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ABA Washington Perspective

Monthly Archive
Vol. II, No. 46, November 14, 2008

ABA Elects Leadership Team for 2009

Arthur Connelly, chairman and CEO, South Shore Bancorp, Weymouth, Mass. (center right), was elected the 2008-2009 ABA chairman during ABA's annual convention in San Francisco. Connelly assumed ABA's top leadership post from Brad Rock, chairman, president and CEO, Bank of Smithtown, Smithtown, N.Y. Also elected were: ABA Chairman-elect Arthur Johnson, chairman and CEO, United Bank of Michigan, Grand Rapids, (right); Vice Chairman Frederick (Rick) Willetts III, chairman, president and CEO, Cooperative Bank, Wilmington, N.C.(center left); and ABA Treasurer Warren K.K. Luke, chairman, president and CEO, Hawaii National Bank, Honolulu (left). Convention delegates also elected new members to the ABA board of directors.

Treasury, Federal Reserve Issue Final Internet Gambling Rule

The Treasury Department and the Federal Reserve Board issued a final rule implementing the Unlawful Internet Gambling Enforcement Act (UIGEA) -- a law that will require financial institutions to block payments from credit cards, checks or electronic funds transfers that settle unlawful Internet gambling wagers.

The rule is effective on Jan. 19, 2009, but compliance is not mandatory until Dec. 1, 2009. During next year's first quarter, ABA will be developing guidance for bankers to assist them in meeting this future compliance deadline.

ABA has told Congress and regulators on many occasions that the 2006 law is unworkable, burdensome and has little chance of stopping unlawful Internet gambling. The patchwork of state and federal laws applied to Internet gambling makes it impossible to determine what transactions should be blocked. Neither the UIGEA nor the regulation provide a definition of "unlawful Internet gambling" so financial institutions are forced into the role of law enforcement, interpreting laws, making the decisions on which transactions to block, and finally blocking those transactions, all without government assistance.

The final rule contains substantial differences from the proposal and it incorporates many of ABA's recommendations. In particular, the final rule clarifies that the obligation of banks is to conduct due diligence of gambling businesses, not gamblers; adopts a more favorable definition of "actual knowledge" in triggering certain bank obligations; and enables banks to rely on account-opening due diligence as sufficient to meet statutory obligations for processes "reasonably designed to identify and block or otherwise prevent of prohibit restricted transactions." This reflects the agencies' recognition that blocking payments in "real time" is not practical and that it is more effective to stop Internet gambling businesses from establishing accounts that would enable them to make or receive any payments.

           
The final rule also:

·         Contains "non-exclusive" sample policies and procedures financial institutions can use during the account-opening process to screen for Internet gambling businesses and meet the requirements of a "reasonably designed" system to block or prohibit restricted transactions.

·         Exempts outbound cross-border ACH credits and wire transfers, although all card transactions remain subject to the rule.

·         Revises the definition of "restricted transaction" to cover only funds being sent to a gambling entity, not funds being sent to the gambler.

·         Clarifies that a payment system participant can rely on a written statement from a payment system operator, such as Visa or MasterCard, that they have established policies and procedures in place to block payments. This would eliminate the provision in the proposed rule that would have required each participant to analyze the card systems procedures.

·         Allows, but does not require, that card networks create merchant codes for different gambling transactions.

·         Allows banks to "overblock" all gambling transactions.

           
Although significant success was achieved by ABA, three important recommendations were not adopted in the final rule: a definition of "unlawful Internet gambling"; a requirement that federal agencies create a list of banned Internet gambling businesses which financial institutions could screen against to block transactions; and an exemption for in-bound cross-border transactions. ABA will continue to work on both the legislative and regulatory fronts to either reverse this initiative or address the remaining implementation problems.

           
In September, the House Financial Services Committee reported a bill that would require the agencies to develop a new rule defining "unlawful Internet gambling" after conducting a full economic impact study of the proposed regulations. But it didn't go anywhere. Chairman Barney Frank (D-Mass.) unsuccessfully sought delay this week in an appeal to the agencies.

HUD Finalizes Major Overhaul of RESPA Regulation

The Department of Housing and Urban Development finalized major changes to its Real Estate Settlement Procedures Act regulation, culminating several attempts at reforms in previous years. Publication is expected in the Federal Register perhaps as early as Nov. 17. Most of the changes will become effective on Jan. 1, 2010.

ABA is disappointed with many aspects of the rule and continues to seek regulatory improvements that focus on the simplification of the entire collection of mortgage-related disclosures. ABA will seek to work closely with the incoming administration and Congress to ensure that regulatory reform objectives are reached that improve consumer disclosure and encourage efficiency and competition.

