August 21, 2013 Newsletter
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SFIG News

Issue Spotlight

Recent Developments

 

SFIG NEWS
SFIG SUBMITS LETTER TO CFPB ON THE ABILITY-TO-REPAY RULE AND QUALIFIED MORTGAGE STANDARDS

On August 21, 2013, SFIG submitted a letter (ATR Letter) to the Consumer Financial Protection Bureau (CFPB) regarding certain aspects of the ability-to-repay rule and the related “qualified mortgage” standard (ATR Rule) that the CFPB issued on January 10, 2013.

SFIG representatives met with the CFPB to discuss the ATR Rule on June 13, 2013. SFIG was invited at that meeting to submit formally its thoughts on the ATR Rule.

The ATR Comment Letter cites four areas of the ATR Rule as being of primary concern to SFIG’s members:

  1. the effect of the “higher-priced covered transaction” threshold on the availability of jumbo prime loans;
  2. the practical effect of the 43% debt-to-income (“DTI”) requirement on consumer access to jumbo prime loans;
  3. the interaction between Appendix Q and the risks to the creditor (and any subsequent assignee) associated with the rebuttable presumption; and
  4. subjective considerations in the verification of self-employment income.

SFIG believes that these issues directly affect consumer access to credit and could have significant negative economic consequences for both primary and secondary mortgage market participants.

SFIG’s Residential Mortgage Committee is in the process of scheduling a series of roundtable discussions relating to matters affecting the mortgage finance industry. It is expected that the ATR Rule will be the subject of one of the first roundtables. If you are interested in participating in the discussion surrounding the ATR Rule, or in matters relating to mortgage finance generally, please contact SFIG at Richard.Johns@sfindustry.org.If you are interested in the roundtables, please contact SFIG or Eric Kaplan at Eric.Kaplan@shellpointllc.com.

Click here for the ATR Letter.

 

SFIG SUBMITS COMMENT LETTER TO EBA ON RISK RETENTION

On August 21, 2013, SFIG submitted a comment letter (EBA Comment Letter) to the European Banking Authority (EBA) regarding the EBA’s consultation paper (Consultation Paper) issued May 22, 2013, regarding revised proposed securitization regulations for the European Union (EU).

The EU risk retention framework places the burden of ensuring compliance on certain regulated investors in securitization transactions. By contrast, the proposed US risk retention framework would place requirements on securitizers for meeting US risk retention requirements. To mitigate the costly and potentially preclusive impact of differing regulatory approaches on cross-border securitization transactions, SFIG recommends that the EBA adopt a framework for "passporting" that would permit non-EU sponsors or originators to comply with a non-EU jurisdiction's risk retention requirements (in lieu of the EU risk retention requirements), provided the EBA has made a comparability determination regarding such jurisdiction's requirements.

The EBA Comment Letter also includes requests that the EBA:

  1. clarify that the proposed risk retention requirements may be satisfied by a single entity on a consolidated group basis, and that non-EU entities may also satisfy the risk retention requirements on a consolidated basis;
  2. clarify that in transactions with multiple sponsors, a single sponsor may satisfy the entire risk retention requirement if certain conditions are met or the sponsors may appropriately apportion the risk retention requirements as agreed between themselves;
  3. ensure that the disclosure-related requirements of the risk retention provisions do not conflict with any obligations binding on sponsors or originators relating to confidentiality and privacy, and that loan-level data not be required in the context of certain publicly-issued securitizations (involving highly granular asset pools) and privately-placed securitization transactions; and
  4. pursue changes that would permit all types of EU regulated entities and firms that are in compliance with any applicable regulations of their respective jurisdictions to be eligible to serve as sponsors.

Click here for the EBA Comment Letter.

 

SFIG MEETS WITH FHFA ON HOUSING FINANCE ISSUES

On August 19, 2013, representatives of SFIG met with senior staff members of the Federal Housing Finance Agency (FHFA) to discuss a number of issues facing the two government-sponsored entities, Fannie Mae and Freddie Mac, and the FHFA’s initiative regarding the development of a common securitization infrastructure (CSI).

This meeting was in follow-up to SFIG's comment letter to the FHFA dated June 30, 2013 about FHFA's Progress Report on the CSI initiative and the expressed desire of FHFA to have a continuing dialogue with SFIG about that initiative. Specific subjects discussed during the meeting included disclosure considerations, contractual issues involving representations and warranties, and the scope and particular functions of various parties to securitizations such as trustees and custodians. Senior FHFA officials expressed appreciation to SFIG regarding their view of the useful nature of the meeting and their interest in further discussions.

Click here for SFIG’s June 30, 2013 Comment Letter to the FHFA regarding the CSI initiative.

 

SFIG MEETS WITH U.S. SENATE BANKING COMMITTEE STAFF ON HOUSING FINANCE REFORM

On August 16, 2013, upon invitation, representatives of SFIG attended a stakeholder meeting with the Majority and Minority staff of the U.S. Senate Banking Committee (Committee) on the subject of government sponsored enterprise (GSE) reform.

