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Fed issues awaited fair lending plan

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WASHINGTON (12/18/07)—The Federal Reserve Board Tuesday unanimously agreed to issue for comment a set of proposals intended to better protect consumers from unfair or deceptive home mortgage lending practices and related advertising. Some are hopeful this effort will be sufficient to stave off Congressional intervention in the regulation of home mortgage lending. As anticipated, the Fed’s proposed rules address such subprime lending practices as prepayment penalties, failure to offer escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the failure to give adequate consideration to a borrower's ability to repay. The consumer protections would be adopted under the Home Ownership and Equity Protection Act (HOEPA), which gives the Fed authority and responsibility to prohibit unfair or deceptive mortgage lending practices. The proposal includes four protections for “higher-priced mortgage loans” secured by a consumer’s principal dwelling. They are:
* Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan; * Creditors would be required to verify the income and assets they rely upon in making a loan; * Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase; and * Creditors would have to establish escrow accounts for taxes and insurance.
The rule would define “higher-priced mortgage loan” in a way intended to capture loans in the subprime market but generally would exclude loans in the prime market. A loan would be covered if it is a first-lien mortgage and has an annual percentage rate (APR) that is three percentage points or more above the yield on comparable Treasury notes, or if it is a subordinate-lien mortgage with an APR exceeding the comparable Treasury rate by five points or more, according to a Fed release. Also, the release noted the following protections would apply to all loans secured by a consumer’s principal dwelling, regardless of the loan’s APR: Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans. The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees. The comment period ends ninety days after publication of the proposal in the Federal Register, which is expected shortly. The CUNA Consumer Protection Subcommittee will be reviewing the proposal in detail to develop the Credit Union National Association’s (CUNA's) comment. The proposal quickly became the target of criticism by Rep. Barney Frank (D-Mass.) , who chairs the House Financial Services Committee. Frank said he and his committee staff have reviewed the Fed’s plan to crack down on abusive lending. “We now have confirmation of two facts we have known for some time: one, the Federal Reserve System is not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other.” Last summer, Frank, frustrated with the pace the Fed was maintaining in implementing HOEPA, said he would want to redistribute the Fed’s power to forbid unfair or deceptive banking practices to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The Treasury Department, on the other hand, backed the Fed’s action. Treasury Under Secretary for Domestic Finance Robert K. Steel issued the following statement: "Treasury commends the Federal Reserve's efforts announced today to improve mortgage lending practices. The Federal Reserve has used its authority to restrict certain practices that are unfair or deceptive and to provide enhanced information to consumers. We support the development of such rules, which recognize the need to protect consumers without unnecessarily restricting their access to credit." However now, in the midst of the country’s subprime woes, criticism of Washington’s inaction is becoming more widespread. A Dec. 18 article in The New York Times said that prior to hitting crisis proportions, it was all but impossible to get regulators’ attention focused on what some saw as a looming threat. The article noted, for instance, that the late Edward Gramlich, a former Fed governor, started nearly seven years ago to warn that there was a burgeoning mass of a new type of lender who were teasing people into loans they couldn’t really afford, but Gramlich’s concerns was rebuffed by the Fed. Also, Sheila C. Bair, when she was a senior Treasury official in 2001, worked to get subprime lenders to adopt best practices with outside monitoring for compliance, but with little effect. Bair is now chair of the Federal Deposit Insurance Corp. Use the resource link below for more on the Fed plan.

Inside Washington (12/18/2007)

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* WASHINGTON (12/19/07)--Freddie Mac is using YouTube to warn delinquent homeowners about foreclosure scams. The video warns homeowners about scammers who offer to help them evade foreclosure if they hand over the deeds to their homes. The scammers sell the homes for a profit, pocket the difference, and then charge borrowers rent for staying in the home while a new loan is processed. Because foreclosure notices are public record, it’s easy for scammers to get copies of the notices and contact troubled borrowers, according to the video … * WASHINGTON (12/19/07)--Former Federal Reserve Board Chairman Alan Greenspan said he supports a federal bailout to help subprime borrowers. In an interview with ABC, Greenspan stated that cash from the government is “available” and should be infused to help borrowers (American Banker Dec. 18). Also, the Greenlining Institute met Monday to discuss solutions that would go beyond the Bush administration’s proposed plan to help borrowers. Bob Gnaizda, Greenlining policy director, said he held the meeting because Treasury Secretary Henry Paulson’s plan, which would encourage lenders to freeze starter interest rates on subprime loans for certain borrowers, is not enough. Under Paulson’s plan, most of those in need will not be helped, Gnaizda said …

