July 10, 2013 Newsletter
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Structured Finance Industry Group


Issue Spotlight

Recent Developments




On June 30, 2013, SFIG submitted a comment letter (FHFA Comment Letter) to the Federal Housing Finance Agency (FHFA) on the FHFA's common securitization infrastructure (CSI) initiative.

The FHFA Comment letter was submitted in response to the FHFA's "Progress Report on the Common Securitization Infrastructure" (Progress Report), released by the FHFA on April 30, 2013. The Progress Report followed the FHFA's white paper, released in October 2012 (White Paper) entitled "Building a New Infrastructure for the Secondary Mortgage Market. "The White Paper set forth a proposal for a new common securitization platform for residential mortgage loans and a model conceptual and disclosure framework (CDF) for residential mortgage-backed securities (RMBS) securitizations.

SFIG endorsed the FHFA's effort to build a stable infrastructure for the future of Fannie Mae and Freddie Mac guaranteed mortgage-backed securities (Agency Securities).

With respect to the CSI generally, SFIG recommended that the FHFA first focus on Agency Securities and "hybrid" risk-sharing transactions involving a limited Government guaranty before turning to the fully private RMBS market.

SFIG also recommended that the FHFA coordinate the resolution of the data disclosure issues considered in the CDF with the loan level data disclosure initiatives proposed by the Mortgage Bankers' Association's Mortgage Industry Standards Maintenance Organization (MISMO).

SFIG cautioned the FHFA that representation and warranty issues may be different for Agency Securities and fully private RMBS transactions, and encouraged the FHFA to create an industry advisory committee to support the continued development of the CSI.

If you wish to be involved in SFIG's Residential Mortgage Committee's advocacy efforts with respect to the CSI, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the FHFA Comment Letter.Click here for the Progress Report.Click here for the White Paper.



On June 28, 2013, SFIG, along with the Clearing House Association L.C.C., the Global Financial Markets Association, the Financial Services Roundtable and the International Swaps and Derivatives Association (collectively, Associations) submitted a comment letter (Basel Letter) to the Basel Committee on Banking Supervision (Basel Committee). The Basel Letter was in response to the Basel Committee's March 2013 Consultative Document, entitled "Supervisory framework for measuring and controlling large exposures" (Proposed Framework).

The purpose of the Proposed Framework is to introduce a large exposure framework for internationally active banks that would place limits on exposure to any one counterparty.

With respect to securitizations, the Associations took exception with the Proposed Framework's "look through" approach (LTA). The Proposed Framework would require that, unless a securitization satisfies a "granularity test" (the securitization holds no asset that represents more than one percent of the pool), the bank would be required to look through to all of the underlying assets in the securitization to determine single counterparty exposure. In addition, the Associations expressed concern with the categorization of unknown underlying assets into one large “unknown” exposure, which assumes that a single client underlies all of the diverse exposures across asset classes and markets.

The Associations suggest that, rather than adopt the LTA approach to securitizations, the Basel Committee allow for the use of a "Pillar 2" approach that relies on a bank's own monitoring of indirect exposure. Under a “Pillar 2” approach, banks would review underlying exposures to determine, document and offer quantitative support for whether an underlying asset impacts its large exposure calculations.

Absent a “Pillar 2” approach, the Associations outlined an alternative framework that relies on an appropriately structured feasibility test and materiality threshold. Among its suggestions, the Associations recommended the exemption of retail asset backed securities, pools of finance receivables and commercial mortgage backed securities. The Associations also expressed concern that the Proposed Framework does not appropriately reflect the different risk profiles associated with various securitization tranches in applying the LTA and recommended that the LTA exclude senior securitization exposures.

Broadly, the Associations raised several broad concerns with the Proposed Framework:

  • The Proposed Framework's suggested measurement methods may not be sufficiently risk sensitive and may substantially overstate actual economic risk.
  • The Proposed Framework appears to attempt to address disparate policy goals through the "blunt supervisory tool" of the large exposure limit.However, this tool may render certain aspects of the Proposed Framework, such as its determination of connected counterparties and the "look through" requirements, unnecessarily complex.
  • The implementation of the Proposed Framework may not allow regulators an opportunity to evaluate the effectiveness of particular methodologies and their effects on the market, particularly the costs and availability of financial products and services.