During the meeting, the Committee’s staff made it clear that GSE reform is the top priority of the entire Committee. That prioritization is accompanied by an “accelerated timeline,” although the Committee wants to ensure that speed is not being undertaken at the expense of a workable solution. Accordingly, the Committee staff is undertaking a comprehensive evaluation of this complex subject, and is keen to evaluate not only broad policy points, but also more functional, technical, and legal issues. More meetings with various industry participants should be expected over the short term future, with hearings anticipated on a frequent basis after the end of recess.

The staff encouraged submission of written comments on housing finance reform issues generally, as well as specific comment on the Corker-Warner bill. Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) are committed to developing legislation that can receive bipartisan support, and the Committee will likely mark-up a bill this year.

SFIG is highly engaged on the topic of GSE reform, and SFIG’s Residential Mortgage Committee and SFIG’s board leadership have already had various meetings on this subject with multiple key regulatory and legislative audiences. If you would like to be part of the GSE reform committee and help drive SFIG’s advocacy efforts across such areas as the Corker-Warner plan, the House Republican’s alternative proposal, and the recent Housing Plan from the Administration, please email Richard.Johns@SFIndustry.org.

Click here for the Corker-Warner proposed legislation. Click here for the House Republican’s alternative proposed legislation. Click here for President Obama’s recent speech on the Administration’s housing plan. Click here for the White House Fact sheet on the Administration’s plan. Click here for SFIG’s positions on various aspects of the Administration’s plan.

 

ISSUE SPOTLIGHT
THE CFPB'S AUTHORITY UNDER DODD-FRANK'S UDAAP PROVISIONS

Recently, a number of observers from across the consumer financial services industry have begun to focus on the Consumer Financial Protection Bureau’s (CFPB) authority under Sections 1031 and 1036 of the Dodd-Frank Act to prohibit “unfair, deceptive, or abusive acts or practices” (UDAAP). Although the Federal Trade Commission Act provides a pre-existing statutory basis for the regulation of unfair or deceptive acts or practices, the Dodd-Frank Act added the term “abusive” to the list. As a result, much of the commentary has surrounded the potential meaning of that specific term.

Although the Dodd-Frank Act provides that the CFPB may engage in rulemaking under the UDAAP provisions, the CFPB has yet to do so.Rather, the CFPB has furnished guidance in its Examination Manual (Examination Manual) and in several Bulletins. In addition, the CFPB has secured consent orders against three credit card providers, and recently brought suit against a Florida-based company offering “debt relief services,” alleging that the company has engaged in “abusive” practices. The Florida suit marks the CFPB’s first enforcement action based on allegedly abusive practices.

Based on the CFPB’s approach to date of fleshing out the UDAAP provisions through a combination of general guidance and enforcement actions, rather than formal rulemaking via the notice and comment process, some commenters have asserted that the CFPB is not engaging in fully transparent behavior, and leaving the industry with insufficient guidance to put in place prospectively policies and procedures in response to UDAAP.

The UDAAP Provisions

The UDAAP provisions were enacted as Sections 1031 and 1036 of the Dodd-Frank Act. Section 1031(a) provides as follows:

The [CFPB] may take any action authorized under subtitle E to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law or in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.

“Covered persons” are defined by the Dodd-Frank Act to be anyone who engages in offering or providing a consumer financial product or service. Additionally, “consumer financial product or service” is a financial product or service offered or provided for use by consumers primarily for personal, family or household purposes, or delivered, offered or provided in connection with a consumer financial product or service. Examples of financial products and services include extensions of credit and loan servicing; real estate settlement services and property appraisals; taking deposits; transmitting or exchanging funds, or acting as a custodian for funds; check cashing; financial advisory services and collection and provision of consumer reports and credit history information.

A “service provider” under the Dodd-Frank Act is any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service. Service providers may or may not be affiliated with the person to whom it provides services.

The Dodd-Frank Act provides brief definitions of “unfairness” and “abusive,” and the Examination Manual includes more extensive guidance regarding these items. The statutory definition of the newly-added term “abusive” is as follows:

[An abusive act or practice is one which:]

  1. materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or
  2. takes unreasonable advantage of –
    1. a lack of understanding on the part of the consumer of the material risks, costs or conditions of the product or services;
    2. the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
    3. the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

The Credit Card “Add-on Products” Consent Orders

In 2012, the CFPB entered into consent orders with three banks - - Capital One Bank, (USA) N.A., Discover Bank, Greenwood Delaware and American Express Centurion Bank - - relating to the marketing on various credit card “add-on products.” These enforcement actions were based primarily on the “deceptive” prong of UDAAP.

The Consent Order (Capital One Consent Order) with Capital One Bank, (USA) N.A. (Capital One) is illustrative. According to the CFPB, in findings of fact which Capital One neither admitted nor denied:

  • cardholders were required to contact third-party call centers (i.e., call centers operated by “service providers” to Capital One) to activate their cards;
  • subprime and low credit-limit account holders were routed to a special activation process where they were solicited to purchase “payment protection products” that, it was claimed, would pay off the balance if the cardholder experienced certain life events, as well as “credit monitoring products” that would provide access to the cardholders credit scores and provided assistance in the event of “identity theft,”
  • the call center representatives were given a script, from which they frequently departed; and
  • the call center representatives made numerous misstatements, such as telling the cardholders that the add-on products were free, “costs only 99 cents,” or “came with the card;” stating unsubstantiated statistics such as “identity theft is the number one crime;” referring to the payment protection products as a “back-up fund” that would kick in automatically if they missed a payment, and responding to requests for additional information by informing the cardholders that they first needed to purchase the products before receiving more information.

