Iowa Banking Law Blog

Regulators Issue Statement on Avoiding Losses Associated with Securitized Mortgages

The federal banking regulators (the FDIC, Federal Reserve, OCC, OTS, and NCUA), along with the Conference of State Bank Supervisors (CSBS) issued a statement encouraging regulated institutions that service mortgage loans to employ certain "loss mitigation techniques" that would preserve homeownership.  The statement is a follow-up to the April 2007 Statement on Working with Mortgage Borrowers and the July 2007 Statement on Subprime Mortgage Lending.  Unlike these previous statements, which urged prudent workout arrangements, the new statement is focused on mortgage loans that have been transferred into securitization trusts. 

The regulators state that when faced with an increased risk of default, servicers of loans should: contact the borrower and assess their ability to repay, assess whether default is reasonably foreseeable, and explore, where appropriate, a loss mitigation strategy that avoids foreclosure, such as loan modifications, payment deferral, conversion into fixed rate, and capitalization of delinquent amounts.

In considering loss mitigation techniques, the statement urges services to consider the borrower's income, debt, and housing related expenses.  Servicers are also urged to refer borrowers to government programs, non-profits, and counseling services that could assist the borrower.  The statement claims that "loss mitigation techniques" that preserve homeownership are less costly than foreclosure. 

This guidance was issued as political pressure to address the mortgage industry mounts.  Presidential candidates have increasingly integrated mortgage and foreclosure issues into their agendas.  President Bush threw his hat in the ring last week by announcing that his administration would put forth proposals to prevent some expected defaults over the next two years.

Unfortunately, this regulatory statement may not stem the congressional tide to over-regulate the industry.

Agencies Issue Proposed Illustrations on Subprime Mortage Lending

          The federal agencies this week issued proposed illustrations contemplated by last month's jointly issued Statement on Subprime Mortgage Lending (Subprime Statement).  Triggered by the agencies' concerns over subprime mortgage lending practices for certain adjustable-rate mortgage (ARM) products, the illustrations aim to improve communications between lenders and consumers by providing examples of the types of communications anticipated by July's Subprime Statement. 

          The Subprime Statement encourages lenders to provide consumers clear, balanced, and timely information to help consumers more effectively weigh the costs and benefits of certain ARM products.  The illustrations both:

• explain some important features and hazards identified in the Subprime Statement (such as payment shock), and
• provide a chart of potential implications of payment shock in a specific, easy-to-understand fashion.

          Use of the illustrations is completely voluntary.  Institutions are free to tailor the illustrations to reflect their product offerings, current market conditions, and a consumer's particular loan requirements.  Whether institutions choose to use the illustrations or not, they should review their statements to consumers regarding subprime lending to ensure that they are clear, balanced, and full explain the terms and risks of such loans.

         The agencies seek public comment on the proposed illustrations.  Comments are due 60 days from the Federal Register publication.  The proposed illustrations are available here on the OTS website.

          For more information on ensuring that your institution is making the necessary disclosures, contact Megan Erickson of Dickinson, Mackaman, Tyler & Hagen, P.C. at 515-244-2600. 

OTS Issues Notice of Proposed Rulemaking on Unfair and Deceptive Practices

On August 3, 2007, the Office of Thrift Supervision (OTS) issued an Advance Notice of Proposed Rulemaking seeking comments not only about defining unfair and deceptive practices but also about whether the OTS should expand current prohibitions against unfair or deceptive acts.  The OTS seeks comment on various issues, including:

• Should the OTS consider further rulemaking on unfair and deceptive practices that would cover products and services in addition to consumer credit? 
• Should the rulemaking cover non-savings institution entities that are related to a savings institution? 
• What principles should OTS consider in defining an act or pratice as unfair and deceptive? 
• Is the FTC guidance on unfair and deceptive practices appropriate for the OTS?
• Should the OTS expand its advertising regulation?

The OTS's proposal does not commit the agency to any particular course of action, if merely seeks comment on the most effective course of action.  Nonetheless, it is a strong indication that the OTS intends to strengthen its unfair and deceptive practices regualtions.  Many analysts think that, at the very least, any OTS rule or guideline will address issues related to unfair mortgages due to the increasing delinquency and foreclosure rates on home loans.

As a bit of background, the Federal Trade Commission Act shields depository institutions from FTC enforcement, leaving unfair and deceptive practices to the Federal Reserve, OTS, and NCUA to deal with.  In June, Rep. Barney Frank threatened the Federal Reserve, stating that if it does not use its rulemaking authority to address unfair and deceptive pratices, and subprime lending specifically, then Congress may take away the Federal Reserve's rulemaking authority on the issue and give it back to the FTC. 

By taking this step, the OTS has put further pressure on the Federal Reserve to take action.  To date, the Federal Reserve has expressed a preference for using its supervisory authority on a case-by-case basis, as opposed to writing proscriptive regulations.  (link to article on Federal Reserve Governor Kroszner's statements in House hearing). 

The full text of the proposed rulemaking can be found here:  http://www.ots.treas.gov/docs/7/73373.pdf

For further information contact Mary A. Zambreno and Jeffrey J. Andersen of Dickinson, Mackaman, Tyler & Hagen, P.C.

Federal Agencies Issue Final Illustrations of Consumer Information for NonTraditional Mortgage Products

After reviewing comments on proposed illustrations, the OCC, Federal Reserve, OTS, FDIC, and NCUA have issued three final illustrations intended to help institutions implement the consumer protection portion of the Interagency Guidance on Nontraditional Mortgage Product Risks adopted in 2006.  A copy and description of the illustrations are available on the Federal Reserve website (link).  The use of the illustrations is optional, institutions are free to provide consumer information described in the Interagency Guidance in another manner.  Since the illustrations come directly from the regulatory agencies, however, the prudent approach may be to use the illustrations and tailor them to your institution’s circumstances and your customer’s needs.  Each of the agencies will post the illustrations on their web sites in a downloadable and printable form. 

If you have any questions concerning the final illustrations or the implementation of these illustrations at your institution, please contact

Jeffrey J. Andersen.