Banking Agencies are encouraging financial institutions to work with borrowers who are unable to make their mortgage payments. 

Link:  http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070417/default.htm

(ag) May 4, 2007, in Predatory Lending/Subprime Lending

Calling for a GAO Study of Foreclosures & the Subprime Market

House Financial Services Committee Chairman Barney Frank (D-MA) and Ranking Republican Committee Member Spencer Bachus (R-AL) are calling on the Government Accountability Office to assess the current situation regarding high rates of foreclosure for subprime mortgages, to analyze the causes, and to provide solutions.  

This issue is a top priority for Congress, the financial services industry, and for consumer advocates.  We all recognize the serious nature of the problem.  Let's hope for realistic consideration, not superficial quick-fix responses.  That's a temptation which often leaves a bad situation worse.  Watch this space as the debate continues.

Link to April 25, 2007, Letter to GAO:  http://www.house.gov/apps/list/press/financialsvcs_dem/press042507b.shtml

(ag) May 1, 2007, in Congress/Subprime Lending

Countrywide Converts to a Thrift Charter

Hmmmm... Interesting.   In early March, the OTS approved the application of Countrywide Bank, N.A., to convert its charter from national bank to federal savings association.  Comments on the application included concerns about state investigations into Countrywide's lending practices and the level of involvement in nontraditional mortgage lending.  However, in approving the application, the OTS concluded that:

"OTS has considered the Applicants', their affiliates', and the Institution's lending practices, including the pricing of loan products, and has not found sufficient information to conclude that the Applicants' and the Institution's officers' and directors' managerial resources are inconsistent with approval of the application based on the reviewed lending practices."

(ag) April 13, 2007, in Subprime Lending

Senate Banking Committee Hearing

The U.S. Senate Committee on Banking, Housing and Urban Affairs has scheduled a hearing on "Subprime Mortgage Market Turmoil:  Examining the Role of Securitization" for April 17, 2007.

(ag) April 12, 2007, in Subprime Lending

Mortgage Lenders Blow Up

Check it out:  The Mortgage Lender Implode - O - Meter:  http://ml-implode.com/

This website tracks subprime lenders as they exit the business or go belly-up.

The tag line for the site is:  "Tracking the housing finance breakdown:  a saga of corruption, stupidity, and government complicity."

As many have said, there's more than enough blame to go around.

(ag) March 12, 2007, in Subprime Lending

The Global Impact of U.S. Subprime Lending Problems

The International Monetary Fund's Global Financial Stability Report (April 2007) identifies credit quality deterioration in the subprime segment of the U.S. housing market as a short-term risk to global financial stability, noting that: 

"While the fallout to date has been limited, there is scope for it to deepen and spread to other markets, possibly to structures mortgage credit products held by a variety of global investors." 

The report concludes, at least tentatively, that these problems may be stabilizing and may be contained.  An alert, but not an alarm!

Link to Executive Summary:  http://www.imf.org/external/pubs/ft/gfsr/2007/01/pdf/summary.pdf

(ag) April 10, 2007, in Subprime Lending

Fed Witness Gives FRB Views on Subprime Lending

The Federal Reserve Board's Director of Banking Supervision & Regulation, Roger Cole, addressed the Senate Banking Committee today, presenting the FRB's overview of the subprime lending problems.  His testimony definitely takes the long-term historical perspective and indicates that this is a cyclical problem of weak loan underwriting standards due to market pressure to generate loans.  The FRB view is that this problem is primarily limited to subprime lenders, which it sees as a small slice of the lending industry.  The FRB has repeatedly said that it does not expect the problems in the subprime lending industry to spillover to the rest of the economy.  Cole also reiterated the tradeoff involved when underwriting standards are so strict that credit is not available to borrowers with less than perfect credit.

Roger Cole was named to his current position on Sept. 21, 2006, but he joined the Fed in 1979 as a senior financial analyst.