Capital One, in light of these alleged practices, agreed to cease and desist from further violations of law in connection with sales of the add-on products, and also to ensure that the service providers to Capital One do the same. Capital One was required to submit a compliance plan to the CFPB to address the UDAAP violations.

Following the CFPB’s entry into of the three consent orders, it released on July 18, 2013 CFPB Bulletin 2012-00, “Marketing of Credit Card Add-on Products” (Add-on Bulletin). In the Add-on Bulletin, the CFPB sets forth a listing of the CFPB’s “expectations” for its supervised institutions, which a number of industry observers suggest reflects the CFPB’s general views regarding UDAAP compliance. These “expectations” include:

  • Marketing materials that reflect the actual terms and conditions of the product and are not deceptive or misleading to consumers;
  • Employee incentive or compensation programs that do not create incentives for employees to provide inaccurate information about the products;
  • Ensuring to the maximum extent practicable, telemarketers and customer service representatives do not deviate from approved scripts;
  • Maintaining compliance programs designed to ensure compliance with prohibitions against deceptive acts and practices, TILA, ECOA, and any other applicable Federal and state consumer financial protection laws and regulations;
  • Conducting a system of periodic quality assurance reviews;
  • Conducting independent audits of the credit card add-on programs; and
  • Providing oversight of any affiliates or third-party service providers that perform marketing or other functions related to credit card add-on products so that these third-parties are held to the same standard, including audits, quality assurance reviews, training and compensation structure.

Numerous observers have remarked upon the CFPB’s intense focus on adequate supervision of service providers in the UDAAP context, including the CFPB’s approach to hold its supervised institutions responsible for the acts of their service providers.

Cordray’s February Speech

On February 20, 2013, CFPB Director Richard Cordray gave a speech in which he reviewed a number of the CFPB’s accomplishments since its establishment. With respect to the UDAAP provisions, Mr. Cordray states:

The new financial reform law makes it illegal to engage in unfair, deceptive, or abusive acts or practices in connection with consumer financial products or services, and directs us to enforce this prohibition…

The possibilities here for injuring consumers are almost limitless. Maybe a customer service representative provided misleading information. Maybe consumers were told only about the benefits of a product and not about any of the limitations or risky features. Maybe important information about rates or fees was hidden or obscured. Or maybe consumers were told that they would have the chance to consider the matter further, and later found they were already signed up and charged for service without ever giving their actual consent.

As noted earlier, this past year we worked with our fellow regulators to take several enforcement actions against credit card companies that deceived and misled consumers in these ways – those with low credit scores and low credit limits. We detailed the problems with these practices, secured relief for those who were wronged, provided guidance for obtaining refunds, imposed penalties to deter such activity in the future, and signaled our concerns to other market participants as a way to press them to clean up any similar practices.

Several commenters have attributed some significance to Mr. Cordray’s observations that “[t]he possibilities here [under the UDAAP provisions] for injuring consumers are almost limitless.” These commenters speculate that it may be the CFPB’s view that unfair, deceptive, or abusive practices are so fact-specific that the best way to regulate them is through enforcement actions (which themselves result either from examinations, consumer complaints or both), rather than through formal guidance issued at the end of a notice and comment process. These commenters are basically suggesting that the CFPB has adopted a “you know it when you see it” mindset with respect to UDAAP, with the result that the industry receives little in the way of prospective guidance.

Earlier in the same speech, Mr. Cordray made note of the CFPB’s successes in addressing the special concerns of vulnerable consumer populations such as the young (student loan borrowers), the elderly and veterans. This indicates that the CFPB may enforce UDAAP provisions with particular zeal on behalf of those populations.

The ADSS Suit

On May 30, 2013, the CFPB brought suit against Florida-based American Debt Settlement Solutions, Inc. (ADSS), a provider of “debt relief services.”

ADSS’ business strategy involved enrolling consumers in debt-relief programs that ADSS claimed would “eliminate your unsecured debt sooner than you even thought possible.” One element of the programs was the establishment by the consumers of a special bank account that ADSS would control, and from which ADSS would pay the consumer’s debts. ADSS collected “enrollment” fees from the participating consumers.

In its complaint, the CFPB alleged in its complaint that ADSS knew that it was “nearly impossible” for ADSS to renegotiate or settle debts of the small size (under $700) owed by its participating consumers. Further, the CFPB alleged that ADSS enrolled consumers in its programs even when ADSS knew that the consumers’ incomes were inadequate to complete the programs.

The CFPB made several claims against ADSS under UDAAP and under the Telemarketing and Consumer Fraud and Abuse Prevention Act. Among the UDAAP claims was the allegation that ADSS’s practices were prohibited under the “abusive” prong of UDAAP – the first allegation of an “abusive” practice brought by the CFPB.