CAMEL Matrix gone for exams after Jan. 1

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WASHINGTON (12/19/07)--Starting Jan. 1, the National Credit Union Administration (NCUA) will eliminate the CAMEL Matrix and focus CAMEL evaluations on “risk consistent with NCUA’s Risk Focused Examination Program (RFE),” the agency said yesterday. In its decision, NCUA cited concerns that some credit unions may target and measure performance against the Matrix rather than focus on broader risk management. “Targeting CAMEL benchmarks in the Matrix can lead to unsafe and unsound goals and may lead to poor business decisions,” said NCUA in a letter to federally insured credit unions. By eliminating the Matrix, NCUA said the focus will be on “evaluating a credit union’s goals and determining strategic plans are realistic, tailored to the credit union’s unique needs, reflective of the current economic environment, and ultimately, in the best interest of the membership.” The agency pointed out that the Matrix maintained an element of controversy even after it became an optional examiner tool because credit unions “do not have identical risk profiles or business models.” The Matrix applied static ratio benchmarks to every credit union. The NCUA said its examiners will continue the RFE practice to assign CAMEL component and composite codes for examination and supervision contacts. It said examiners will assign the “C”, “A”, and “E” component ratings without a matrix following the approach currently used for assigning the “M” and “L”. The RFE practice to disclose CAMEL component ratings and the overall rating in the Examination Report Overview will continue. “When a CAMEL component or composite rating changes, examiners will inform management,” wrote the agency. “Disclosing ratings facilitate understanding of NCUA’s assessment of the credit union’s overall operation.” According to the letter, NCUA staff that use CAMEL will receive training prior to implementation. “This same training will be made available to state supervisory authority staff that needs to be aware of NCUA’s CAMEL Rating System,” it said. Credit Union National Association (CUNA) Deputy General Counsel Mary Dunn said NCUA earlier this year briefed several CUNA committees about the upcoming changes. Dunn said she believed the Matrix elimination is positive for credit unions and consistent with NCUA's risk focused examinations. “We plan to work with NCUA and credit unions to monitor the agency's implementation of the changes to help ensure that is the case, and we want to hear from credit unions if they have concerns about the implementation of the CAMEL changes,” said Dunn. Use the link below to access NCUA’s complete letter to credit unions.

FTC keeps data security in sights

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WASHINGTON (12/19/07)—Personal financial data security issues have all but been supplanted as a topic on Capitol Hill by the pressing concerns regarding the subprime mortgage and credit markets, but data security problems still loom large for financial services providers. The Federal Trade Commission (FTC), however, will be moving into 2008 with a program to spread the word on data protection. The FTC this week held a briefing for to reveal two key elements of its plan. First, the agency noted, it will schedule a series of regional workshops, the first of which is slated for April 2008 in Chicago. The workshops will explore steps an individual organization can take to protect itself from identity rip-offs and fraud, as well as mitigating actions after an event has occurred. The FTC said it will also be making staff experts available as speakers for outside organizations’ seminars and conferences. The FTC reiterated the precepts of its AVOID ID Theft program, which essentially is a how-to guide to protect against ID theft. Materials disseminated through the AVOID program address ways to: detect suspicious activity; deter identity thieves through safeguarding information; and defend against information theft promptly once there is a suspicion of a problem. The FTC also said it is now promoting a new website featuring data security information, including a 20 minute tutorial. The site, the FTC indicated, describes five steps of a sound data security plans:
* Take stock - know what personal info you have; * Scale down - keep only what you need for your business; * Lock it - protect the information you keep; * Pitch it – but carefully--properly dispose of data you don’t need anymore; and * Look ahead – have a plan in case your data is breached.
Use the resource link below to access the FTC website information.

NCUA urges care in holiday credit card use

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ALEXANDRIA, Va. (12/19/07)— National Credit Union Administration (NCUA) Chairman JoAnn Johnson, as a member of President Bush’s Financial Literacy and Education Commission (FLEC), made use of the holiday season to alert consumers about safe credit card practices. She said the increase in consumer spending this time of year makes it a good time to remind credit card users to take steps to guard against identity theft. Johnson outlines the following practices for the wise use of credit cards:
* Be cautious when using cash advances and read the fine print in the agreement, particularly since they usually carry higher interest rates; * Be aware that paying the maximum amount possible on your credit card balance, instead of the minimum required, decreases the time it takes to pay off your credit card, saves money in interest charges, and helps establish a better credit rating.
In addition to prudent use of credit cards, Johnson also stressed greater consumer awareness as a tool to combat identity theft. The NCUA noted a recent survey released by the Federal Trade Commission, which reported 8.3 million American adults were victims of identity theft in 2005. Johnson recommended these steps to help prevent identity theft include:
* Safeguard any documents that contain sensitive personal information, including proper disposal and shredding; * Read financial and credit card statements as soon as they arrive and look for unauthorized transactions; and * Review your credit report from all three credit reporting agencies and make certain there are no inaccuracies, annually if possible.
Use the resource links below for more information about financial literacy programs.

Knollenberg a new CURIA supporter

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WASHINGTON (12/18/O7)—Rep. Joe Knollenberg (R-Mich.) is the latest federal legislator to declare support for the bill intended to improve credit union service to members, the Credit Union Regulatory Improvements Act (CURIA, H.R. 1537).
Click to view larger image U.S. Rep. Joe Knollenberg (R-Mich.), right, with the Michigan Credit Union League's Patick LaPine and during the 2006 CUNA GAC. (Photo provided by CUNA)
Knollenberg is a first-time supporter of CURIA this year and his backing brings the number of sponsors to 141. Knollenberg is also known to credit unions for his support of the credit union tax exemption. In a 2004 letter to the Michigan CU League expressing his strong support, the federal lawmaker said the presence of credit unions in a community provides needed financial opportunities to small businesses, families and workers. He noted that credit unions are unlike other financial institutions as not-for-profit financial cooperatives owned by their members and said “(c)learly, credit unions' tax-exempt status should not be repealed or altered." Use the resource link below for details of CURIA and a list of all co-sponsors.