American Banker  |  Wednesday, June 23, 2010
By Stacy Kaper and Cheyenne Hopkins

WASHINGTON — House and Senate conferees were set Tuesday to deal national banks a setback, agreeing on final language that would make it harder for federal regulators to preempt state consumer protection laws.

In the final scheduled week of negotiations, the panel also tackled a host of other issues and was expected to reach an accord on provisions that would create a consumer protection regulator, establish mortgage underwriting standards, and force lenders to retain some risk of mortgages they sell into the secondary market.

Although preemption was not debated on Tuesday, Senate conferees gave ground to a House proposal on the issue, agreeing to language that says the Office of the Comptroller of the Currency can only preempt state laws that “significantly” interfere with the business of banking. Preemption experts mostly agreed that the added language would make it harder for the OCC to preempt a state law and strengthen state regulators’ case in court.

“The ‘prevents or significantly interferes with’ language means that any state consumer financial protection laws that do not significantly interfere with national bank powers will continue to stand,” said Patricia McCoy, director of the Insurance Law Center at the University of Connecticut’s School of Law. “In other words, it’s not enough for a state law to interfere — it must interfere ’significantly.’ ”

The new language effectively overrules the 2004 preemption rules, which said that state law was automatically preempted if it “obstructs” or “impairs” a bank’s operations, a standard many critics considered too broad.

“It’s a win for the states,” said Arthur Wilmarth, a professor at Washington Law School at George Washington University. “It makes it even clearer the OCC’s 2004 preemption rules cannot apply … This is a much more demanding standard for finding preemption.”

Although industry representatives continue to vigorously oppose the new language, the OCC apparently agreed to it. Some observers said it was the best deal the agency was going to get. The House had been seeking additional language that would have forced the OCC to prove a substantive federal standard existed before preempting a state law on a particular consumer issue — an even tougher standard that would have been harder to meet.

“At times in the legislative process one realizes that the language you are confronted with is the best you are going to get, so you might as well embrace it,” said L. Richard Fischer, a lawyer at Morrison & Foerster LLP.”The Federal Reserve has been doing this for nearly 12 months, and now it appears that the OCC has finally learned this lesson.”

Other observers suggested that banks had already lost once it was clear Congress was going to craft a new preemption standard.

“The national banks — at least the handful to whom consumer finance actually matters — are likely to see this as a defeat,” said Raj Date, chairman and executive director of the Cambridge Winter Center for Financial Institutions Policy. “But, realistically, preemption is a complicated and high-stakes field, so the banks were likely to continue to litigate borderline cases irrespective of the outcome here.”

Conferees also were poised by Wednesday to finalize language on other consumer protection provisions.

As expected, the House agreed to the Senate’s structure for a new consumer regulator, which would be an autonomous unit inside the Federal Reserve Board.

House and Senate conferees were also expected to finalize a deal struck Monday between Sen. Richard Durbin, D-Ill., and House lawmakers to allow the central bank to ensure interchange rates on debit cards are “reasonable and proportional.” Although the wording is opposed by the banking and credit union industries, it now appears the final regulatory reform bill will include the provision.

Under conference committee rules, the House makes an offer to change the bill, which the Senate conferees can accept, reject, or counter. Once the two sides agree, the bills must still be approved by the full House and Senate.

House Financial Services Committee Chairman Barney Frank said Tuesday he wanted to ensure the conference is finished by Thursday so that President Obama can bring a final blueprint for overhauling the financial system to the Group of 20 meeting this Saturday. Lawmakers are hoping to have a final bill passed before the Fourth of July recess.

Much of the debate Tuesday concerned proposed risk-retention requirements. House conferees sought to strike a provision added to the Senate bill that would let banking regulators define and exempt a class of qualified mortgages from the bill’s requirement that lenders retain 5% of a loan’s risk when packaging it into a security.

While Frank noted the House version would also allow regulators to reduce or waive the risk-retention standard, he objected to exempting a specific class of loans. “We do want to give the regulators the power to go to zero,” he said. “If you can prove to the regulators that you have designed a product that is a very safe and sound one, the regulators could say your risk retention is zero.”

But Frank said the Senate measure went too far. “I don’t want to have that too rigid,” he said. “I don’t want to make it too easy for anyone to get around. That’s why I don’t want to remove risk retention from a class of loans.”

Conferees did agree to exempt federally insured loans from the risk-retention requirement such as those backed by the Federal Housing Administration and the Veterans Administration.

The Senate also agreed to accept much of the House’s language to establish underwriting standards for all mortgages. The language is largely based on legislation that passed the House multiple times that would force regulators to set standards and ensure borrowers have the ability to repay their loans.

