October 23, 2013 Newsletter
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October 23, 2013
 

SFIG News

Issue Spotlight

Recent Developments

 

SFIG NEWS
SFIG TO SUBMIT CREDIT RISK RETENTION COMMENT LETTER TO REGULATORS
On October 30, 2013, SFIG will be submitting a comment letter to the Office of the Comptroller of the Currency, the Treasury Department, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development on their Notice of Proposed Rulemaking published in the Federal Register on September 20, 2013 regarding credit risk retention. The letter will reflect the perspectives of our full membership, which includes sponsors of structured finance products, investors, financial intermediaries, rating agencies and other market participants. For any questions, please reach out to Richard Johns, Sairah Burki, or Sonny Abbasi.
 

 

SFIG EXPECTS TO COMMENT ON FED’S PROPOSED LIQUIDITY REQUIREMENT RULE
On October 17, 2013, the Board of Governors of the Federal Reserve System (Federal Reserve Board) announced that it will consider a “proposed rule to introduce a quantitative liquidity requirement in the United States” (Proposed Rule) at its October 24, 2013 meeting. Among other things the Proposed Rule is expected to introduce a liquidity coverage ratio (LCR) that will test a bank’s ability to withstand a “liquidity stress” period in which the bank loses access to funding for 30 days.

All materials released by Federal Reserve Board in connection with its meeting on the Proposed Rule will be distributed by SFIG to SFIG members promptly upon availability.

SFIG expects to comment on the Proposed Rule through its Regulatory Capital and Liquidity Committee (RC&L Committee). The RC&L Committee will schedule a conference call to discuss the Proposed Rule early in the week of October 28, 2013.

If you are interested in participating in the RC&L Committee’s review of the Proposed Rule, please contact SFIG at Sairah.Burki@sfindustry.org or Richard.Johns@sfindustry.org.

Click here for announcement of the Federal Reserve Board’s October 24, 2013 meeting.
 

 

ISSUE SPOTLIGHT
THE CHINESE SECURITIZATION MARKET

Overview

Recent developments in China have caused observers to ask whether a robust securitization market may begin soon in that country.

In August of 2013, Alibaba Group, the Chinese e-commerce company, executed a Rmb 500 million (U.S. $82 million) offering of asset-backed securities. The securities were backed by short-term micro-loans that Alibaba Finance provided to clients on its e-commerce platforms.

The Alibaba transaction was undertaken using a “special asset management plan” (SAMP). SAMPs are generally thought of as being quasi-securitizations, since the “true sale” and bankruptcy remote nature of the asset pool is unclear. SAMPs tend to rely heavily on corporate guaranties and liquidity facilities.

Also in August, Chinese regulatory authorities re-committed themselves to a pilot program (Pilot Program) involving China’s “credit asset securitization” (CAS) framework. Unlike the SAMP framework, the CAS framework would result in a U.S.-style securitization that is bankruptcy remote and has familiar securitization parties (sponsor, servicer, trustee, etc.).

The Pilot Program was officially launched in February of 2012, followed by a major regulatory release in May of 2012. A number of potential securitizers prepared to participate in the Pilot Program, but progress stalled, perhaps related to changes in China’s senior leadership during the same period. Recent indications are that the Pilot Program is back on track, and could result in as many as 20 participating institutions collectively issuing up to U.S. $49 billion in asset-backed securities during the first half of 2014.

On August 28, 2013, a representative of China’s central bank, the People’s Bank of China (PBOC) issued a statement that “n order to better support economic growth, we have to deepen reform and encourage innovation. We have to speed up development of asset securitization.”

Brief History of Securitization in China

China’s original interest in securitization as a financing technique appears to have been based on a desire to find a structure capable of removing non-performing loans (NPLs) from bank balance sheets.

The desire to create the legal isolation needed for balance-sheet removal resulted in the PRC Trust Law (Trust Law), introduced in 2001. The Trust Law granted considerable flexibility in establishing trusts, and specifically allowed for the establishment of business trusts.

Following the introduction of the Trust Law, a number of NPL securitizations were undertaken, mostly by state-owned commercial banks and their associated asset-management companies.

In April of 2005, the PBOC and the China Banking Regulatory Commission (CBRC) released new regulatory measures, entitled “Administration of Pilot Projects for Securitization of Credit Assets Procedures” (Original 2005 Pilot Measures).

