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Credit ratings get Washington spotlight

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WASHINGTON (7/27/11)—Any new credit rating standards that are developed must be able to quickly reflect market changes and “adjust for new information,” the Federal Reserve said in a credit rating report released on Tuesday. The report, required by the Dodd-Frank Wall Street Reform Act, makes the case for ratings reforms, noting that “credit ratings have proven in a number of important situations to have several shortcomings, including issues related to possible conflicts of interest and weaknesses in modeling.” Any new standards must “not increase the risk of regulatory arbitrage as new financial methods and structures are developed” and also “have broad applicability and be sensitive to the risk posed by different exposures,” the report added. The Dodd-Frank Act requires federal financial regulators to replace references to or requirements in their regulations regarding credit ratings with new standards of creditworthiness as established by each agency. The National Credit Union Administration (NCUA) has proposed replacing the current requirement that a security be assigned a specific grade (such as AA, A, or BB) to be a permissible investment, with the requirement that the security satisfy a narrative standard on credit quality. The narrative must generally include an internal analysis of the issuer of a given security, with a statement showing that the credit union considers the security provider to be capable of meeting its financial commitments. The NCUA was the first federal agency to publicly release newly developed credit ratings standards. The Credit Union National Association (CUNA) has said that these ratings changes, which have not been finalized, may create issues for credit unions. Credit ratings "can be useful to credit unions as part of a comprehensive approach to assessing credit risk," CUNA said, adding that the NCUA should consider permitting credit unions to rely on credit ratings "as long as the credit union also conducts further reasonable and appropriate due diligence." Credit rating agencies are the topic of a House Financial Services Committee Subcommittee on Oversight and Investigations hearing scheduled for 10:00 a.m.(ET) today. For the Fed report, a CUNA letter to the NCUA on credit ratings, and more on today’s House hearing, use the resource links.

FSOC FDIC nominees see some bipartisan committee support

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WASHINGTON (7/27/11)—President Barack Obama’s nominees for Federal Deposit Insurance Corp. chairman, Comptroller of the Currency, and Financial Stability Oversight Council member could face a potentially easy path to their new positions if Tuesday’s even-tempered Senate Banking Committee confirmation hearing is any indication. Senators spoke with FDIC nominee Martin Gruenberg, potential Comptroller of the Currency Thomas Curry, and FSOC nominee S. Roy Woodall Jr. during the Tuesday hearing. Committee Chair Sen. Tim Johnson (D-S.D.) in his opening statement noted that the three nominees are “well qualified,” adding that the nation needs “strong leadership” at from its financial regulators as the country recovers from recent economic troubles. Discussions of both too big to fail and smaller institutions, credit access, and general economic and financial services topics made up the bulk of the hearing. Sen. Bob Corker (R-Tenn.) sought reassurances that Gruenberg would work with the Senate on addressing too big to fail institutions and FDIC examiner consistency, and the FDIC nominee said that working with smaller institutions would be a priority during his chairmanship. Senator Robert Menendez (D-N.J.) said he is concerned that still-developing reforms to the definition of a qualified residential mortgage (QRM) may harm the housing market if the definition is not broad enough. Gruenberg said that the final QRM definition, once agreed to, must balance concerns over consumer credit access and financial market security concerns. The Credit Union National Association and others, including a bipartisan group of lawmakers, have criticized a proposal to require a 20% down payment for a loan to be defined as a QRM, saying that this change would shut out responsible homebuyers and further cripple the housing market. For an archived video of the hearing, use the resource link.

FSOC report covers recent future financial issues

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WASHINGTON (7/27/11)--The present state of the U.S. financial system and some of the issues that could shape the system going forward are addressed in the Financial Stability Oversight Council’s (FSOC) first ever annual report. The FSOC was created when the Dodd-Frank Act was signed into law just over one year ago. The report identifies declining real estate prices, a sudden increase in term premiums on U.S. government debt, and an escalation of the European sovereign debt crisis as issues that could trouble the economy going forward. The council, which provides a forum for discussion between various regulatory agencies, is comprised of National Credit Union Administration Chairman Debbie Matz, Treasury Secretary and FSOC Chairman Tim Geithner, Federal Reserve Chairman Ben Bernanke, Acting Comptroller of the Currency John Walsh, Securities and Exchange Commission Chairman Mary Schapiro, and Federal Deposit Insurance Corp. Chairman Sheila Bair, and representatives from the Commodity Futures Trading Commission and the Federal Housing Finance Agency. The council will also oversee the resolution of troubled financial institutions. Matz was one of the 10 FSOC members that attested to the report, and added that the release of the FSOC report “marks an important milestone. “The FSOC is a critical institution that will have an important role in financial stability for many years to come,” she added. For the full FSOC report, use the resource link.