If you are interested in participating in SFIG's Regulatory Capital and Liquidity Committee, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the Basel Letter. Click here for the Proposed Framework.



SFIG is currently seeking individuals to participate in preparing comment letters on three regulatory proposals.

One regulatory proposal is the European Banking Authority's (EBA) "Consultation Paper on Draft Regulatory Technical Standards on the determination of the overall exposure to a client or group of connected clients in respect of transactions with underlying assets under Article 379 of the proposed Capital Requirements Program" (EBA Large Exposures Proposal). The comment deadline for this proposal is August 16, 2013.

The second regulatory proposal is the EBA's "Consultation Paper on Draft Regulatory Technical Standards On the retention of net economic interest and other requirements relating to exposures to transferred credit risk (Articles 394, 395, 397 and 398) of Regulation (EU) No [xx/2013] and Draft Implementing Technical Standards Relating to the convergence of supervisory practices with regard to the implementation of additional risk weights (Article 396) of Regulation (EU) No [xx] of [xx/2013]" (EBA Risk Retention Proposal). The comment deadline for this proposal is August 22, 2013.

The third regulatory proposal is the Securities and Exchange Commission's (SEC) proposed rule regarding money market fund reform (Money Market Proposal). The comment deadline for this proposal is September 17, 2013.

If you are interested in participating in the process of preparing a comment letter with regard to any of the three regulatory proposals, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the EBS Large Exposures Proposal. Click here for the EBA Risk Retention Proposal. Click here for the Money Market Proposal.




In recent weeks, student loans have been the subject of several articles in the mainstream press.

First, on July 1st, 2013, the interest rate, which is set by Congress, doubled on newly-originated, subsidized, Government-guaranteed student loans. Although the higher rates may have little if any effect on securitization deals backed by these loans, various analysts and policymakers have expressed concerns about other potential impacts. Several pieces of legislation have been introduced in response to the increase of subsidized loans’ interest rates.

Second, the Congressional Budget Office issued a report on June 10, 2013 entitled "Options to Change Interest Rates and Other Terms on Student Loans" (CBO Report). The CBO Report has been the subject of publicity and discussion, with some commenters suggesting that the Government will "make money" from Government-guaranteed student loans over the next ten years, while others cite the CBO Report for the opposite conclusion.

Third, the state legislature of Oregon has passed a bill that creates a committee charged with studying a new proposed program to finance higher education at Oregon state schools. The proposed program, referred to as "Pay it Forward, Pay it Back," would bypass traditional student loans as a source of higher education financing, replacing them with a state funded program that would be replenished with future payments based on a percentage of the borrower’s income.

Background on the State of Student Loans

According to a report (CFPB Background Report) on student loans by the Consumer Financial Protection Bureau (CFPB), there are over 38 million student loan borrowers with a cumulative outstanding debt that has exceeded $1.2 trillion. Student loans are the second-largest consumer credit asset class, after residential mortgage loans.

A statistical breakdown of the data shows that:

  • Nearly one in five U.S. households owe student debt with an average outstanding balance of $26,682.
  • One in eight borrowers have student debt balances of more than $50,000.
  • 40 percent of U.S. households headed by someone under age 35 have student loans.
  • 25 percent of borrowers under age 30 spend 10 percent or more of their income on student loan repayment.
  • 30 percent of borrowers are delinquent on repayment of their student loans, translating to around 6.7 million borrowers who are more than 90 days delinquent on their student loans.
  • There has been a 31 percent increase in the number of people who have taken out student loans between 2007 and 2012.
  • 85 percent of outstanding student loan balances are Government-guaranteed student loans, while 15% are private student loans.For student loans originated in 2013, 93 percent were Government-guaranteed.

Student loans are the only type of household debt that has continued to increase during the economic recession.

The non-profit One Wisconsin Institute, in its survey entitled “Impact of Student Loan Debt on Homeownership Trends and Vehicle Purchasing,” (One Wisconsin Survey) finds that the average repayment period of student loan borrowers hovered around 21.1 years, and usually longer for those with advanced degrees.