HUD's new regulation completely replaces the Good Faith Estimate and HUD-1 forms with more voluminous and reformatted disclosures. The rule also specifies what closing costs on the HUD-1 form can and cannot change at settlement, and limits other fee changes to no more than 10 percent of the amounts listed on the GFE. These changes are expected to impose significant compliance costs on lenders.

HUD did not coordinate its RESPA changes with a project underway by the Federal Reserve Board to update its Truth in Lending Act regulation. HUD Secretary Steve Preston said HUD did not have time to coordinate with the Fed. "We thought any delay on moving forward would be at a cost to the consumer," he told reporters. Interest rate and term information, and other TILA-related disclosures, will now be mandated in the RESPA forms.

ABA and a broad coalition of industry trade groups had strongly urged HUD to withdraw the rule, and more than 240 members of Congress said the rule did not simplify or reduce the cost of the mortgage or real estate settlement processes. HUD claimed that the new regulation would save consumers nearly $700 at closing.

The regulation expands the GFE and HUD-1 forms with additional pages, although HUD said the four-page proposed GFE was reduced to three pages in the final rule, including an instructional page. The proposal requiring settlement agents to read a script at closing was replaced with a new page in the HUD-1 form to allow consumers to compare final loan terms and closing costs with those listed in the GFE.

Another significant provision of the regulation is a new rule that will require yield spread premiums to be disclosed. Brokers will be required to show the interest rate of the loan and the percentage that is being "charged or credited for the interest rate chosen." ABA believes the new formulation will be confusing to consumers.

Staff Contact--Rod Alba (202) 663-5592.

Treasury Shifts TARP Funds Away from Buying Bad Mortgage Assets

Treasury Secretary Henry Paulson made it official that the financial stabilization program's original centerpiece, which was to buy illiquid mortgage-related assets, has been shelved so that the funds can be used elsewhere.

Instead, the remaining Troubled Asset Relief Program funds will be deployed to continue to reinforce the stability of the financial system so that banks and other financial institutions can provide credit. He said programs are being evaluated to attract private capital, potentially through a matching program. The capital needs of non-bank financial institutions, which are not eligible for the bank capital purchase program, are also being considered, he added.

Paulson said funds will also be used to provide support for securitizing consumer credit outside of the banking system, including credit card receivables, auto loans, student loans and similar products. He said that market "has for all practical purposes ground to a halt." Treasury is working with the Federal Reserve Board on a potential liquidity facility for highly-rated AAA asset-backed securities.

Paulson said that another priority is to continue exploring ways to reduce the risk of foreclosure. He said Treasury is discussing with the FDIC its IndyMac Bank model for modifying loans to prevent foreclosures, but that the means to finance such a program need to be justified. "We must be careful to distinguish this type of assistance, which essentially involves direct spending, from the type of investments that are intended to promote financial stability, protect the taxpayer and be recovered under the TARP legislation," Paulson said.

Asked about using TARP funds to bail out the auto companies, Paulson said a separate law already provides $25 billion for funding new technology, but that Congress could modify the TARP law to make more funds available. However, he said any solution should lead to viability.

Congress may take up the auto funding issue at a post- election session next week.

Staff Contact--Robert Davis (202) 663-5588.

Regulators Encourage Banks to Lend to Creditworthy Borrowers

In light of federal programs that are making new capital available to banks, broadening deposit insurance and increasing liquidity, the banking regulators made it clear to banks that they are expected to lend to creditworthy borrowers.

"The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers and other creditworthy borrowers," the interagency statement said. The credit should be provided consistent with prudent lending practices.

Banks are also advised to maintain a strong capital position. In this connection, "banking organizations should not maintain a level of cash dividends that is inconsistent with the organization's capital position," the agencies added.

The agencies also said they expect banks to work with existing borrowers to avoid preventable foreclosures. The agencies urged lenders and servicers to adopt systematic, proactive and streamlined mortgage loan modification protocols and to review troubled loans using protocols.

Banks are also advised that management compensation policies should be aligned with the long-term prudential interests of the institution, and that short-term payments for transactions with long-term horizons should be prevented.

The agency requirements apply to all banks, regardless of whether they are participating in the Treasury capital infusion program. Supervisors will support banks' efforts and will monitor compliance, the statement said.

Staff Contact--Wayne Abernathy (202) 663-5222.

New Programs Detailed To Help Homeowners Avoid Foreclosure

One program was announced and another was proposed this week to help more homeowners with troubled mortgages avoid foreclosure.

