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On July 20, the Senate Committee on Banking, Housing, and Urban Affairs (Committee) held a hearing entitled, “Housing Finance Reform: Maintaining Access for Small Lenders.” Frequent topics of discussion in the hearing included, among other things, housing finance reform, secondary market access, affordable housing, access to credit in rural areas, mortgage insurance, and mortgage backed securities issued by government-sponsored enterprises (GSEs), operating under conservatorship since 2008.
Sen. Mike Crapo (R-Idaho), Chairman of the Committee, remarked in his opening statement that “small lenders play a critical role in the mortgage market,” and that a need exists to preserve access to the secondary market. However, Sen. Crapo asserted that although GSEs are currently earning profits, a risk exists for taxpayers if there is a market downturn. “A mortgage market dominated by two huge government-sponsored companies in conservatorship is not a long-term solution, and is not in the best interest of consumers, taxpayers, lenders, investors, or the broader economy,” Sen. Crapo stated.
Sen. Sherrod Brown (D-Ohio), ranking member of the Committee, released an opening statement in which he stated, “[S]mall lenders are often the only lenders willing to go the extra mile to underwrite mortgages . . . in cities’ urban core and in rural communities. . . . As we continue to debate the role of the GSEs, private capital, and large financial institutions in providing access to affordable mortgages, we cannot create a system that allows the GSEs or new players to use a business model that serves only the largest lenders, the highest income borrowers, or the well-off pockets of our country.”
The coalition of consumer groups and small lenders present at the hearing supported GSE reform, sought additional support for small lenders, and called for prompt government action relative to housing finance reform.
The July 20 hearing—a video of which can be accessed here—included testimony from the following witnesses:
- Ms. Brenda Hughes, Senior Vice President and Director of Mortgage and Retail Lending, First Federal Savings Bank of Twin Falls, on behalf of the American Bankers Association (testimony)
- Mr. Tim Mislansky, Senior Vice President and Chief Lending Officer, Wright-Patt Credit Union and President and CEO, myCUmortgage, LLC on behalf of the Credit Union National Association (testimony)
- Mr. Jack E. Hopkins, President and CEO, CorTrust Bank, N.A., on behalf of the Independent Community Bankers of America (testimony)
- Mr. Charles M. Pruvis, President and CEO, Coastal Federal Credit Union, on behalf of the National Association of Federally-Insured Credit Unions (testimony)
- Mr. Wes Hunt, President, Homestar Financial Corporation, on behalf of the Community Mortgage Lenders of America (testimony)
- Mr. Bill Giambrone, President and CEO, Platinum Home Mortgage and President, Community Home Lenders Association (testimony)
On July 20, the Senate Banking Committee will hold a hearing on mortgage reform for small lenders. The hearing, entitled “Housing Finance Reform: Maintaining Access for Small Lenders,” will feature witnesses from the American Bankers Association, the Credit Union National Association, the Independent Community Bankers of America, the National Association of Federally-Insured Credit Unions, the Community Mortgage Lenders of America, and the Community Home Lenders Association.
FHFA Director Testifies Before Senate Banking Committee, Provides Overview of Housing Finance System and Prospects for Reform
On May 11, the Senate Banking Committee held a hearing at which FHFA Director Mel Watt fielded questions from lawmakers about the conservatorships of Fannie Mae and Freddie Mac (the Enterprises) and prospects for housing finance reform. In his opening statement, Committee Chairman Mike Crapo (R-ID) noted that Fannie and Freddie have been in conservatorship for close to nine years, and stated that “a housing finance system dependent on two government sponsored enterprises in perpetual conservatorship is not a sustainable solution.” According to Sen. Crapo, because approximately 70 percent of mortgages are backed by the federal government, “if the housing market experiences a downturn, taxpayers could again be on the hook for billions of dollars.” Ultimately, the Chairman set forth his position that housing finance reform should be considered the “most significant piece of unfinished business following the financial crisis.”
Meanwhile, FHFA Director Watt testified that, under his leadership, FHFA has “responsibly balanced” and met its “multiple statutory mandates to manage the Enterprises’ day-to-day operations.” He also identified some of the key changes and reforms that have taken place during the conservatorships, including: (i) requiring the Enterprises to emphasize sound underwriting practices in their purchase guidelines; (ii) reducing the Enterprises’ retained portfolios by over sixty percent since 2009; and (iii) developing effective loss mitigation programs, which include aligning the Enterprises’ loss mitigation standards and developing updated loan modification and streamlined refinance products to follow the Home Affordable Modification Program and the Home Affordable Refinance Program.
