Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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The momentum driving legislation targeting abusive credit card practices, which seemed to be lagging in the Senate, has accelerated again on the strength of a strong public push from the White House. Inviting executives from the major credit card issuers to discuss the issue with him, President Barack Obama told them, in so many words, “Cut it out.” What he actually said: “The days of any time, any reason rate hikes and late fee taps have to end.”

While indicating his willingness to listen to industry concerns, Obama made it clear that he generally supports pending legislation that would curb common industry pricing and marketing practices, among them: Sharp, sudden, and unannounced increases in interest rates triggered by over-limit charges, late payments, and defaults on unrelated credit accounts.

“No more fine print, no more confusing terms and conditions,” Obama told the 13 industry executives attending the meeting he called at the White House. “We want clarity and transparent from here on out.”

The same day the President was meeting with, and pressuring, the industry executives, Senators Christopher Dodd (D-CT), chairman of the Senate Banking Committee, and Chuck Schumer (D-NY), released the text of a letter they have sent to Federal Reserve Chairman Ben Bernanke, urging the agency to use its emergency powers to implement new rules barring unfair and deceptive credit card practices immediately, instead of making implementation effective, as currently planned, in July of 2010. (The regulatory agencies have recently issued for public comment proposed clarifications in those rules. See related item below.)

“Credit card providers have been aggressively raising rates on consumers to avoid the ramifications of this rule when it goes into effect next year,” the senators wrote. Imposing rate hikes in this manner, they said “clearly violates the spirit and intention of the rules, even if the delayed implementation date has the effect of making such behavior illegal.”

The House of Representatives meanwhile, is poised to act this week to approve the “Credit Cardholder’s Bill of Rights.” Lawmakers are expected to amend the bill to include some changes sought by President Obama, among them, provisions that would:

  • Require issuers to apply payments above the minimum to higher-rate balances (the legislation approved by the House Financial Services Committee requires them only to apply payment proportionally across balances subject to different rates);
  • Give issuers somewhat more flexibility to apply rate increases to existing balances;
  • Require issuers to disclose the total amount consumers would pay if they make only minimum payments.
  • Before reporting the bill favorably, the Financial Services Committee approved a change sought by Rep. Carolyn Maloney (D-NY), the bill’s sponsor, that would make one provision – the 45-days advance notice of a rate increase on future charges – effective 90 days after enactment. All other provisions of the bill would take effect simultaneously with the Fed’s rules, in July of next year.

Maloney’s original bill called for the earlier effective date, but legislators were persuaded by the industry’s arguments that issuers need more time to make the changes in policies and procedures required to comply with the new rules.

The Senate bill, sponsored by Sen. Dodd and approved recently (and narrowly) by the Senate Banking Committee, retains an earlier implementation date (nine months after enactment) and goes beyond the House bill in other respects., banning penalty fees that are not justified by a company’s direct costs, limiting their ability to impose higher rates on “high-risk” borrowers, and restricting card solicitations aimed at young consumers.

Industry executives continue to warn that proposed restrictions will increase the cost of credit and limit its availability, but given moves by issuers to boost interest rates and reduce or eliminate existing credit lines, Sen. Dodd told reporters recently, “I don’t know how much more costly [credit cards] can be.”


As credit card freeform legislation moves toward a vote in the House (see related item), the federal regulatory agencies have issued for public comment proposed clarifications of the Federal Reserve’s new regulations barring unfair and deceptive” credit card practices. The proposal, open for a 30-day comment period, is intended “to facilitate compliance” with the rules, which become effective in July of next year. The proposed language clarifies two points:

The rules prohibiting lenders from increasing rates on existing card balances will apply to balances when an account is closed, the balance is transferred to another account issued by the same institution, or acquired by another institution. “An institution would not be permitted to increase the rate on a credit card balance because the account has been closed,” the new language specifies.

The rules apply to “deferred interest” programs offered by lenders and retailers. The terms governing interest charges on purchased made under these programs “cannot be changed through a ‘hair trigger’ or ‘universal default’ rate increase,” the clarification explains.


The Supreme Court heard arguments this week in a dispute that could produce a decision that narrows federal authority to preempt state regulation of federally-chartered banks and credit unions.

This legal battle – the latest in a series of clashes over the preemption authority of the Comptroller of the Currency – began when Elliot Spitzer, then the attorney general of New York, tried to investigate the mortgage lending practices of several large national banks. The Comptroller interceded, saying national banks were not subject to state scrutiny. A District Court and the U.S. Court of Appeals for the Second Circuit agreed, rejecting Spitzer’s contention that the OCC’s broad interpretation of the preemption authority established in the National Bank Act improperly tilted the balance of power between the state and federal governments.

