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Inside Washington (07/05/2009)

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* WASHINGTON (7/6/09)--The Small Business Administration’s (SBA) America’s Recovery Capital (Arc) program is off to a slow start. Only 71 lenders have made a total of 139 Arc loans--worth $4.6 million--as of June 22, SBA said (American Banker July 2). The program may be off to a sluggish start because of lenders’ concerns about underwriting costs and scrutiny if a borrower defaults, said Arne Monson of Holtmeyer and Monson, a Memphis-Tenn.-based firm. Monson said he serves about 400 community banks but has only made one Arc loan. Arc offers $35,000 in interest-free loans to small businesses. SBA anticipated great demand for the program, so it capped the number of loans financial institutions can offer by the week, but the limit could be eliminated, said Janet Tasker, SBA deputy associate administrator for capital access. Financial institutions can make an Arc loan after looking at three years’ worth of financial statements and two years’ worth of cash flow projections from the applicant ... * WASHINGTON (7/6/09)--During a speech in London last week, Charles Evans, president/CEO of the Federal Reserve Bank of Chicago, suggested several ways banks could create contingent capital and bankruptcy plans to avoid bringing down the entire financial system in the event of a crisis. “The argument is that banks need to hold more capital and they tend to resist holding higher levels because it is expensive,” he said. He noted that the Squam Lake Working Group proposes that systemically important banks should issue new contingent capital certificates, where securities could be sold as debt liabilities to make standard tax-deductible interest payments. However, the liabilities would be converted into equity shares if some predetermined threshold was breached, he said. Another option is to require firms to purchase contingent capital in the form of capital insurance. A final option is to require institutions to have a “shelf bankruptcy” plan that has already considered and addressed problem areas. To carry out this plan, supervisors would require firms to address potential problem areas. “One can envision this plan being stress-tested as part of the regulator examination process,” he said ... * WASHINGTON (7/6/09)--The loans that auto dealers use to purchase dealership inventory will now be partly guaranteed under the Small Business Administration’s Dealer Floor Plan Pilot Initiative, announced Wednesday. Under the plan, the agency will guarantee 75% of floor plan loans with values between $500,000 and $2 million. The program will also be open to boat, RV, and manufactured home dealers. (American Banker July 2) ... * WASHINGTON (7/6/09)--The Department of Housing and Urban Development (HUD) has sharply increased its enforcement actions this past year and is becoming less tolerant of errors in Federal Housing Administration (FHA) mortgages. Expected increases in the agency’s public profile and risk exposure could result in even stricted enforcement actions going forward. One source said that the department acted against 111 lenders during the first nine months of the current fiscal year, a far higher rate than 95 enforcement actions taken during the prior fiscal year. HUD also recently withdrew FHA approval for 102 lenders and fined several others. Lenders have been fined for failing to check credit reports or performing quality-control audits on loans within a prescribed deadline. (American Banker July 2) …

Senate hearing to address rural CU bank issues

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WASHINGTON (7/6/09)--The Credit Union National Association (CUNA) will testify Wednesday before a Senate Banking subcommittee's hearing entitled "The Effects of the Economic Crisis on Community Banks and Credit Unions in Rural Communities." The hearing is being conducted by the subcommittee on financial institutions. Frank Michael, president/CEO of Stockton, Calif.’s Allied CU will testify on CUNA's behalf, Community Reinvestment Association of North Carolina Executive Director Peter Skillern and representatives from other banking groups also will testify during the hearing, which is expected to be chaired by Sen. Tim Johnson (D-S.D.). On the House side, Rep. Barney Frank’s (D-Mass.) Financial Services Committee will hold a markup session for the Section 8 Reform Act of 2009 on Wednesday morning. Frank has also scheduled several hearings on proposed financial regulatory reforms for the remainder of July. He recently said that financial reform legislation could be submitted to the full House of Representatives as soon as August.

NCUA explains CUSO loan restrictions

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ALEXANDRIA, Va. (7/6/09)--In a recent National Credit Union Administration (NCUA) legal opinion letter, the agency addressed a query regarding which restrictions apply to credit union service organizations (CUSOs) that purchase and service delinquent loans. NCUA Associate General Counsel Sheila Albin wrote that the “primary restriction” for CUSOS that service delinquent loans may not “advance new principle.” While CUSOs cannot originate consumer loans that are not student loans or mortgage loans, they may “restructure loans in aid of their collection activity,” she added. According to Albin, the NCUA’s view on these types of transactions is that CUSOs that purchase “non-performing loans” are permitted to restructure delinquent debt, provided the “credit union made the original underwriting decision and no new credit is being extended to the borrower.” The NCUA currently permits CUSOs to change some loan terms, including payment schedules and/or interest rates. However, Albin added, CUSOs should not use these limited loan restructuring rights to attempt to circumvent lending restrictions on federal credit unions. To read the complete letter, use the resource link below.

FDIC advises investors in failed banks or thrifts

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WASHINGTON (7/6/09)--The Federal Deposit Insurance Corporation (FDIC) on Thursday published its Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions. The new policy statement would advise private capital investors that wish to acquire or invest in failed banks or thrifts on the “terms and conditions of the investments or acquisitions,” according to a release. If the policies outlined in the statement came to pass, the FDIC would “establish standards for bidder eligibility in connection with the resolution of failed insured depository institutions.” FDIC Chair Sheila Bair said the agency is “particularly concerned with the owners’ ability to support depository institutions with adequate capital and management expertise.” This policy statement should provide the necessary safeguards, Bair added. Under the rules set forth in the policy statement, the acquired depository institution must be capitalized at a Tier 1 leverage ratio (15%). The leverage ratio must be maintained for three years. However, some of the safety and soundness considerations can be “satisfied with a lower, but a still high level, of Tier 1 capital.” While the FDIC is seeking comment on all aspects of the proposal, the agency particularly requested outside input on “the appropriate level of initial capital” needed to satisfy safety-and-soundness concerns and general economic concerns. Comments are due within 30 days of the statement’s publication in the Federal Register. For the full FDIC release, use the resource link.