In its complaint, the CFPB alleges:

Despite receiving financial information showing that some consumers could not afford the monthly payments under the debt-relief program in which they were enrolled, ADSS nonetheless collects “enrollment” fees from these consumers in the first three to six months of their enrollment. This practice causes certain consumers to spend their last savings paying ADSS fees for a service from which they will not benefit.

Instead of negotiating any debts with creditors during the first three to six months of a consumer’s enrollment – as it represents to consumers that it will – ADSS collects its “enrollment” fees during this period. As a result, consumers with inadequate income to complete the program drop out after paying significant fees and without receiving any benefit.

This practice takes unreasonable advantage of consumers’ lack of understanding of how long it will take ADDS to settle their debts and therefore how much money they will spend before realizing any benefits from enrolling in ADDS’s debt-relief program.

On June 7, 2013, the court entered a Stipulated Final Judgment and Order, that essentially adopted the CFPB’s requested relief.

The case may illustrate the CFPB’s reasoning and approach regarding the application of UDAAP’s “abusive” prong to an arguably vulnerable consumer population.

Debt Collection Practice Guidance

In its most recent actions under the UDAAP provisions, the CFPB issued two Bulletins on July 10, 2013 that address debt collection practices, as well as a set of form letters designed for use by consumers when communicating with debt collectors.

The first Bulletin, CFPB Bulletin 2013-07, “Prohibition of Unfair Deceptive or Abusive Acts or Practices in the Collection of Consumer Debts” (Debt Collection Bulletin) essentially extends the principles of the Fair Debt Collection Practices Act (FDCPA) – which governs third-party debt collectors – those attempting to collect a debt owed to another party – to debt owners. Again, since this guidance was issued as a CFPB bulletin, it was not issued following the notice and comment process that would constitute formal rulemaking.

The Debt Collection Bulletin provides a non-exhaustive list of examples of conduct related to the collection of consumer debt that may be deemed UDAAPs:

  • Collecting or assessing a debt and/or any additional amounts in connection with a debt (including interest, fees, and charges) not expressly authorized by the agreement creating the debt or permitted by law.
  • Failing to post payments timely or properly or to credit a consumer’s accounts with payments that the consumer submitted on time and then charging late fees to that consumer.
  • Taking possession of property without the legal right to do so.
  • Revealing the consumer’s debt, without the consumer’s consent, to the consumer’s employer and/or co-workers.
  • Falsely representing the character, amount, or legal status of the debt.
  • Misrepresenting that a debt collection communication is from an attorney.
  • Misrepresenting that a communication is from a government source or that the source of the communication is affiliated with the government.
  • Misrepresenting whether information about a payment or non-payment would be furnished to a credit reporting agency.
  • Misrepresenting to consumers that their debts would be waived or forgiven if they accepted a settlement offer, when the company does not, in fact, forgive or waive the debt.
  • Threatening any action that is not intended or the covered person or service provider does not have the authorization to pursue, including false threats of lawsuits, arrest, prosecution, or imprisonment for non-payment of a debt.

The CFPB adds that it will be “watching these practices closely.”

The second Bulletin is CFPB Bulletin 2013-08, “Representations Regarding Effect of Debt Payments on Credit Reports and Scores” (Credit Report Bulletin).

The Credit Report Bulletin is intended to provide guidance under both the FDCPA and UDAAP. The focus of the CFPB’s concern in the Credit Report Bulletin are representations and warranties made by creditors, debt buyers and third-party debt collectors intended to encourage consumers to pay their debt, such as representations regarding the relationship between:

  • Paying debts in collection and improvements in a consumer’s credit report;
  • Paying debts in collection and improvements in a consumer’s credit score;
  • Paying debts in collection and improvements in a consumer’s creditworthiness; or
  • Paying debts in collection and the increased likelihood of a consumer receiving credit or more favorable credit terms from a lender.

With regard to representations regarding credit reports, the CFPB notes that such reports typically do not include debts older than seven years in any case, as required by the Fair Debt Reporting Act. The CFPB would consider it deceptive if a debt owner or collector were to tell a consumer that cleaning up such an “obsolete” debt would result in an improved credit report. Even for non-obsolete debts, it would be a deceptive practice if the consumers were to pay or settle the debt, and the debt owner or collector does not report that fact, in turn, to the credit reporting agencies.

The CFPB also states that representations that paying a debt will improve the consumer’s credit score or make the consumer appear more “creditworthy” are in and of themselves potentially deceptive, given the number of factors that may go into the determination of a credit score or a determination of “creditworthiness.”

Click here for the UDAAP provisions of the Dodd-Frank Act. Click here for the Capital One Consent Order. Click here for the Add-on Bulletin. Click here for the February speech by Mr. Cordray. Click here for the CFPB’s complaint against ADSS. Click here for the ADSS Stipulated Final Judgment and Order. Click here for the Debt Collection Bulletin. Click here for the Credit Report Bulletin.

 

RECENT DEVELOPMENTS
REVISED RISK RETENTION RULE NOW EXPECTED ON AUGUST 28

According to White House press reports, the federal agencies responsible for jointly promulgating the revised risk retention rule under the Dodd-Frank Act are expected to propose a revised rule on August 28, 2013.