Cuomo inherited the case and sought the Supreme Court review. Although the High Court considered the preemption question just two years ago (in Watters v. Wachovia) and decided it in favor of federal regulators, the court’s decision to revisit the question has led some analysts to speculate that the justices may want to rethink the court’s position. That the review comes in the middle of a severe economic crisis, for which public opinion hold banks at least partly responsible, is making some industry executives uncertain and nervous about how the court is going to rule. Their fear: If the court didn’t plan to overturn its Watters decision, why did it agree to hear a case that raises the same preemption issues?

One answer may be that this case differs from Watters in one key respect. In Watters, the court ruled that federal law preempted a state law requiring the mortgage banking subsidiaries of a national bank to obtain a state license and submit to examinations by state regulators. In the current case, the state law at issue – New York’s fair lending law – is not preempted. The question is whether the state has the authority to enforce its law against national banks.

The OCC contends that the preemption theory applies. “Even when a state fair-lending statute is not preempted because its substantive requirements are not meaningfully different from those imposed by federal law,” the agency argues in its Supreme Court brief, “enforcement of the law by state officials poses a significant threat to national banks’ performance of their federal responsibilities and to the OCC’s exercise of its supervisory duties.”

All the living former comptrollers of the currency supported that position in an amicus brief, arguing that the “rights and interests of consumers would be undermined if states could use their limited resources to impose additional layers of enforcement authority on national banks, rather than concentrating those resources on state-regulated entities.”

Cuomo, backed by the attorneys general of the other 49 states and the District of Columbia, contends that states must have the ability and the authority to protect their citizens from abusive lending practices by enforcing state fair lending laws against all financial institutions, including those operating under federal charters.

“The regime of ‘enforcement preemption’ is inconsistent with the… [visitorial powers provision], which OCC’s regulation purports to construe,” Cuomo argues in his brief.

Cuomo is referring to the “visitorial powers” provision of the National Bank Act and the OCC’s expansive interpretation of that language, outlined in a set of rules issued in 2004. In those rules, the OCC asserted that the “visitorial powers” state regulators were precluded from exercising over federal banks, included “the inspection of banks and bank records, supervision of their activities, and enforcement of applicable state or federal laws relating to the authorized activities of national banks.

The OCC contends that this interpretation is a reasonable extension of federal preemption authority; state regulators insist that the interpretation goes beyond the statutory language and the legislative intent behind it – a position with which at least some current lawmakers agree

An amicus brief submitted by Rep. Barney Frank (D-MA), chairman of the House Financial Servicers Committee and several Democratic members of the committee, argues that Congress did not intend to give the OCC the broad preemption authority the agency is claiming. “Because states traditionally have the responsibility for enforcing their own laws, and there is no claim that the states laws themselves are preempted,” the legislators argue, ‘clear and manifest’ congressional intent is required to preempt the field of enforcement… [And] Congress did not intend to occupy the entire field of banking regulation, leaving ample room outside OCC visitation for regulatory enforcement by the states.”

Commenting recently to reporters, Frank indicated that if the court upholds the OCC, he (Frank) will push for legislation overturning the decision. The preemption of consumer protections “was a grave error, particularly since the comptroller…at the time had nothing to put in its place,” Frank asserted in a recent interview with the Wall Street Journal. He added that he intends to be at his most coercively persuasive’ in seeking to scale back the preemption authority as part of a planned overhaul of financial industry regulations.


It is not surprising that mortgage lenders and brokers don’t like the new “Home Valuation Code of Conduct” that took effect May 1. But it is more than a little surprising that the new appraisal standards, applicable to all loans purchased by Fannie Mae and Freddie Mac, are equally unpopular with appraisers, who have been agitating for the insulation from lender pressure that the HVCC is designed to provide.

While appraisers say they support the intent of new standards, they worry about the unintended consequences – primary among them, undermining the ability of independent appraisers to compete with the large appraisal management companies (AMCs) many lenders will be encouraged, if not required, to retain. The critics include the Appraisal Institute and the American Society of Appraisers, industry trade groups that, in the past, have been among the most outspoken critics of undue pressure lenders and brokers have exerted on appraisers to produce valuations high enough to support pending loan transactions.

The new code is the result of an agreement New York Attorney General Andrew Cuomo reached with Fannie Mae and Freddie Mac after he threatened to subpoena information from both companies in connection with a suit Cuomo has brought against First American Corporation. The suit, which is still pending, accuses First American of allowing the loan staff at Washington Mutual to hand-pick appraisers based on their willingness to “cooperate” on valuations – a euphemism for “meeting the numbers” required to support loans originators wanted to close. Cuomo had sought information from Fannie and Freddie to determine whether they had purchased loans based on artificially inflated appraisals; he withdrew the subpoena when the two companies agreed to adopt the HVCC.

