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Watt announces changes to Representation and Warranty Framework

LAS VEGAS (10/22/14)--Mortgage lenders soon will be provided with more certainty about requirements for covering losses on loans sold to Fannie Mae and Freddie Mac, according to Federal Housing Finance Agency (FHFA) Director Mel Watt. Speaking at the Mortgage Bankers Association convention in Las Vegas Tuesday, Watt outlined upcoming revisions and clarifications to the agency's Representation and Warranty Framework.
He noted the agency is also working to develop new guidelines for mortgages with loan-to-value ratios between 95% and 97%, which Watt said will "responsibly serve a targeted segment of creditworthy borrowers with lower down payment mortgages by taking into account 'compensating factors.'"
Representations and warranties provide assurances that allow Fannie and Freddie to purchase loans efficiently without checking each loan individually or being at each closing. They also provide both entities remedies to address situations when lenders' obligations to meet purchase guidelines have not  been fully met.
Credit Union National Association Deputy General Counsel Mary Dunn said CUNA is encouraged by Watt's comments.
"This will ensure that any lender outliers will manage their risk, and it is not targeted at those which comply and have already adopted efficient and responsible lending practices," she said. "While we will be reviewing the details as available, this proposal will mitigate some of the concerns that credit unions have regarding their need for more flexibility on mortgages."
Dunn added that CUNA is pleased the agency is working to allow the purchase of home loans with a 3% down payment, which she called "a move that will open doors to home loans to creditworthy borrowers."
Critics have said that the FHFA framework did not originally provide enough clarity to enable lenders to understand when Fannie or Freddie would exercise their remedy to require repurchase of a loan. Lenders also reported credit overlays that drove up the cost of lending and restricted lending to certain borrowers.
"To address this problem, FHFA and the enterprises (Freddie and Fannie) have worked to revise the Framework to ensure that it provides clear rules of the road that allow lenders to manage their risk and lend throughout the enterprises' credit box," Watt said in his remarks.
The upcoming changes identified by the FHFA head include clearly defining six categories of life-of-loan exclusions:
  • Misrepresentations, misstatements and omissions;
  • Data inaccuracies;
  • Charter compliance issues;
  • First-lien priority and title matters;
  • Legal compliance violations; and
  • Unacceptable mortgage products.
The agency also clarified that only life-of-loan exclusions can trigger a repurchase under the framework for loans that have already earned repurchase relief.
Watt said more details about the updated definition for each life-of-loan exclusion, as well as the new lower down payment mortgage guidelines, will be announced in the coming weeks.
Use the resource link below for the full text of Watt's remarks.

Regulators approve final QRM rule

WASHINGTON (10/22/14)--Federal regulators Tuesday approved a final qualified residential mortgage (QRM) rule, which requires investment banks to hold at least 5% of a loan's risk on their books when securitizing loans unless the loans meet the definition of a QRM.

The rule more closely aligns the definition of QRM with the Consumer Financial Protection Bureau's (CFPB) qualified mortgage (QM) definition than did the original proposal. The Credit Union National Association strongly advocated for a closer alignment .

"CUNA has advocated strongly for the important step of aligning the Qualified Residential Mortgage with the existing Qualified Mortgage definition," said Mary Dunn, CUNA's deputy general counsel and senior vice president. "Doing so encourages lenders to work with creditworthy borrowers to make home loans that will continue to drive the country and our economy forward."

Thomas Curry, Comptroller of the Currency, said the rule is an important milestone.

"The rule we are approving today will require lenders to retain some of the risk for the loans that go into securitized pools except for home mortgages that meet the standards necessary under the qualified residential mortgage, or QRM, exception," he said in announcing his agency's adoption of the definition.

Curry added, "Under this rule, QRM is equivalent to QM, that is, the qualified mortgage rule approved by the Consumer Financial Protection Bureau."

Federal Housing Finance Agency (FHFA) Director Mel Watt called it "a major step forward" to providing certainty to the housing market.

"Aligning the qualified residential mortgage standard with the existing qualified mortgage definition also means more clarity for lenders and encourages safe and sound lending to creditworthy borrowers," he said.

CUNA supported aligning the definition of a QRM more closely with the definition of a QM in commenting on the proposal last year. However, CUNA does not support a 43% debt-to-income ratio a borrower must meet for a QM.

The new rule also states that regulators will review the QRM standards in four years.

