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FHFA OIG urges greater oversight of GSEs

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WASHINGTON (10/1/12)--The Federal Housing Finance Agency (FHFA) has held government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac under government conservatorship since 2008, and the FHFA's oversight of them would be improved by tighter control of their individual business decisions, the FHFA's Office of the Inspector General (OIG) said in a report.

The OIG report noted that the FHFA requires the GSEs to obtain approval for decisions involving legal settlements over $50 million, risk limit increases and other business decisions. However, the OIG found, the FHFA does not review and approve Fannie Mae's single-family underwriting standards or its High Touch Servicing Program, which, according to the OIG release, involved multiple transfers of mortgage servicing rights for more than 700,000 loans with an unpaid principal balance in excess of $130 billion.

"As conservator, FHFA has a responsibility to ensure that the [GSEs'] underwriting standards appropriately balance credit risk and return. FHFA can further fulfill its conservator responsibility by ensuring sound oversight of underwriting standards through more active involvement and detailed guidance governing its review process," the OIG said.

The report also recommended the FHFA ensure that significant GSE business decisions are sent to the conservator for approval and encouraged the FHFA to properly analyze, document, and support the decisions it makes as conservator. The agency should also work to confirm that the GSEs have complied with FHFA instructions.

The GSEs agreed with most of the OIG recommendations. For the full OIG report, use the resource link.

Inside Washington (09/28/2012)

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  • WASHINGTON (10/1/12)--Treasury Secretary Timothy Geithner Thursday sent a letter to the members of the Financial Stability Oversight Council calling for reform of the money market fund (MMF) industry. "Further reforms to the MMF industry are essential for financial stability," Geithner wrote. "MMFs are a significant source of short-term funding for businesses, financial institutions, and governments. The funds provide an important cash-management vehicle for both institutional and retail investors. However, the financial crisis of 2007–2008 demonstrated that MMFs are susceptible to runs and can be a source of financial instability with serious implications for broader financial markets and the economy." Last month, the Securities and Exchange Commission (SEC) announced that it would not proceed with a vote to solicit public comment on potential structural reforms of MMFs. The SEC took steps in 2010 to strengthen the liquidity, credit-quality, maturity and disclosure requirements of the funds. However, Geithner said the reforms did not address two characteristics of MMFs that leave them susceptible to destabilizing runs: the lack of explicit loss-absorption capacity in the event of a drop in the value of a portfolio security; and the "first-mover advantage" that provides an incentive for investors to redeem their shares at the first indication of any perceived threat to the fund's value or liquidity …
  • WASHINGTON (10/1/12)--In a letter to financial regulators, a bipartisan group of 53 senators stressed that proposed Basel III capital rules are too complex and expensive for community banks to comply with and will hurt the banks' ability to lend to borrowers. "Community banks have little or no access to capital markets," the group wrote. "In most cases, they must rely on the bank's officers, directors and shareholders to raise additional capital. Raising capital for community banks in the best of times is challenging and nearly impossible in times of economic stress." In June, the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency released proposals that would implement Basel III in the U.S. Basel III standards will require banks to hold common equity of 4.5% by 2015. In addition, banks must hold a 2.5% conservation buffer, which will be gradually introduced by 2019, and increase Tier 1 levels from 4% to 6% by 2015 (News Now Aug. 14). The international bank rules are intended to force banks to hold more capital as a buffer against future financial shocks …
  • WASHINGTON (10/1/12)--The overall quality of first-lien mortgages serviced by large national and federal savings banks improved from the same period a year ago, but showed seasonal decline from the prior quarter, according to a report released Thursday by the Office of the Comptroller of the Currency (OCC). The percentage of mortgages that were current and performing at the end of the quarter was 88.7%, compared with 88.9% the prior quarter and 88.1 % a year earlier, according to the OCC Mortgage Metrics Report for the Second Quarter of 2012.  The percentage of mortgages that were 30 to 59 days past due was 2.8%, up 12.1% from the prior quarter but down 7.5% from a year ago. Seriously delinquent mortgages--60 or more days past due or held by bankrupt borrowers whose payments are 30 or more days past due--fell to their lowest level in three years. The percentage of mortgages that were seriously delinquent was 4.4%, down 0.8% from the prior quarter and 9.2% from a year earlier. Several factors contributed to the year-over-year improvement, including strengthening economic conditions, servicing transfers, and the ongoing effects of both home-retention loan-modification programs, as well as home forfeiture actions, the OCC said …
  • WASHINGTON (10/1/12)--The Federal Reserve on Friday began the quarterly publication of transaction-level information related to discount-window lending to depository institutions and open market transactions.  The data in the initial release cover transactions between July 22, 2010, and Sept. 30, 2010. The transaction-level detail supplements the extensive aggregate information the Federal Reserve has previously provided in weekly, monthly and quarterly reports. Data on discount window loans include the name of the borrowing institution, the amount borrowed, the interest rate charged and information about collateral pledged. Data on open market transactions include temporary and permanent purchases and sales of Treasury and agency securities, securities lending activities, and foreign exchange transactions and foreign currency reserve investments.  Information on each transaction includes the identity of the counterparty, the security or currency purchased or sold, and the date, amount and price of the transaction  …
  • ALEXANDRIA, Va. (10/1/12)--Credit union staff and volunteers still have time to register for the online town hall with National Credit Union Administration (NCUA) Board Chairman Debbie Matz Thursday at 3 p.m. ET. Registration for this free NCUA webinar is available online. Participants also will use this link to log into the webinar after registration. Registrants should allow pop-ups from this website
  • ALEXANDRIA, Va. (10/1/12)--Speaking at the Combined Council of America's Credit Unions' (CCACU) 31st Annual Conference last week, National Credit Union Administration (NCUA) Board Member Michael Fryzel encouraged credit unions to "understand what credit union members want and then make sure they get it in the least-cost, highest-quality manner possible. For 80 years credit unions have done this, and done this well," he said, but credit unions will need to do "as well or better" in the years ahead. CCACU credit unions are tied to the U.S. automobile industry, and Fryzel said while the automobile industry has had its share of issues, CCACU credit unions "have been unwavering in their service." …

