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Geithner Administration proposal on GSE reform out in April

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WASHINGTON (3/24/10)--U.S. Treasury Secretary Tim Geithner on Tuesday called for the government to “begin the process of fundamental reassessment and reform” of Fannie Mae and Freddie Mac. “A broad reform process of the housing finance system must be undertaken to achieve comprehensive and effective reform that delivers a more stable housing market with stronger regulation, more effective consumer protections and a clearer role of government with less risk borne by the American taxpayer,” Geithner added during prepared testimony delivered before the House Financial Services Committee. The Obama Administration will “develop a comprehensive reform proposal” for the roles of Governmental Sponsored Entities (GSEs) Freddie Mac and Fannie Mae “through public consultation with a wide variety of constituents, market participants, academic experts, and consumer and community organizations,” and the GSEs “will not exist in the same form as they did in the past.” The Treasury and the U.S. Department of Housing and Urban Development (HUD) on April 15 will submit their reform proposals for public comment, Geithner said, adding that the administration would then look to “work closely with the Congress, on a bipartisan basis, prior to finalizing a comprehensive reform plan.” In executing these reforms, the administration will look to align incentives, avoid allowing privatized gains to be funded by public losses, strengthen regulation, and diversify investor base and sources of funding. However, the administration will continue to support the availability of affordable single- and multiple-family real estate options. Some legislators at the hearing indicated that they would support including GSE-related reforms as part of regulatory restructuring legislation, and republicans on the committee said that the government should create an exit strategy from ownership of the GSEs. However, Geithner said that GSE reform can wait and must be done in context of overall housing finance reform. To read Geithner’s full testimony, use the resource link.

NCUA files suit against former New London FCU auditors

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ALEXANDRIA, Va. (3/24/10)--The National Credit Union Administration (NCUA) has followed up its recent lawsuit against Wells Fargo Investment Advisors by also filing suit against the former auditors of now defunct New London Security FCU, Ed Lorah & Associates, L.L.C. The NCUA began the first suit after it uncovered alleged fraud that was perpetrated by former A.G. Edwards (which is now owned by Wells Fargo) employee Edwin Rachleff. Rachleff embezzled $12 million in funds from the credit union through numerous false account statements that he filed between 1998 and 2008, and these statements eventually contributed to the failure of New London FCU, which created a $10 million loss for the NCUA’s share insurance fund. (See related story: NCUA seeks recoup of $10M following Conn.-based fraud case, Feb. 4, 2010.) The NCUA is also seeking $10 million in damages from Ed Lorah & Associates. The latest NCUA lawsuit alleges that “professional malpractice” and “breach of contract” by audit firm Beller Shepatin & Co., P.C., which has since merged with Ed Lorah & Associates, L.L.C., prevented New London FCU from detecting Rachleff’s fraudulent activities. “As a consequence of Beller Shepatin's professional malpractice, and breach of contract, the Credit Union was unable to prevent or mitigate the damages caused by the fraudulent investment account, ultimately losing virtually all of its assets,” the complaint adds. According to the NCUA complaint, Beller Shepatin & Co. “performed the services for which it was retained in a negligent and careless manner” and failed to comply with standard auditing practices, “to properly request confirmation of the accounts being audited,” to “adhere to proper standards by maintaining control over the entire confirmation process,” to “ascertain the independence and authenticity of the financial statements and documentation it received,” and to “detect, identify, and question the inconsistencies and differences in the account statements it received for the two separate Credit Union accounts at A.G. Edwards.” A summons to Ed Lorah & Associates was filed on March 19, and a date for the trial has not yet been set.

CDCUs eligible for deposits in new BEA round

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WASHINGTON (3/24/10)--The U.S. Treasury's Community Development Financial Institutions (CDFI) Fund on Tuesday announced that it will make up to $25 million in awards available through its 2010 Bank Enterprise Award (BEA) Program. “The BEA Program complements the community development activities of insured depository institutions by providing financial incentives to expand investments in CDFIs and to increase lending, investment, and service activities within economically distressed communities,” the CDFI Fund said in its release. The CDFI Fund has awarded a total of $311 million in funds through “formula-based grants to applicants” since its inception in 1994. Applicants that participate in CDFI-related activities, equity investments, distressed community financing activities, and basic financial service activities for low- to moderate-income individuals “or the institutions serving them” are eligible for the funds. All applications must be submitted by May 5. While eligible applicants must be federally insured banks and thrifts, “those awarded BEA funds are encouraged to increase their financial assistance to Community Development Financial Institutions (CDFI), including credit unions,” the release added. For the full release, use the resource link.