Truth in savings mortgage registration move from NCUA to CFPB

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WASHINGTON (7/27/11)--Truth in Savings, mortgage loan originator registration, and the privacy of consumer financial information are among the rules that have been transferred to the oversight of the Consumer Financial Protection Bureau from the National Credit Union Administration since the new agency began its work on July 21, the CFPB noted in a Federal Register document. The transfer of authority was designated by the Dodd-Frank Wall Street Reform Act. Other rulemaking priorities that the CFPB has taken over from the NCUA include:
*Portions of Fair Credit Reporting rules; *Insurance requirements; *Rules addressing some types of loans and lines of credit that are extended to credit union members, but only as applied to non-federally chartered housing creditors under the Alternative Mortgage Transaction Parity Act (AMTPA).
The Credit Union National Association (CUNA) has said that recent AMTPA changes would only impact a minimal number of state-chartered credit unions. The CFPB has contacted the CEOs of the firms that it now oversees, and has also begun to accept consumer credit card complaints. The agency soon will have the capacity to deal with other issues. A series of interim rules that will cover confidentiality, how testimony of records are made available to the public, and related Privacy Act and Freedom of Information Act requirements will also be issued by the CFPB in the future, and the agency will also detail how its own investigative procedures and administrative enforcements will proceed. Other administrative and internal CFPB matters are also being handled at this time, the CFPB recently said. For the CFPB’s list of new regulatory responsibilities, use the resource link.

CUNA Q-and-A clarifies corp liquidation letter

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WASHINGTON (7/27/11)--In response to certain credit union concerns regarding a recent agency communication related to liquidation of two bridge corporate credit unions, the Credit Union National Association (CUNA) has secured further information from the National Credit Union Administration (NCUA) in the form of a Q-and-A. The NCUA recently sent letters to credit unions belonging to Western Bridge Corporate FCU and U.S. Central Bridge Corporate FCU, which have approved plans to reorganize as United Resources FCU and—for U.S. Central’s payment business—as PayNet. Those transitions will involve the liquidation of the two bridges and the creation of two new corporate charters, the NCUA letter stated. Credit unions with certificates of deposit (CDs) in Western Bridge or U.S. Central Bridge that mature after the date of their bridge’s liquidation will be paid the full principal amount of the CD at the time of liquidation. The credit union will also receive interest accrued and payable to the account on the CD up to the point of liquidation. To help stabilize corporate credit unions in crisis in 2009, the NCUA asked credit unions who were members to leave or deposit funds with their corporates. The agency also announced the Temporary Corporate CU Share Guarantee Program. That program, currently slated to run through the end of 2012, provided credit unions with a federal guarantee for any shares that were in excess of the $250,000 federal share insurance cap. A number of credit unions have expressed concerns because some of the CDs that will be liquidated had maturities well into next year. The yields anticipated through maturity are significantly higher than any re-investment rate a credit union is likely to find in the current market. “The dismay is understandable,” said CUNA Chief Economist Bill Hampel. “Credit unions believe they stepped up to the plate to provide liquidity in a time of need, and are now troubled to learn they will earn a lower total return than they calculated based on the ending date of the guarantee program.” Because of the concern expressed by credit unions, CUNA posed a question to NCUA about the payout of CDs at the two liquidating bridges: Q: Did NCUA consider continuing the higher dividend rates until original maturity, or paying off the CDs at a premium to cover the reduced investment yield the depositing credit unions would receive when they reinvest the funds? NCUA: The legal obligation under the Temporary Corporate Credit Union Share Guarantee program stipulated NCUA would pay all principal plus interest accrued to the account at the time of liquidation. This practice is consistent with how NCUA pays out shares under its deposit insurance program. The temporary guarantee did not stipulate it would pay future dividends from the point of liquidation. The NCUA board deliberated whether to extend the liability to the Corporate Stabilization Fund to pay dividends beyond the legal requirement, but concluded that such an action would add unwarranted costs to the Corporate System Resolution Plan. Had the NCUA Board decided to extend the liability to the maturity of the CDs, all federally-insured credit unions would have paid increased assessments over time. Member advisory councils for Western Bridge and US Central Bridge developed the business plans for the proposed United Resources Corporate and PayNet Corporate charters. These member-driven business plans stipulated that the new charters would not assume the affected CDs. Accordingly, once the certificates become part of the bridge liquidation estate, it will trigger NCUA’s obligation to pay out the CDs under the procedures of the temporary guarantee. Q: Why did NCUA decide not to cover the higher yields until original maturity or until the end of the Temporary Corporate Credit Union Share Guarantee program? NCUA: A decision to cover the affected CDs would have added costs to the corporate stabilization fund and exceeded the legal requirements of the Temporary Corporate Credit Union Share Guarantee program. Thus, if NCUA had paid the dividends beyond the legal obligation, approximately 7,300 federally insured credit unions would have borne the costs for the benefit of 200 credit unions, including corporates, with the CDs. This was one of the considerations which served as the basis for not paying out liabilities beyond the guarantee obligation. Q: How much would it have cost the agency to cover the higher yields until maturity or the end of the program by paying off all the CDs at a premium? NCUA: The associated premium to satisfy all future dividends would have been approximately $30 million. This was one of the considerations which served as the basis for not paying out liabilities beyond the guarantee obligation. Q: Roughly what proportion of the CDs that will be paid off before maturity were purchased by credit unions after the Temporary Corporate Credit Union Share Guarantee became effective and NCUA requested credit unions continue to provide liquidity to the conserved corporates? NCUA: CDs with maturities beyond the expected dates of resolution and purchased after the Temporary Corporate Credit Union Share Guarantee became effective represent 26 percent of the $30 million premium discussed in the question above. Said another way, nearly 74 percent of the premium ($22 million) is associated with CDs that were purchased prior to the Temporary Share Guarantee and were subject to loss of principal had NCUA not implemented the program. Many of these credit unions had tens, if not hundreds, of millions of dollars in certificates that largely would have been uninsured. Q: How much would it have cost to cover the higher yields just on those CDs that were purchased after the time of the Temporary Share Guarantee? NCUA: The premium associated with CDs purchased after the Temporary Share Guarantee became effective in January 2009 would be approximately $8 million.

