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Inside Washington (09/08/2008)

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* WASHINGTON (9/9/08)--Downey Financial Corp., a $13 billion asset Newport Beach, Calif.-based thrift, was issued a cease-and-desist order last week by the Office of Thrift Supervision (OTS). OTS ordered the thrift to meet a minimum Tier 1 capital ratio of 7% and a minimum total risk-based capital ratio of 14% (American Banker Sept. 8). Downey sent out a press release Friday that did not mention the cease-and-desist order specifically, but said that the company would sell certain non-core real estate assets to a third party for $110 million. Downey also is working on a capital plan and has enhanced the bank’s regulatory capital by $176 million through the third-party real estate sale and previously disclosed contributions of capital from its parent company. In 45 days, the bank plans to submit to the OTS an asset-reduction plan, long-term business plan, real estate-owned disposition plan, and a plan to strengthen executive management ... * WASHINGTON (9/9/08)—The House Small Business Committee has scheduled a 10 a.m. hearing for Thursday on “Examining Expiring Tax Incentives and the Needs of Small Businesses.” The focus of the hearing is expected to be on tax extenders that expired in 2007 and are set to expire in 2008 and that affect and benefit small businesses, and which many small businesses use as incentives to grow and expand their businesses. A witness list was not yet available…

Inequitable terms ruling may impede foreclosures CUNA

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WASHINGTON (9/8/08)—A Massachusetts trial court ruling this year highlights the fact that unfair mortgage terms and origination practices can jeopardize a lender’s ability to foreclose on a property whose owner is in default. Chris Johnson, vice president of State Governmental Affairs for the Credit Union National Association (CUNA), has advised credit unions that in the case Commonwealth of Massachusetts v. Fremont Investment & Loan, the court limited a lender's exercise of all of its specific rights under its mortgage agreements with its borrowers. The Massachusetts attorney general obtained a preliminary injunction against Fremont, a subprime lender that originated thousands of mortgages in Massachusetts and whose lending practices were considered by the attorney general to have contributed significantly to the foreclosure crisis in that state. Johnson notes the court's order prohibits Fremont from initiating or advancing foreclosures on loans that are "presumptively unfair." Under the terms of the injunction, Fremont must provide the attorney general's office with at least a 30-day notice of all foreclosures it intends to initiate for the loans that Fremont owns and services. In turn, the AG has an opportunity to object to the foreclosure going forward. If Fremont has issued a loan that is considered "presumptively unfair," and the borrower occupies the property as his or her principal dwelling, the attorney general has 45 days to object to the foreclosure. Under the terms of the injunction, a loan is "presumptively unfair" if it has all of the following characteristics:
* The loan is an adjustable-rate mortgage with an introductory period of three years or less; * The loan has an introductory or "teaser" interest rate that is at least three percent lower than the fully-indexed rate (the relevant index at the time of origination plus the interest margin specified in the mortgage note); * The borrower has a debt-to-income ratio (the ratio between the borrower's monthly debt payments, including the monthly mortgage payment, and the borrower's monthly income) that would have exceeded 50% if Fremont had measured the debt by the debt due under the fully-indexed rate, not by the debt due under the teaser rate; and * Fremont extended 100% financing, or the loan has a substantial prepayment penalty.
The lesson of the Fremont case, according to Johnson, "is that the lender's inequitable origination practices have now hamstrung its ability to foreclose on properties that secure mortgages that it owns." Johnson further noted that although Fremont ultimately is likely to be able to exercise its foreclosure rights, "it will generally not be able to do so until after it has incurred significant expenses, and lost considerable time, in complying with the terms of the injunction." Johnson believes that credit unions are highly unlikely to find themselves subject to legal actions and outcomes similar to those in the Fremont case. "Credit unions' prudent underwriting practices and equitable loan terms constitute a bulwark of protection when unfortunate events result in mortgage delinquencies and foreclosures," he said, but noted the case "demonstrates the need for continued vigilance in maintaining fair and reasonable lending terms and practices." For more analysis of the case, use the resource link below.

CU parties statement on relief in FOM case

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WASHINGTON (9/9/08)—A coalition of interested credit union parties filed a statement with a U.S. district court regarding an appropriate relief plan in a case that challenged a National Credit Union Administration’s (NCUA) decision to grant a six-county area community credit union expansion in Pennsylvania. In July, the U.S. District Court for the Middle District of Pennsylvania ruled that the NCUA’s record was not sufficient to sustain its decision and ordered the plaintiff American Bankers Association and defendant NCUA to suggest a remedy to the court. In its lawsuit against the federal regulator, the bankers argued that the NCUA acted in an arbitrary and capricious way in 2003 when it approved Harrisburg, Pa.-based Members 1st FCU's charter request. The agency decision was later used as basis to authorize two other charter requests, one from New Cumberland FCU and the other from AmeriChoice FCU. In a statement on appropriate resolution to the case, the Credit Union National Association (CUNA), Pennsylvania Credit Union League and other credit union parties made points for the record regarding the remedy negotiated by the NCUA and ABA. As part of the agreed upon order, the affected credit unions will revert to the select employee group and associational charters that they held prior to the community charter expansions. Also as part of the agreement, all members who joined the credit unions under the community charters may remain as members. Although the ABA, in its brief, did not ask that the credit unions involved divest the members who were added under the NCUA decision, the credit union parties noted that the case should not serve as a precedent that the consent of the bankers “or similar plantiffs” is required for that outcome. Also, the credit union parties said that although the court’s final order is silent on the issue, the entire matter should be remanded to the NCUA to take further actions as may be appropriate. The credit unions named in the lawsuit and the National Association of Federal Credit Unions were also parties to the credit union statement on appropriate relief. Since most issues have been agreed upon, the judge likely will decide whether to accept the proposed order in a relatively short time—possibly within several weeks.

NCUAs Kutchey named OEI deputy director

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ALEXANDRIA, Va. (9/9/08)—John Kutchey has been named deputy director of the National Credit Union Administration’s (NCUA’s) Office of Examination and Insurance (OEI), where he will assist in overseeing the agency’s supervision and examination program, risk management and data collection programs. Kutchey takes his new post after having served most recently as OEI’s director of risk management. “John Kutchey has long been an asset to NCUA’s executive management team,” said
John Kutchey is shown here at a 2007 open board meeting as NCUA Deputy Director of the Office of Examination and Insurance Larry Fazio discusses the agency’s proposal on capital standards for credit unions. (Photo provided by CUNA)
NCUA Director Leonard Skiles. “In filling this important leadership position, John will bring valuable field management expertise that will serve to further strengthen the agency’s supervision and examination program.” Kutchey started his career with the NCUA 18 years ago as an examiner in Baltimore, Md. He also has served as a problem case officer, supervisory examiner, and director of supervision in Region II. While with NCUA, Kutchey has also completed several details, most notably as the associate regional director - operations in Regional V and as the director of insurance in Region II. The NCUA noted that Kutchey has received numerous awards highlighting his accomplishments and contributions to the agency.