Several sources contend that the increasingly high level of student loan debt can be traced to the high price of attaining a post-secondary education, a cost that continues to climb. The average cost of annual tuition, room and board, and other administrative fees for a four-year public college/university was approximately $14,000 during the 2007-2008 academic cycle. Similarly, the average annual cost of tuition, room and board, and other administrative fees for a four-year private college/university was nearly $24,000 during the same time period. Consequently, many borrowers must take out substantial loans to subsidize the full price of tuition and other collegiate expenses.

Borrowers can either take out a federal Government-guaranteed loan, or a private loan. The borrowing limits under private loans are usually higher than under Government-guaranteed loans. However, the CFPB points out that private loan borrowers face fewer affordable payment options than they would with Government-guaranteed loans and those borrowers do not benefit from the same consumer protections as borrowers with Government-guaranteed loans.

Impact on other Consumer Credit Products

A number of observers, including the CFPB, contend that the financial impact of student debt leaves many borrowers facing injurious consequences when they struggle to repay or default on their loans. The overhang of high student debt constricts the choices borrowers make on other financial matters. According to the One Wisconsin Survey, the housing market is of particular concern, since many student loan recipients also tend to be prospective first-time homebuyers. Many borrowers are eschewing buying a home so to avert delinquency on their loans. The One Wisconsin Survey also suggests that high student loan debt lends individuals to purchase less expensive, used rather than new, cars.

The July 1 Interest Rate Increase

On July 1, 2013, the fixed rate of interest on newly-originated, subsidized Government-guaranteed student loans doubled from 3.4% to 6.8%. Subsidized loans account for about one-quarter of all Government-guaranteed student loans.

Since the increase in rates applies only to newly-originated loans, none of the affected loans would be in an existing securitization pool. All of the affected loans are Federal Direct Lending Program loans and none are FFELP loans (which are only student loans currently being securitized).

The rate increase resulted from the failure of Congress to extend the 3.4% rate.Earlier in the year, the U.S. House of Representatives passed a bill, H.R. 1911, that would index student loan rates to the yield on the 10-year Treasury note. There has also been a bill introduced in the U.S. House, H.R. 1595, that would have extended the 3.4% rate to July 1, 2015.

The U.S. Senate may vote later this month on a bill that would index the rate on both subsidized and unsubsidized Government-guaranteed student loans to the 10-year Treasury note rate.

The CBO Report

The purpose of the CBO Report is to project the total cost of Government-guaranteed student loan program for loans made between 2013 and 2023. The conclusions of the CBO Report have been interpreted differently by various readers of the CBO Report. This is due to the emphasis the readers have put on the two accounting methods discussed in the CBO Report.

Under rules established by the Federal Credit Reform Act of 1990 (FCRA), the cost to the Government of a student loan is recorded in the federal budget during the year in which the loan is disbursed, taking into account the amount of the loan, expected payments to the Government over the life of the loan, and other cash flows, all discounted to a present value using the interest rate on U.S. Treasury Securities.Using the FCRA approach, the CBO estimated that the Government-guaranteed student loan program would reduce the federal deficit by $184 billion for loans made between 2013 and 2023, assuming that the higher, 6.8% rate applies to the subsidized loans. The savings are due to low Government borrowing costs, which are projected to be substantially lower than the rate on the loans.

The CBO also analyzed the Government-guaranteed student loan program using "fair value accounting," which, unlike the FCRA, accounts for the fact that losses from borrower defaults tend to be highest when economic and financial conditions are poor - a phenomenon that the CBO refers to as "market risk".Using the fair-value approach, the Government-guaranteed student loan program (using the same assumptions as to loan rates and Government borrowing costs) would increase the federal deficit by $95 billion during the 2013-2023 period.

Finally, the CBO assessed a few alternatives that would alter the terms of subsidized loans. Under one alternative the interest rate remain at 3.4% rather than allowing it to double. The CBO determined that this would increase the cost of the student loan program by $41 billion between 2013 and 2023. A second alternative would restrict access to subsidized loans to students who are eligible to receive Pell grants while allowing the interest rate to rise to 6.8%. This approach would provide a steady stream of revenue for the government, allowing it to accrue savings between $21 billion and $49 billion between 2013 and 2023. A third alternative would be to maintain the 3.4% rate but only allow those borrowers who are qualified for Pell grants. The CBO determined that this option would increase the cost of the program by $1 billion during the same time period.

