If you’ve been following the “Thinking Out Loud” discussions posted periodically on this site, you have seen several in which Members Mortgage President Joe Zampitella has highlighted the dangers reverse mortgages pose for the seniors who obtain them and the credit unions that originate them. It appears that some federal bank regulators share his concerns about this fast-growing mortgage product.
Comptroller of the Currency John Dugan warned recently that reverse mortgages could become the next subprime mortgage crisis, absent effective measures to prevent potential abuses.
“While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest type of subprime mortgages, and that should set off alarm bells,” Dugan told bankers attending an American Bankers Association regulatory compliance conference. “I believe the critical lesson here is the need to act early before problems escalate,” he added.
Dugan distinguished between the “Home Equity Conversion Mortgage” (HECM) insured by the Federal Housing Administration, and “proprietary” mortgages offered without FHA insurance that, he said, provide fewer consumer protections.
He cited several potential risks related to the way reverse mortgages are structured and marketed, including: Their complexity, misleading marketing and inappropriate sales strategies linking loan approval to the purchase of other financial products.
“With access to large lump sums upon closing, elderly borrowers can be particularly vulnerable to coercive sales of annuity and long term care insurance products that are expensive and may not be appropriate to their needs,” Dugan said.
“Another risk is that reverse mortgage borrowers, because they have no immediate repayment obligations, may overlook substantial fees that are attached to the loan. And consumers who spend their loan proceeds quickly or unwisely may end up short of the funds they need for home maintenance or property taxes, with disastrous consequences: The failure to make those payments can result in foreclosure.”
The federal regulators are drafting interagency guidance for reverse mortgages, but “more definitive regulatory standards” may be needed to protect vulnerable consumers, Dugan said, “and the OCC is prepared to do that, even if the standards we advocate initially apply only to reverse mortgage lending by national banks.”
UNFAIR AND DECEPTIVE MORTGAGE PRACTICES
Moving to close a perceived consumer protection gap, the Federal Trade Commission (FTC) is seeking public comment on proposed rules that would identify and bar or restrict “unfair and deceptive” acts or practices in the marketing, origination and servicing of mortgage loans. The rules would not apply to federally-chartered banks, savings and loans and credit unions, but would cover state-chartered depository institutions (including credit unions) and affiliates of federally-chartered depository institutions, as well as non-bank financial companies, including mortgage brokers, appraisers and loan servicers.
The FTC notice of proposed rulemaking seeks input on a wide range of issues, asking specifically about the impact of adopting new disclosure requirements and restrictions that would not apply to federally-chartered institutions. Of particular interest is the lengthy list of servicing practices the FTC rules might consider branding “unsafe and deceptive,” among them:
- Charging fees that are not authorized by the mortgage contract or by state law;
- Charging in advance for “estimated” attorneys fees or for other services that aren’t provided;
- Charging late fees that are not permitted under the service agreement or that are “otherwise improper”;
- Failing to post payments in a “timely and proper” manner;
- Failing to have adequate procedures to ensure the accuracy of information used to service loans;
- Failure to have “adequate customer service” to handle disputes’
- Taking foreclosure action without verifying loan information, investigating borrower disputes, and giving borrowers an opportunity to obtain foreclosure counseling or seek mediation;
- Structuring loan modifications or other workout plans “without regard to the consumer’s ability to repay”;
- Charging “unnecessary or excessive fees” in bankruptcy cases.
Public comments on this proposed rulemaking are due July 30th. The FTC is also seeking comments on a separate proposal to prohibit or restrict unfair or deceptive acts or practices by foreclosure rescue and loan modification services. The agency has taken several enforcement actions against these services, which have proliferated as the mortgage foreclosure crisis has deepened. But the agency wants to determine whether new regulations are needed to protect consumers.
“Homeowners who are facing foreclosure or struggling to make mortgage payments shouldn’t have the added burden of being misled by unscrupulous businesses promising assistance that never comes,” FTC Chairman Jon Leibowitz said in a press statement announcing this initiative.
The commission is seeking comment specifically on “the costs and benefits” of prohibiting ore restricting the payment of advance fees for loan modification and foreclosure rescue services. Comments are due by July 15th.
FTC IN THE SPOTLIGHT
The Federal Trade Commission, which usually plays only a supporting role in the enforcement of lending laws has moved into the spotlight recently, and the financial industry isn’t exactly applauding the development. In addition to rulemaking initiatives that could define unfair and deceptive mortgage lending practices (see above), industry executives are concerned about legislation moving through Congress that would expand the FTC’s authority to bar unfair practices in the credit and debt services markets.
The legislation, approved recently by the Commerce, Trade and Consumer Protection Subcommittee of the House Energy and Commerce Subcommittee, would specifically authorize the FTC to ratchet up its scrutiny of the auto financing and debt consolidation industries, and to seek civil penalties, which state attorneys general could enforce.
A letter to the committee, signed jointly by all the major banking industry trade associations and the National Association of Federal Credit Unions, warned that giving the FTC expedited rulemaking authority could result in the adoption of rules “based on subjective notions of unfairness or on an incomplete understanding of an industry or of the full consequences of a rule.”
The trade groups objected particularly to allowing state attorneys’ general to enforce the FTC rules – an “unnecessary” step that, the industry executives warned, “encourages litigation abuse” and “would likely result in duplicative and inconsistent lawsuits….While the country’s focus is currently directed at fixing the economy at home, the balkanization of enforcement powers to state Attorneys General will greatly hinder the ability of financial institutions in the United States to be effective market participants in the future,” the letter warned.