The Original 2005 Pilot Measures represented China’s first comprehensive attempt to create a securitization regime that was broadly consistent with U.S. and European Union standards as they existed at the time.

In November 2005, the CBRC released a more comprehensive set of standards, entitled the “Measures for the Supervision and Administration of Credit Assets of Financial Institutions” (2005 Pilot Measures).

Two prominent transactions making use of the 2005 Pilot Measures were launched in December of 2005, one by China Construction Bank and one by China Development Bank. These were considered the first Chinese securitizations that embraced international standards.

As the early signs of the financial crisis began to appear, the CBRC released a cautionary notice in February of 2008, entitled “Notice of China Banking Regulatory Commission on Further Improving the Management of Credit Assets Securitization Business” (2008 Notice). The 2008 Notice required all participating banks to:

  • pay attention to asset quality and . . . promote securitization activities in line with business strategy and management capacity,
  • sell the securitized assets “in a real sense” so as to make these assets off balance sheet and mitigate credit risk,
  • accurately judge the risk transfer and strictly abide by capital requirements,
  • strengthen risk management and internal controls “thus to ward off operational risk,”
  • work out a proper assessment of loan service performance, and
  • disclose information and protect “investors’ legitimate interests.”

However timely and sound the guidance from the 2008 Notice, it did not prevent the suspension of China’s securitization markets during the ensuing financial crisis.

As noted above, the Pilot Program was re-launched in early 2012. On May 17, 2012, the PBOC, the CBRC and the Ministry of Finance issued a “Notice of Issues Relevant to Further Expansion of the Pilot Program for Securitization of Credit Assets” (2012 Pilot Measures).

Substantive Requirements of the Pilot Measures

Collectively, the Original 2005 Pilot Measures, the 2005 Pilot Measures, the 2008 Notice and the 2012 Pilot Measures (collectively, Pilot Measures) define a securitization framework that is generally similar to that in the U.S. Specifically, the Pilot Measures provide that:

  • asset-backed securities be issued by a special purpose trust administered by an independent trustee,
  • the investors are entitled to decide “major matters that have an influence on their interests” through investor meetings,
  • the property of the special purpose trust is legally isolated from the property of both the sponsor institution and the trustee,
  • the trustee is required, without first having received a demand from the investors, to enforce representations and warranties against the sponsor and compel the repurchase or substitution of non-conforming assets,
  • the trustee may replace the servicer, subject to any contrary instructions given by the investors,
  • the final prospectus be issued at least five business days prior to settlement,
  • annual audited reports be prepared with respect to the securitization,
  • re-securitizations and synthetic securitizations are prohibited,
  • the sponsor must hold at least a 5% interest in the “minimum tranche” issued in connection with the securitization, and must hold that interest for the duration of that minimum tranche,
  • the securitization must receive ratings from at least two qualified credit rating agencies, and investors must “establish an internal credit rating system to enhance discretion over the risk profile and reduce the dependence on external rating agencies,”
  • the transaction parties (sponsor and trustee) must make “timely, accurate, truthful and complete information regarding the credit asset securitization” available as required by the investors, and
  • no single investor can own more than 40% of a securitization.

Under the Pilot Program, each sponsor’s securitization program must be specifically approved by the CBRC. Both sponsors and trustees are required to have:

  • a good social reputation and operational performance, with no “major irregularities” within the past three years, and
  • a “sound corporate governance structure,” and risk management and internal control systems.

In addition, the sponsor must have a “reasonable target and clear strategic planning for the securitization business,” and “professional . . . personnel necessary for carrying out the securitization business.”

It is also worth noting that the Pilot Measures require that a number of ongoing reports on a securitization must be filed with the CRBC. The CBRC is a “prudential regulator” to a greater extent than is the U.S. Securities and Exchange Commission, and it is where most of the required asset-backed securities periodic reports are required to be filed. Thus it may be fair to say that securitizations undertaken under the Pilot Program will be subject to more ongoing regulatory oversight than comparable transactions in the U.S.

Other provisions of the Pilot Measures require a sponsor bank to undertake a securitization in such a manner as to remove the assets from its balance sheet, and to allocate appropriate capital against any risks to the bank of the securitization structure, including the holding of retained interests.