Consumers paying more post-interchange EPC study

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WASHINGTON (10/1/12)--Debit interchange fee cap legislation was promoted by retailers as consumer-friendly policy before it was enacted last year, but consumers actually have paid an average of 1.5% more for certain goods since the interchange fee cap implementation, an Electronic Payments Coalition (EPC) study has found.

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The Federal Reserve Board's final rule implementing the interchange law capped large issuer debit interchange fees at 21 cents. An additional five basis points per transaction may be charged to cover fraud losses, and an extra penny may be charged by financial institutions that are in compliance with established fraud prevention standards. Most credit unions are exempt from the fee cap.

To gather data on the interchange cap's impact on consumers, EPC researchers made 36 shopping trips to 18 stores across the county, purchasing a consistent list of products at each store. One round of purchases was made in September 2011, just before the interchange cap took effect, and another round was made late last month.

Overall, the EPC found that 67% of retailers visited either increased their prices or kept them the same. Specifically, the EPC found that after the interchange cap implementation, shoppers paid on average:

  • Eighty cents, or 5.4%, more for the same items at a Walmart in Portland, Maine;
  • One dollar, or 2.6%, more for the same items at a 7-Eleven in Washington, D.C.;
  • Thirty cents, or 2.9%, more for the same items at a Walgreens in Boston; and
  • $2.22, or 6.6%, more for the same items at Home Depot in Atlanta.
The EPC noted that these increased prices come as retailers save billions and debit card issuers are forced to make up for lost revenue. "With a wink and a nod, giant retailers promised to lower prices for their customers if Congress passed [interchange legislation]. One year after implementation, retailers have taken home $8 billion while many of their customers pay more at the register," EPC spokeswoman Trish Wexler added. The EPC study was covered in Washington political paper Politico's Morning Money column.

