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July 19, 2007

Fed Feels Pressure to Protect Consumers
Housing's Hurt Spoils His View
Subprime Pain Could Get Worse
Anti-Predatory-Lending Bill Introduced
General Electric to Sell WMC Mortgage, A Subprime Loan Unit

Discover Sees Fall in Consumer Spirit
Credit Scoring System Is About to Undergo Change
The Politics of Lending Loom Large Over the Unbanked
US Sen. Dodd: Panel's Pace Reflects Bipartisan Strategy

Length of Average Auto Loan Inches Up
Tips Shared on Healing 'Scars' With Auto Dealers & Financing
The Loan Road Ahead
Buy-Here, Pay-Here Mid-Year Report

The Fair Mortgage Practices Act introduced last week by Reps. Spencer Bachus, Paul Gillmor and Deborah Pryce would create a national registration and licensing standard for mortgage originators and brokers. In addition, the bill calls for transparency in the mortgage process by simplifying disclosures and encourages financial institutions to evaluate a borrower's ability to repay a mortgage loan.

The legislation also increases support for housing counseling, prohibits prepayment penalties on Hybrid ARMs that are effective within 120 days of the end of the introductory fixed rate period and requires subprime mortgages to have escrow accounts. Other provisions include strengthened enforcement against mortgage fraud schemes and improved integrity of appraisals.

While The Fair Mortgage Practices Act covers several of the same issues addressed by the federal regulators' Statement on Mortgage Lending, AFSA believes its introduction is likely to frame the debate going forward. As House Financial Services Chairman Barney Frank begins to shape his own proposal, this bill sets a floor from which he can move to address additional issues raised by consumer advocates, such as suitability and assignee liability.
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House Financial Services Chairman Barney Frank, along with two subcommittee chairs, asked the Government Accountability Office (GAO) to review a regulatory prohibition against collecting race and gender data in non-mortgage loans. In a July 16th letter to the GAO, Reps. Frank, Mel Watt and Carolyn Maloney questioned the Federal Reserve’s 2003 decision not to remove a ban under Regulation B which implements the Equal Credit Opportunity Act (ECOA). Citing the increase in mortgage loans given to minorities after passage of the Home Mortgage Disclosure Act (HMDA), the letter asks if lifting the ban in Regulation B would help women and minorities obtain more loans, such as small business and auto loans.

The lawmakers asked the GAO to complete its study by spring of 2008. AFSA will monitor this issue and will meet with lawmakers to determine the outlook for possible legislation. Back to Top

Rep. Carolyn Maloney (D-NY), Chair of the House Financial Institutions and Consumer Credit Subcommittee, is holding an invitation-only roundtable on credit card billing practices on Monday, July 30. Roundtable participants will include federal and state regulators, consumer groups and six card issuers.

Trade associations were not invited to participate in this discussion. Chairwoman Maloney's goal is to convene the decision makers for the nation's largest issuers and convince them to agree to certain principles - or best practices - concerning billing and disclosures. Among the practices to be discussed are universal default, double-cycle billing, late fees, over-limit fees, payment allocation, and 'pay to pay' fees.

While Chairwoman Maloney has called this roundtable a first step in combating "unfair and deceptive practices," it remains likely that she and her colleagues in Congress will still push to ban certain practices through legislation. AFSA will continue to meet with the Chairwoman and others in Congress as they look to address their concerns with the credit card industry.
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On July 16, AFSA staff attended a FDIC Advisory Committee meeting on Economic Inclusion. The Committee discussed why high-priced lenders disproportionately lend to low-income and minority home borrowers, efforts to help troubled borrowers, mortgage brokers, and steps that could be taken by the FDIC.

The Committee developed several recommendations for the FDIC Board, which will be amended throughout the next few weeks. Among the recommendations: 1) Define subprime loans not by the characteristics of borrower, but by the characteristics of the loan. 2) Eliminate prepayment penalties in the subprime market, except for legitimate administrative costs in states where consumers are prohibited from paying those costs up front. 3) Examine the secondary market. 4) Support The Fair Mortgage Practices Act’s licensing provisions. 5) Mandate escrow accounts for all subprime loans.
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Colonnade Advisors and Town & Country Acceptance Corporation are the latest companies to join AFSA. The association looks forward to working these new members, whose contact information appears below.