CFPB Proposals

The CFPB has put forward some ideas to provide relief to the borrowers with unmanageable student loan debt, particularly for those who have taken on private loans. As previously mentioned, Government-guaranteed student loans typically offer more flexible and generous repayment options than private student loans.

On May 8, 2013, the CFPB released a report entitled "Student Loan Affordability-Analysis of Public Input on Impact and Solutions" (CFPB Affordability Report). The CFPB Affordability Report was issued in response to a "Request for Information Regarding an Initiative to Promote Student Loan Affordability" published in the Federal Register in February of 2013. Over 28,000 comments were received in response to the Request for Information.

One plan discussed in the CFPB Affordability Report is a “refi relief” program, which gives borrowers who are current in their student loan payment obligations the opportunity to consolidate and refinance their private student loans. Many young consumers who take out private loans have limited credit history, with the result that the interest rates on those loans are calculated based on “perceived risk.” Although many consumers do find jobs with salaries that allow them to meet their monthly payments, the CFPB Affordabililty Report states that “they may be unable to find a refinance option with a lower rate that reflects the strong likelihood they will fully be able to pay back their loan.”

Another proposal in the CFPB Affordability Report is a “road to recovery,” which addresses borrowers in distress and those who have fallen behind on their monthly payments. This proposal is especially pertinent to those who either have a tough time securing a job, or to the underemployed. The unemployed/underemployed demographic typically spends a disproportionate amount of their income on student debt. Thus, policy makers propose that the road-to-recovery path is one that should be a “negotiable, transparent, step-by-step process where monthly payments are lowered to match a reasonable debt-to-income ratio.”

The CFPB also has identified a class of borrowers who may need more than alternative payment options. These borrowers may have already defaulted on their loans or have damaged credit histories. For these borrowers, the CFPB suggests a “clean slate” option, wherein borrowers are allowed the chance to rebuild their credit and escape default. This plan would have the borrower negotiate with the lender on a payment plan that suits the borrower’s unique financial situation. When the borrower has successfully completed the payment plan, that person can become qualified for mortgages or small business loans.

The Oregon Proposal

Recently, the Oregon legislature approved a plan to move towards implementing a new method of funding for higher education. The plan, entitled “Pay it Forward, Pay it Back,” would have students withdrawing money from a designated fund. Upon completion of their degree, they would “pay into a special fund 3% of their salaries annually for 24 years.” Other states, including Washington, New York, Vermont, Pennsylvania and California have explored similar proposals, but Oregon is the first to take legislative action on the idea. The state would provide funds for seed money, presumably, from a state debt offering, but it predicts the designated fund should become self-sustaining within a few years. This program would have the borrowers repaying at incremental levels. When they first graduate, borrowers are predicted to pay an average of $800 back into the program, but as their incomes grow, they would pay up to $2,000 by the twentieth year.

If you are interested in participating in SFIG's Student Loan Committee, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the CFPB’s factsheet and here for the CFPB Background Report. Click here for the One Wisconsin Survey. Click here for the CBO Report. Click here for the CFPB Affordability Report.




The Board of the Financial Industry Regulatory Authority (FINRA) will consider at its July 11, 2013 meeting "a proposal to disseminate transaction information in additional types of asset-backed securities, including Rule 144A transactions in such securities," according to an agenda for the upcoming meeting.

If the proposal is approved, the data, which is currently reported to FINRA's Trade Reporting and Compliance Engine (TRACE) system, would be disseminated to the same extent as is currently the case for corporate bonds, agency mortgage-backed securities and to-be-announced (TBA) transactions.

More details will be available after the July 11, 2013 FINRA Board meeting.



