Turning a largely but not entirely deaf ear to warnings about over-regulating the financial industry, the House of Representatives has approved sweeping changes in the oversight of financial institutions.
What the “Wall Street Reform and Consumer Protection Act” will look like in final form is far from clear. The Senate has not yet begun consideration of its version of the bill, which will have to be reconciled with the House measure. And the Obama Administration reportedly is unhappy with some of aspects of the legislation the House has approved. Still, the bill’s supporters have hailed it as the most significant overhaul of bank regulation since the Great Depression –motivated, they note, by a financial meltdown that brought the world close to a repeat of that economic disaster.
“We have a set of rules in place that will allow the most productive parts of the free market economy and particularly the financial system, to play the role they should play, but with much less chance of abuse,” Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee and the primary architect of the House bill, said after its passage.
Critics, including Republicans (who voted against the bill in a block) and some moderate Democrats, complained that it will unduly and dangerously restrict credit, discourage financial innovation and undermine the economic recovery. Liberal Democrats and consumer advocates, who supported the reforms, complained that key restrictions and consumer protections were watered down during the negotiation process.
Banking industry lobbyists weren’t able to block all the provisions they opposed, but they made significant dents in some of them. A prime target was the Consumer Financial Protection Agency, which assumes the Federal Reserve’s responsibility for enforcing existing financial consumer protection measures and developing new ones.
Democrats defeated an amendment bankers sought that would have eliminated the agency and most of its authority, but they agreed to exempt credit unions and small banks (with assets of less than $10 billion) from the agency’s examination oversight, although those institutions will still be subject to the agency’s rulemaking authority.
In another major concession, the Democratic leadership scuttled a provision that would have overturned the federal preemption authority of bank regulators, accepting an amendment affirming the Comptroller of the Currency’s power to preempt any state law “that “significantly” or “materially” interferes with the business of banking.
Banking industry lobbyists also succeeded in blocking an effort to give bankruptcy judges the authority to “cram down” or restructure the terms of residential mortgages.
But despite those and other concessions, the House bill includes many changes bankers don’t like, primary among them, provisions that:
- Establish and assign significant power to a new Consumer Financial Protection Agency.
- Give bank regulators the authority to break up otherwise healthy financial institutions if they think those institutions pose a threat to the financial system.
- Give the Fed systemic risk oversight over financial institutions.
- Empower regulators to ban incentive pay that encourages excessive risk-taking by financial institutions.
- Require banks with more than $50 billion in assets to pay larger supervisory fees to finance a special fund that will cover the failure of large and “systemically important” financial institutions.
- Regulate the derivatives markets.
- Allow shareholders to cast advisory votes on executive compensation packages.
The bill’s key provisions target regulatory gaps that, many industry analysts believe, created an almost fatal fault line in the international financial infrastructure.
“This bill puts the referees back on the field,” Rep. Steny Hoyer (D-MD), the House Majority Leader, said during the floor debate. “We are sending a clear message to Wall Street Speaker of the House Nancy Pelosi (D-CA), added. “The party is over. Never again.”
REVERSE MORTGAGE GUIDANCE
Reflecting growing concern about abusive practices in the origination of reverse mortgages, the Federal Financial Institutions Examination Council (FFIEC) is proposing guidance to ensure border protections for borrowers and to help lenders avoid the legal, compliance, and reputation risks these products can create.
Reverse mortgages, “used appropriately,” could become an important and effective tool for addressing the credit needs of an aging population, the guidance acknowledges. But the complexity of the loans creates the potential for abuse, making it essential, regulators believe, to ensure that borrowers understand the loans and receive the information they need to make informed and appropriate decisions. The proposed guidance emphasizes in particular the need for borrowers to obtain adequate consumer counseling, and the need for lenders to adopt policies that prohibit “conflicts of interest and abusive practices.”
