July 5, 2007
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Draft “Security Freeze” Bill Unveiled
AFSA Comments on Federal Regulatory Agencies’ Final Statement on Mortgage Lending
AFSA Submits Letter to Fed on Electronic Disclosures under Reg Z
DaimlerChrysler Financial to Split Units
New Wells CEO Faces Housing Challenge
Minnesota Paves the Way to Making Retailers Pay More for Data Losses
Poll Shows Mixed Trends in Solicitations via Mail
Many Major Merchants Still Lax on Credit Card Data Security
Prepaid Cards Are Opening Doors for the Unbanked in the US
Mortgage Mess Shines Light on Brokers' Role
Program to Bail Out Owners
Feds Issue Final Subprime Rules
S&P, Moody's Hide Rising Risk on $200 Billion of Mortgage Bonds
About 28 Million People Deliberately Swear Off Banks
Bankruptcies Back on the Rise
Bank Regulators to Unveil New Subprime Loan Standards--Reuters
Hundreds of New Iowa Laws Begin July 1
Oregon Legislature Adjourns Sine Die
Car Title Loan Company Challenges Oregon Interest Rate Limit
Draft “Security Freeze” Bill Unveiled
Representative Carolyn Maloney (D-NY), Chairwoman of the House Financial Institutions and Consumer Credit Subcommittee, unveiled a draft bill last week that would allow all consumers to place a “security freeze” on their credit reports. According to the first draft, the legislation would allow consumers to freeze their credit file for any reason--by mail, telephone, Fax or online. Consumer-reporting agencies would be required to place the freeze on the consumer’s report within one day of receipt of the request and to remove the freeze within 15 minutes of a request by the consumer.
AFSA opposes this approach to a credit freeze on the grounds that it would adversely affect the credit system in the U.S. economy, while still not adequately protecting consumers. Allowing consumers the file freeze by phone, fax or online does nothing to authenticate the identity of the party requesting the freeze. Such a federal statute would actually provide fraudsters additional tools to harm consumers and make it more difficult for victims to repair their credit. In addition, widespread use of a credit freeze, if not used properly, could also inhibit consumers’ ability to receive credit at times when they need it most.
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AFSA Comments on Federal Regulatory Agencies’ Final Statement on Mortgage Lending
While the federal agencies that authored the final Statement on mortgage lending released June 29th deserve credit for their efforts to provide greater uniformity and clarity for the mortgage lending process, AFSA remains concerned that this standard will limit borrowing choices. “In particular, the Statement’s guideline calling for lenders to underwrite to a fully indexed rate means some consumers will not qualify for homes while others will be unable to obtain refinancing,” said AFSA president/CEO Chris Stinebert in a comment released to the media.
The statement severely restricts the use of stated-income loans and scales back the permissible use prepayment penalty provisions. In addition, the statement establishes a new standard for determining a borrower’s ability to repay based on underwriting tied to a fully indexed rate, which is defined as index plus margin.
The statement serves to guide the examination process of depository institutions that are involved in mortgage lending. A number of state regulators have already indicated their intention to adopt the statement for state-regulated lenders in their jurisdictions. AFSA is cautioning policy makers at all levels to refrain from going beyond this statement--until its impact on the market can be evaluated.
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AFSA Submits Letter to Fed on Electronic Disclosures under Reg Z
On June 29, AFSA submitted a comment letter in response to a proposed rule published by the Board of Governors of the Federal Reserve Board that relates to electronic disclosures under the Board’s “Regulation Z.”
“AFSA supports the proposal and urges the Board to adopt it in final form with one modification,” wrote the association. “AFSA believes the proposal provides sufficient and satisfactory guidance with respect to the provision of electronic disclosures under Regulation Z.”
In its letter, AFSA also asked the Board to reconsider its approach as it relates to the provision of application and solicitation disclosures electronically so as to permit a card issuer to provide such disclosures through a clear and conspicuous link provided on or with an electronic application or solicitation.
(click for web site)
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DaimlerChrysler Financial to Split Units
Forbes (07/02/07)
DaimlerChrysler Financial Services has announced that when Daimler sells its Chrysler Group operation to Cerberus Capital Management, DaimlerChrysler Financial Services will unlink its Mercedes-Benz and truck financial businesses from Chrysler Financial. However, company spokesperson Jack Ferry declined to say whether Chrysler Financial operations would at some point be integrated into GMAC Financial Services.