Associate Membership
Christopher Gillock
Managing Director
Colonnade Advisors LLC
Chicago, IL

Affiliate Membership
Dennis Shears
Chairman
Town & Country Acceptance Corporation
Birmingham, AL Back to Top

Wells Fargo Arrives With Jobs
Express Times (07/17/07)

Wells Fargo christened its new auto finance call center on June 16. The call center will be home to around 375 employees this year, with room for 650. The company says it outgrew its earlier location, and the bigger space is needed to further growth.
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GMAC and Habitat for Humanity to Turn Philadelphia Green
PRNewswire (07/12/07)

GMAC Financial Services is currently working with Habitat for Humanity to build the country's first LEED-certified, low-income housing. The seven new houses to be constructed in East Philadelphia will be sold with a zero-interest mortgage to families who qualify for aid. These houses will be equipped with LEED-certified features designed to conserve energy and reduce indoor toxins. Aside from being environmentally friendly, these homes will have the added advantage of saving families money on power bills. Approximately 100 GMAC volunteers will take part in two builds.
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Shoppers Aren't Swayed by Credit-Disclosure Data
Wall Street Journal (07/18/07) P. B3A; Lovley, Erika

A new study paid for by the American Bankruptcy Institute and the Ford Foundation has found that credit card disclosure information designed to prevent consumers from overspending could actually spur many consumers to go on a shopping spree. The study found that a shopper's emotions play a much bigger role in their spending behavior than awareness about credit card debt. As a result, shoppers can get so down about their mounting debts that they go out shopping in order to alleviate their bad mood. Out of the 471 consumers whose spending decisions were studied, one in five said they shopped to end a bad mood. That proportion could be even higher among consumers in general because many consumers do not understand how their moods influence their spending decisions. The findings of the study could pressure lawmakers and the credit card companies to find new ways to educate consumers about how their emotions influence their spending.
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Merchants Payments Coalition Launches Ads About Credit Card Fees
Progressive Grocer (07/17/07)

The Merchants Payments Coalition, a group of almost 30 merchant trade associations seeking a more transparent credit card fee system, has launched a series of advertisements targeting interchange fees. The ads ask Americans if they wonder who pays for all the credit card junk mail they receive, with a slogan responding, "You do ... Interchange is the biggest credit card fee you've never heard of--and it's dangerous." The ads have recently run in Washington newspapers, in light of a hearing on interchange fees scheduled later this month by the House Judiciary Committee's Antitrust Task Force. The group estimates that Visa and MasterCard collected over $36 billion in interchange fees for 2006, while only about 13 percent of those fees are spent on actual processing. The remaining revenue contributes to marketing, rewards programs, and profits.
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Pay Up Before You Swipe
Clarion-Ledger (07/13/07) Floyd, Nell Luter

Prepaid cards are becoming increasingly popular among consumers who do not have bank accounts, as well as travelers who do not want to carry cash and parents who want a money management tool for their children. In addition, some health spending accounts now come with prepaid cards, which makes the accounts more convenient for the user, said Jennifer Doidge with Visa USA. Prepaid cards are also being used by a growing number of states to distribute unemployment and child support payments. Yet despite the growth in the popularity of prepaid cards, they were only used for about 2 percent of electronic payments in 2003 and 4 percent of electronic payments in 2005, said the American Bankers Association's Tracey Mills.
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Fed Feels Pressure to Protect Consumers
Wall Street Journal (07/17/07) P. A8; Paletta, Damian

The Federal Reserve is being pressured by lawmakers, particularly House Financial Services Committee Chairman Barney Frank (D-Mass.), to exert its authority over the lending practices of 7,000-plus national banks and the entire mortgage industry. The Federal Reserve has the power to prohibit unfair and deceptive practices, but it has been hesitant to do so in recent years because it did not want to hinder the development of innovative lending products. Frank expects the central bank to take aggressive action by the fall, or he will call for its authority to be transferred to other federal watchdogs. In response to criticism from Senate Banking Committee Chairman Christopher Dodd (D-Conn.), meanwhile, Fed Chairman Ben Bernanke went from saying in May that the central bank has "authority" over lending practices to announcing in June that it "has the responsibility" to outlaw certain unscrupulous practices. Although it remains to be seen what action the central bank will take, consumer groups and Democrats want it to focus on prepayment penalties imposed on borrowers who are refinancing out of adjustable-rate mortgages, among other practices.
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Housing's Hurt Spoils His View
Washington Post (07/19/07) P. D1; Henderson, Nell