As originally proposed, the code prohibited lenders from using appraisal divisions they owned or in which they had an interest. That requirement was eased, so that lenders do not have to eliminate in-house appraisal departments or divest their interest in appraisal subsidiaries; but they do have to establish solid firewalls, preventing any “substantive communications” between lending and sales staffs and appraisers. The code specifically prohibits lenders from using appraisal reports completed by appraisers “selected, retained, or compensated in any manner” by mortgage brokers and real estate agents.” It also prohibits lenders from suggesting a target value to appraisers and specifies that an appraiser’s compensation can’t be linked in any way to the value determined for a property or the closing of a loan for which the appraisal was produced.

In announcing that Fannie and Freddie – now operating under federal conservatorship – had agreed to adopt the new code, James Lockhart, director of the Federal Housing Finance Agency, which oversees the GSEs, said the tougher standards will “strengthen the appraisal process against the possibility of improper influence and coercion.” A study published recently by the Center for Public Integrity found evidence of that “influence and coercion.” (See related item below.)

But appraisers say the code simply shifts the locus of that influence from lenders, mortgage brokers and real estate agents to appraisal management companies, which “are just as capable of pressuring appraisers as anyone else,” an Appraisal Institute spokesman told reporters recently.

Recent press reports indicate that the appraisal industry trade groups plan to ask Fannie and Freddie, Congress, or both to revise the new code. Separately, the National Association of Mortgage Brokers (NAMB) is also intensifying its campaign against the appraisal code. The trade group, which filed but then withdrew a suit seeking to block the new standards, recently issued a “call to action,” urging members to contact legislators and ask them to repeal the code or delay its implementation “for at least 12 months.”

Appraisers’ complaints about lender pressure led the bank and credit union regulators to propose revisions in the interagency appraisal guidance they adopted in 1994. Regulators are still reviewing comments they received on the proposed guidance, which emphasizes the need to ensure “the independence of an institution’s appraisal and evaluation program from influence by the loan production process or borrower.”

Although the guidance echoes the concerns underlying Cuomo’s appraisal code of conduct, industry regulators also share the concerns lenders, brokers and appraisers have expressed about those new standards and have joined in the effort to revoke or revise them. In a joint letter sent to Congress in January, the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration warn that the HVCC “could unnecessarily undermine the safe and sound extension of mortgage credit, reduce the availability of mortgage credit to many consumers, and ultimately lead to less reliability and accuracy in real estate appraisals.

The letter specifically questions the adequacy of the data collection and analysis on which the HFCC is based, and argues that the Interagency Guidance addresses concerns about appraiser independence. If the new code is not withdrawn, the regulators say, it should be “revised to exempt federally regulated lenders,” and its implementation should be delayed “until the significantly adverse consequences are prevented and other material legal and policy concerns are satisfactorily addressed.”

The Federal Deposit Insurance Corporation (FDIC) did not sign that letter, but sent one of its own to Congress, citing many of the same concerns and arguing that the new code “would overlay [the] long-standing set of federal regulations and professional appraiser practice, with [potentially] unintended costs and consequences.” A better approach to ensuring appraiser independence, the FDIC letter suggests, is one that “accommodates professional standards and could be appropriately scaled to correspond with the wide variety and size of mortgage lending institutions.”

While not asking Congress to delay or revoke the regulations, as the other agencies proposed, the FDIC did urge that the new standards be vetted through the standard rulemaking process, with advance notice and time for comment, instead of the “blanket, carte blanche adoption of this sweeping regulatory structure.”


Appraisers who have complained in the past about pressure from mortgage lenders have said they had two choices: Bend their appraisals to meet the lenders’ desired outcome or end up on lists of “uncooperative” appraisers whose phones would never ring. A report by the Center for Public Integrity CPI) has found evidence to support these claims, in the form of “blacklists” that lenders allegedly used to boycott appraisers who refused to inflate their prices. The report’s authors also say they found many appraisers who acknowledged that they bowed to lender pressure to ‘hit the numbers’ in order to remain in business. These appraisers, along with the lenders who pressured them, “helped pump air into the housing bubble that led to widespread economic devastation,” the report contends.

The report points to a class action suit filed against Countrywide Financial Corporation on behalf of blacklisted appraisers, accusing the company (now a subsidiary of Bank of America) of “engaging in a practice of pressuring and intimidating appraisers into using appraisal techniques that met Countrywide’s business objectives, even if those techniques [violated] industry standards.”

While focusing on abuses of the appraisal process, the CPI report, entitled “The Appraisal Bubble,” also argues that the securitization of mortgages fundamentally changed both the structure of the mortgage lending business and the purpose of appraisals. Instead of being designed to protect lenders by verifying the value of the collateral securing loans the lenders kept in their portfolios, the report says, appraisals became an obstacle lenders were impelled to circumvent in order to sell loans in which they had no continuing interest, beyond the closing and servicing fees they collected.

“With no skin in the game,” the report suggests, “lenders focused on closing deals. In this climate, many in the industry say, the appraisal became a barrier to jump over” rather than the “front-line defense for loan underwriting departments” it had been in the past.