On July 3, the Board of Governors of the Federal Reserve System (Federal Reserve) adopted a final rule revising its risk-based capital and leverage capital requirements. On July 9, the Federal Deposit Insurance Corporation (FDIC) adopted an interim final rule that is identical to the Federal Reserve’s rule. In general, these final rules closely follow the securitization provisions of the proposed rule issued in June of last year. There were only a few changes in the rules that affect securitization exposures:

1. The standardized risk weights for residential mortgage loans remain unchanged from the existing Basel I rules. The "category 1" and "category 2" classifications set forth in the proposed rule that would have assigned risk weights to residential mortgage loans based on underwriting standards and loan-to-value ratios were not adopted in the final rule.

2. The definition of resecuritization has been modified to exclude single bond re-REMICs and other securitizations of a single underlying exposure.

3. Parameter W in the Simplified Supervisory Formula Approach (SSFA) calculation will exclude contractual deferrals of payments of principal or interest on (a) all federally guaranteed student loans and (b) other consumer loans (including non-federally guaranteed student loans) provided such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for deferral periods that are not initiated based on changes to a borrower's creditworthiness.

The final rules, however, did not address several industry concerns with the securitization provisions of the proposed rule, including the following:

  1. The 1,250% maximum risk weight for securitization exposures was not capped as requested at the dollar amount of the relevant securitization exposure.
  2. A 1,250% risk weight is applied to the relevant securitization exposure when a bank fails to comply with the new due diligence requirements. The federal banking regulators rejected a request for progressively increasing risk weights based on the severity and duration of due diligence violations, which would have been consistent with the EU capital framework.
  3. The amount of an off-balance sheet commitment that is not made to an ABCP conduit is the notional amount of the exposure and is not reduced to the available asset base. Under the final rule, the notional amount of a bank’s off-balance sheet exposure to an ABCP conduit securitization exposure may be reduced to the maximum potential amount that the bank could be required to fund given the ABCP program’s current underlying assets. Commenters argued that the risks associated with an undrawn commitment to a customer securitization transaction are the same regardless of whether the commitment is made directly to the customer's SPE or through an ABCP conduit.
  4. Kg for purposes of determining the SSFA has not been made more risk sensitive. The industry expressed concern that the Kg parameter provided in the proposed rule was not sufficiently risk sensitive and commenters argued that the credit quality of the underlying assets should receive more recognition under the SSFA. However, citing their interest in reducing complexity and aligning capital requirements under the securitization framework with the general requirements for credit exposures under the Standardized Approach, the federal banking regulators are adopting the Kg parameter as proposed.
  5. The minimum risk weight for securitization exposures under both the Standardized Approach and the Advanced Approach is 20%. While inconsistent with the 7% minimum risk weight that currently applies internationally under the Basel III framework, consistent with the U.S. approach, the Basel Committee on Banking Supervision proposed an increase in the minimum risk weight for securitization exposures to 20% in its December 2012 consultative paper.
  6. Pool-wide inputs may not be used to determine Kirb for purposes of the Supervisory Formula Approach. This presents issues for banks investing in securitization exposures that may not have access to the information necessary to calculate the capital charge on individual underlying assets or asset segments but is consistent with the current SSFA under the U.S. Basel II rules and the market risk rule.
  7. Securitization exposures in which a small percentage of the underlying exposures constitute securitization exposures are not excluded from the definition of resecuritization. The industry expressed concern that a small percentage of the underlying exposures of many existing CLOs consist of other securitization exposures (typically, to other CLO transactions) and that to treat the entire amount of such a transaction as a resecuritization overstates the risk of the transaction. To address this concern, commenters requested that the definition of resecuritization be modified to exclude securitizations in which 5% or less of the underlying exposures constitute securitization exposures. The federal banking regulators rejected the request, indicating they believe "the introduction of securitization exposures into a pool of securitized exposures significantly increases the complexity and correlation risk" of the underlying pool.

The SFIG Regulatory Capital and Liquidity Committee is reviewing the final rules to understand the implications specific to securitization and is planning a call to discuss the final rules on Thursday, July 18, 2013 at 2pm (EST). If you are interested in participating in SFIG’s Regulatory Capital and Liquidity Committee, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the Federal Reserve’s Rule. Click here for a memorandum from the staff of the Federal Reserve regarding the Federal Reserve Rule. Click here for the FDIC rule.