Director Watt also acknowledged that “FHFA knows probably better than anyone that these conservatorships are not sustainable” and urged Congress to act on several issues related to housing finance reform, including:
- developing a transition process to a new housing finance system to avoid disruption to the housing finance market;
- determining whether the federal government should provide taxpayer backing for the conservatorship, and if so, in what form;
- addressing the role the Enterprises might play in the reformed housing finance system and what statutory changes to their organizational structures, purposes, ownership and operations will be needed to ensure that they play their assigned roles effectively; and
- identifying what regulatory and supervisory structure and authorities will be needed in a reformed system, and who will have responsibility to exercise those authorities.
Furthermore, Director Watt noted that under the provisions of the Enterprises’ Preferred Stock Purchase Agreements, on January 1, 2018 the $1.2 billion buffer protecting the Enterprises against having to make additional draws of taxpayer support in the event of an operating loss in any quarter would be reduced to zero, at which time “neither Enterprise will have the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support.” Director Watt warned that such a situation could erode investor confidence and “stifle liquidity in ways that could increase the cost of mortgage credit to borrowers.” Accordingly, the Director argued that the Enterprises “need some kind of [capital] buffer to shield against short-term operating losses” that could “result in an additional draw of taxpayer support and reduce the fixed dollar commitment Treasury has made to support the Enterprises.”
Reaction of Industry Organizations. In a statement issued shortly after the hearing, Camden R. Fine, President and CEO of Independent Community Bankers of America (ICBA), expressed support for Director Watt after his testimony, agreeing about the need for Fannie and Freddie “to retain their earnings and to start rebuilding their capital buffers.” Meanwhile, Competitive Enterprise Institute (CEI) financial policy expert John Berlau was critical of what he called “an unfair, ongoing government policy of confiscating all Fannie/Freddie shareholder profits.” According to Mr. Berlau, the Enterprises’ “perilous financial state is the direct result of the Obama administration’s 2012‘Third Amendment’ policy, which confiscates all of Fannie and Freddie’s profits for the US Treasury.” He argued that curtailing this policy would allow the Enterprises to “retain some earnings and build capital to spare taxpayers another bailout.”
On May 12, FDIC Vice Chairman Tom Hoenig spoke at the Systemic Risk and Organization of the Financial System Conference in California. He delivered prepared remarks on “Financial Markets and Accountability: A Better Way Forward.” Specifically, Hoenig discussed his views on the need for change in the banking industry and how his recently introduced reform proposal would strengthen the financial system and provide regulatory relief and long-term economic growth.
Hoenig argued that his proposal, “Regulatory Relief and Accountability for Financial Holding Companies Engaged in Nontraditional Banking Activities,” would help cure the ills and vulnerabilities of the current U.S. financial system, in which the largest banks have grown disproportionately big with activities that are too consolidated, resulting in a financial system that remains “heavily subsidized, increasingly concentrated, and less competitive.”
Hoenig’s proposal outlines ideas to address too-big-to-fail, enhance financial stability, and return the “safety net to its original purpose of depositor and payment system protection.” The proposal requires the largest banks to hold more capital, while partitioning nonbank activities away from the safety net. Hoenig stated that his proposal is intended to enhance competition by creating a more level playing field between insured and noninsured financial firms. The proposal also inhibits the intermingling of funding and operations between affiliates, which, while advantageous during good times, provides “far greater advantages” during bad times. Hoenig stated this would provide more stability and more consistent economic growth, and facilitate resolution using bankruptcy.
ICBA Support. Independent Community Bankers of America President and CEO Camden R. Fine issued a statement on Hoenig’s remarks, agreeing that “excessive regulatory burdens have exacerbated the dangerous consolidation of the banking industry into fewer and fewer hands,” and that “[t]o combat excessive consolidation and concentration of resources in the largest and most systemically risky financial firms, ICBA advocates comprehensive regulatory relief for community banks.” ICBA recently published a white paper entitled Community Bank Regulatory Relief: A Roadmap to Economic Growth and Prosperity outlining its views on regulatory reform.
On April 18, three industry organizations representing community banks and credit unions—the Credit Union National Association (CUNA), the Independent Community Bankers of America (ICBA), and the National Association of Federally-Insured Credit Unions (NAFCU)—sent a letter urging the Federal Reserve System (Fed) to provide central bank settlement services in support of private sector development of future payment systems, rules, and standards. The letter also urges the Fed to take on three operational roles in addition to settlement capabilities: (i) to serve as an “on-ramp” to real-time payments; (ii) to serve as a real-time payments operator, much as it currently is an operator for checks, automated clearinghouse payments, and wire transfers; and (iii) to maintain a “payments directory” that would link together financial institutions and private-sector payments directories. The organizations argue, among other things, that the Fed’s commitment to these operational roles is critically important to achieving the “much-needed goals of safety, equitable access, and ubiquity” in developing an improved payments system. The letter emphasizes that the organizations are not requesting that the Fed develop rules or standards for real-time payments, but rather take the position that such efforts “should be left for private sector rules and standards organizations.”