The mortgage finance industry will be especially focused on the proposed definition of “qualified residential mortgage” (QRM); QRMs will be exempted from the risk retention requirements.

These reports indicate that the requirements for QRM status are likely to be loosened, to mirror the Consumer Financial Protection Bureau’s (CFPB) definition of “qualified mortgage” (QM) under the CFPB’s ability-to-repay rule. In particular, the mortgage industry is expecting a relaxation of the QRM requirements proposed in April 2011 – namely, a minimum 20% downpayment and a maximum 36% debt-to-income ratio.

 

OBAMA SAID TO URGE REGULATORS TO COMPLETE DODD-FRANK RULEMAKING

According to White House reports, President Obama met with regulators on August 19, 2013, to urge them to complete regulations needed to implement the Dodd-Frank Act.

The meeting was said to include the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of the Treasury, the Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau, the acting Director of the Federal Housing Finance Agency, and the chairs of the Securities and Exchange Commission, the Commodities Futures Trading Commission, the Federal Deposit Insurance Corporation and the National Credit Union Administration.

 

FHFA INSPECTOR GENERAL RAISES QUESTIONS CONCERNING G-FEE INCREASES

In a report released on July 16, 2013, (OIG Report) entitled “FHFA’s Initiative to Reduce the Enterprises’ Dominant Position in the Housing Finance System by Raising Gradually Their Guarantee Fees,” the Federal Housing Finance Agency’s (FHFA) Office of Inspector General (OIG) raised several questions and concerns regarding the FHFA’s strategy regarding increases in the guarantee fees (G-Fees) charged by the two Government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.

The OIG Report begins by noting that the GSEs’ average combined guarantee fees have nearly doubled since 2011, primarily due to two factors first, legislation enacted in 2012 designed to offset temporary reductions in federal pay roll taxes; and second, the FHFA’s initiative to increase private sector investment in mortgage credit risk.

The OIG Report was critical of the FHFA’s use of the undefined phrase “increase private sector investment in mortgage credit risk” in setting the G-Fee rates. The OIG Report acknowledges that the FHFA faces “trade-offs and challenges” with respect to this initiative, including the risk of higher G-Fees dampening consumer demand for housing and private sector investment in mortgage credit risk, as well as other regulatory initiatives designed to invest in mortgage credit risk.

The OIG Report states that, when questioned about the appropriateness and practicality of developing definitions or measures of additional private sector investment in mortgage credit, FHFA officials resisted developing specific definitions and measures of such increased private investment. The OIG Report notes that it was “not persuaded” by the FHFA’s rationale.

The OIG Report also faulted FHFA for not establishing a more formal and ongoing working relationship with the Federal Housing Administration to assess issues of mutual concern, including the pricing of guarantees, shifts in the mortgage business and risks between the government supported and the government insured markets.

If you are interested in participating in SFIG’s Residential Mortgage Committee, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the OIG Report.

 

IRS LAUNCHES ONLINE FATCA REGISTRATION PORTAL

On August 19, 2013, the Internal Revenue Service (IRS) announced the opening of its new online registration portal for foreign financial institutions that need to register with the IRS under the Foreign Account Tax Compliance Act (FATCA). The new IRS online registration system allows foreign financial institutions to establish online accounts with the IRS, designate contact persons for FATCA registration purposes, oversee FATCA information for affiliated group members and branches of the foreign financial institution, and request automatic notifications from the IRS of FATCA status changes.

Beginning in January of 2014, foreign financial institutions will be expected to finalize their online FATCA registration information.As the IRS approves registrations, it will provide a notice of registration and a global intermediary identification number (GIIN) to each registered foreign financial institution.

Foreign financial institutions, including foreign investment entities, will generally need to register with the IRS through the new online registration portal for FATCA purposes. Such registration is generally required for foreign financial institutions to avoid the 30% withholding tax imposed under FATCA on certain U.S.-source income beginning on July 1, 2014.

Click here for a copy of the IRS’s news release for the new FATCA online registration portal.

 

NEW YORK FED REPORT FOCUSES ON AUTO SECTOR

The Federal Reserve Bank of New York (New York Fed) released its “Quarterly Report on Household Debt and Credit” (Fed 2Q Report) for the second quarter of 2013 on August 14, 2013. On its Liberty Street Economics blog, the New York Fed provided some additional analysis on the auto loan component of household debt.

The New York Fed’s analysis revealed that newly originated auto loan aggregate balances have now recovered to pre-recession levels.

Using credit score data, the New York Fed concluded that it does not see evidence that the increased level of auto lending results from a deterioration of credit standards.

The New York Fed also noted that younger people, particularly those with student loans, were taking out less auto debt then was the case prior to the recession, possibly suggesting a “long-term decline in the demand for autos among young Americans.”

Click here for the Fed 2Q Report.Click here for the Liberty Street Economics auto loan analysis.