Given the fact that Senate Banking Committee Chairman Chris Dodd is definitely on the warpath, assigning a substantial of share of blame for the present subprime lending debacle to the federal banking regulators, providing this testimony cannot have been much fun for witnesses like Roger Cole.

Link:  http://www.federalreserve.gov/BoardDocs/Testimony/2007/20070322/default.htm

(ag) Mar. 22, 2007, in Subprime Lending/Predatory Lending

Baseball and Subprime Lending

In a move to disassociate from the subprime lender Ameriquest, the Rangers baseball team has reclaimed its stadium name.  Ameriquest Field is history.  It's now back to "The Rangers Ballpark in Arlington".  Those naming opportunities do carry risk as well as reward!

(ag) March 21, 2007, in Subprime Lending/Predatory Lending

Called on the Carpet - Dodd Summons Subprime Lenders and Regulators

Senate Banking Committee Chairman Chris Dodd has scheduled a hearing for Thursday, March 22.  He's calling it Mortgage Market Turmoil - Causes and Consequences.  The Committee wants some answers from the nation's biggest subprime lenders and from their regulators, FRB, OCC, FDIC and CSBS.

The House Financial Services Committee will also conduct a hearing scheduled for March 27, 2007, captioned "Protecting Home Ownership: How Current Subprime Mortgage Practices Affect Foreclosures".

(ag) Mar. 20, 2007, in Subprime Lending/Predatory Lending

Subprime Summary

A bit of recent history on Subprime Lending & Predatory Lending:

1. The Federal Banking Agencies issued a very general pronouncement regarding unfair or deceptive acts or practices prohibited by section 5 of the Federal Trade Commission (FTC) Act.  FIL-26-2004 (Mar. 11, 2004):  http://www.fdic.gov/news/news/financial/2004/fil2604.html

2. Interagency Guidance on Home Equity Lending (2005).

3. Interagency Guidance on Non-Traditional Mortgage Lending (2006) -- Does NOT include Hybrid ARMs:  FDIC FIL (Oct. 5, 2006):  http://www.fdic.gov/news/news/financial/2006/fil06089.html

AND FDIC FIL 90-2006 - Interagency Proposed Illustrations of Consumer Information on Nontraditional Mortgage Products (Oct. 5, 2006):  http://www.fdic.gov/news/news/financial/2006/fil06090.html

4. Senator Chris Dodd, Chairman of the Senate Banking Committee, chastized federal banking regulators for not providing any regulation of Hybrid ARMs.

6. FIL-6-2007 (Jan. 26, 2007) - FDIC's Supervisory Policy on Predatory Lending:  http://www.fdic.gov/news/news/financial/2007/fil07006.html

7. A February 21, 2007, comment letter to the Federal Banking Agencies from over 80 consumer groups pleaded with the Federal Banking Agencies to issue some regulation over subprime hybrid ARMs and offers some interesting statistics:  http://www.responsiblelending.org/pdfs/guidance-letter.pdf

Excerpts from the Comment Letter: "Specifically, subprime hybrid 2-28 and 3-27 adjustable rate mortgages (ARMs) pose the risk of the very severe payment shock that the guidance is intended to prevent.  We therefore call upon you to help protect American families by issuing supplementary guidance to clarify that subprime hybrid ARMs are subject to the same underwriting standards as non-traditional mortgages, particularly the requirement of underwriting at the fully-indexed rate.

The severity of the current problem demonstrates that simply reiterating past guidance is not sufficient."

. . . .

"A mid-year 2006 analysis from Fitch Ratings reported that 2-28 subprime ARMs carried an average built-in payment shock of 29% even if interest rates remained unchanged, and since the London Interbank Offered Rate (LIBOR) increased 1.09% by year-end, the Fitch analysis suggests current payment shock of 48%."

[I don't know about you, but I'd be aghast if my mortgage payment suddenly increased 48%!!!]

. . . .