One of the goals of the Pilot Program is to remove assets from bank and large finance company balance sheets, enabling those entities to make more loans. If successful, the Pilot Program could draw more lending back into the larger, more regulated institutions and away from the shadow banking sector. However, the Pilot Program is a purely domestic program that does not allow for cross-border securitizations. This has led some observers to note that, since banks are likely buyers of the asset-backed securities to be issued in the Pilot Program, much of what will be accomplished will simply be shifting assets among banks.

All in all, the Pilot Measures define a framework that, although perhaps not as detailed as that in the U.S. or the European Union, reflects many of the same themes and would seem broadly in line with “international standards” for securitization.

Eligible Assets for Chinese Securitizations

According to a recent report by CLSA, a prominent Asian brokerage and investment group, China is “addicted” to debt. The total debt level (government, commercial and consumer) is over 200% of China’s gross domestic product (GDP) and year-over-year debt growth for the first quarter of 2013 was 58%, compared to the first quarter of 2012.

Much of this is government debt, particularly local government debt, which represents 35% of GDP, although corporate debt and debt of state-owned enterprises are the largest components of China’s debt, together representing 115% of GDP.

Consumer debt in China is relatively modest however, accounting for only 31% of GDP. This relative low level of consumer debt has been attributed to several factors, including a general “cultural bias against debt,” as well as a lack of a “social safety net system” in China, that encourages individuals to provide their own individual “safety net” through savings.

By way of example, although the home ownership rate in China is between 85% and 90% (compared to about 65% to 70% in the U.S.), only 11% of Chinese homeowners have a mortgage (China requires a 30% to 40% downpayment for first-time homebuyers). In the U.S., 70% of homeowners have some mortgage debt.

Similarly, only 1% of urban Chinese use consumer loans to purchase consumer goods, while 47% of U.S. households have installment loans and 46% carry a credit card balance.

With respect to automobile financing, roughly 85% of new car purchases in the U.S. involve financing, while in China only 6% of car purchasers use credit in making the purchase. Meanwhile, China has become the world’s largest car sales market, with 18.1 million units expected to be sold in 2013. The comparable figures for the U.S. and Europe are 16.7 million and 12.1 million, respectively. PricewaterhouseCoopers projects Chinese auto sales will reach 27.7 million units in 2019.

Much of the new consumer debt has been originated in the so-called “shadow banking system,” including small specialty finance companies, “peer-to-peer” lending platforms and a variety of “wealth management products.”

In sum, it would appear that China’s current stock of assets eligible for securitization is heavily weighted toward non-consumer debt, particularly local government and state-owned enterprise debt. These could be securitized through CLO-type transactions, as well as NPL securitizations.

China would seem to have great potential at some point to develop a robust consumer credit securitization industry, although at present the stock of consumer debt is relatively quite low, compared to the U.S. and Europe.
 

 

RECENT DEVELOPMENTS
FEDERAL REGULATORS PROVIDE GUIDANCE ON QUALIFIED MORTGAGE FAIR LENDING RISKS
On October 22, 2013, Five federal regulatory agencies (Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency) issued a statement to address industry questions about fair lending risks associated with offering only Qualified Mortgages. Creditors have asked for clarity regarding whether the disparate impact doctrine of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, allows them to originate only Qualified Mortgages. For the reasons described in the statement, the five agencies do not anticipate that a creditor's decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution's fair lending risk.

The CFPB’s Ability-to-Repay Rule implements provisions of the Dodd-Frank Act that require creditors to make a reasonable, good faith determination that a consumer has the ability to repay a mortgage loan before extending credit to the consumer. Lenders are presumed to have complied with the Ability-to-Repay Rule if they issue Qualified Mortgages, which must satisfy requirements that prohibit or limit risky features that harmed consumers in the recent crisis.

The ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction based on characteristics including race, religion, marital status, color, national origin, sex, and age.

The agencies note the decisions creditors will make about product offerings in response to the Ability-to-Repay Rule are similar to decisions creditors have made with regard to other significant regulatory changes affecting particular types of loans. The statement counsels that creditors should continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring policies and practices and implementing effective compliance management systems.

Click here for the statement.
 