"By then, we should have enough experience with the standards to know whether they strike the right balance between long-term financial stability and the home-financing needs of American families, and we can adjust them if necessary," Curry said.

The joint rule was proposed by the Federal Reserve Board, Federal Deposit Insurance Corp., U.S. Department of Housing and Urban Development, FHFA, Office of the Comptroller of the Currency and the Securities and Exchange Commission.

Use the resource link below to access the complete rule.

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CUNA Attorneys Conference: Existing regs apply to social media activity

DANA POINT, Calif. (10/22/14)--Credit unions are often encouraged to engage their members through the channels of social media, but once they fully enter that world they also need to make sure they "get their arms around" where all social media is coming from within the organization, according to a panel discussion held Tuesday at the Credit Union National Association Attorneys Conference.

Ross Hansen and Jennifer Kraus of CUNA Mutual Group addressed the compliance challenges that come with maintaining a presence on social networks.

Most importantly, they said, a credit union must be fully aware of all its social media activities at all times, including who is posting them and where they are coming from.

Existing regulations for advertising, privacy and lending also apply to social media messaging. For example, an advertisement may show differently on a mobile device than it does on a website, which could be a risk if certain required copy is cut off on a mobile platform.

According to Kraus and Hansen, general business liability insurance does not cover lawsuits for hosted website activities. Those activities generally require cyber-specific policies.

In addition, the credit union fidelity bond does not cover member losses incurred due to information mistakenly exposed through a credit union's website, only losses sustained by the credit union itself.

The two also advised that credit unions and other organizations may want to consider third-party vendors that can assist with social media setup, execution and tracking.

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CUNA Attorneys Conference: Updates provided on BSA reqs, corporate CUs

DANA POINT, Calif. (10/22/14)--Bank Secrecy Act (BSA) issues and National Credit Union Administration (NCUA) regulations were highlighted during sessions at the Credit Union National Association Attorneys Conference this week.

T. Wayne Hood, senior vice president and general counsel at ORNL FCU, Oak Ridge, Tenn. with $1.5 billion in assets, spoke about the latest developments in BSA compliance. Most notably, he addressed some of the popular misconceptions about offering financial services to legal marijuana-based businesses.

Hood said the U.S. Department of Justice seems to believe that it is not good use of resources to go after financial institutions whose actions are in clear compliance with existing state laws if priorities such as preventing distribution of marijuana to minors and preventing revenue from marijuana sales from going to criminal enterprises are met.

It is very difficult to offer services to such businesses, and to do so requires a robust BSA compliance program, Hood emphasized.

Some in the room said it is possible. A representative from $1.3 billion-asset Numerica CU, Spokane Valley, Wash. said that credit union is currently offering services to legal marijuana-based businesses, so it is possible to comply with BSA requirements while serving the businesses.

This led to a discussion among attendees about the pros and cons of serving such businesses.

Also at the conference, an update on corporate credit union cases was provided by John Ianno, NCUA senior associate general counsel. He said five corporate credit unions have settled for a reported $1.6 billion, and there are 15 active suits that are currently in the discovery stage of litigation. 

The NCUA is making these recoveries in its role as conservator for the corporate credit unions. The proceeds are used by the agency to reduce or eliminate natural person credit union assessments to repay the U.S. Treasury loans to the National Credit Union Share Insurance Fund during the financial crisis.

Ianno said the NCUA predicts that damages in those remaining cases will be in the billions, and that the agency is committed to seeing those through, with the goal of recovering more for the credit union system.

Pamela Yu and Sarah Chung of the NCUA discussed the agency's recent letter regarding contractual agreements with credit union service organizations (CUSOs). The requirements only apply to contractual agreements relating to CUSOs that a credit invests in or loans to, not CUSOs who solely provide services to the credit union.

Yu and Chung also provided updates on various NCUA rulemakings, including proposals regarding fixed assets, bylaws and appraisals. CUNA General Counsel Eric Richard highlighted the agency's risk-based capital proposal during his remarks and answered questions about the proposal following his speech.