On June 28, 2013, Reuters reported that Freddie Mac was close to beginning a "road show" to market its inaugural Structured Agency Credit Risk (STACR) transaction.

According to "market sources" referenced in the Reuters article, the transaction will take the form of a synthetic securitization. The transaction will reference a pool of recently originated mortgages rather than offer interests in the mortgage loans themselves, as do regular Freddie Mac Participation Certificates.

The STACR securities will not be guaranteed by Freddie Mac. Rather, they will enable Freddie Mac to transfer a portion of the risk on the reference pool of mortgages, thus reducing Freddie Mac's expose on its guaranties of outstanding Participation Certificates backed by those mortgages.

Fannie Mae is expected to offer a similar type of risk-transfer securities soon.

The two Government-Sponsored Enterprises (GSEs) Freddie Mac and Fannie Mae, have been mandated by their conservator/regulator, the Federal Housing Finance Agency (FHFA) to engage in risk-transfer transactions involving at least $30 billion in aggregate unpaid principal balance of single-family mortgages in 2013. In the most recent "Conservatorship Strategic Plan: Performance Goals for 2013," released on March 4, 2013, the FHFA assigned a 50% weight to the goal of having each GSE contain their dominant presence in the market-place while simplifying and shrinking certain lines of business. The 50% weight was the highest weight assigned by the FHFA to any individual goal, suggesting that it is the FHFA's top priority for 2013.

Sources in the Reuters article indicated that the GSE risk-transfer transactions have the potential to become a large and liquid new asset class, provided that the initial transactions are successful.

In recent years there has been a relative dearth of new-issue, non-agency residential mortgage backed securities (RMBS), as Government guaranteed single-family RMBS issuances have represented over 90% of the market. In light of this, according to sources quoted in the Reuters article, investors seeking access to residential mortgage credit have had few avenues to access this market, and the STACR transactions (along with the expected Fannie Mae transactions) are expected to receive substantial attention and interest.

Click here for the Reuters article on the STACR transaction. Click here for the FHFA's March 4, 2013 GSE Performance Goals.



On June 28, 2013, an individual named Gregory D. Smith filed a complaint (Complaint) in the U.S. District Court for the District of Nevada seeking declaratory and injunctive relief against the City of North Las Vegas' plan to use its eminent domain power in response to the alleged problem of "underwater mortgages" (mortgage loans that have an outstanding principal balance greater than the current value of the property securing the mortgage) relating to residential real properties in North Las Vegas.

Mr. Smith is identified in the Complaint as being "a resident of, homeowner in, and taxpayer to" North Las Vegas, and appears to be basing his standing to file the Complaint principally upon his status as a taxpayer.

At its June 19, 2013 City Council meeting, the City Council of North Las Vegas determined to enter into an "Advisory Services Agreement" with Mortgage Resolution Partners (MRP), a private entity that has promoted the use by municipalities of their eminent domain authority to seize underwater mortgages and subsequently refinance them.The City Council had several prior meetings at which several members of the City Council questioned the constitutionality of the use of eminent domain for such a purpose under the U.S. and State of Nevada Constitutions.

Mr. Smith alleges that the proposed use of eminent domain in this context would violate the Fifth Amendment to the U.S. Constitution, as an unlawful taking of private property, as well as several provisions of the Nevada Constitution. He also alleges that the plan violates the Contract Clause of Article I, Section 9 of the U.S. Constitution, the Commerce Clause of Article I, Section 8 of the U.S. Constitution and certain Nevada statutes.

The Complaint states that "[t]he public fisc of the City of North Las Vegas will be depleted and endangered by the unlawful use of public moneys expended in pursuit of the [eminent domain] plan."

MRP claims that several cities, in addition to North Las Vegas, have entered into Advisory Services Agreements with it to explore the use of eminent domain for this purpose. In recent weeks the eminent domain approach to underwater mortgages has been the subject of much commentary, some of which supports and some of which challenges, the approach.

SFIG continues to evaluate its advocacy position on eminent domain.Interested members are invited to contact SFIG at Richard.Johns@sfindustry.org if they wish to participate in the discussion.

Click here for the Complaint.