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New Wells CEO Faces Housing Challenge
Los Angeles Times (06/28/07) Reckard, E. Scott
John G. Stumpf, president of Wells Fargo since mid-2005, succeeds Richard Kovacevich in the chief executive officer position. Kovacevich will most likely stay on as the company's chairman until he turns 65 in two years. These two men have been instrumental in continuing to develop the Wells name since their Minneapolis-based Norwest Corp. took over the company in 1998. As the new CEO, Stumpf faces a number of challenges, including the toughest housing market since 1991. Still, even in the face of adversity the company has continued to remain competitive, with profits rising 11 percent to $2.24 billion in the first quarter of this year.
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Minnesota Paves the Way to Making Retailers Pay More for Data Losses
IT Business Edge (07/04/07) Weinschenk, Carl
Several states are considering legislation that would hold retailers responsible for costs incurred by banks and credit unions as a result of data breaches. In California, the Senate Judiciary Committee last month approved a bill that would force retailers to reimburse financial institutions for these costs and forbid them from storing certain types of information. Retailers would also be required to use strong encryption and access controls during data transmission. The bill now moves to the Senate Appropriations Committee, which is expected to hold hearings on the legislation before the end of next month. Texas, Connecticut, Illinois, and Massachusetts are considering similar laws. At the federal level, meanwhile, a representative of The Presidential Task Force on Identity Theft is pushing for national standards that would protect data and force companies that suffer data breaches to promptly notify affected consumers.
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Poll Shows Mixed Trends in Solicitations via Mail
American Banker (06/29/07) Breitkopf, David
A recent study conducted by Auriemma Consulting Group shows some mixed trends in direct-mail solicitations of credit cards. The survey, which was conducted in January, found that 60 percent of consumers had responded at least once to a card offer they received in the mail, up from 39 percent in December 2005. However, the percentage of offers that are opened dropped from 29 percent in December 2005 to 26 percent in January. Forty-eight percent of the respondents taking part in the January survey said they never open direct mail credit card solicitations. The results of the survey are spurring some issuers to take a look at alternative marketing channels. JPMorgan Chase, for example, is focusing more of its marketing efforts on its branches and merchant partnerships.
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Many Major Merchants Still Lax on Credit Card Data Security
Electronic Payments International (06/28/07) P. 7
The Payment Card Industry Security Standards Council (PCISSC) has set a September 2007 deadline for compliance with its Data Security Standard (DSS). Yet of the approximately 1.5 billion credit card transactions that occur annually, less than half of them demonstrate DSS-compliance, said ExaProtect CEO Jean-Francois Dechant. Dechant added that many merchants have no immediate plans of achieving such compliance, despite potential fines of up to $500,000 from the PCISSC. The DSS requires merchants to uphold an information security policy, maintain vulnerability management programs and secure networks, and protect cardholder data. The standard also includes provisions for monitoring and testing networks along with implementing competent access control measures. ExaProtect noted that $160 billion of credit card transactions each year exhibit DSS compliance, yet $200 billion transactions do not.
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Prepaid Cards Are Opening Doors for the Unbanked in the US
Electronic Payments International (06/28/07) P. 7
H&R Block's reloadable Emerald Prepaid MasterCard product was responsible for the meteoric ascension of H&R Block Bank's assets from $14 million to $211 million between March and mid-May 2006. The new prepaid card accounts were restricted to clients completing their taxes in one of H&R Block's nearly 13,000 branches and were promoted as a direct-deposit alternative to getting income tax refunds by check. "Blending the functions of a traditional bank account with the benefits of the Emerald Card provides a unique banking experience that meets many of our tax clients' needs and gives them the opportunity to easily enter a banking relationship," remarked H&R Block Bank President Kathy Barney. H&R Block Chairman and CEO Mark A. Ernst noted how significant it was that close to 40 percent of the bank's customers previously lacked a banking relationship, adding that his firm calculated that clients saved over $60 million in tax refund check-cashing fees through their adoption of the prepaid cards. Customers are now using their accounts for payroll deposits and other kinds of transactions. Emerald Cards can be reloaded by a customer's employer at MoneyGram's 27,000 sites or Green Dot's 50,000 sites, and Emerald Card accounts can be elevated to checking accounts as well.
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Mortgage Mess Shines Light on Brokers' Role
Wall Street Journal (07/05/07) P. A1; Simon, Ruth; Hagerty, James R.