 

FEDERAL RESERVE ISSUES FINAL RULE ON ANNUAL BANK ASSESSMENTS

The Board of Governors of the Federal Reserve System (Federal Reserve) issued a final rule on August 16, 2013, to implement Section 318 of the Dodd-Frank Act.The rule mandates that the Federal Reserve collect assessments, fees or other charges from two types of entities (Companies). The first type of Companies consists of domestic and foreign bank holding companies and savings and loan holding companies with total consolidated assets in excess of $50 billion. The second type of Companies consists of nonbank financial companies that the Federal Reserve designates for supervision by the Financial Stability Oversight Counsel. The assessments will be equal to the expenses that the Federal Reserve expects to incur in its supervision and regulation of those Companies.

The Companies will be informed of their 2012 assessment in October when the final rule becomes effective and the charges will be due by the date specified in the notice, which will be no later than December 15, 2013. Going forward, the Federal Reserve will notify the Companies of their assessments by June 30th of each year and payments will be due by September 15th. Assessments are assessed based on the total asset size of a Company. The reasoning set forth in the final rule that the size of a Company "is generally reflective of the amount of supervisory and regulatory expenses associated with a particular company." A Company has 30 days to appeal to the Federal Reserve to dispute the Federal Reserve's determination of the Company's total assessable assets. The Federal Reserve will respond to any appeals within 15 days after the end of the appeal period.

According to the press release from the Federal Reserve, it estimates that it will collect $440 million from 70 Companies for the 2012 assessment period.

Click here for the final rule.

 

COMMERCE DEPARTMENT REPORTS THAT HOUSING STARTS ARE UP

The U.S. Commerce Department on August 16, 2013 reported that housing starts rose 5.9% in July, which represents a rebound from June. The housing numbers were propelled by a strong performance in the multifamily category, which is historically more volatile than single-family home construction. Single-family starts fell 2.2% from June. Despite the residential slowdown, builder confidence remains high according to last weeks’ report from the National Association of Home Builders, and building permits for single-family projects climbed to a 613,000 pace in July, exceeding the number of starts and signaling a possible pickup in construction in the next months.

A rise in housing starts is an indicator that the overall housing market continues to improve, which can lead to higher equity values and stronger consumer confidence. The performance of these assets at financial institutions and those backing securitizations also should improve due to fewer defaults and better recoveries on any defaulted assets. Finally, with double digit percentage increases, year over year, inventory will be available for mortgage-backed securitizations in the latter half of 2013.

Click here for the U.S. Commerce Department report.

 

RECENT EMINENT DOMAIN DEVELOPMENTS IN CALIFORNIA

Last week’s Issue Spotlight presented the latest developments in the plan of the City of Richmond, California (Richmond) to seize mortgage loans from private label securitizations through the use of eminent domain.

Since the Issue Spotlight, Fitch Ratings announced on August 16, 2013, that the potential use of eminent domain by communities in California would negatively affect private label RMBS and future lending in those regions. Fitch Ratings believes the eminent domain programs “could further weigh on private investor confidence and appetite for private-label mortgage-backed securities going forward.” Fitch Ratings went on to state that, “the use of eminent domain could also have other unintended consequences, including increasing mortgage interest rates and decreasing credit availability in affected areas.”

In contrast to the warnings by Fitch Ratings, the Department of Housing and Urban Development (HUD), as reported by The Wall Street Journal on August 16, 2013, is taking a “wait and see” approach.According to Elliot Mincberg, a top official at HUD, HUD is “concerned about the developments,” but at this point HUD is waiting for more information on how Richmond would use eminent domain.

Meanwhile, according to Bloomberg Businessweek reports, Gayle McLaughlin, Mayor of Richmond, along with several supporters, tried to enter the San Francisco headquarters of Wells Fargo Bank on Thursday, August 15, 2013, demanding that Wells Fargo drop its lawsuit to prevent eminent domain seizure. Although Mayor McLaughlin and her supporters were not allowed to enter the building, a security guard informed the Mayor that Wells Fargo would call to schedule an appointment.

Click here for Fitch Ratings’ announcement on the eminent domain plans.

Click here for The Wall Street Journal’s summary of the HUD’s response to the eminent domain developments.

Click here for Bloomberg Businessweek’s article on the Richmond Mayor’s visit to Wells Fargo Bank headquarters.

Click here for an article and accompanying maps regarding Richmond’s “fair market price” offers for mortgages on certain properties.

 

CALIFORNIA COURT ALLOWS SUIT TO PROCEED AGAINST S&P

On August 14, 2013, a California Superior Court judge denied Standard & Poor's (S&P) motion to dismiss a lawsuit filed by California Attorney General Kamala Harris against the rating agency on February 5, 2013. The California state court case was filed at the same time as a similar U.S. Department of Justice (DOJ) case was filed against S&P. In both cases, the government is accusing S&P of knowingly providing unreasonably high ratings in order to win market share and increase profits. In a statement made at the time the cases were filed, S&P called the suits by the DOJ and the State of California “meritless.”

The California case is notable for its asserted violations of unfair competition laws and the California False Claims Act, which allows the state to seek triple damages. Commenters have pointed out that California’s use of the False Claims Act in this case has the potential of stretching the law. The California False Claims Act has not previously been used to seek damages from financial analysts.