"A recent study by the Center for Responsible Lending estimates that 2.2 million subprime loans made in recent years have ended or will end in foreclosure (at a rate of 19%). See Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners available at, http://www.responsiblelending.org/pdfs/CRL-foreclosure-rprt-1-8.pdf . "

. . . . "according to the MBA National Delinquency Survey, subprime loans constitute just 13% of outstanding mortgages but over 60% of foreclosures. 

A majority of home loans made in 2005 to African-American families were subprime loans, and the overwhelming majority were 2-28s and 3-27s. Forty percent of loans to Latinos were also in this category. 

8.  Proposed Guidance on ARMs (2007) Interagency Proposed Statement on Subprime Mortgage Lending" - Published in the Federal Register March 8, 2007, Comments Due by May 7, 2007.  FDIC FIL-26-2007 (Mar. 9, 2007):  This Proposed Guidance reiterates a list of imprudent (and likely predatory) lending practices from Banking 101: 

• "Offering low initial payments based on a fixed introductory or "teaser" rate that expires after a short initial period then adjusts to a variable index rate plus a margin for the remaining term of the loan."
• "Approving borrowers without considering appropriate documentation of their income." (These "stated income loans" are frequently referred to as "liar's loans" because whatever amount the borrower reports as his income goes on the application without further verification -- and frequently the lender tells the borrower the income that will be required to support the loan amount requested.)
• "Setting very  high or no limits on how much the payment amount or the interest rate may increase ("payment or rate caps") at reset periods, potentially causing a substantial increase in the monthly payment amount [resulting in] 'payment shock'."
• "Containing product features likely to result in frequent refinanciag to maintain an affordable monthly payment."
• "Including substantial prepayment penalties and/or prepayment penalties that extend beyond the initial interest rate adjustment period."
• "Providing borrowers with inadequate information relative to product features, material loan terms and product risks, prepayment penalties, and the borrower's obligations for property taxes and insurance."

9.  Tuesday, March 13, 2007:  Trading in the securities of New Century Financial Corp., the nation's second largest subprime lender, was suspended by the New York Stock Exchange (NYSE). This is the step prior to delisting.  The company's own lenders terminated credit lines and accelerated loans, heading New Century towards bankruptcy.  The company is under criminal investigation and is the subject of at least 11 shareholder class action lawsuits for securities fraud. 

10.  The Stock Market reacts badly, with the Dow Jones Industrials dropping more 240 points in response to the New Century delisting and fears about other subprime lenders, including: 

• Ameritrust Mortgage (Charlotte, NC) -- formerly a high flyer named by Inc. Magazine to its "500 Fastest Growing Private Companies in America" list.  Ameritrust Mortgage closed its subprime wholesale division on March 5, 2007. [Does this remind anyone of Enron's boom-to-bust?]
• Accredited Home Lenders Holding Company was reported in this weekend's Wall Street Journal as having to sell $2.7B in loans at a substantial discount to meet its own lenders' calls for repayment.
• Fremont General also announced plans to exit the subprime business.
• GMAC Financial Services.
• H&R Block.
• Countrywide Financial.
• Ameriquest Mortgage Company, formerly a major subprime lender, departed the subprime market in 2006 after predatory lending lawsuits resulted in a nationwide settlement of $325M.

(ag) March 19, 2007, in Subprime Lending/Predatory Lending

Suprime Slide - Deja Vu All Over Again

It's the dot com bubble, it's the '80s s&l crisis, it's what happens when people don't follow prudent lending and investment principles.

What we're seeing now in the subprime market is the result of poor credit underwriting standards.  Bankers know better.  Regulators know better.  Even borrowers know better (if they can decipher the fine print).  But when the economy is good and there are more dollars chasing loans than there are prime loans to be made, it's "Let the good times roll!" 

From the lenders' perspective:  After all, these subprime loans yield a higher interest rate in a banking world experiencing ever narrower interest-rate margins (the difference between the interest rate lenders pay for deposits and other funding sources and the interest rate they receive on loans).  In a low-interest rate environment, many borrowers can and do make the monthly payments.  Lenders are looking for new markets -- and here's a big one.