The guidance would specifically prohibit lenders from making approval of a reverse mortgage contingent on the purchase of another financial product and would direct lenders to avoid compensation policies that provide “inappropriate incentives” encouraging loan officers or third parties to originate reverse mortgages. The guidance also emphasizes the need for “clear and conspicuous” disclosure of critical information to borrowers and warns that regulators “will evaluate potentially misleading marketing materials and take appropriate action” to address any violations of the Federal Trade Commission Act, barring unfair and deceptive financial practices.
The FFIEC issues joint guidance on behalf of the four federal bank regulators (the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency and the Office of Thrift Supervision) and the National Credit Union Administration, applicable to the institutions those agencies regulate. The reverse mortgage guidance covers both Home Equity Conversion Mortgages (HECMs) insured by the Federal Housing Administration (FHA), which represent the lion’s share of the reverse mortgage market, and proprietary loans that are not federally insured and are not covered by the FHA’s rules restricting origination costs and mandating a number of consumer protections.
For that reason, the guidance says, “lenders offering proprietary products should be especially diligent regarding effective compliance risk management.” The guidance specifically directs institutions offering proprietary products “to follow or to adopt as appropriate relevant HECM requirements in the general areas of mandatory counseling, disclosures, affordable origination fees, restrictions on cross-selling of ancillary products and reliable appraisals.” Additionally, the guidance directs institutions to “take appropriate steps” to ensure that reverse mortgage borrowers are capable of paying their property taxes and maintaining homeowners’ insurance, noting that failure to do so could trigger a foreclosure.
Regulators also make it clear that while they are concerned about reverse mortgages generally, they are particularly concerned about the proprietary products in the market. “Depending on how they are structured,” the guidance notes, “proprietary reverse mortgage products may contain a higher degree of risk than HECMs. Therefore, to address these risks effectively, proprietary products may warrant careful scrutiny under the principles, considerations and risks” outlined in the guidance.
Reverse mortgages have also been attracting Congressional attention, most recently in the floor discussion preceding House approval of the financial regulatory reform legislation. (See related item.) In a 277-149 vote, legislators approved an amendment introduced by Rep. Jan Schakowsky (D-IL), authorizing the new Consumer Financial Protection Agency the reform bill creates to monitor and regulate the practices of reverse mortgage lenders. As the population ages, Schakowsky noted, “many seniors are turning to reverse mortgages. We must do everything in our power to ensure the fidelity of the system and shield our parents and grandparents from being cheated or misled.”
ET TU, PAUL?
Although bankers were hardly pleased when President Barack Obama called them “fat cats,” they weren’t all that surprised by the Presidential expression of the public anger against the industry that many Americans blame for the financial meltdown and the economic recession it triggered. But industry executives were stunned by the tongue-lasing former Federal Reserve Chairman Paul Volcker delivered recently at an international banking conference, where he told bankers, among other things, that the financial innovations of which they are so proud have been essentially worthless.
“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth ¾ one shred of evidence,” Volcker, who is now chairman of President Obama’s Economic Advisory Board, fumed at a conference focusing on financial regulation.
Volcker wasn’t happy about trends in that area, either, as he blasted banks for failing to recognize the link between outsized executive compensation and excessive risk-taking and for opposing regulations to curb practices that contributed to the near collapse of the international financial structure. “There is a lot of evidence that financial weaknesses brought us to the brink of a Great Depression,” Volcker said. But the changes bankers and their regulators have proposed or are willing to accept are the equivalent of “a dimple” on a mountainside, Volcker complained.
Obama’s swat at bankers, delivered before Volcker’s, targeted both their failure to increase lending to small business and their opposition to the regulatory reform legislation Congress has been considering. (See related item ).
“I made very clear that I have no intention of letting [industry] lobbyists thwart reforms necessary to protect the American people,” Obama told reporters after meeting with senior executives representing 12 of the nation’s largest financial institutions.
Some participants in that meeting, including Bank of America and Wells Fargo, immediately pledged to boost their small business lending. Industry representatives also indicated that they would take steps to support legislative proposals that industry lobbyists have been working frenetically to dilute. Talking to reporters after meeting with President Obama, Richard Davis, president and chief executive of U.S. Bancorp, said bank CEOs see “a disconnect” between their intentions and the actions of lobbyists representing their institutions.