Credit unions and community banks also are being harmed by the interchange regulations, the Credit Union National Association and other finance industry partners said in a recent letter to Congress.

The letter noted that a U.S. Government Accountability Office (GAO) study released last month--which found smaller community banks and credit unions, supposedly "exempted" from the fallout of this legislation-- have instead seen interchange revenue decreases of 5% in the first three months following interchange fee cap implementation.

The letter also noted that credit unions and community banks are struggling to maintain viable debit programs, and have had to raise their fees in some cases. "The GAO further concludes that even more harm to community banks and credit unions is likely as the marketplace evolves," the letter added. (See Sept. 24 News Now story: Interchange cap not helping consumers: CUNA, trades)

For the EPC study, use the resource link.

CUNA opposes NCUA liquidity proposal

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WASHINGTON (10/1/12)--While it is important for credit unions to address key operational issues, such as sources of emergency liquidity, the Credit Union National Association (CUNA)  urged the National Credit Union Administration (NCUA) not to proceed with a plan that would require credit unions with less than $10 million in assets to maintain basic written emergency liquidity policies.

The NCUA proposal, which CUNA opposes, would also require federally insured credit unions (FICUs) with assets of $10 million or more to develop contingency funding plans describing how their credit union would address liquidity shortfalls in emergency situations. FICUs with assets of $100 million or more would be required to have access to a backup federal liquidity source for emergency situations. This backup liquidity could come from NCUA Central Liquidity Fund (CLF) membership or direct borrowing from the Federal Reserve's Discount Window.

"Although overall liquidity management and policies are vital to credit union operations, there is no need for credit unions to secure access to specific types of emergency liquidity beyond what other federally insured depository institutions are required to do," CUNA Deputy General Counsel Mary Dunn wrote in a comment letter.

"Credit unions are already inundated with too many rules and any additional regulatory requirements should be imposed only if there is clear and convincing evidence that they are needed from a material safety and soundness standpoint or to meet statutory requirements," Dunn added. "In our view, the agency has not provided sufficient rationale or justification for issuing a new regulation."

Dunn noted that interagency guidance on liquidity policies, plans, and procedures, released in 2010, "sufficiently addresses primary issues regarding liquidity risk management" and said that other agencies "have not found the need to issue regulations on emergency liquidity."

New NCUA liquidity regulations "would be redundant in terms of safety and soundness results, while imposing significant and unnecessary compliance costs on credit unions. Moreover, NCUA and state examiners already have sufficient authority to direct credit unions to address any material deficiencies in their liquidity risk management policies and implementation," Dunn said.

If the NCUA does move forward with the liquidity proposal, the CUNA comment letter suggested the agency change the proposal to:

  • Ensure the definition of smaller credit unions dovetails with the NCUA's revised definition of "small entity," which is now under review;
  • Use, for larger credit unions, indicators such as loan-to-share ratios--and not just asset size only--in determining whether additional liquidity policy and federal liquidity source requirements should be imposed; and
  • Allow, under certain conditions, Federal Home Loan Banks (FHLBs) to be permissible sources of emergency liquidity.
In other comments, Dunn wrote that the agency should refrain from imposing Basel III liquidity measures and monitoring tools, or similar measures, on credit unions with assets of $500 million or more. "The Basel III requirements have raised questions from banks and regulators alike and were not developed with any consideration of the unique nature, structure or characteristics of credit unions," Dunn wrote.

She also noted concern among credit unions that, with the demise of U.S. Central Bridge Corporate FCU, the CLF must be modified, for example, to address the requirement for stock subscriptions and to facilitate the ability of credit unions to use the CLF as readily as institutions are able to utilize the Federal Reserve's Discount Window for liquidity purposes.

For the full CUNA comment letter, use the resource link.
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