In testimony before the House Financial Services Committee on Wednesday, Federal Reserve Chairman Ben Bernanke told lawmakers that the housing slump would pull down the economic growth rate to about 2.5 percent through next year. "Rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities--problems that likely will get worse before they get better," said Bernanke, who spent much time talking about consumer protection issues and how the central bank is working to curtail predatory lending and foreclosures. Despite predictions of slow economic growth, Bernanke said the central bank is more concerned about rising inflation--especially as food and energy prices continue to drift higher. His testimony leads many analysts to believe the Federal Reserve will hold the short-term interest rate at 5.25 percent over the coming months--a level that has been kept in place for a year so far.
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Subprime Pain Could Get Worse
Baltimore Sun (07/19/07)

Analysts caution that the subprime mortgage crisis likely will worsen before the market sees any improvement. Bear Stearns' announcement earlier this week that two of its hedge funds that invested in subprime mortgages are now essentially worthless is expected to result in a widespread revaluation of portfolios with similar investments and prompt banks to make big write-downs. Punk Ziegel & Co. analyst Richard Bove says, "When [banks] go back and look at these securities, it could be up to a 15 to 20 percent devaluation." The extent of the revaluation probably will not become clear until at least the early fall, after the various firms post results for the fiscal quarter ending in August.
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Anti-Predatory-Lending Bill Introduced
American Banker (07/19/07) P. 3; Hopkins, Cheyenne

Using Minnesota's new anti-predatory-lending law as a guide, U.S. Rep. Keith Ellison (D-Minn.) of the House Financial Services Committee has proposed legislation that would force mortgage lenders to adhere to a suitability standard. The bill would require lenders to underwrite mortgages at the fully indexed and fully amortized rate and take the borrower's repayment ability into consideration, and it also would establish a fiduciary relationship between the lender and borrower. Additionally, the legislation would prohibit prepayment penalties and negative amortization, require mortgage brokers to act in their clients' best interests, and restrict points and fees to 5 percent of the loan amount. Whether Ellison's bill is passed remains to be seen, as different anti-predatory-lending bills are expected from Reps. Brad Miller (D-N.C.) and Melvin Watt (D-N.C.) as well as House Financial Services Committee Chairman Barney Frank (D-Mass.).
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General Electric to Sell WMC Mortgage, A Subprime Loan Unit
New York Times (07/13/07) P. C2

Problems in the flawed-credit mortgage lending market have prompted General Electric to put its subprime unit up for sale, just three years after entering the niche. WMC Mortgage made only $3.4 billion in new loans in the first quarter, compared to $9 billion in the previous quarter, and the company has cut its staff to about 700 workers from more than 1,200 employees over the past year. Also, the loan portfolio has been reduced by $3 billion to less than $1.5 billion in an aggressive effort to sell loans on its books. GE has retained the services of Morgan Stanley to serve as adviser for the sale.
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Discover Sees Fall in Consumer Spirit
American Banker (07/19/07)

Discover Financial Services reports that consumer spending has most likely declined this month from June due to a waning of consumers' confidence in the economy. The firm's Discover Spending Confidence Monitor showed 34 percent of consumers expecting to spend more in July than in June, a six-point fall off from the previous month's survey. Nearly half of consumers, 49 percent, expected to maintain their spending level in July, but 62 percent of consumers rate the economy as fair or poor, and 59 percent expect it to worsen. Discover said the concerns are fueled by consumers' facing tighter budgets along with less confidence in their personal finances last month.
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Credit Scoring System Is About to Undergo Change
Star-Telegram (TX) (07/16/07) Parker, Vicki Lee

