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March 29, 2007
Identity Thieves Exploiting Flaws in the Payment System
Micropayments: Maximum Potential
Card Companies Crack Down on Restaurants
Bernanke Open to Limiting Lending
Schumer Targets Mortgage Brokers
Legislature Urged to Allow Courts to Oversee Foreclosures
Regulator Favors Standards Against Predatory Lending
Tighter Rules on Subprime Lending Sought
Farm Credit System to Present Proposals to Congress
Subprime Loans Don't Deserve Blanket Criticism
The Subprime Loan Machine
N.Y. Suit Could Test Loans' 'Suitability'
The Real Facts About Payday Loan Bill
College Loan Lenders Pique Cuomo Interest
Subprime Defaults May Spread to Auto Bonds, S&P Says
Countrywide Bank's $500,000 Grant to ACORN Housing Moves New Orleans One Step Closer to
Recovery
"Firm Offer" Case Demonstrates Judicial Confusion on Prescreening Solicitations
Subprime Debate Moves to the House
AFSA Urges Caution on CRL Paper
Henry B. Goodman, M/V Acceptance Ltd., Named "Outstanding Independent"
Robert T. Rawl Named Chairman of the AFSA Independents Advisory Board
Identity Thieves Exploiting Flaws in the Payment System
Providence Journal (RI) (03/27/07)
Law enforcement officials say a growing a number of identity thieves are stealing personal information,
transferring the data to phony credit cards, and then using the cards to make purchases. The recent thefts from TJX Cos. and
Stop & Shop fit that model. In the TJX theft, a ring of suspects used the stolen data to make fake credit cards with
magnetic strips containing the account information of TJX customers. The thieves then used the cards to purchase $24,000
worth of gift cards from one Wal-Mart in Gainesville, Fla., and $18,000 from another Wal-Mart. In the Stop & Shop theft,
four suspects swapped the store's bank card readers with machines that record shoppers' financial information. The
information was then transferred on to fake bank cards that were used to make withdrawals from ATMs in California. Law
enforcement officers say this method of identity theft is growing increasingly popular with thieves because it makes illegal
purchases harder to trace.
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Micropayments: Maximum Potential
Electronic Payments International (03/07) P. 10; Conroy, Victoria
Google and eBay's PayPal are siphoning online payment market share from traditional financial institutions
thanks to the ever-increasing popularity of micropayments for such things as the downloading of digital content. Their
popularity is linked to the emergence of more user-friendly interfaces and portals due to improvements in Internet design,
technology, software services, and applications, while the customer anonymity micropayment services support is also a
much-valued advantage, as is their linkage to accounts and the ability for consumers to make micropayment purchases with
debit or credit cards. Google and PayPal are expected by Booz Allen Hamilton to be among the most dominant providers in the
online payments market by the end of the decade. PayPal has a global account member base of 114 million, and is available in
103 nations and regions worldwide; it posted a global transaction volume of $8.8 billion in the first quarter of 2006, and
last April rolled out PayPal Mobile, a text-message service that allows American and Canadian consumers to send money, buy
items, or make charitable contributions via their mobile phones. PayPal's standard transaction fee structure bears a
similarity to the fee structure of credit cards: Merchants pay a very small fee--just a few cents--and a small portion of
the transaction price of each payment. In late 2005 PayPal lowered its rate for transactions under $2 to 0.05 percent, plus
5 percent of the transaction cost, although the total transaction cost would be $0.15. Gartner consultant Avivah Litan
contends that banks and card companies' attempts to directly compete with PayPal would be useless, and instead says they
should concentrate on reselling PayPal's services to merchants. "PayPal has long has the capability to serve the
micropayments market," Litan stated in a report. "But it waited until it had amassed enough customers and enough opportunity
to earn profits from merchants which sell goods and services priced under $3."
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Card Companies Crack Down on Restaurants
Wall Street Journal (03/24/07) P. B1; Sidel, Robin
The credit-card sector is coming down hard on thousands of restaurants for not satisfactorily shielding
diners' credit-card information from thieves. Recently, MasterCard, Visa USA, and financial groups that take care of
electronic payments have brought fines, mailed warning letters, and conducted seminars to get restaurants to be more cautious
about protecting the data. In addition, firms that handle card transactions--including Chase Paymentech, which is a joint
venture of First Data and JPMorgan Chase--are placing more pressure on restaurants, stating they may end service to those
that are not meeting their security regulations. In the past two years, Visa claims restaurants accounted for around 40
percent of scenarios in which intruders obtained unauthorized access to credit-card data, the biggest percentage of incidents
among retailer groups.