On June 27, 2013, the Consumer Financial Protection Bureau (CFPB) announced that it had entered into two Consent Orders (Consent Orders), one with U.S. Bank National Association (U.S. Bank) and one with Dealers' Financial Services, LLC (DFS) in connection with an auto lending program developed by U.S. Bank and DFS that was targeted to military servicemembers.

The lending program, called the Military Installment Loans and Educational Services (MILES) program required servicemembers to repay their auto loans using the military allotment system, which deducts payments directly from the servicemember's paycheck before the remainder of the salary is deposited to the servicemember's bank account.

According to the Consent Orders, the MILES program was jointly developed by U.S. Bank and DFS.U.S. Bank financed the substantial majority of all loans originated under the MILES program. DFS's only business is the operation of the MILES program.

The CFPB found that U.S. Bank failed to account properly for the fee charged to the borrowers for use of the military allotment system as a "finance charge" under the Truth In Lending Act. In addition, servicemembers are paid twice a month and thus the allotted amounts were drawn twice a month, but the servicemembers' loan accounts with U.S. Bank were only credited once a month. This, the CFPB found, was a further violation by U.S. Bank of the Truth In Lending Act, by inaccurately reporting the borrowers' payment schedules.

The CFPB also found that a service contract offered to borrowers was marketed in a deceptive manner. Borrowers were told that purchasing the service contract would add "just a few dollars to your monthly payment," although the actual cost was over $40 per month. Borrowers were also told that the scope of the service contract was broader than it actually was.By way of example, the market brochure for the service contract stated that "brakes" were covered, but it did not disclose that brake pads and rotors were excluded.

According to the Consent Orders, U.S. Bank had a contractual right to review all of the marketing and advertising materials provided to prospective borrowers by DFS, but, according to the CFPB, U.S. Bank did not "regularly validate" the statements made in the DFS-provided materials.

Of perhaps broader significance to the securitization and consumer finance industry is the CFPB's use in the Consent Orders of its authority under Title X of the Dodd-Frank Act to hold "covered persons," including large insured depository institutions (such as U.S. Bank) and certain non-depository consumer finance companies accountable for the actions of their "service providers," as defined in Section 1002(26) of the Dodd-Frank Act. That section defines "service provider" as "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." The CFPB found that DFS was a "service provider" to U.S. Bank with respect to the MILES program.

In its Bulletin 2012-03 on the subject of services providers, released on April 12, 2012 (Bulletin), the CFPB emphasized that "the mere fact that a supervised bank or non-bank enters into a business relationship with a service provider does not absolve the supervised bank or non-bank of responsibility for complying with Federal consumer financial law to avoid consumer harm. "In the Bulletin, the CFPB stresses that it expects supervised banks and non-banks to provide oversight of their service providers, including requesting and reviewing the service provider's policies and procedures, internal controls and training procedures.

Although the underlying auto dealers involved in the MILES program were not the subject of the CFPB's review of the MILES program, it is possible that various other auto finance programs, such as "turn-down" programs, may result in a finding that dealers are acting as "service providers."

Click here for the U.S. Bank Consent Order. Click here for the DFS Consent Order. Click here for the Bulletin.



The Basel Committee on Banking Supervision (Basel Committee) has released three proposals for comment:

  • On June 26, 2013, the Basel Committee published its "Revised Basel III Leverage Ratio Framework and Disclosure Requirements" (Leverage Ratio Proposal) for consultation. The Basel III reforms introduced a leverage ratio to complement the risk-based capital requirements. The Leverage Ratio Proposal sets out a specific formula for calculating the leverage ratio for banks subject to the Basel III framework, as well as a set of public disclosure requirements. Comments on the Leverage Ratio Proposal are due by September 20, 2013.
  • On June 28, 2013, the Basel Committee released a consultative paper entitled "The Non-internal model method for capitalizing counterparty credit risk exposures" (Non-internal Method Proposal). The Non-internal Method Proposal would replace the capital framework's existing methods for assessing counterparty credit risk associated with derivatives transactions. The new proposed method would, according to the Basel Committee, improve the risk sensitivity of the existing “current exposure” method by differentiating between margined and unmargined trades.
  • Also on June 28, 2013, the Basel Committee released a second consultative paper, entitled "Capital treatment of bank exposures to central counterparties" (CCP Proposal) relating to derivatives. The CCP Proposal sets out formulas for calculating regulatory capital for banks’ exposure to central counterparties.