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CUs get good 1st report card on liquidity rule implementation: NCUA Report

ALEXANDRIA, Va. (10/22/14)--The October edition of The NCUA Report , the National Credit Union Administration's monthly newsletter, examines the 12 months since the agency passed its liquidity rule.
The NCUA adopted a liquidity rule in October 2013 that formalized liquidity policies and plans, as well as ensured larger credit unions have prearranged access to a federal contingent liquidity source. These sources can be the Federal Reserve's discount window, NCUA's Central Liquidity Facility (CLF), or both.
Since the rule was adopted, all federal credit unions with more than $250 million in assets have made the appropriate arrangements with a federal liquidity source, an article in The NCUA Report noted. The remaining major and time-sensitive requirement for those credit unions to conduct is advance planning and testing of contingency resources, which must be done by Dec. 31.
According to the NCUA, all current CLF members will be considered in compliance with that requirement, and new members will be tested on a rolling basis as they join. Fed discount window users need to successfully pledge collateral before they can run a test transaction.
As of June 30, there was a 70% increase in CLF members and a 37% increase in Fed discount window arrangements in a one-year period..
Other items in The NCUA Report include:
  • A guest commentary from Small Business Administration Administrator Maria Contreras-Sweet about how SBA loans can help credit unions and their members;
  • A look at how student interns can help low-income credit unions in areas such as Web design or marketing;
  • A recap of the September board meeting, which included an update on the Temporary Corporate Credit Union Stabilization Fund, a charter expansion, and some housekeeping amendments to NCUA rules and regulations; and
  • A guide to managing the credit risk of private student loans.
Use the resource link below to access The NCUA Report .

Regulator says large banks could face downsizing for ethics gaps

NEW YORK (10/22/14)--Without a change in culture and behavior at banks, "dramatic downsizing" might be necessary, warned William Dudley, president/CEO of the New York Federal Reserve Bank. Speaking at a workshop at the bank this week, Dudley said that because of the importance of the financial sector in the lives of each consumer, it is incumbent upon them to serve a beneficial role.

"Financial firms exist, in part, to benefit the public, not simply their shareholders, employees and corporate clients," he said. "Unless the financial industry can rebuild the public trust, it cannot effectively perform its essential functions. For this reason alone, the industry must do much better."

Dudley cited ethical lapses, professional misbehavior and compliance failures adding up to fines of more than $100 billion assessed to banks since 2008. He also quoted a 2012 Harris poll that said 68% of respondents disagreed with the statement, "In general, the people on Wall Street are as honest and moral as other people."

Unless supervisors are "pushing forcefully for change throughout the industry," the bad behavior will persist, Dudley said, leading to only one conclusion.

"The inevitable conclusion will be reached that your firms are too big and complex to manage effectively," he said. "In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively."

Use the resource link below to access Dudley's full remarks.

Inside Washington (10/22/14)

  • WASHINGTON (10/22/14)--There now is a summary report from Inspector General (IG) for the Federal Reserve System and the Consumer Financial Protection Bureau that reviews the Fed's and Federal Reserve Bank of New York's supervisory activities related to losses at JPMorgan Chase & Co.'s chief investment office (CIO). The evaluation was launched to assess the effectiveness of the Fed board's and New York Fed's supervisory activities regarding JPMorgan's CIO and also to identify any lessons learned that could inform future supervisory activities. An agency release noted that the IG review centered on the multibillion-dollar loss by JPMorgan's CIO in 2012 "due to a complex trading strategy involving credit derivatives." The CIO employee who initiated the relevant trades became known as the "London Whale." Bloomberg Quicktakes describes the London Whale as the trader who lost at least $6.2 billion for JPMorgan Chase & Co. "That's a lot of money until you remember that it didn't stop the bank from earning a record profit of $21.3 billion the same year," the Bloomberg news topic guide says ...
  • WASHINGTON (10/23/14)--There have been "minor technical problems" in the Financial Assistance and Technical Assistance Excel workbook documents distributed by the U.S. Treasury Community Development Financial Institutions (CDFI) Program, and the agency has distributed new guidance--in the form of frequently asked questions (FAQ)--to help applicants with these problems. The FAQ document, along with application materials for the program, can be found on the CDFI Fund's website at and in the Application Materials section. A release announcing the new guidance notes that the technical problems will have no impact on the scoring or rating of the FY 2015 applications. The CDFI Program release also reminds that there are two remaining scheduled webcasts for potential applicants to ask CDFI Fund staff questions about the FY 2015 applications. The webcasts, one focused on matching funds and one as a makeup opportunity for all other questions, will be held on Nov. 4 ...

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