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Bernanke Open to Limiting Lending
Washington Post (03/29/07) P. D1; Henderson, Nell
In testimony before the Joint Economic Committee, Federal Reserve Chairman Ben Bernanke attributed rising
subprime mortgage defaults to the failure of lenders to measure a borrower's repayment ability when interest rates adjust.
According to Bernanke, "A large increase in early defaults on recently originated subprime variable-rate mortgages casts
serious doubt on the adequacy of the underwriting standards for these products." The economist also said federal legislation
to more strictly regulate lending practices may be a good idea, but he noted that the central bank can only enforce standards
for federally regulated banks. Sen. Charles Schumer (D-N.Y.), the committee's chairman, called Bernanke's testimony "further
indication that we must respond on the federal level" to curtail predatory lending.
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Schumer Targets Mortgage Brokers
Buffalo News (03/29/07) Epstein, Jonathan D.
Sen. Charles Schumer (D-N.Y.) says simple registration of mortgage brokers in some states is not enough to
reign in a subprime mortgage lending market that has spiraled out of control. On Wednesday, the chair of the Senate Housing
and Transportation Subcommittee said a national regulatory system for non-bank mortgage lenders and brokers, a "suitability"
standard for home mortgages, and a ban on "stated income" or "low-documentation" loans and "pick-a-payment" options is
needed. "The subprime market is the wild west of mortgage loans, and it's time we bring a sheriff into town," Schumer said
in a telephone press conference. The previous day, the National Association of Mortgage Brokers said it opposed a proposal
for a national registry of brokers floated by two groups of regulators, expressing objections that the measure would not
include all mortgage lenders.
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Legislature Urged to Allow Courts to Oversee Foreclosures
South Coast Today (MA) (03/28/07) Kibbe, David
Massachusetts Secretary of State William Galvin told state lawmakers during a Joint Committee on Housing
hearing that courts should handle foreclosure cases as a means of safeguarding victims of predatory lending. However,
Attorney General Martha Coakley supports the adoption of more stringent laws facilitating the prosecution of fraudulent
lenders, noting that there are too many cases in the courts already. With more than 22,000 foreclosure filings statewide and
more on the horizon, Galvin believes there is "an emergency situation" that requires stricter regulation of subprime lenders.
One bill under consideration from Sen. Jarrett Barrios (D-Cambridge) would mandate state licensing for loan officers,
pre-closing reviews of mortgage terms by third parties, and a 30-day period for delinquent borrowers to make up any past-due
amounts without penalty.
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Regulator Favors Standards Against Predatory Lending
New York Times (03/28/07) P. C2
In testimony before a House Financial Services subcommittee, Federal Deposit Insurance Chairwoman Sheila
Bair urged lawmakers to pass national anti-predatory-lending legislation that would beef up existing rules and govern both
federally and state-governed lenders. Bair is the first top regulator to call for such a measure. Meanwhile, Securities and
Exchange Commission Chairman Christopher Cox told lawmakers at a House Appropriations subcommittee hearing that an
enforcement unit has been established by the agency to determine whether some subprime lenders engaged in fraud by failing to
make proper disclosures to investors of securities backed by such mortgages. Companies under investigation were not named.
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Tighter Rules on Subprime Lending Sought
San Jose Mercury News (CA) (03/27/07) Harmon, Steven
Lawmakers in California recently held a hearing about rising subprime mortgage foreclosures, with Senate
Banking, Finance and Insurance Committee Chairman Mike Machado (D-Stockton) insisting that lenders need to be more strictly
regulated. Machado faulted state Department of Corporations Commissioner Preston DuFauchard for only asking mortgage brokers
to cease stated-income loans when he has the power to institute regulations. University of California-Berkeley Haas School
of Business professor Nancy Wallace underscored the need for lenders to make sure borrowers understand that their payments
could adjust upward over time, adding that regulators should check that lenders are in compliance with truth-in-lending laws.
Additionally, University of Southern California Marshall School of Business economics professor Stuart Gabriel noted that
the housing market could slow further due to problems in the subprime mortgage market and could possibly cause an economic
recession. However, representatives of the mortgage industry stated that subprime lending plays a major role in boosting
homeownership rates and should not be regulated to the point where credit dries up.