From the borrowers' perspective:  The American dream is owning your own home.  And it looks so easy when lenders are aggressively seeking out borrowers with "less than perfect credit".  Many borrowers have gambled that rising home prices and low interest rates will continue.  Few really take to heart what will happen if the loan reprices in two to three years.

From the regulators' perspective:  Providing "guidance" should suffice.  No one likes a heavy-handed regulator -- and there is competition for charters and Congressional oversight to consider.  There's no immediate problem to address.  The free market will sort this out.  Should there be isolated issues, informal non-public measures avoid creating a generalized atmosphere of panic and possible adverse business consequences for a given lender or for all lenders -- and may avoid the extreme case: "runs" on a financial institution.

(ag) March 19, 2007, in Subprime Lending

Chris Dodd Speaks Out - Credit Cards, GSEs, Hybrid ARMs

Senate Banking Committee Chairman Chris Dodd has been hitting the speaking circuit on several key issues. 

1. Credit Cards - Here's an excerpt from Sen. Dodd's Mar. 14, 2007, speech to the National League of Cities: 

"Just look at the credit card situation, if you will. The average American family has a revolving debt problem of over $9,300; 98 percent of that is in credit cards and it's growing.

When you consider that a median income for an American family is $43,000, with that kind of credit card obligations growing by the day, it's going to be very difficult for these people to put aside the savings or make the kind of investments for their own financial security and future.

When you have these kinds of interest rates and gimmicks that are being used to make it impossible for people to get out from under these obligations, then the problems only get worse and worse.

I'm a strong advocate of credit cards; don't misunderstand me. But the abuse by the financial institutions in making it impossible for people to get out from underneath these financial problems is causing us serious, serious problems.

We've already had hearings on this, and my hope is that we'll pass legislation that'll prohibit some of the practices that have made it so difficult for people to manage their financial affairs in a more solid and safe way."

Link to Speech:  http://banking.senate.gov/index.cfm?FuseAction=Articles.Detail&Article_id=121&Month=3&Year=2007

2.  GSEs.  Sen. Dodd tells Fed Chairman Ben Bernanke that there is broad support for legislation to create a new regulator to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.  Essential powers for the new -- and independent --- regulator, which would be outside the appropriations process, should include the ability to set both minimum and risk-based capital levels; enforcement and prompt corrective action powers, including the authority to set prudential management and internal control standards, to place a GSE in receivership, and to oversee both safety and soundness and adherence to the mission of promoting affordable home ownership (not turf building).

Link to Sen. Dodd's Mar. 6, 2007, Statement on GSEs:  http://banking.senate.gov/index.cfm?FuseAction=Articles.Detail&Article_id=120&Month=3&Year=2007

3.  Hybrid Adjustable Rate Mortgages (ARMs with "teaser rates" which, after 2-3 years, hit subprime borrowers with higher interest rates and monthly payments they can't afford).  Sen. Dodd finally received what he calls "the right answer" from the Federal Banking Agencies:  Proposed application of nontraditional mortgage guidance to these Hybrid ARMS. 

Link to Sen. Dodd's March 2, 2007, statement of approval to federal banking agencies for the proposal and urging that they finalize this proposal pronto:  http://banking.senate.gov/index.cfm?Fuseaction=Articles.Detail&Article_id=118&Month=3&Year=2007

(ag) Mar. 15, 2007, in Congress, Consumer Protection, Predatory Lending

Udall's Credit Card Bill

Congressman Mark Udall (D-CO) introduced H.R. 1461 on Friday, Mar. 9, 2007.  The "Consumer Credit Protection Act" is intended to ban abusive credit practices, enhance consumer disclosures, and protect underage consumers.The Bill has been referred to the House Financial Services Committee.   

Link to Bill Text:  http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.1461:

(ag) Mar. 13, 2007, in Congress, Consumer Protection, Predatory Lending