Iowa Banking Law Blog

Reform of Financial Services Regulation, Long Rumored, Now Questioned

The U.S. Treasury today has begun the long anticipated review of the regulation of financial services in the United States. The U.S. Treasury will be seeking comment and pose a series of questions to determine whether the current system of regulation is working. The agency apparently intends to conduct an in depth inquiry as to whether the federal oversight can be streamlined with the obvious implication that the number of regulatory agencies needs to be reduced. For example, should the Office of Thrift Supervision and the Office of the Comptroller of Currency be combined? What role should the Federal Reserve have in the bank regulation? Should the FDIC serve as both insurer and regulator? No industry is immune from revisiting its regulation. Banking, insurance, securities and commodities are all at issue. These questions should ignite a spirited and vested debate.  A monumental proposal for a changing of the guard may be on the horizon.

The formal notice and request for public comment from the Department of Treasury is available here: Review by the Treasury Department of the Regulatory Structure Associated with Financial Institutions.

When Federal and State Law Collide in Garnishment Procedures

The Agencies have issued a proposed guidance concerning garnishment orders received by financial institutions.

Generally, federal law protects certain federal benefits – such as Social Security, Supplemental Security income, Veterans’ benefits, Federal Civil Service retirement benefits, and Federal Railroad retirement benefits – from inclusion in garnishment orders.  Unfortunately, however, when garnishment orders are sought in state court by creditors and debt collectors, either some orders may not provide that certain funds are exempt from garnishment due to federal law or the customer’s account is a commingled mixture of exempt and non-exempt funds.  Financial institutions, in an effort to comply with the state court order, typically put a freeze on the account until the issue can be resolved but because these exempt federal benefits are sometimes the only source of income for individuals, even a temporary freeze on the account can wreak havoc on an individual’s financial security. 

The proposed guidance is intended to solicit comments regarding how to comply with both federal and state laws.  The proposed guidance also proposes best practices, such as promptly notifying the customer of a garnishment order, determining whether accounts contain only exempt funds, notifying the creditor that the account may contain exempt funds, minimizing the cost to the customer by refraining from charging certain fees, and lifting the freeze as soon as permissible.

Comments can be made via the Federal Reserve’s website or by email, fax, or snail mail.

For further information contact Mary Zambreno.

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. 

OCC Issues Proposal for Regulatory Relief

On July 3, 2007 the OCC issued proposed rules intended to reduce the regulatory burden faced by national banks and to update various OCC regulations.  The 74 page proposal was published in the Federal Register.  While the changes are relatively modest, the proposal shows that the OCC is cognizant of significant regulatory burden faced by national banks.  A few of the changes are outlined below:

-An applicant for a national bank would no longer need to file a proxy with the local district office and the OCC's securities practices division.  Under the proposed rule filing with the securities division alone will suffice.

-The review period for a change in permanent capital is cut from 30 days to 15 days.

-Bank officers and employees who make investment recommendations for customers will have 20 additional days to report personal transactions to the bank.  They will now have 30 days after the end of the quarter to make such reports.

-When opening an intermittent branch every year at a specific location or event multiple applications will no longer be required.

The changes given above are only examples of the changes proposed.  In addition to these, the proposed changes streamline the rules governing electronic banking, community development investments, record keeping requirements for securities transactions, fiduciary powers, and activities for operating subsidiaries.

State bank regulators may review these changes to determine whether they should follow suit to maintain some semblance of competitive equality.