The House conferees also adopted a proposal from Rep. Scott Garrett, R-N.J, that would establish a comprehensive framework for a covered bond market in the U.S. to provide liquidity for home mortgages, commercial real estate and public sector financing. It would specifically create a covered bond regulator within the Treasury Department. It would also define the eligible asset classes to be included in the “cover pool”; establish criteria for issuers interested in offering covered bonds; detail the process of transferring the covered assets to a separate estate in the event of an issuer insolvency; and appoint an administrator to oversee and manage the separate estate.

While the Senate did not vote on the issue late Tuesday, Senate Banking Committee Chairman Chris Dodd and Sen. Bob Corker, R-Tenn., expressed support for the measure.

The conference is expected to address prudential regulation on Wednesday, including provisions dealing with charter approvals, conversions and industrial loan companies. The Senate is also expected to offer language to beef up provisions to implement the Volcker Rule, which would ban proprietary trading.

American Banker  |  Monday, June 28, 2010
By Paul Muolo and Sara Lepro      

Federal Housing Administration mortgage volume could get a boost from regulatory reform, because loans insured by government agencies are fully exempt from the bill’s risk-retention requirement.

The legislation finalized by the conference committee late last week would require originators to retain at least 5% of the credit risk in loans they securitize unless the assets meet a “qualified mortgage” test. All loans backed by the FHA, the Department of Veterans Affairs or the Rural Housing Service will automatically meet that test.

“FHA gets a pass,” said David Kittle, senior director of industry relations for IMARC, a mortgage fraud investigation company, and a former chairman of the Mortgage Bankers Association. “Does it give them an advantage? Well, sure. Anytime you are carved out of something that can be onerous for everybody else, then certainly you benefit.”

Certain — and possibly most — loans securitized through Fannie Mae and Freddie Mac will also be eligible for securitization without risk retention.

“I believe chances are very good that in the future almost every mortgage that Fannie and Freddie either buy or securitize will be qualified mortgages under the risk-retention provision,” said Glen Corso, managing director of the Community Mortgage Banking Project, a trade group.

But without an automatic exemption, lenders will have more hoops to jump through when they make loans headed to Fannie or Freddie, giving FHA an edge.

How many hoops will ultimately depend on how a “qualified” mortgage is defined. Under the final bill, federal banking agencies, the Securities and Exchange Commission, and Federal Housing Finance Agency will draft rules establishing underwriting standards and allowable product features for these fully documented loans. Qualified mortgages also have to meet a new and tougher “ability to repay” standard in the bill along with a 3% limit on points and fees and a separate 2% limit on bona fide discount points. Regulators have the flexibility to set risk-retention requirements lower than 5% for residential loans that don’t meet the qualified mortgage test.

Balloon, negative amortization, and most interest-only notes will be excluded from the definition but debt-to-income ratios and verification practices must be defined by regulators and could change. The bill, as expected, gives little boost to a revival of the private-label securitization market.

“Time and time again we keep hearing that we need the private sector to jump in, yet all the regulations that are being passed are keeping them out of the game, on the bench, on the sidelines,” said Sylvia Alayon, senior vice president of national operations at due diligence firm Capital Markets Assessment Corp. “We do need the private sector because many loans, like jumbo loans, can never be absorbed by the government agencies, and they represent a significant part of the market.”

Still, mortgage veterans were relieved on Friday that the bill will not force them to retain risk on all securitizations, regardless of loan characteristics, as in the initial language they had lobbied against.

“It’s nice to win one,” said Lewis Ranieri, co-inventor of the mortgage-backed security.

Dow Jones  |  Wednesday, June 23, 2010
By Jessica Holzer

WASHINGTON — The share of performing mortgages increased slightly during the first quarter of 2010 for the first time since March 2009, although loan performance was still down from a year ago, federal bank regulators reported Wednesday.

The share of current and performing mortgages climbed to 87.3% at the end of March, up from 86.4% at the end of last year. Meanwhile, the share of seriously delinquent loans dropped to 6.5% in March from 7.1% in December, with delinquencies improving across all risk categories.

However, first-quarter loan performance was still worse than a year ago, when 89.8% of mortgages were performing and 4.8% of loans were seriously delinquent. The share of foreclosures in process also jumped to 3.5% in March from 2.5% a year ago.

The results were due to a combination of factors, Office of the Comptroller of the Currency Deputy Comptroller for Large Banks Joe Evers said in a press call with reporters. Mortgage loan performance usually enjoys an uptick during the late winter and early spring, he said, but these numbers were not adjusted for seasonality.

Meanwhile, the decline in delinquencies reflects improving efforts by mortgage servicers to help borrowers stay in their homes. When a loan is modified, it is reset from “delinquent” to “current.”

Bruce Krueger, a mortgage expert at the OCC, said the data isn’t adjusted for seasonality because there are already too many factors affecting the numbers. He argued the improving loan performance was due to other factors than just the seasonal impact.

“Something is happening here that is over and above seasonality,” Krueger said.

Wednesday’s report is compiled by the OCC and the Office of Thrift Supervision. It covers roughly 34 million U.S. home mortgage loans totaling nearly $6 trillion in unpaid principal balances.