Fannie, Freddie Program. Fannie Mae and Freddie Mac will launch a streamlined loan modification program by Dec. 15 with uniform eligibility standards supported by the 27 large servicers in the HOPE Now alliance, the Treasury Department, the Federal Housing Administration and the Federal Housing Finance Agency.

The fast-track program will target borrowers who have missed three payments or more. Under the program, the existing loan will be modified to achieve a first mortgage payment of no more than 38 percent of a household's monthly gross income.

This will be achieved through a mix of reducing the mortgage interest rate, extending the life of the loan or deferring payment on part of the principal.

If an affordable payment is not possible, the servicer will further work through a customized process. Servicers will receive an $800 payment for each modified loan in the program.  

FDIC Program. FDIC Chairman Sheila Bair called the Fannie, Freddie program a "step in the right direction but falls short of what is needed."

The FDIC program, formally proposed today, would use federal funds to guarantee up to half of a lender's losses if the borrower whose loan was modified subsequently fails to make payments after making six payments. The loss sharing program would end eight years after the modification.

The FDIC estimated the program would cost $24.4 billion to reduce the number of foreclosures by almost 1.5 million through the end of 2009. The FDIC said it was prepared to run the program for the Treasury Department. It is unclear where the money would come from because Treasury Secretary Henry Paulson is opposed to using the Troubled Asset Relief Program funds.

Using the FDIC's IndyMac modification model, borrowers who missed two payments would be eligible for a reduction in their monthly payment. The new housing payment would be no more than 31 percent of gross income. Servicers would reduce the monthly payment by cutting the interest rate to a minimum of 3 percent, by extending the loan repayment beyond 30 years or by deferring repayment of the principal.

Servicers would be paid $1,000 for each loan modified. Servicers would have to agree to undertake a systematic review of all loans, subject each loan to an expected net present value test and modify all loans that pass the test. Failure to do so would disqualify servicers from further participation in the program. 

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) said he supports the program. 

Staff Contact--Robert Davis (202) 663-5588.

ABA Urges FASB To Indefinitely Suspend Fair Value Effective Dates
ABA urged the Financial Accounting Standards Board to indefinitely delay the effective dates of fair value guidance that has not yet been implemented. Fair value accounting has already exacerbated the problems in financial markets, ABA said, and FASB should take steps to do no further harm.

To continue to require the effective dates "would, at a minimum, further stir up financial markets that are in need of composure, and would moreover presume an outcome from the congressionally mandated study that has not yet been determined," ABA said in a letter to FASB.

ABA recommended deferral of the effective date of SFAS No. 157, fair value guidance for non-financial assets and non-financial liabilities. The effective date is fiscal years beginning after Nov. 15, 2008, and interim periods within those fiscal years.

Deferral was also recommended for SFAS No. 141(R), fair value for business combinations, which is effective for the acquisition date on or after the beginning of the first annual reporting period beginning on or after Dec. 15, 2008.

SEC Study. In comments to the Securities and Exchange Commission on its study of mark-to-market accounting, ABA clarified that it does not support an immediate suspension of all forms of fair value because it would result in confusion for both preparers and investors.

Instead, ABA said it believes that improvements must be made to existing rules prior to Dec. 31, 2008, year-end reporting, and any further moves to require fair value for all financial institutions should be abandoned. 

Regulators Comment. The accounting specialists at the bank regulatory agencies registered their continued strong opposition to expanded use of fair value accounting "beyond where it is currently required or permitted, particularly for non-traded, illiquid financial instruments whose fair value cannot be reliably measured."

In a recent letter to FASB commenting on a paper developed by the International Accounting Standards Board, the regulators said broader use of fair value accounting would increase the accounting complexity for banks, especially medium-sized and smaller institutions, that in general do not use fair values to manage their exposures. The regulators recommended that FASB work on valuation when markets become illiquid.
 

Staff Contact--Donna Fisher (202) 663-5318.

Solution To Accounting for OTTI Recommended To FASB

 ABA recommended to the Financial Accounting Standards Board a solution to the distortions caused by current accounting rules for "other than temporary impairment."

In a letter to FASB, ABA suggested that OTTI, instead of being written down to fair value, should be written down only for the credit impairment related to the investments -- not to the market's perception of that loss through mark-to-market accounting. Therefore, if debt securities continued to pay interest to the banks that hold them, and their credit quality was not impaired, the securities would not have to be written down.

"We strongly encourage the FASB to issue a proposal quickly that would utilize credit risk," ABA said. "Our recommendation would result in simplification and more meaningful information for users of financial statements. Our hope is that this new approach can be applied for Dec. 31, 2008, financial reporting purposes."