 

FHFA WANTS $1.2B LEHMAN CLAIM HANDLED OUT OF BANKRUPTCY
On October 18, 2013, the Federal Housing Finance Agency (FHFA) requested permission to transfer a $1.2 billion dispute with Lehman Brothers Holdings Inc. from bankruptcy court to a federal district court, claiming that the matter is centered on a federal nonbankruptcy statute. In addition to its bid to have the issue handled by a nonbankruptcy judge, the FHFA is also asking the bankruptcy court overseeing Lehman’s remaining bankruptcy proceedings to stay this matter until a ruling is made on the FHFA’s request.

In court papers, the FHFA argues that Lehman’s alleged failure to pay back $1.2 billion, plus interest, on loans issued by Freddie Mac a month before it entered bankruptcy in September 2008 entitle it, as Freddie Mac’s conservator, to a priority claim to recover that amount. The FHFA says that it is authorized under the Housing and Economic Recovery Act of 2008 (HERA) to avoid and recover any transfers by a debtor that hindered the repayment of an entity regulated by the FHFA and that those rights are superior to any other party’s rights in a bankruptcy proceeding. The FHFA contends that since the disputes rest on HERA, a federal nonbankruptcy statute, the U.S. Bankruptcy Code requires that the matter be removed from bankruptcy court and handled by a federal district judge.

Freddie Mac issued loans to Lehman in August of 2008 that were based on information the investment firm provided with respect to its creditworthiness and ability to repay that the government-run enterprise now claims was false, according to the FHFA’s motion. The FHFA asserts that Lehman made transfers to third parties “with the intent” of hindering, delaying or defrauding Freddie Mac’s repayment. Lehman knew that it was facing a liquidity crisis when it took out the loans, the FHFA contends. Lehman has not disputed that Freddie Mac holds a $1.2 billion unsecured claim, but holds that if it were allowed priority treatment, it would harm thousands of creditors who are awaiting payment on their claims.

Lehman first agreed to hold the $1.2 billion in reserves for Freddie Mac in late 2011 and later agreed to file away more than $5.1 billion in cash for claims, some of which stem from derivatives contracts, asserted by federal loan mortgage guarantor Fannie Mae.

The case is In re: Lehman Brothers Holdings Inc. et al., case number 1:08-bk-13555, in the U.S. Bankruptcy Court for the Southern District of New York.
 

 

FED TO PROPOSE NEW BANK LIQUIDITY REQUIREMENT AT OCTOBER 24 MEETING
On October 17, 2013, the U.S. Federal Reserve (Fed) said it plans to propose new liquidity requirements for U.S. banks during its October 24, 2013 board meeting. The liquidity rules come as part of U.S. implementation of Basel III. Regulators have already approved rules to implement the portion of the agreement that governs bank capital.

Click here for the Fed Final Rule regarding bank capital.
 

 

CFTC ISSUES NO-ACTION RELIEF REGARDING SWAP TRANSACTIONS BY CERTAIN NON-U.S. PERSONS
On October 17, 2013, the U.S. Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) issued a no-action letter that provides relief for certain non-U.S. persons that are not guaranteed or conduit affiliates of U.S. persons for purposes of the de minimis calculation.

The relief provided in the letter states that DSIO will not recommend that the CFTC take an enforcement action against any non-U.S. person that is not a guaranteed or affiliate conduit of a U.S. person for failure to include, in its de minimis calculation for purposes of the swap dealer definition under CFTC Regulation 1.3(ggg)(4), a swap executed with a guaranteed affiliate of a U.S. person on or before the date such non-U.S. person is required to register with the CFTC as a swap dealer under CFTC Regulation 1.3(ggg)(4)(iii), provided that (1) the guaranteed affiliate is affiliated with a swap dealer registered with the CFTC; (2) the guaranteed affiliate has crossed the de minimis threshold; and (3) the guaranteed affiliate represents in writing, with a copy thereof delivered to DSIO no later than 48 hours after execution of such swap (using the email address dsionoaction@cftc.gov0, that (a) such guaranteed affiliate intends to register as a swap dealer; and (b) the date its registration is required under CFTC Regulation 1.3(ggg)(4)(iii).

Click here for the no-action letter.
 

 

STUDY SHOWS THAT ONE IN FIVE MORTGAGES WOULD NOT QUALIFY FOR SAFE HARBOR UNDER DODD-FRANK

On October 17, 2013, ComplianceEase announced that it had analyzed the effects that the QM rules will have on current mortgage loans audited by ComplianceAnalyzer, its patented automated compliance solution. It concluded that more than one in five loans originated today would not qualify for the QM Safe Harbor.