Comments are due on the Non-internal Method Proposal and on the CCP Proposal by September 27, 2013.

SFIG's Accounting Policy Committee will review each of the three proposals for possible comment by SFIG. If you are interested in participating in the Regulatory Capital and Liquidity Committee, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the Leverage Ratio Proposal. Click here for the Non-internal Method Proposal. Click here for the CCP Proposal.



On June 6, 2013, the Supreme Court of the State of Oregon issued two decisions relating to the authority of the Mortgage Electronic Registration System (MERS) during the foreclosure process under Oregon state law. According to the publication Housingwire, the decisions are "precedential cases the mortgage industry has been waiting months for."

The two cases were Brandrup v. Recontrust Company, N.A. and Niday v. GMAC.MERS was an additional defendant in each case. The bulk of the Court's analysis of the legal issues is found on the Brandrup decision.

The holdings in both cases are essentially inconclusive, as the Court in both cases decided that MERS' authority rested on a question of fact, the answer to which was not before the Court.

Specifically, the Court held that, although MERS was not the "beneficiary" of the deeds of trust at issue in the cases, MERS may nevertheless have the power to transfer beneficial interest in the deeds of trust, and to foreclose, provided that it acted as an agent or nominee for the original beneficiary and successor beneficiaries. The Court stated that no evidence was before it as to "who ultimately holds the relevant interests in the notes and trust deeds, and whether that person and each of its predecessors in interest conferred authority on MERS to act on their behalves in the necessary respects."

The bulk of the decisions were devoted to a consideration of the meaning of the word "beneficiary" in the context of a deed of trust under Oregon law.

A number of commenters have observed that cases such as Brandrup and Niday reveal that the results that MERS was trying to achieve – lower transactional costs and great speed of execution for transfers of mortgages in the secondary market – are hampered by the vagaries of state law, which leads to numerous inconsistent judicial decisions across the U.S.Even in these two cases, the seven-member Oregon Supreme Court was itself divided five-to-two on the principal issue of the meaning of "beneficiary" in the relevant Oregon statute.

The concern regarding inconsistent results across the fifty states has led to a number of proposals to create a "national lien registry" in an attempt to create uniformity. This idea was endorsed by the Board of Governors of the Federal Reserve System (Federal Reserve) in its January, 2012 white paper entitled "The U.S. Housing Market: Current Conditions and Policy Considerations" (Fed White Paper). In the Fed White Paper, the Federal Reserve stated that:

A final potential area for improvement in mortgage servicing would involve creating an online registry of liens.Among other problems, the current system for lien registration in many jurisdictions is antiquated, largely manual, and not reliably available in cross-jurisdictional form. Jurisdictions do not record liens in a consistent manner, and moreover, not all lien holders are required to register their liens. This lack of organization has made it difficult for regulators and policymakers to assess and address the issues raised by junior lien holders when a senior mortgage is being considered for modification. Requiring all holders of loans backed by residential real estate to register with a national lien registry would mitigate this information gap and would allow regulators, policymakers, and market participants to construct a more comprehensive picture of housing debt.

Some observers have suggested that part of the task of establishing a national lien registry would involve the adoption of federal laws to provide a uniform, national set of laws governing transfers of mortgages and clear rights of nominees to initiate foreclosures. This would be in addition to the substantial technological and data requirement challenges of establishing such a system.

Many of the pieces of legislation that have been proposed in connection with the "reform" of Fannie Mae and Freddie Mac, such as the "Housing Reform and Taxpayer Protection Act of 2013" (Corker-Warner Bill) call for the establishment of a "national electronic registry system" for mortgages.Please see SFIG's June 19, 2013 Newsletter for more detailed information about the Corker-Warner Bill.

If you are interested in participating in SFIG Residential Mortgage Committee, which is considering matters such as MERS and the idea of a national lien registry, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the Brandrup decision. Click here for the Niday decision. Click here for the Fed White Paper. Click here for the Corker-Warner Bill.



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