Some industry analysts have suggested that the subtext of the legislation may be more significant than the legislation itself. The various moves to expand the FTC’s consumer protection footprint in the banking area are part of a broader effort by Congress to wrest the consumer protection function from the bank regulatory agencies as part of the restructuring of financial industry regulation. One possibility, floated by Administration officials, is to create a separate agency, modeled on the Consumer Product Safety Commission, responsible for ensuring the safety of financial products and services; another option, industry analysts note, would be to expand the consumer protection scope of existing regulatory agencies, including the FTC.
Rep. George Radanovich (R-CA), the ranking member on the Energy subcommittee, opposed giving the FTC what he characterized as “blanket” authority to adopt rules targeting consumer credit. “It is not clear how wide a net that will cast or what business practices will be captured,” he told CongressDaily.
THE DEBATE BEGINS
The long-anticipated debate over the future of Fannie Mae and Freddie Mac has begun. Lawmakers and industry executives, who may not agree on very much as this debate unfolds, agreed on one key point in an initial hearing before the House Financial Services Capital Markets Subcommittee: Any action to restructure the two giant government services enterprises (GSEs) should wait until the economy has recovered. Most of the participants in this initial hearing also seemed to agree with Rep. Paul Kanjorski (D-PA), the subcommittee chair, who noted, “This debate will be a long-distance relay between Congresses, not a 100-meter sprint within the 111th Congress.”
Roiled by accounting scandals and further weakened by the housing meltdown, Fannie and Freddie have been operating under government conservatorship for the past year. But they have also emerged as key players in the Obama Administration’s efforts to stem the raging foreclosure tide and bolster the housing market. The debate over how to restructure the quasi-public GSEs will pit critics, who have long argued that they should be privatized and severed from the implicit government backing that gives them a competitive edge in the financial markets—against supporters who maintain that Fannie and Freddie should continue operating pretty much as before, but with a clearer mission and stricter, more effective government oversight.
Kanjorski identified some of the restructuring options legislators will consider:
“Reconstituting the enterprises as they were before the conservatorship decision; splitting them into smaller operating companies like we did with AT&T; regulating the prices they charge like a utility; creating cooperative, non-profit ventures; or revolving them back into the government.”
Privatizing the companies is another option, Kanjorski acknowledged in a statement opening the hearing, and while there is precedent for that approach, he said, “we ought to move cautiously. We created Fannie Mae and Freddie Mac because of a market failure, and we ought to ensure that any new system of housing finance continues to provide a stable source of funding and long-term credit to help people to purchase homes. In short, we must keep our minds open to all reform proposals and refrain from drawing lines in the sand about what each of us will, or will not, support until we have had the chance to consider the pros and cons of many different options.”
Kanjorski said he will evaluate restructuring proposals against one overriding concern: “I want to ensure that community banks and retail credit unions continue to have access to a neutral source of affordable funding to help them compete against large institutions. These mortgage providers are important participants in our markets, and we must ensure that they continue to have an opportunity to help hard-working families to achieve the American dream of homeownership.”
Speaking from the opposite end of the political spectrum, Rep. Scott Garrett (R-NJ), the subcommittee’s ranking member, promised to “keep an open mind” as the discussion of restructuring options unfolds. “[But] I think one thing we can definitely agree on is that doing nothing and keeping the status quo is unacceptable,” he said. Underscoring the strong feelings and deep-seated animosity toward the GSEs that is likely to color the coming debate, Garrett continued, “Fannie Mae and Freddie Mac played leading roles in adding fuel to the mortgage finance fire that burned down a good portion of our financial system and economy as a whole. By financing roughly 36 percent of the subprime housing market and increasing their leverage to 100-to-1, they abused their governmentally granted advantages in the marketplace and have run up a bill with the taxpayers to the tune of $85 billion and counting…. Fannie and Freddie were a large part of the problem,” Garrett asserted, “and reforming them should be a large part of the solution.”
RATE CAP RESURFACES
The cap on credit card interest rates that banking industry lobbyists managed to keep out of the credit card reform bill has cropped up, in slightly different form, in a bankruptcy reform measure that analysts say has a good chance of winning Congressional approval.
The Senate Judiciary Committee may vote this week on the “Consumer Credit Fairness Act,” which would require bankruptcy courts to eliminate creditor claims for certain “high-cost” credit card debt, defined as charges with interest rates exceeding the lesser of 15 percent plus the yield on 30-year Treasuries or 36 percent. The legislation, sponsored by Sen. Sheldon Whitehouse (D-RI), would direct bankruptcy judges to either disallow creditor claims for those debts or convert the bankruptcy filing from a Chapter 13 restructuring to a Chapter 7 debt elimination proceeding.
The high-cost credit definition would effectively impose an 18.5 percent cap on consumer loans (based on current Treasury rates), according to an American Banker report. Equally disturbing for financial industry executives, this article pointed out, the measure would make it easier for consumers to discharge their debts in bankruptcy, undermining a central goal of the bankruptcy reform legislation enacted four years ago.
“If this thing were enacted as is, it would be the equivalent of the atomic bomb in the consumer credit market,” Bill Himpler, executive vice president of the American Financial Services Association, told the Banker. “It would wipe out the availability of credit for anything other than mortgages for prime customers. Lenders would have no way to protect the assets they have…We’d be out of business,” he added.
In related news, bankruptcy filings are expected to reach the 1.5 million-mark this year, up dramatically from 1.1 million filings last year, according to an estimate by Automated Access to Court Electronic Records. The data processing company reports that bankruptcy filings totaled more than 6,000 per day in May, as job losses, declining wages, and extended unemployment periods battered consumer finances.
More struggling consumers are turning to credit counseling agencies for help, but an increasing number of them are beyond any assistance the agencies can offer, according to a recent USA Today report. “People are coming to us in much worse shape than they used to be,” David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, told the publication. “We used to be able to help 20 percent to 25 percent of the people who came to us,” he added. “Now, we can only help 7 percent to 8 percent [of them].”