Highlights from ComplianceEase’s analysis include the following:

  • More than half of such loans have fees that exceed the new 3% points and fees threshold;
  • Loans with fees that exceed the 3% threshold typically exceed it by nearly $1,500; and
  • The rest have APRs that are too high to qualify for the safe harbor classification.

 

 

CFPB REPORT HIGHLIGHTS PRIVATE STUDENT LOAN PAYMENT PROCESSING PITFALLS
On October 16, 2013, the Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman released a report (CFPB Student Loan Report) analyzing complaints the CFPB has received from private student loan borrowers. According to the CFPB Student Loan Report, private student loan borrowers face payment processing pitfalls that can lead to increased costs, prolonged repayments, and harm to their credit profiles.

The CFPB Student Loan Report analyzed more than 3,800 private student loan complaints, comments, and other input from borrowers between October 1, 2012 and September 30, 2013. The most common complaints submitted to the CFPB were about payment processing pitfalls when consumers try to take control of their loans, including when borrowers attempt to pay off their loans early or pay them off in a certain sequence. The CFPB Student Loan Report highlights include:

  • Prepayment Stumbling Blocks: Since options to refinance high-rate private student loans are limited, many consumers attempt to pay off their loans in order to reduce the amount of interest owed over the life of the loan. But many consumers express confusion about how to pay off their loans early. For example, borrowers complained that payments in excess of the amount due are applied across all their loans, not the highest-interest rate loan that they would prefer to pay off first.
  • Partial Payment Snags: When borrowers have multiple loans with one servicer and are unable to pay their bill in full, many servicers instruct borrowers to make whatever payment they can afford. Many complaints described how servicers often divide up the partial payment and apply it evenly across all of the loans in their account. This maximizes the late fees charged to the consumer and it can exacerbate the negative credit impact of a single late payment.
  • Servicing Transfer Surprises: When borrowers’ loans are transferred between servicers, borrowers say they experience lost paperwork, processing errors that result in late fees, and interruptions of routine communication, such as billing statements. Consumers complained that payment-processing policies can vary depending on the servicer. And, consumers said when they make decisions on the previous servicer’s practices, they can get penalized.

The Dodd-Frank Act established an ombudsman for student loans within the CFPB to assist borrowers with private student loan complaints. The CFPB Student Loan Report, which was mandated by Congress, is the second issued by the ombudsman and was submitted to the Director of the CFPB, the Secretary of the Treasury, the Secretary of Education, and Congress.

The CFPB currently has the authority to supervise student loan servicing practices at large depository institutions. In March of 2013, the CFPB proposed a rule to define nonbank larger participants in the student loan servicing marketplace that would extend the Bureau’s supervisory authority to certain nonbank student loan servicers.

Click here for the report.
 

 

CFPB CONSUMER ADVISORY
On October 16, 2013, the Consumer Financial Protection Bureau (CFPB) issued a consumer advisory (CFPB Consumer Advisory) to help borrowers instruct student loan servicers on how to process such borrowers’ payments. If a borrower has several loans with the same loan servicer and they do not provide instructions on how to process the money sent in each month, the servicer generally decides how to allocate the payments. The CFPB included sample instructions for a student loan servicer instructing them to always direct any extra payments toward the highest-rate loan.

Click here for the Consumer Advisory.
 

 

SALLIE MAE 3RD-QUARTER NET UP 38% ON LOWER LOAN LOSS PROVISIONS
On October 16, 2013, Sallie Mae released its third-quarter 2013 financial results that included an 11% increase in loan originations compared to the year-earlier ($252 million in the year-earlier period and $187 million in the second quarter) and a decline in private education loan charge-off rates to 2.6% from 3.2%, the lowest level in five years. Sallie Mae's third-quarter earnings grew 38%. Overall, Sallie Mae reported a profit of $260 million, up from $188 million a year earlier.

Sallie Mae originates, finances and services private education loans and also services loans for third parties including the federal government. Sallie Mae, earlier this year, unveiled a plan to split itself into two firms--an education-loan manager and a consumer banking operation. The education-loan management business will own 95% of Sallie Mae's assets. As of September 30, 2013, the company held $106 billion of FFELP loans, compared with $128 billion as of September 30, 2012. Approximately $12 billion of the $22 billion decline in FFELP loans is a result of the sales of the residual interests in FFELP securitization trusts earlier in the year.