As previously covered by InfoBytes, the Fed created the Faster Payments Task Force and the Secure Payments Task Force in June 2015 to lead industry efforts toward a speedier and better payments system. The CFPB also issued a set of guiding principles aimed to help private industry better protect consumers as new, faster electronic payment systems continue to emerge. (See InfoBytes coverage) The April 18 letter “applaud[s] the formation of both [Task Forces]” and “strongly encourage[s] the ongoing commitment of the [Fed] to lead and catalyze payments industry activities until the desired outcomes stated in the 2015 Strategies for Improving the U.S. Payments System paper are achieved.”
State AGs, Industry Groups Submit Comments Addressing CFPB’s Proposed Delay of Prepaid Accounts Rule
As previously covered in InfoBytes, the Bureau released its final rule (the “Prepaid Accounts Rule”) on prepaid financial products in October of last year in order to provide consumers with additional federal protections under the Electronic Fund Transfer Act and also to offer consumers standard, easy-to-understand information about prepaid accounts. Recently, however, the CFPB announced its intention to delay the effective date of its Prepaid Accounts Rule by six months. If approved, the proposed extension would push back the current October 1, 2017, effective date to April 1, 2018. According to the proposed rule and request for public comment published by the Bureau in the March 15 Federal Register, the extension comes in response to comments received from “some industry participants” who “believe they will have difficulty complying with certain provisions.” The CFPB has taken the position that extending the deadline for compliance “would, among other things, help industry participants address certain packaging-related logistical issues for prepaid accounts that are sold at retail locations.” Comments on the proposal were due April 5.
State AG’s Letter. On April 5, attorneys general from 17 states and the District of Columbia submitted a letter to congressional leaders presenting various arguments against pending House and Senate resolutions (S.J. Res. 19, H.J. Res. 62, and H.J. Res. 73) providing for congressional disapproval and effectively nullifying the CFPB’s Prepaid Accounts Rule. The state attorneys general—including AGs for the District of Columbia, California, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Mississippi, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, and Washington, along with the Executive Director of the Hawaii Office of Consumer Protection—argued, among other things, that consumer protections provided by the Rule are important because, among other things, “consumers frequently report concerns about hidden and abusive fees as well as fraudulent transactions that unfairly deplete the funds loaded onto prepaid cards.” The AGs’ letter notes further that prepaid cards are often used by “vulnerable consumers” who have limited or no access to a traditional bank account. Notably, although they characterize these congressional resolutions as a “misplaced effort,” the state AGs acknowledge that the Congressional Review Act “gives Congress, with the President’s signature, a window to veto a rule from going into effect.”
American Bankers Association (ABA) Letter. In another comment letter, submitted on April 3, the ABA commended the CFPB for “proposing to extend the deadline” because, among other things, “some industry participants, especially those offering prepaid cards in retail stores, may have difficulty complying with certain provisions.” The ABA also noted that the extension of time presents an opportunity for the Bureau to “consider making adjustments as appropriate to ensure unnecessary disruption to consumers’ access to, and use of, prepaid accounts.” As explained in the letter, the ABA’s primary concern about the Prepaid Accounts Rule “remains the inconsistency and lack of clarity of the regulation’s distinction between checking accounts and prepaid accounts.” To this end, the ABA recommends that the Bureau use the extra time to “remove inconsistencies in the Rule and clarify the distinction between a prepaid account and a checking account to ensure that banks do not inadvertently violate the regulation and risk significant potential liability and supervisory actions.” The ABA’s letter also calls for “similar changes” to the “definition of ‘payroll account’” in order to further distinguish product types.
Independent Community Bankers of America (ICBA) Letter. Also on April 3, the ICBA also submitted a short comment letter stating, among other things, that it “fully supports extending the effective date” as the additional time will “ensure that systems and technology changes could be made to facilitate compliance.”
- Jonice Gray Tucker to discuss “How the new administration sets the tone for 2021” at the American Conference Institute Legal, Regulatory and Compliance Forum on Fintech & Emerging Payment Systems
- Sherry-Maria Safchuk to discuss UDAAP in consumer finance at an American Bar Association webinar
- Jeffrey P. Naimon to discuss "What to expect: The new administration and regulatory changes" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “The future of fair lending” at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Steven R. vonBerg to discuss "LO comp challenges" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss “The False Claims Act today” at the Federal Bar Association Qui Tam Section Roundtable