As more and more borrowers default on home loans they could not afford or whose terms they did not understand, the role of mortgage brokers increasingly is being scrutinized. Wholesale Access reports an increase in the number of broker-assisted loans to 58 percent of all mortgages from 40 percent over the last 10 years, with brokers accounting for about 50 percent of prime loans, 75 percent of subprime loans, and 70 percent of Alt-A mortgages. Experts say lenders are willing to work with mortgage brokers because they eliminate the need to open numerous branches, hire new employees and cover their benefits. and lay off workers when demand declines. However, there are concerns about the inability to cease unethical and criminal behavior on the part of mortgage brokers, as the Conference of State Bank Supervisors reveals a lack of licensing laws in 32 states and the absence of mandatory criminal background checks in nine states. While some lawmakers, including Sen. Charles Schumer (D-N.Y.), insist that regulations governing mortgage brokers need to be put into place, National Association of Mortgage Brokers Legislative Chairman Joseph Falk does not see a need to point the finger at brokers when lenders, individual loan officers, and Wall Street investment banks also contributed to problems currently affecting the subprime market.
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Program to Bail Out Owners
Memphis Commercial Appeal (TN) (07/05/07) Flaum, David
The Federal Home Loan Bank of Cincinnati has created a new program that will make discounted-rate money available to its members for the purpose of bailing borrowers out of mortgages that are about to go into default. The bank will provide up to $250 million to banks, thrifts, and credit union members at interest below the going rate. "There are thousands of families who will be put at risk of foreclosure when interest rates are recalculated on their adjustable-rate mortgages," says Cincinnati FHLB President and CEO David Hehman. The goal is to help prevent some foreclosures; but Brenda Harper, vice president of mortgage lending for Hope Community Credit Union, says banks will need to make a profit somehow for the program to be a success.
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Feds Issue Final Subprime Rules
Realty Times (07/03/07) Perkins, Broderick
On July 2, the Office of the Comptroller of the Currency, the Federal Reserve Board of Governors, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration issued rules for federally regulated mortgage brokers and lenders regarding subprime mortgages. The regulators' "Statement on Subprime Mortgage Lending" requires these brokers and lenders to underwrite loans based on the borrower's repayment ability and the fully indexed interest rate, modify mortgages to help borrowers in trouble, clearly disclose the loan's costs and risks and ensure borrowers of adjustable-rate mortgages are aware of possible "payment shock" when their rates rise. While some critics think the rules were issued too late--considering millions of buyers may be headed for foreclosure already and numerous lenders imposed stricter underwriting standards on both subprime and prime loans voluntarily--experts note they were released faster than other regulations have been in recent years.
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S&P, Moody's Hide Rising Risk on $200 Billion of Mortgage Bonds
Bloomberg (06/29/07) Pittman, Mark
New Bloomberg data shows that Fitch Ratings, Moody's Investors Service, and Standard & Poor's are failing to lower the credit ratings on approximately $200 billion of securities backed by home loans in order to conceal burgeoning losses in the market for subprime mortgage bonds. Downgrades by the three organizations would force hundreds of investors to place their holdings up for sale, which in turn would throw the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations into further turmoil. Graham Fisher & Co. managing director Joshua Rosner warns, "You'll see massive losses from banks, insurance companies and pension managers." As defaults by subprime borrowers mount, more and more ratings companies are looking to delay the inevitable by dumping securities. In turn, the subprime meltdown is having ripple effects in the capital markets partly because mortgage bonds rank as the world's largest debt market.
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About 28 Million People Deliberately Swear Off Banks
Associated Press (07/01/07) Aversa, Jeannine
In the United States, between 10 million and 28 million individuals are estimated to be operating without bank accounts, a group primarily composed of those who are Hispanic or black, low-income, and young. Together, they earn about $510 billion annually, and banks are trying to attract their business, as are retailers like Wal-Mart and check-cashing institutions. To that end, the Federal Deposit Insurance Corp. has launched an initiative to move the "bankless" into the economic mainstream. Banks, community groups, and others are uniting in nine markets to offer services such as check cashing, financial education, and affordable small loans. Meanwhile, technological advances have given rise to electronic cards now being offered to the bankless by some employers, check-cashing establishments and, soon, Wal-Mart; paychecks are loaded onto the cards, which then can be swiped at retailers or supermarkets. Those who avoid traditional financial firms often report feeling that they write too few checks to make an account worthwhile; others are suspicious of banks. For these people, and for illegal immigrants, check-cashing outlets are a convenient way to cash checks and perform other transactions.