During the third-quarter of 2013, Sallie Mae issued $1.7 billion in FFELP asset-backed securities (ABS), $624 million in private education loan ABS and $1.25 billion in unsecured bonds. In addition, the company closed on a $1.1 billion asset-backed borrowing facility that matures on August 15, 2015. This facility was used to fund the call and redemption of SLM 2009-D Private Education Loan Trust ABS.

Click here for Sallie Mae’s third quarter financial results.
 

 

BCBS PUBLISHES UPDATED RCAP METHODOLOGY
On October 16, 2013, the Basel Committee on Banking Supervision (BCBS) published an updated methodology for its jurisdiction-specific Regulatory Consistency Assessment Programme (RCAP). RCAP is intended to promote full and consistent implementation of the Basel framework and highlight the potential of any gaps found in the regulatory regime. The updated methodology includes a framework for assessing Basel implementation, and provides guidance on RCAP's methodologies. The newest version also includes the RCAP Questionnaire, which can be used by jurisdictions to assess the consistency of their rules with the Basel capital standards.

Click here for the updated methodology.

Click here for the RCAP Questionnaire.
 

 

HUD RELEASES AUGUST 2013 HAMP SERVICER PERFORMANCE REPORT
On October 16, 2013, the Department of Housing and Urban Development and the Department of the Treasury released the Making Home Affordable (MHA) Program’s Home Affordable Modification Program (HAMP) Servicer Performance Report through August of 2013. The MHA HAMP report this month identifies an average of 51.5% back-end debt-to-income ratio after permanent modifications through August of 2013, a slight decrease from July’s 51.6% ratio.

Click here for the report.
 

 

BANKS NEARING COMPLETION OF SETTLEMENT REGARDING CONSUMER RELIEF OBLIGATIONS
On October 16, 2013, Joseph A. Smith, Jr., Monitor of the National Mortgage Settlement filed with the U.S. District Court for the District of Columbia interim credit reports on Bank of America, Chase, Citi and Wells Fargo. These reports cover credited consumer relief and refinancing conducted through December 31, 2012 and demonstrate each bank’s progress toward its total consumer relief obligations.

Click here for a summary report.

Click here for a fact sheet.
 

 

BONDHOLDERS APPEAL CALIFORNIA EMINENT DOMAIN CASE DISMISSAL
On October 16, 2013, bondholders of mortgage loans that Richmond, California has threatened to seize through eminent domain asked a federal appeals court to revive their lawsuit against the city. Bank trustees for investors including BlackRock Inc., Pacific Investment Management Co. and DoubleLine Capital LP are appealing U.S. District Judge Charles Breyer’s September 16, 2013 ruling dismissing the case. They are asking a federal appeals court in San Francisco to review the ruling, according to the filing.

Judge Breyer ruled that the lawsuit had to be dismissed because Richmond city council members had not yet voted to proceed to state court and file an eminent domain case to seize the loans. The trustees’ claims depend on “future events that may never occur,” Breyer said in dismissing the case.

Bank trustees sued in August of 2013 alleging constitutional violations in Richmond’s plan to use eminent domain to seize more than 600 loans on which the amount owed is more than the value of the property and refinance them to give homeowners built-in equity. Richmond offered to purchase the nondelinquent, underwater mortgages owned by private trusts for 80% of the appraised home value. The plaintiffs argue that the appraised home values as well as the percentage of appraised home value offered are too low. The city intends to use private investment capital from its partner, Mortgage Resolution Partners LLC (MRP), to finance purchases from approximately 31 trustees. If trustees refuse the city’s offer, the city’s plan calls for the use of eminent domain to force a sale.

Richmond Mayor Gayle McLaughlin and lawyers for MRP say the plan will prevent foreclosures and blight. Lawyers for the trustees allege that majority of the targeted loans are still performing, and the plan will harm investors and disrupt the U.S. housing market if the housing plan is allowed to proceed and other communities follow suit. MRP is promoting this program to several other cities.

Click here for the filing in the federal appeals court.
 

 

E.U. TAKES FINAL STEP ON UNIFIED BANK REGULATION
On October 15, 2013, the European Union took another step to shore up its banking sector after Britain agreed to new rules placing many of the largest lenders in the euro area under the supervision of the European Central Bank (ECB).

