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Fed proposes new mortgage origination standards

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WASHINGTON (4/20/11)--Creditors would be required to determine a consumer's ability to repay their mortgage before finalizing the loan under a Federal Reserve proposal that was unveiled on Tuesday. The Fed proposal amends the Truth in Lending Act as proscribed by language in the Dodd-Frank Wall Street Reform Act. The Fed changes also establish minimum mortgage underwriting standards. The proposal would apply to all consumer mortgages other than equity lines of credit, timeshare plans, reverse mortgages, or temporary loans, the Fed noted. Credit Union National Association (CUNA) Senior Assistant General Counsel Michael Edwards said that the mortgage rule changes reflect congress’s attempt “to require, among other things, at least some minimal underwriting of mortgage loans, in response to evidence that many non-depository mortgage lenders did not engage in safe and sound underwriting practices before the financial crisis.” The Fed proposal offers four possible ways to comply with the new requirements, including two possible alternative definitions of a the “qualifying mortgage” compliance options. In addition to making “qualifying mortgages,” other proposed compliance options include considering eight weighing factors regarding the borrower’s ability to repay as part of the underwriting process, certain types of balloon payments loans made in rural and underserved areas, and refinancing mortgages with negative amortization, interest-only payments, or balloon payments into more traditional mortgages. Under the proposal, lenders could comply by considering eight weighing factors as part of the underwriting process, such as income and assets, employment status, the monthly payment on the mortgage, the borrower’s other debt obligations, borrower’s credit rating, the borrower’s debt-to-income ratio, and similar factors. For the “qualifying mortgage” compliance option, on proposed definition of “qualifying mortgage” would be a loan of 30 years or fewer – without negative amortization, interest-only payments, or a balloon payment – that has fees and points under 3% of the loan value. The underwriting of the mortgage would need to be based on the maximum interest rate that could apply in the first five years of the loan (such as in the case of an adjustable rate mortgage), and would need to use a payment that fully amortizes the loan. Any other mortgage obligations would also need to be taken into account by the lender prior to the loan being approved. Under this alternative, making “qualifying mortgages” would be treated as a safe harbor for lenders. A second, alternative definition of “qualifying mortgage” would require much of the underwriting criteria covered above, and would provide a rebuttable presumption of compliance in place of a safe harbor. Lenders would also need to consider and verify a potential homebuyer’s employment status, debt obligations, and credit history. Monthly payments on any concurrent mortgages and the borrower’s monthly debit-to-income ratio or residual income would also need to be considered. Lenders could also offer so-called balloon-payment qualified mortgages of five 5 years or longer duration in designated “rural” or “underserved” areas if the lender complies with the “qualified mortgage” requirements and underwrites the mortgage based on the scheduled payment other than the balloon payment. Nonstandard mortgages with features such as negative amortization, interest-only payments, or balloon payments may be refinanced into standard mortgages if borrowers are able to repay their refinanced mortgage. The Fed would also require the underwriting of the newly refinanced standard mortgage to be based on the maximum interest rate possible during the first five years of the loan. The Fed will accept comments on its 474 page proposal until July 22. The final rule will be released by the Consumer Financial Protection Bureau, which will take jurisdiction over Regulation Z/Truth in Lending oversight and rulemaking on July 21. CUNA continues to analyze the Fed proposal.