Loan modifications and other efforts by mortgage servicers to help borrowers, including trial period plans under the Obama administration’s Home Affordable Modification Program, or HAMP, jumped in the first quarter. However, modified loans continued to re-default at high rates.

Loan modifications, trial period plans and payment plans climbed by more than 5% in the first quarter from the previous quarter and by more than 61% from a year earlier. Mortgage servicers implemented 629,678 such actions, including nearly 100,000 loan modifications and almost 190,000 trial period plans under HAMP.

Actions by servicers to keep people in their homes continued to outpace foreclosures during the quarter, with the number of modifications and payment plans totaling 1.7 times the number of foreclosures.

Still, foreclosures started by servicers during the quarter jumped to 370,536, up 18.6% from December. Modified loans continued to perform poorly. A year later, more than half of modified loans were 60 or more days past due.

However, mortgage servicers seem to be getting better at modifying loans. Of the 587,097 modifications completed in 2009, more than half were current at the end of March. That’s compared with just 27% of loans that were modified in 2008.

By Kenneth R. Harney

Saturday, June 5, 2010; E01

Though the Wall Street and banking features of the giant financial industry overhaul bill taking shape on Capitol Hill have drawn most of the attention, home buyers and mortgage applicants should be major winners when the legislation is finally signed into law, probably early next month.

Not only will the zero-down, funny-money loans and slipshod underwriting that triggered the housing bubble and bust be virtually eliminated from the marketplace, but so will the “steering” practices used by loan officers to earn extra fees by putting unsuspecting borrowers into poisonous mortgages.

Conferees from the House and the Senate are negotiating the differences between their bills, but on the key consumer fundamentals, it’s not too early to project the probable results.

Here’s a quick overview of what’s likely to go the president’s desk affecting housing and mortgage finance:

– A new consumer-protection agency — armed with broad powers to rein in bad mortgage products and predatory lending practices anywhere in the country — is now a certainty. The House bill would create a stand-alone independent federal entity, and the Senate bill would establish a consumer financial product safety “bureau” housed in the Federal Reserve. Rep. Barney Frank (D-Mass.) the House Financial Services Committee chairman, said he expects the conference to approve his stand-alone concept. But either way, consumers will for the first time have regulators and investigators watching out for the latest scams and gimmicks in the home loan industry.

– Uniform minimum standards for mortgages and underwriting practices. Though such bubble-era favorites as “stated income,” “pick-a-pay” and negative amortization loans are not prohibited by the legislation, lenders will be powerfully motivated to offer fully documented, verified-income mortgages with down payments sufficient to ensure that borrowers have a stake in the deal. There also will be mandatory determinations by lenders that applicants can afford to repay the mortgage debt, insurance and taxes on time.

– Prohibition of prepayment penalties on nontraditional loans that are not fully documented, not fixed-rate and which don’t carry standard amortization schedules. This would prevent, for example, the sort of “gotcha” adjustable-rate mortgages of the boom years, in which consumers found themselves trapped by fast-rising payments and heavy penalties if they tried to refinance early. Prepayment penalties would still be permitted on income-verified standard loans, but lenders would be required to offer alternative financing without penalties for early payoffs.

– Mandatory provision of credit scores when mortgage applicants are turned down. Though this appears only in the Senate version, it has a strong chance of ending up in the final bill in some form, given the pro-consumer composition of the majority of the House negotiating team in the conference. Since lenders often place great weight on credit scores, the idea here is to provide unsuccessful applicants with the score that contributed to the loan rejection. Along with the score itself, lenders would be required to provide the name and contact information of the score provider, typically a credit reporting agency, plus brief descriptions of the negative information in their credit bureau files that led to the low score. Consumers already have the right under federal law to free credit reports when they are rejected for a loan, but they don’t get free credit scores.

– Restrictions on mandatory arbitration clauses embedded in many contracts for mortgage and other credit. Both the House and the Senate bills contain provisions on this. The House bill would empower the Consumer Financial Protection Agency to restrict lenders’ use of mandatory arbitration requirements if it finds them to be harmful to borrowers. The Senate version would require the consumer agency to conduct a study of mandatory arbitration clauses before taking action to restrict them. Either way, there could be important changes in industry practices.

– Real estate appraisal improvements. The House bill would give the new consumer protection agency oversight on home mortgage appraisals and the power to create rules and standards to guarantee “appraiser independence” from pressures by lenders, realty agents and others. It also would require that once the new rules are adopted, the controversial “Home Valuation Code of Conduct” mandated last year by Fannie Mae and Freddie Mac be terminated. The code has been criticized by consumers, realty agents, builders and appraisers for encouraging lowball appraisals and the use of inexperienced appraisers willing to work for low fees. The Senate bill does not have appraisal provisions, but a bipartisan push is under way to convince conferees to adopt the House version.