ABA's proposal also would satisfy the Securities and Exchange Commission's request in an Oct. 14 letter that FASB "expeditiously address issues" related to accounting rules for OTTI -- something ABA has asked of both agencies repeatedly in meetings and letters.

Staff Contact--Donna Fisher (202) 663-5318.

ABA Recommends Flexibility in FDIC Temporary Liquidity Guarantee Program

Because the FDIC's Temporary Liquidity Guarantee Program was implemented quickly and it is highly likely there will be negative unintended consequences, ABA urged the FDIC to be flexible about changing elements of the program. The TLGP fully insures non-interest bearing transaction accounts and guarantees newly issued senior unsecured debt.

"Maintaining a flexible system, responsive to market realities and U.S. bank and holding company experiences and comments is the most important change that the FDIC can make to the final rule," ABA said in its comment letter.

ABA said it is very important that the program does not create competitive imbalances that would favor banks of different sizes and types or disadvantage or punish banks that choose not to participate.

ABA offered suggestions to improve the interim rule:

·         Overnight federal funds (and other overnight sweeps and transactions) should be excluded from the guarantee program.

·         The 75 basis point fee for guaranteed debt is too high, even for longer-term unsecured debt (and certainly for overnight funds).

·         Institutions should be allowed to issue guaranteed debt or non-guaranteed debt as they consider appropriate, with full disclosure for either decision.

·         The FDIC should provide model disclosures for the temporary protection for non-interest bearing transaction accounts. 

Staff Contact--James Chessen (202) 663-5130.

FDIC Extends Comment Deadline for Part of Premium Proposal

The FDIC extended the comment period for 30 days on portions of its proposal to raise assessments and take risk factors into account. The comment period on the proposal to raise premiums by 7 basis points, effective Jan. 1, 2009, for the first quarter will continue to end on Nov. 17.

The extension for comments through Dec. 17 will apply to the proposed differentiation of assessments based on risk and an additional change in assessments beginning in the second quarter of 2009. The extension also applies to technical and other changes to the risk-based assessment system.

Under the proposal, new risk factors that could increase premiums include a bank's "excessive" use of brokered deposits tied to rapid growth. Another new risk factor would be a bank's excessive use of secured liabilities, including Federal Home Loan Bank advances.

ABA has argued that reciprocal deposits and sweeps from broker/dealer affiliates act more like core deposits and should be distinguished from other brokered deposits. The association also has long opposed including FHLBank advances in the risk-based formula, noting that they provide an important source of liquidity, lower-cost funding and stability that lowers risk of failure.

Staff Contact--Rob Strand (202) 663-5350.

Fannie, Freddie Loan Limits To Remain Unchanged for 2009

The conforming loan limit for single-family loans that Fannie Mae and Freddie Mac can purchase in 2009 will remain at this year's $417,000. The loan limits for two-, three- and four-unit properties will also remain unchanged. When average home purchase prices decline over the previous year, the loan limit does not change.

The special higher limit for loans of up to $729,750 in high-cost areas will drop to $625,500 on Jan. 1, 2009.

The Department of Housing and Urban Development also announced that the maximum for Federal Housing Administration guaranteed loans in high cost areas will also drop to $625,500 on Jan. 1. Prior to being raised to $729,750 in 2008, the high-cost maximum was $362,790. The maximum in low-cost areas in 2009 will be $271,050.

Staff Contact--Rod Alba (202) 663-5592.

ABA Annual Convention Highlights

Connelly Lists Goals for His Service as New ABA Chairman

Banker Arthur Connelly set two major goals for his tenure as ABA chairman in 2009: increased support for BankPac and state association PACs coupled with effective grassroots participation, and working closely with banking regulators to help them better understand the industry.

In his inaugural remarks at the annual convention, Connelly called for an increase in ABA's Direct Contact Bankers program so that more members of Congress will know their hometown banker, "and be eager to take your call when the chips are down in Washington." Connelly urged bankers to carry that message to bankers back home. He said he wanted the letters A-B-A to stand for Aggressive Banking Advocacy.

At the regulatory agencies, Connelly called for "smart regulation" written to help banks serve their communities and help grow the economy. "We must do whatever it takes to see that the consequences for the mistakes others have made do not descend upon us. We followed the rules. Now we must protect our industry."

Brad Rock Calls for More Regulation of Unregulated Lenders

In his farewell remarks at ABA's annual convention, outgoing chairman Brad Rock called for more regulation, not of banks but of unregulated or lightly regulated lenders.