In the complaint, the State of California alleges that S&P's rating of mortgaged backed securities led to almost $600 million in losses to California pension fund investors in 2008. S&P sought dismissal of the lawsuit on several grounds under the False Claims Act, including that the statute of limitation to file a claim under the Act had lapsed. To successfully make that argument, S&P had to show that California reasonably should have known of the alleged wrongdoing before June 15, 2008. The California Superior Court judge ruled that S&P did not meet its burden of proof that the statute of limitations had run. The next pre-trial conference on the case is scheduled for September 6, 2013.

 

CFPB RELEASES UPDATE TO ATR/QM COMPLIANCE GUIDE

On August 14, 2013, the Consumer Financial Protection Bureau (CFPB) issued an update to its April 10, 2013 Small Entity Compliance Guide for the Ability-to-Repay (ATR) and Qualified Mortgage (QM) Rule. In addition, the CFPB issued a revised comparison chart that compares the ATR requirements with the requirements for originating QM loans. The updates include amendments to the final QM rule since January 10, 2013.

The CFPB’s guide describes its rule implementing the ATR/QM provisions of the Dodd-Frank Act, which generally applies to mortgage applications received by a creditor after January 9, 2014.

Click here for a copy of the updated guide and here for a copy of the comparison chart.

 

SELECTION PROCESS HEATS UP FOR NEXT FED CHAIR

Increasing popular press coverage of the two leading candidates to be President Obama’s choice to succeed Ben Bernanke as Chairman of the Board of Governors of the Federal Reserve System (Fed) is highlighting the different role of the Fed since the financial crisis. Janet Yellen, current Fed Vice-Chairman, and Lawrence “Larry” Summers, currently a Harvard professor, have been the subject of lengthy profiles in The Wall Street Journal and other publications.The members of the Fed's Board of Governors, including its chairman and vice-chairman, are chosen by the President and confirmed by the U.S. Senate.

Historically, the choice of the Fed chairman has rarely generated much public anticipation or political debate.Typically, the president has quietly picked a new chairman and then quickly obtained the Senate’s confirmation. For example, The Wall Street Journal and The New York Times reported in 1987 that markets were surprised by President Reagan’s swift nomination of Alan Greenspan to replace Paul Volcker after the latter announced that he did not want to stay on for a third term. After Mr. Greenspan served eighteen years as Fed chairman, President George W. Bush’s nominee, Ben Bernanke, was confirmed by the U.S. Senate as Fed chairman by unanimous voice vote.Four years later, however, the Fed’s actions during the financial crisis led to a record level of U.S. Senate opposition before Mr. Bernanke was confirmed for a second term.

The current level of discussion and political debate about the next chairman of the Fed is unprecedented. Part of the reason for this is that Congress, through the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), has greatly expanded the Fed’s regulatory purview. The next Fed chairman will have substantial influence as to how these Dodd-Frank provisions are implemented and as a result will have substantially greater regulatory influence than previous Fed chairmen.

President Obama is expected to announce his choice in late September or October.If the U.S. Senate doesn’t confirm a new Fed chairman by January 31, 2014, the vice-chairman (presently Janet Yellen) will be elevated to chairman. Several media outlets reported in June 2013 that Chairman Bernanke is not seeking reappointment and that President Obama has indicated that he would not reappoint Mr. Bernanke for a third term.

Janet Yellen has spent much of her career at the Fed. Fed minutes have revealed that Ms. Yellen was one of the only top Fed policy makers who warned about the housing bubble before the crisis.She was a member of the Fed in the 1990s during the years when Mr. Greenspan was chairman; president of the Federal Reserve Bank of San Francisco in the 2000s; and, since 2010, has worked as the Fed’s vice-chairman in Washington, helping craft the central bank’s response to a weak recovery.

In contrast to Janet Yellen, Larry Summers is seen as having a closer connection to the White House than the Federal Reserve. Mr. Summers ran President Obama's National Economic Council in 2009 as the president was devising plans to prop up weak banks and revive the economy.Since leaving the Obama administration in late 2010, Mr. Summers has held various positions in academia. Previously, Mr. Summers was at the U.S. Treasury in 1990s as the U.S. advised governments in Mexico, Asia and Russia in dealing with their respective financial crisis.

 

INVESTORS’ PUSHBACK TO RESCAP SETTLEMENT REBUFFED

Investors were dealt a blow in the most recent development in the Residential Capital LLC (ResCap) bankruptcy proceedings. In ResCap’s complicated plan to separate itself from its parent Ally Financial (the former GMAC), ResCap is seeking to resolve mortgage put-back claims from monoline bond insurer Financial Guaranty Insurance Co. (FGIC). Investors in the ResCap securitizations (Investors), including Freddie Mac, are seeking to block the FGIC deal.The New York state judge overseeing FGIC’s conservatorship signed off on the FGIC deal on August 16, 2013.