The British decision, which was announced at a monthly meeting of the EU’s finance ministers, clears the way for the ECB to take over as the single bank supervisor late next year. Britain’s assent is the final hurdle for the supervisory legislation, which will go into force once it is published in the EU’s official register.

At their meeting on October 15, 2013, the finance ministers were still divided on whether to create a single body that would decide when to shut down, or save, failing banks, and whether some of the costs should be shared among euro area countries. At the meeting, ministers focused on putting together a deal by December of 2013 that would outline procedures to be used for dealing with failing banks. The finance ministers also need to agree on a financial safety net that could be tapped until a formal bank crisis fund, which would rely on contributions from financial institutions themselves, is established.
 

 

OCC, FED PUBLISH RISK-BASED AND LEVERAGE CAPITAL FINAL RULE IN FEDERAL REGISTER
On October 11, 2013, the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (FRB) published a final rule (Final Rule) in the Federal Register that replaced their existing risk-based and leverage capital rules. The Final Rule published in the Federal Register is the official memorialization of the Final Rule announced by the OCC and FRB on July 3, 2013. The Final Rule is consistent with the interim final rule published by the Federal Deposit Insurance Corporation on July 9, 2013. The Final Rule establishes a new regulatory capital framework that incorporates revisions to the Basel capital framework, including Basel III and other elements. The Final Rule strengthens the definition of regulatory capital, increases risk-based capital requirements, and amends the methodologies for determining risk-weighted assets. The Final Rule applies to all national banks and federal savings associations. Subject to various transition periods, the Final Rule is effective for advanced approaches banks on January 1, 2014, and for all other banks on January 1, 2015.

Highlights of the Final Rule include the following:

  • Implements strict eligibility criteria for regulatory capital instruments.
  • Revises the Prompt Corrective Action framework to incorporate new regulatory capital minimum thresholds.
  • Adds a new common equity tier 1 capital ratio of 4.5% and increases the minimum tier 1 capital ratio requirement from 4.0% to 6.0%.
  • Improves the measure of risk-weighted assets to enhance risk sensitivity.
  • Retains the existing regulatory capital framework for one- to four-family residential mortgage exposures.
  • Allows banks not subject to the advanced approaches rule to retain the existing treatment for accumulated other comprehensive income through a one-time election.
  • Allows certain depository institution holding companies to continue to include in tier 1 capital previously issued trust preferred securities and cumulative perpetual preferred stock.
  • Limits capital distributions and certain discretionary bonus payments if banks do not maintain a capital conservation buffer of common equity tier 1 capital above minimum capital requirements.
  • Removes references to credit ratings consistent with the Dodd-Frank Act and provides alternative measures of creditworthiness.
  • Establishes due diligence requirements for securitization exposures.

To aid smaller, less complex banks with their Final Rule compliance, the OCC published the New Capital Rule Community Bank Guide and the New Capital Rule Quick Reference Guide for Community Banks.

Click here for the Final Rule.

Click here for the New Capital Rule Community Bank Guide.

Click here for the OCC’s New Capital Rule Quick Reference Guide for Community Banks.

Click here for a summary from SFIG’s July 10, 2013 newsletter comparing the Final Rule to the proposed rule and identifying the key industry comments that the regulators did not address in the Final Rule.
 

 

BANKS PRESSURE CAR DEALERS ON LOAN PRACTICE BECAUSE CFPB PRODS LENDERS TO APPLY ANTIDISCRIMINATION TESTS
Banks, responding to demands from the Consumer Finance Protection Bureau (CFPB), are increasing pressure on auto dealers to prove that they are not marking up the cost of auto loans to women and minorities in a manner inconsistent with fair-lending laws. In recent months, thousands of dealers have received letters from banks warning them of the need to comply with fair-lending laws. In connection with arranging an auto loan, the dealer often marks up the interest rate on such loan as compensation—a practice called dealer markup or dealer reserve.

The banks’ letters are setting off a bigger battle in Washington over the role of the CFPB, which was prohibited from regulating auto dealers at its creation in 2010. The CFPB oversees banks and other lenders, and in March of 2013, the CFPB warned banks that they had to ensure that their auto loans complied with fair-lending laws. The CFPB’s move has banks actively questioning dealers about their lending practices.