Fair Isaac Corp. will be making some significant changes to its FICO credit-scoring formula in September. The current FICO model divides the population into 10 segments, eight with good credit, and two with bad or little credit. The new system will up the FICO categories to 12, with four groups for potential borrowers who have poor or thin credit. The FICO model will also no longer allow people with poor credit to "piggy back" on the credit of people with better credit. Fair Isaac hopes these changes will help lenders by establishing more reliable credit scores for those consumers who could potentially present a higher risk.
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The Politics of Lending Loom Large Over the Unbanked
Bank Technology News (07/07) Sraeel, Holly

There are currently an estimated 73 million individuals in the United States who are considered unbanked or underbanked. Many of the people in this group are creditworthy but have not been able to build up a credit history for financial or cultural reasons. Around 12 million to 14 million of the unbanked are illegal immigrants. The majority of bankers feel that they have a right, even an obligation, to lend to members of this group as long as they have proper identification. Unfortunately, by doing so, banks are putting themselves at odds with U.S. immigration law, which prohibits aiding or encouraging illegal immigrants to stay in the country.
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US Sen. Dodd: Panel's Pace Reflects Bipartisan Strategy
Dow Jones Newswires (07/12/07) Paletta, Damian

In an interview, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) acknowledges that his committee has been passing fewer bills than its House counterpart, the Financial Services Committee. However, Dodd says, the makeup of his committee, which is evenly divided between Democrats and Republicans, requires a more bipartisan approach to crafting and passing legislation, which can be more time-consuming than the process in the House, where Democrats on the Financial Services Committee have a four-vote advantage. As a result, the Senate committee has held just 22 hearings compared to the House's 48, and has passed only seven bills to the House's 17, but Dodd says that the bills that have passed his committee have been particularly productive, including a measure to reform foreign-investment approval. Bills still under consideration by the committee include industrial loan company ownership.
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Length of Average Auto Loan Inches Up
Automotive Digest (07/17/07)

Information recently released by the Federal Reserve shows the average lifespan of an auto loan has risen to 61.1 months, a steady increase from 57.8 months in April and 58.3 months in May. The median APR rate also has increased from 3.89 percent in May to the current figure of 4.88 percent, while revolving and non-revolving credit is up 9.75 percent annually and 4.5 percent annually, respectively. The median amount financed for a new car shot up as well, from $27,013 in April to $27,163 in May.
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Tips Shared on Healing 'Scars' With Auto Dealers & Financing
Credit Union Journal (07/16/07) Bartlett, Michael

Credit unions and car dealerships have not always had the best of relationships. However, the relationship has been changing lately, thanks to the exceptionally low interest rates, short terms, and the perception of deeper buying credit unions can offer. In order to further improve their relationship with auto dealers, experts say the best thing credit unions can do is cut down on their approval time. Increasing dealer awareness and countering the outdated ideas some dealers still have about credit unions are also essential steps.
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The Loan Road Ahead
Credit Union Journal (07/16/07) Bartlett, Michael

Auto industry insiders predict that despite high gas prices, the auto-lending business will continue to grow. Experts suggest that used and new car loans as well as the subprime business will remain relatively safe bets for lenders. This projection is based on the steadily climbing number of licensed drivers and the rising ratio of cars per household. Insiders are also encouraged by recent, strong economic figures. Although the GDP for the first part of the year has been sluggish, employment is high and the country's net financial assets per household are on the rise.
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Buy-Here, Pay-Here Mid-Year Report
SubPrime Auto Finance News (07/12/2007) Shilson, Ken

A survey of buy-here, pay-here (BHPH) dealer clients from the first half of 2007 reveals trends that may impact the rest of the sales year. The majority of dealers noted that although sales have rarely exceeded 2006 numbers, collections have continuously done well. Sales are most likely suffering due to astronomical gas prices and inflation. These factors have hit low-income consumers especially hard, which is a problem, because they are typically the bread and butter of the BHPH market. Dealers have also had trouble finding cost-effective inventory; however, the used-car market has provided auxiliary inventory sources. Luckily, dealers are not cooling their heels in these tougher sales times. They are cutting operating costs, becoming stricter about collections, and getting resourceful to find cheap inventory. By following these steps, BHPH dealers hope to remain an affordable option for potential buyers.
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