The Investors claimed that the deal between ResCap and FGIC under which ResCap would be able to satisfy over $5 billion of claims for approximately $560 million was prejudicial to the Investor’s claims against FGIC. Judge Doris Ling-Cohan said that FGIC can enter the deal with ResCap and found that the state insurance regulator overseeing FGIC's rehabilitation had acted reasonably in agreeing to the deal, overruling the objections of the Investors who hold over $700 million of mortgage-backed securities FGIC insured. Judge Ling-Cohan said the Investors couldn't challenge the settlement, which they said unfairly shortchanged them, because they are only investors in the securities that FGIC has insured and not FGIC policyholders, none of whom has objected to the settlement.

"Notwithstanding this, the objectors complain that they were not consulted about the settlement and were not aware of the settlement negotiations. However, the objectors are no more than mere creditors of certain FGIC’s creditors and their consent is simply not required to consummate a settlement of policy claims," Judge Ling-Cohan said. The Investors are objecting to the settlement in part because FGIC’s guaranty policies are being terminated as part of the plan. So, not only will ResCap be capping its exposure to the securitizations under the settlement, but so will FGIC. The Investors contend that they should be able to continue pursuing payment under the policies from FGIC even though FGIC won’t be collecting the full value of its claims against ResCap.

The settlement still needs the approval of the U.S. Bankruptcy Court judge overseeing the ResCap bankruptcy. ResCap’s bankruptcy plan calls for its former parent, Ally Financial, to pay $2.1 billion to settle its obligations to ResCap's creditors. The $560 million payment to FGIC will come out of this amount. ResCap filed for bankruptcy in May 2012. FGIC's parent company, FGIC Corp. filed for bankruptcy in 2010, and its own bankruptcy plan was confirmed in April 2012. It is not a party to FGIC’s New York state-court rehabilitation proceeding. FGIC entered the state rehabilitation in June 2012 and its rehabilitation plan was approved a year later, and it became effective on August 12, 2013.

Click here for the New York state judge’s ruling.

 

CFTC ISSUES FINAL RULES TO IMPLEMENT ENHANCED RISK MANAGEMENT STANDARDS FOR SYSTEMICALLY IMPORTANT DERIVATIVES CLEARING ORGANIZATIONS

The Commodity Futures Trading Commission (CFTC) recently approved final rules (Final SIDCO Rules) to implement enhanced risk management standards for systemically important derivatives clearing organizations (SIDCO). Prior to adopting the Final SIDCO Rules, the CFTC reviewed the current risk management standards in light of relevant international standards and existing prudential requirements in order to identify areas where additional risk management standards for SIDCOs would be necessary and appropriate. Based on its review, the CFTC has determined that the Principles for Market Infrastructures, developed by the Bank for International Settlements, are the international standards most relevant to the risk management of SIDCOs. The adoption of these rules is an important first step in making the CFTC’s rules for SIDCOs fully consistent with the Principles for Financial Market Infrastructures, thereby enabling them to continue to be Qualifying Central Counterparties for purposes of international bank capital standards.

Overall, the Final SIDCO Rules (i) increase financial resources requirements for certain SIDCOs (those involved in activities with a more complex risk profile or that are systemically important in multiple jurisdictions), (ii) do not allow SIDCOs to include assessments in calculating their available default resources, and (iii) enhance system safeguards for SIDCOs for business continuity and disaster recovery.

Click here for the Final SIDCO Rules.

 

STUDENT LOAN LEGISLATION ENACTED

Federal student loan legislation passed this month, along with U.S. Department of Education changes to the PLUS loan application process, will provide short-term relief to students and parents seeking to finance college and graduate school tuition.

Under the "Smarter Solutions for Students Act," interest rates on federally subsidized higher education loans will be set annually at fixed rates determined by reference to high-yield 10-year Treasury notes. The legislation, which applies retroactively to loans originated after July 1, 2013, caps the rates for undergraduate loans at 8.25%, graduate loans at 9.5% and PLUS loans at 10.5%. While this year's rates range from 3.86% for undergraduate loans to 6.41% for PLUS loans, students can expect rates closer to the legislative caps in coming years, as the bill is designed to be revenue neutral over a 10 year span. The Congressional Budget Office projected the bill to increase the federal government's expected $184 billion profit on student loans over that time by $715 million. That increase will be applied to federal budget deficit reduction. The bill further calls for a study to recommend future improvements to federal student loan administration and efficiency.

In a related measure, the U.S. Department of Education has responded to pressure from congressional leaders and college presidents by loosening parent PLUS loan creditworthiness guidelines. PLUS loan requirements were tightened in 2011, and had contributed to declining enrollment figures, particularly at historically black colleges and universities. As with other asset classes, the competing concerns of ability to pay and promoting access to credit continue to shape the debate surrounding student loan policy and regulation.

 

UPCOMING SFIG EVENT

ABS Vegas 2014 – January 21-24, Las Vegas, Nevada. Click here for more information.

SFIG is now accepting sponsorship contracts for this conference. If you are interested, please contact SFIG.

 

SFIG COMMITTEES AND TASK FORCES

SFIG has a number of Committees and Task Forces meeting and working on many topics of interest to the securitization industry. Please visit our website for more information, including how to join.

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SFIG is pleased to share this edition of its newsletter with our members, as well as our supporters in the structured finance community. To ensure that you receive future editions of the newsletter, please visit our website (www.sfindustry.org) to learn about membership opportunities.

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