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Farm Credit System to Present Proposals to Congress
Ohio Farmer (03/26/2007)
The Farm Credit System wants to expand its service to single-family, owner-occupied homes as a way to make
competitive mortgages available to more rural families. Representatives from the Farm Credit System plan to present a
proposal to Congress on Tuesday, with hopes of joining other USDA programs that are able to operate under the updated
definition of rural--which is now an area with a population of up to 50,000 people. Currently, residents of towns with up to
2,500 people can only receive mortgages from the Farm Credit System. The proposal is part of a larger plan to improve access
to capital for farmers, ranchers, and rural families.
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Subprime Loans Don't Deserve Blanket Criticism
Providence Journal (RI) (03/25/07) Brown, Jeff
Jeff Brown, a Philadelphia Inquirer business writer, maintains that subprime lending provides opportunities
for homeownership, and to those who characterize the subprime lending industry as "predatory," Brown responds by
distinguishing between hidden and disclosed risks. Brown believes that brokers who hide subprime rules from borrowers should
be penalized, and that regulation is needed to heighten transparency; still, in 2006, 86 percent of subprime payments were
not overdue and over 95 percent of subprime borrowers were "not in foreclosure." This perspective takes into account the
federal government's efforts, beginning in 1977 with the Community Reinvestment Act, to boost low-income homeownership.
Soaring prices for housing, securitization, and low interest rates stimulated subprime lending through the 1990s. While
there are currently large numbers of subprime delinquencies and foreclosures, Brown points out that the loans have not grown
riskier, merely more prevalent, and argues that as long as borrowers understand the risks, they "have a right" to choose
subprime mortgages.
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The Subprime Loan Machine
New York Times (03/23/07) P. C1; Browning, Lynnley
University of Connecticut law professor Pat McCoy says upwards of 40 percent of subprime loans are written
with the help of software that automatically obtains credit information and calculates the borrower's default risk. The
software has helped subprime lenders speed up operations, lower costs, and minimize fraud; but some believe it prompted them
to place more emphasis on credit scores and allowed them to approve many borrowers who should not have been financed. The
software also made nothing-down and interest-only loans available to higher-risk borrowers. First Franklin Financial, for
instance, processed seven times more applications in 2005 than it did prior to its implementation of automated underwriting
software from Arc Systems in 1999.
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N.Y. Suit Could Test Loans' 'Suitability'
American Banker (03/23/07) P. 17; Berry, Kate
Attorney Jacob Zamansky of Zamansky & Associates has filed a lawsuit in New York claiming that mortgages
granted to two dozen elderly borrowers who cannot afford their payments are "legally void and unenforceable" because the
lenders failed to consider repayment ability when granting the credit. The litigation against Countrywide Home Loans Inc.,
IndyMac Bank, Homecomings Financial LLC, PHH Mortgage Corp., Washington Mutual Inc., and First National Bank of Long
Island--which seeks to stop collections and foreclosure proceedings--could be an early test of mortgage suitability
standards. According to Zamansky, "Industry standards require mortgage lenders to 'know their customer' and consider the
suitability of the borrower." He adds that lenders are required "to engage in, and adopt, 'safe and sound' lending policies
which prevent abusive or predatory loans to borrowers who lack the ability or means to repay."
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The Real Facts About Payday Loan Bill
Walker County Messenger (03/26/07) Thrash, Joe
A payday loan bill recently proposed in the Georgia Legislature would sanction and regulate payday loans to
industrious individuals in need of short-term money for unforeseen expenses, according to Joe Thrash, a cash advance industry
employee of six years. Some critics accuse the payday advance industry of "predatory" behavior, such as taking advantage of
uneducated or unemployed customers. However, state laws prevent lenders from granting cash advances unless the customer has
an active checking account and a stable source of income. Moreover, the Federal Reserve Bank of New York has reported that
payday loans are not predatory and "may actually enhance" financial well-being. The proposed Georgia law would cap the
amount loaned at 25 percent of the customer's monthly earnings, or at $750. It also would limit loan fees to $15 for each
$100 borrowed, a more cost-effective percentage than that of overdraft or bounced check fees. The bill would also permit
borrowers to repay their loan over time at no additional cost, and late fees would be illegal. Because banks no longer
provide this service, customers who need "convenient, dignified and understandable credit" will have to turn to expensive and
perilous options like Internet lenders and title pawn if the proposal does not pass, Thrash says.