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Bankruptcies Back on the Rise
Idaho Press-Tribune (07/01/07) Dooley, Bryan
Officials note that bankruptcy filings are rising again, after having dropped sharply in the wake of a 2005 law intended to curb bankruptcy fraud and abuse. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was designed to check over-use of the bankruptcy process by requiring applicants to meet multiple requirements before being given protection. However, critics fear the legislation has made a difficult process even more arduous and costly, and contend that the law was funded by the consumer credit industry's campaign contributions. Supporters of the law argue that there was a significant need for reform, noting that bankruptcy filings between 1983 and 2003 increased five-fold. In 2005, the consumer credit industry and other advocates of the legislation asserted that about 10 percent of bankruptcy filings involved abuse or fraud, in contrast to the American Bankruptcy Institute's estimate of 3 percent. The initial drop in filings may have been fueled by those rushing to gain protection before the new rules went into place. However, the current growth of bankruptcies suggests that the most common grounds for bankruptcy, such as job loss, divorce, and health expenses, have not gone away. Between January 2007 and May 2007, the number of bankruptcy filings rose 65 percent from the same period in 2006; the figure remains below the 2005 level, though officials predict that filings will eventually rise to pre-legislation levels.
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Bank Regulators to Unveil New Subprime Loan Standards--Reuters
Seeking Alpha (06/29/07)
New guidelines for depository lenders on how to underwrite to flawed-credit borrowers could be released as early as June 29, Reuters reports. The standards are not expected to deviate much from a draft released in March, which requires lenders to go to greater lengths to inform customers of potential costs and better gauge their repayment ability over the long term. Comptroller of the Currency John Dugan told Reuters earlier this week that the new subprime standards are likely to discourage low- and no-documentation loans. Dugan's office is issuing the rules along with the Federal Reserve Board, the FDIC, the Office of Thrift Supervision, and the National Credit Union Administration.
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Hundreds of New Iowa Laws Begin July 1
Quad Cities Online (06/29/07)
A number of new laws passed during Iowa's most recent legislative session will go into effect when the state's budget year begins on July 1. The new legislation includes a rule that caps interest rates on car title loans at 21 percent.
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Oregon Legislature Adjourns Sine Die
Bend Weekly (06/29/07)
State legislators in Oregon ended their annual session on June 28. During this session, the House and Senate passed a number of bills intended to better protect Oregon consumers. Among the proposed legislation was a Senate bill which obligates companies to notify consumers if their personal or financial records are at risk because of a breach in security. It would also allow individuals who suspect they may be at risk for identity theft to freeze their credit file. Another bill introduced in the House would expand consumer protection to companies who market loans to Oregon residents by phone, mail, or over the Internet. Other measures would cap interest rates on consumer and title loans at 36 percent.
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Car Title Loan Company Challenges Oregon Interest Rate Limit
Associated Press (06/28/07)
A new statute in the state of Oregon that caps annual consumer loan interest rates at 36 percent has been challenged by Northwestern Title Loans of Georgia, a car title lender that operates 17 outlets in Oregon. The lender will request a Marion County Circuit judge to temporarily suspend the law's enactment. The ordinance's backers claim car title and payday lenders entice susceptible poor residents into cycles of debt by charging triple-digit interest rates. Lawmakers were advised by state lawyers that Oregon is empowered to treat consumer lenders distinctly from banks and credit unions. The state of Oregon and the Department of Consumer and Business Services are named in the Georgia car title lender's lawsuit.
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Abstract News © Copyright 2007 INFORMATION INC.
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AFSA Newsbriefs is a weekly executive summary of AFSA initiatives and consumer credit articles. For more information,
please contact newsbriefs@afsamail.org.
AFSA's mission is to protect and improve the consumer credit business, maintain a positive public image, and create a legislative climate in which reasonable credit regulation can and will be enacted. The Association operates in the public interest, encourages and maintains ethical business practices, supports financial education for consumers of all ages, and provides other assistance in related fields on an as-needed basis. The American Financial Services Association has provided services to its members for over ninety years. The Association's officers, board, and staff are dedicated to continuing this impressive legacy of commitment through the addition of new members and programs, and increasing the quality of existing services.
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