Inside Washington (03/23/2010)

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* WASHINGTON (3/24/10)—A joint statement by federal financial regulators, including the National Credit Union Administration (NCUA), on funding and liquidity risk was given a May 21 effective date when the guidance was published this week in the Federal Register. The statement, released last week, reiterated “the importance of effective liquidity risk management for the safety and soundness of financial institutions.” (News Now March 18) It emphasized “the importance of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets, and a formal, well-developed contingency funding plan as primary tools for measuring and managing liquidity risk” for financial institutions. According to the release, “the agencies expect each financial institution to manage funding and liquidity risk using processes and systems that are commensurate with the institution’s complexity, risk profile, and scope of operations.” The Credit Union National Association (CUNA) last year commented on joint federal regulatory guidance on funding and liquidity risk management, saying that the guidance, which clarified and summarized principles of sound liquidity risk management previously issued by the agencies, made sense for banking organizations, but would only be redundant to existing rules for credit unions… * WASHINGTON (3/24/10)—Credit scores and reports, and the role they play in the nation’s economy, are the subject of a hearing today scheduled by the House Financial Services subcommittee on financial institutions and consumer credit. A subcommittee release said the session will focus on how credit scores and reports are formulated, who purchases them and for what purpose. The hearing is also intended to provide a discussion of relevant issues of particular concern to consumers and several members of Congress, including the impact of rising medical debt on credit scores and reports and their use for hiring purposes. Witnesses are expected to include representatives from the Federal Reserve, the Federal Trade Commission and the three major credit bureaus… * WASHINGTON (3/24/10)—The U.S. Treasury Department is about to start asking institutions that received funds from its Troubled Asset Relief Program (TARP) to provide data on the compensation packages of their top 25 executives. Kenneth Feinberg, Treasury's special master for compensation, was expected to send out a letter yesterday to each of the 419 TAPR-receiving firms asking for information on 2008 year-end bonuses. The review, required under the 2009 law that created the position of “special master,” is a departure from the data collection to date, which has primarily consisted of reviews and pay setting at the seven firms receiving large sums of TARP aid. Some on Wall Street worry that Feinberg could target certain pay contracts and hold them up to public scrutiny unless the firms involved agreed to retroactively cut the pay (The Wall Street Journal March 23)… * WASHINGTON (3/24/10)—The House Financial Services Committee has postponed its March 25 scheduled markup of the FHA Reform Act to a date and time to be announced at a later date...

CUNA applauds NCUA legacy asset timetable

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ALEXANDRIA, Va. (3/24/10)—Credit Union National Association (CUNA) President/CEO Dan Mica yesterday commended the National Credit Union Administration's (NCUA's) projected timetable for solving the corporate credit union "legacy asset" issue. NCUA Chairman Debbie Matz Tuesday, at a Missouri CU Association meeting, revealed that credit unions may see some positive regulatory action on corporate credit union legacy assets by the end of June. Mica said of the chairman's announcement, "CUNA has stressed how crucial it is for the agency to solve the legacy assets issue in our comment letters, correspondence and conversations with NCUA. "The chairman's timetable of addressing this issue before the proposed corporate rule is finalized is commendable and indicates the agency’s willingness to listen and work toward a fair solution. CUNA will continue to work with her and the agency." In her announcement, Matz said it has taken months of work, but the agency is “close to proposing a plan that would remove the riskiest legacy assets from ongoing corporates, while carrying forward the most valuable pieces of the corporate system.” “The plan would empower retail credit unions to choose which corporates they will support. And it would ensure that those corporates begin with clean balance sheets,” Matz told her credit union audience. Legacy assets are primarily mortgage-backed and asset-backed securities that were bought by corporates before 2009 that have been severely devalued as a result of the turmoil in the overall mortgage market. Currently estimated losses on these legacy assets have already been expensed, but CUNA has in the past expressed two concerns with these legacy assets: First, if the actual losses turn out to be sufficiently less than expensed thus far, there should be an opportunity for the credit unions that took the losses to share in the gains, and, second, if the actual losses are greater than expensed thus far, that future capital contributors not be liable for those losses. In Missouri, Matz warned it is still a work “very much” in progress, but the agency envisions a plan that “could even allow retail credit unions to recover future earnings from legacy assets that out-perform current loss projections.” However, there are still “a multitude of questions about underwriting, funding, accounting, and much more” that would have to be worked out, she said. “There is no easy way to un-bundle over $50 billion worth of long-term assets, repackage them into marketable bonds, and move them from corporates’ balance sheets without realizing the losses. This effort is so huge--and so important--that we are dedicating 20 of our top staff to work on it.” Matz asked for credit union patience, but added her team is cautiously optimistic that a comprehensive resolution plan will be brought to the NCUA board by the end of June. In the meantime, NCUA is also reviewing over 800 comment letters on the agency’s proposed rule to strengthen corporate credit union regulation. “Based on the comment letters,” Matz assured, “we will not move forward with a final corporate rule until after we announce the plan for legacy assets. While the legacy assets plan will ensure that corporates begin with clean balance sheets, the final rule will ensure that corporates maintain those clean balance sheets. When the new safeguards are refined and implemented, corporates will be much better positioned to protect retail credit unions’ hard-earned capital.”