Treasury responds to SandP rating reduction

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WASHINGTON (4/20/11)--U.S. Treasury Secretary Tim Geithner on Tuesday said that he disagreed with Standard & Poor's (S&P) move to cut the long-term AAA credit rating of the U.S. to negative, noting that the potential for consensus on how to improve the country’s long term fiscal condition is better than it has been. S&P on Monday said that the credit rating cut was partly due to a "material risk" that U.S. policy makers might fail to reach an agreement on how to address the nation's medium- and long-term budget challenges by 2013. Such a result would “render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns," S&P said. Geithner in an appearance on CNBC said that both Democrats and Republicans agreed that reforms need to be made to bring down long term deficits. “Both sides understand that if we are going to do this, we have to do it together,” he added. The Treasury leader said that legislators would be wise to lock in “credible” targets for potential savings in the budget. “Where we agree on specifics, we can do that too,” he added. Deputy Treasury Secretary Neal Wolin also spoke out on Tuesday, defending the government’s implementation of the Dodd-Frank Act. Wolin said he was responding to allegations of a lack of coordination by regulators and complaints that the reforms implemented by Dodd-Frank would unfairly disadvantage U.S. firms that compete in the global market. Wollin also spoke out against criticism of the pace of Dodd-Frank’s reforms, saying that regulators “have been and are moving quickly but carefully to implement this legislation” and “continue to seek public input.” The Deputy Secretary added that getting the details of the regulations right “remains critical.” “Although there may be reasonable debate about the substance of Dodd-Frank implementation work, there is no question that regulators have been implementing the statute in a careful, considered, and serious manner,” Wolin said. However, House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala.) continued to criticize the pace of Dodd-Frank reforms, saying in a release that it remains “difficult for individual firms – especially small businesses – and the public at large to meaningfully participate and offer their insights and observations.”

WesCorp directors seek NCUA suit dismissal

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LOS ANGELES, Calif. (4/20/11)--The former directors and officers of Western Corporate FCU (WesCorp) have asked U.S. District Judge George Wu to dismiss the National Credit Union Administration’s second complaint in its $6.8 billion lawsuit against the former leaders of the now conserved corporate. The former WesCorp directors accused the NCUA of 20-20 hindsight in the charges lodged in its second complaint, which was filed on Feb. 22. That document alleges that WesCorp officers and directors breached fiduciary duties by failing to impose "prudent concentration limits" on WesCorp's increasing concentration of private label mortgage backed securities (MBS) and Option ARM MBS. Overall, the NCUA has repeatedly claimed that the former WesCorp officials did not use sufficient care when they made certain investments before the recession hit the corporate system. In their response to the second NCUA complaint, the former directors state that their decisions on investments are protected from retroactive second-guessing under California's Business Judgment Rule if the process by which they made decisions reasonably relied on expert input from management and others. The directors contend that NCUA has failed to allege any departure from this type of process. In addition, the former directors note that the NCUA’s second complaint “consists of retreads–-old allegations made fatter but in no material way made better.” The defense motion also notes that while the NCUA has held WesCorp under conservatorship since 2009, and has had full access to that corporate’s books and records since that time, the agency today “is no closer to stating a claim than when it started this crusade against unpaid, uninsured volunteer directors. “The claims against the directors should be dismissed without further leave to amend,” the motion adds. Judge Wu earlier this year allowed the agency to file its second amended complaint during a tentative ruling that favored the former directors. In that tentative ruling, Wu warned that NCUA would have to prove the directors are not covered by California's Business Judgment Rule, which provides directors "broad discretion in making corporate decisions and [allows] these decisions to be made without judicial second-guessing in hindsight (News Now Feb. 3). Wu at that time also ruled that the NCUA’s allegations of improper motives or conflict of interest are insufficient and said "the end result [of the amended complaint] might very well be the same."

Inside Washington (04/19/2011)

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* WASHINGTON (4/20/11)--A Federal Deposit Insurance Corp. (FDIC) report issued earlier this week claims that regulators in 2008 could have successfully wound down Lehman Brothers Holdings Inc., avoiding further shock to the market and preventing a taxpayer-funded bailout, if the powers given to the agency by the Dodd-Frank Act had been in place. (Reuters, 4/19/11) Critics have said that the FDIC’s claims, which were made in a 19 page document, are overly optimistic. The FDIC’s pending resolution authority, which is set to come into effect later this year, would allow that agency, with the approval of other regulators, to temporarily operate troubled holding companies or insurance firms until they can be sold or shut down… * WASHINGTON (4/20/11)—A 43-member group of House Democrats late last week called for “reforms that reduce the risk to taxpayers and that create conditions for the private sector to play a larger role in the secondary mortgage market." The group has also called for the eventual winding down of mortgage backers Fannie Mae and Freddie Mac, American Banker reported. Among the mortgage reforms touted by Reps. Jim Himes (D-Conn.), Gary Peters (D-Mich.) and others are a strong private market and maintaining 30-year fixed-rate mortgages.