"These are the people and activities that need to be the principal subject of our regulatory focus in the coming months," he said. "If lawmakers do not recognize these essential differences and simply regulate banks more, without addressing the other unregulated activities. . .we will have placed even more burden on the institutions best able to pull us out of this mess -- community banks."

Rock admonished bankers to remember that their participation in ABA grassroots activism is a powerful force in Washington.

Yingling Predicts 2009 Most Important Year for Banking Since 1930s

ABA President and CEO Ed Yingling predicted that next year will be the most important year for the future of banking since the 1930s and that bankers' involvement will be needed not just on one or two occasions, but constantly.

"We will face a very difficult environment -- a wounded economy and a public mad as hell and not discriminating as to who deserves their wrath," he told delegates to the annual convention. "Throughout of this, there will be more ideas for additional regulations than you can imagine; and we have some ideas of our own for less regulation."

Yingling said many community bankers are rightfully angry about the current economic crisis. Most never made a toxic subprime loan, yet all are feeling the effects. Among other reasons, they are mad that the emergency economic stabilization law has been dubbed a "bank bailout," thus tarnishing their own reputation, and that their deposit insurance premiums are increasing.

"We are all angry, and we have a right to be, but we need to channel that anger into a dedication to tell our story to the public, the press and especially to members of Congress every day.

Reich, Olson Predict New Regulatory Structure for Banking

Two financial regulators -- Office of Thrift Supervision Director John Reich and Public Company Accounting Oversight Board Chairman Mark Olson -- predicted that the current financial crisis will likely result in a new regulatory structure.

Reich said the starting point of the discussion will be the Treasury Department's blueprint for reform. But Reich said this is his last year as OTS director and he will leave "sooner rather than later."

Olson predicted a tough time ahead for banking. "This is not going to be a lift-the-reg-burden environment in the next two years," he said.

Selected Short Subjects

·         Capital Purchase Program. The Treasury Department amended its guidance to clarify that non-exchange-traded banks are not subject to the Nov. 14 deadline to apply for the Capital Purchase Program. No deadline was announced. The Nov. 14 deadline applies only to banks that file periodic reports with either the Securities and Exchange Commission or an institution's primary federal regulator and are listed on a national securities exchange. ABA requested the clarification.

·         Appraisals. The federal bank, thrift and credit union regulatory agencies jointly proposed interagency appraisal and evaluation guidelines to update 1994 guidelines. The proposal is intended to respond to heightened concerns over appraisals and credit quality, the agencies said. The guidance would provide additional detail on the agencies' expectations for independent appraisals and provide greater explanation of agencies' minimum appraisal standards. The deadline for comments will be 60 days after the proposal is published in the Federal Register.

·         Stored Value Cards. The FDIC updated its general counsel opinion No. 8 to clarify that all funds underlying stored value cards will be treated as "deposits" to the extent that the funds have been placed at an insured depository institution. The funds will be insured to the FDIC insurance limit and premiums will be assessed. The policy also discusses the insurance of stored value cards issued by third parties. The treatment of the funds is the same as a 2005 proposal.

·         Credit Cards. The Office of the Comptroller of the Currency ruled against a request by the Financial Services Roundtable and the Consumer Federation of America to allow banks to provide workout programs to credit card borrowers. Under the proposal, borrowers would repay less than the full amount over time and banks would defer loss recognition. OCC responded that banks have the option of offering relief on the card principal provided it is accounted for off-balance sheet with any repayment recorded as a recovery. But OCC said it is not prudent to defer timely recognition of loss. The program would have allowed as much as 40 percent of credit card debt to be forgiven for customers who don't qualify for existing repayment plans.

·         Foreign Tax Credits. ABA presented a white paper to the Internal Revenue Service seeking reversal of an IRS practice of challenging banks' use of foreign tax credits on grounds that they lack economic substance. The IRS appears to argue that the core of the banking business -- obtaining and providing financing -- lacks purpose and economic substance, ABA said. "By denying foreign tax credits claimed with respect to our members' financing and investment transactions, the IRS will impose double a tax on our members' income. . ." and contradicts congressional intent, ABA said.

·         Realtors CU. The National Credit Union Administration chartered the Realtors Federal Credit Union, Rockville, Md., with a national field of membership. The credit union will operate as an Internet-based credit union without physical branches. The credit union will be available only to members and employees of the National Association of Realtors.

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ABA Washington Perspective is published Mondays by the American Bankers Association as a service to its members.

For more information on this publication and other services provided by ABA, e-mail the editor Jim Eberle, or write to: Jim Eberle, American Bankers Association, 1120 Connecticut Avenue, NW, Washington, DC  20036.