Improve CDRLF rules by streamlining CUNA

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WASHINGTON (7/27/11)--The Credit Union National Association (CUNA) supports efforts to improve the process for “low-income” credit unions to apply for loans and technical assistance grants from the Community Development Revolving Loan Fund (CDRLF) and offered suggestions to streamline the process of applying for loans and grants. In a comment letter sent Monday, CUNA’s urged the National Credit Union Administration (NCUA) to minimize reporting and monitoring burdens on “low-income” credit unions seeking CDRLF assistance by using existing reports whenever possible. The CUNA letter said the NCUA’s proposed rule change aimed at reorganizing CDRLF regulations should also provide greater flexibility in terms and conditions. Recommended changes include:
* A non-exhaustive list of permissible loan fund uses, such as developing new products or community partnerships; * An increase in the maximum loan limit, currently set at $300,000; * A reference to the CDRLF Interest Rate Policy and a specific interest rate on the notice of funding; and, * Removal of the current requirement for matching funds.
CUNA expressed concern that requiring financial projections would increase the cost of seeking CDRLF assistance. But CUNA offered support for the removal of the current requirement for a Community Needs Plan, which would be replaced by a narrative on the intended uses of funds.

Inside Washington (07/26/2011)

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* WASHINGTON (7/27/11)--In its merger with the Office of Thrift Supervision (OTS)--mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act--the Office of the Comptroller of the Currency (OCC) has inherited the unfamiliar job of handling a lawsuit involving the closing of United Western Bank, a thrift it never regulated. United Western Bank filed suit against regulators in February, claiming the OTS was wrong to seize it and asking the judge for reinstatement (American Banker July 26). United Western alleged the OTS and the Federal Deposit Insurance Corp. seized the thrift before giving it enough time to recover. In June, U.S. District Court Judge Amy Berman Jackson ruled the suit against the OTS--now the OCC--could proceed. Jackson granted the Federal Deposit Insurance Corp.’s request to exit the case, but allowed the United Western to pursue its claims against OTS, because a statute specifically allows a bank to challenge the OTS director’s decision to appoint a receiver in the District Court. The outcome of the case could determine if similar suits will follow. Thomas Vartanian, a partner at Dechert LLP, speculated that the OCC, while not the party accused of any wrongdoing, would pursue the case based on principle … * WASHINGTON (7/27/11)--The Financial Crimes Enforcement Network (FinCEN) Tuesday issued its final rule amending Bank Secrecy Act regulations on prepaid access. The rule puts in place suspicious activity reporting, and customer and transactional information collection requirements on providers and sellers of certain types of prepaid access similar to other categories of money service businesses. Under the final ruled “stored value” has been renamed as “prepaid access.” The rule adopts a targeted approach to regulating sellers of prepaid access products, focusing on the sale of prepaid access products with features or values that pose heightened money laundering risks. Products of $1,000 or less and payroll products that can’t be used internationally, do not permit transfers among users and cannot be reloaded from a non-depository source are exempted from the rule. Closed-loop, prepaid-access products sold in amounts of $2,000 or less are also exempted. The rule excludes government funded and pre-tax flexible spending for health and dependent care funded prepaid access programs …