Click here for the CFPB Bulletin 2013-02: Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.
 

 

IMF GLOBAL FINANCIAL STABILITY REPORT STATES THAT MORTGAGE REITS POSE DANGERS REQUIRING MORE OVERSIGHT
On October 9, 2013, the International Monetary Fund (IMF) released its Global Financial Stability Report (Global Financial Stability Report).

The Global Financial Stability Report stated that regulators should boost oversight of the largest real-estate investment trusts (REITs) that use borrowed money to invest in mortgage-backed securities because rising interest rates may push the firms into asset sales that destabilize markets. The report noted that a version of that scenario occurred during the rise in rates that began in May of 2013. The Global Financial Stability Report noted that further interest rate increases may lead to a more destabilizing unwinding of positions, with a surge of a 0.5 percentage point or more reducing the portfolio values at the biggest mortgage REITs enough to generate at least temporary dislocations in the MBS market.

The Global Financial Stability Report noted that with the amount of repurchase agreement (repo) financing used by the two largest mortgage REITS comparable to that of Lehman Brothers Holdings Inc. before its 2008 collapse, the mortgage REITs point to a microcosm of fragilities in the shadow banking system that deserve closer monitoring. According to the report, the mortgage REIT industry’s reliance on short-term loans to invest in government-backed mortgage securities means sales as such mortgage securities’ prices decline could create a fire sale risk spiral. Mortgage securities sales may reduce the value of holdings among other investors (such as banks) and potentially cause declines big enough to “induce repo lenders to pull back funding or raise rates more broadly (or both), with negative consequences for other leveraged short-term borrowers,” the IMF report noted.

“Sizable disruptions in secondary mortgage markets against a backdrop of rising mortgage rates could also have macroeconomic implications, jeopardizing the still-fragile housing recovery,” according to the report. Increased oversight of mortgage REITs and firms involved in the repo market that they turn to for financing “would help reduce the risk of a cascading failure of counterparties” noted the report. A review of repo “haircuts,” or down payments, would be “desirable,” along with greater disclosure, according to the IMF report. The report stated that authorities also “could consider changing the exemption status for certain” mortgage REITs, or label the largest as systemically important and in need of more oversight.

Click here for the Global Financial Stability Report.
 

 

UPCOMING SFIG EVENTS

Fall Symposium

A reminder that SFIG's Fall Symposium will be held on Tuesday, October 29, from 5:00 to 8:00 p.m., at the offices of Cadwalader, Wickersham & Taft LLP, located at One World Financial Center in New York City. The event, open to both SFIG members and non-members, is complimentary and will be followed by a cocktail reception. Please note that a government- issued ID will be required when you check-in.

Please click here to register for the Symposium. The agenda is below. If you are unable to attend, we will be providing a webinar service; we will provide details of how to register for this shortly. Please forward this e-mail to any colleagues who might be interested in the event but may not be on SFIG’s distribution. Registration will close at 12pm EST, on Wednesday, October 23. Depending on the level of pre-registrations, walk-ups may be accommodated the day of the event.

Please note that unfortunately, SFIG will not be able to accommodate members of the press at this event.

Agenda

5.00pm – 5:30pm: Registration

5.30pm – 5:45pm: Brief Discussion of the US LCR Proposals by Reginald Imamura, Chairman of SFIG

5:45pm – 6:05pm: An Economist’s View on Another Government Shutdown and Potential Debt Ceiling Breach by Alec Phillips, U.S. political economist in Global Investment Research at Goldman Sachs

6:05pm – 7:05pm: Risk Retention Proposals and Reactions by a panel of experts

7.05pm -8.05pm: Cocktail reception

ABS Vegas 2014 – January 21-24, Las Vegas, Nevada.

Momentum is continuing to build. We plan to announce the preliminary schedule and speaker nomination process at the end of the week. SFIG is now accepting sponsorship contracts for this conference. If you are interested, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for more information about the conference.

Click here for the latest list of over 455 confirmed investor and issuer attendees.

Click here for the list of more than 75 conference sponsors.

 

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.

SFINDUSTRY.ORG

Contact Information

For all matters, please contact Richard Johns.

For Investor related matters, please contact Kristi Leo.

For ABS Policy related matters, please contact Sairah Burki.

For MBS Policy related matters, please contact Sonny Abbasi.

 

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