That comment struck consumer advocates and legislators who support regulatory reform as somewhat disingenuous. One unidentified Congressional aide told reporters, “Reading the public statements and Congressional testimony of these bank executives, it’s hard to see much distance between them and their lobbyists."
FILL IN THE BLANK
American consumers in financial trouble will do anything to____________________. If you thought “save their home” should complete that sentence, you would have been absolutely right five years ago, but not today.
Consumers responding to a recent survey asking about their financial priorities ranked making their credit card payments ahead of paying their mortgages ¾ a dramatic departure from past surveys, in which mortgage payments always ranked first. Two trends explain that shift, according to Nancy Stahl, editor of Cardbeat, a syndicated market research report published by Auriemma Consulting Group, which conducted the study.
The first trend: Credit has become tighter and underwriting standards have become more restrictive as lenders have become more risk averse. Many consumers, especially those struggling with job losses or reduced incomes, are using their credit cards as a “financial lifeline” keeping them afloat, Stahl said. The second trend: Many homeowners are under water on their mortgages and see no likelihood of recovering any time soon. Assuming they will lose their homes to foreclosure anyway, Stahl says, these borrowers are more concerned about maintaining their credit cards.
“Intense media coverage of the housing crisis and of legislative efforts to assist homeowners who fall behind may be swaying borrowers toward the conclusion that it is more important to be current on their credit card than on their mortgage,” she suggested.
The Auriemma study highlights what some analysts see as a fundamental shift in consumer attitudes with sweeping implications for the economy. A survey of affluent consumers conducted last month by the Harrison Group, a market research firm, found that nearly half fear they could suffer serious financial setbacks in the future. That concern, which appears to be widely shared across the income spectrum, is making people more cautious about their finances — less inclined to spend money and more inclined to save it.
Although the recession appears to be ending, a Wall Street Journal article reporting on changing consumer attitudes noted, “businesses ranging from shoemakers to financial services to luxury hotels don't expect American consumers to return to their spendthrift ways anytime soon. They see consumers emerging from the punishing downturn with a new mind-set: careful, practical, more socially conscious and embarrassed by flashy shows of wealth. Much as the 1930s shaped the spending habits of an entire generation,” the Journal reported, “many companies now anticipate a shift in consumer behavior that persists even after jobs and growth get back closer to normal.”
"We seem to be at a cultural inflection point that we haven't seen since World War II," Jim Taylor, vice chairman of market researcher the Harrison Group, who was quoted in the article, noted. "People are getting used to being careful,” he added, “and I don't know how you undo that."
BETTER AND WORSE?
Reading recent news reports, you might be forgiven for concluding that mortgage insurance companies are a bit schizophrenic.
Two weeks ago, an American Banker article noted with concern that insurers were rejecting record numbers of claims on defaulted loans “compounding the pain that banks and other lenders have felt from the housing crisis.” Reflecting continuing concern about declining home values and deteriorating credit quality, these mandatory buybacks of failed loans are straining bank balance sheets and impeding their recovery, the article suggested.
But now comes another report, this one considerably more upbeat, from the Wall Street Journal, indicating that mortgage insurers are actually beginning to feel better about the real estate outlook and are easing the restrictive underwriting requirements they had adopted in markets they deemed to be particularly vulnerable. In one example, insurers who had been requiring borrower credit scores of at least 700 for low down payment (5 percent) loans, in targeted markets, will now accept scores as low as 680.
Many companies are also reducing the number of markets on their “at risk” list, expanding financing opportunities for home buyers there.
Analysts say the companies are motivated not only by their belief that market conditions are improving, but also, and perhaps more, by a fear of losing market share as more borrowers, unable to qualify for conventional mortgages, have been turning to loans insured by the Federal Housing Administration.
“To have any presence in the mortgage market,” Guy Cecala, editor of Inside Mortgage Finance, told WSJ, “mortgage insurers have to be more flexible.”