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College Loan Lenders Pique Cuomo Interest
Newsday (03/24/07) Winslow, Olivia
New York state Attorney General Andrew Cuomo's plan to sue the student loan provider Education Finance
Partners (EFP) is part of the state's examination of financial relationships between New York colleges and student loan
lenders. Cuomo claims that EFP, by sharing revenue "kickbacks" with colleges like Long Island University (LIU), is paying
colleges to "steer" customers to the company. Cuomo says EFP has given some schools up to $100,000 in one year; it gave LIU
$2,300, according to LIU treasurer Robert Altholz. Cuomo is also investigating the New York Institute of Technology (NYIT)
and Dowling College, both of which collaborate with Sallie Mae, the country's largest student loan lender. These
collaborations penalize the colleges if they assist students with loan debt consolidations using lenders other than Sallie
Mae, but college financial officers argue that the contracts are set up so Sallie Mae can administrate federal Stafford loans
to graduate students under the "school-as-lender" initiative. The colleges then fund scholarships with a cut of revenue from
the lender. Dowling chief financial officer Susan Williams says Sallie Mae has directed over 1,000 graduate loans, bringing
in $13 million, $700,000 of which went to Dowling. NYIT's chief financial officer states that Sallie Mae offered students
discounts and decreased fees, and that students receive a list of 7-10 other lenders with good rates, leaving the students
free to choose. This perspective is echoed by Sallie Mae spokesman Tom Joyce, who maintains that Sallie Mae's contracts
permit schools to list--but not market--other consolidators.
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Subprime Defaults May Spread to Auto Bonds, S&P Says
Bloomberg (03/27/07) Pittman, Mark
Standard & Poor's (S&P) reports that increasing numbers of subprime mortgage defaults may harm bonds backed
by car loans as individuals with bad credit scores battle home debt. S&P analyst and study leader Mark Risi notes that to
maintain growth, lenders like Wachovia and Capitol One are offering longer-term loans to those with poor credit, conditions
which heighten the likelihood of default. In 2006, 71 percent of subprime car loans went toward buying used cars, in
comparison to 58 percent in 2001. Risi says the good news is that most borrowers of subprime car loans are renters, not
homeowners, and are immune to mortgage market issues. Though it sounds counterintuitive, most consumers--when choosing
between making a car or home payment--pay for the car so they can drive to work and make money to pay for their home. Still,
S&P data reveals that 3.02 percent of subprime car loans made in early 2006 defaulted in 2007.
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Countrywide Bank's $500,000 Grant to ACORN Housing Moves New Orleans One Step Closer to
Recovery
Countrywide News Release (03/27/07)
Last year, Countrywide Bank gave the Association of Community Organizations for Reform Now (ACORN) a
$500,000 grant, which was used to jumpstart construction on two New Orleans homes that were just recently completed and given
to their displaced owners. Countrywide Bank Senior Vice President David Culver spoke at the dedication ceremony, saying the
two homes represent the bravery of the owners and their families, the resilience of a ravaged city, and the dedication of
community leaders, housing advocates, architectural students, financial institutions, and others committed to rebuilding the
Lower 9th Ward. The grant is part of Countrywide's Community Reinvestment Act, which invests in affordable housing programs
across the country. The houses were used as on-the-job-training for workers from Bethel Colony South, Covenant House, and
ACORN Services. The project is the first step toward a larger rebuilding effort by ACORN Housing, which plans to renovate
150 adjudicated properties.
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"Firm Offer" Case Demonstrates Judicial Confusion on Prescreening
Solicitations
In Bonner v. Home123 Corporation (March 9, 2007), the Northern District of Indiana held that the mailers at
issue in this case were not "firm offers of credit" and therefore not covered under the Fair Credit Reporting Act
(FCRA)—contrary to other recent decisions. The mailers purported to offer the various recipients a mortgage loan,
indicating they were "pre-approved" and included ranges of dollar amounts that might be applicable. All mailers, however,
contained a disclosure stating that the specific terms were to be determined upon an in-depth underwriting examination. In
holding that these mailers were not "firm offers of credit," the court determined that the mailers were merely advertisements
and solicitations. They did not include any "crucial terms" such as information about APR, reasonable estimates of the loan
amount, loan terms and methods of repayment or applicable fees.
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Subprime Debate Moves to the House
On March 27, the House Financial Institutions Subcommittee heard from federal banking
regulators—including, among others, the FDIC, Office of Thrift Supervision and the Federal Reserve, about the agencies'
proposal to expand subprime guidance to cover hybrid ARMs. These regulators expressed concern about legislative action that
might overreach, leaving many creditworthy borrowers unable to access credit. They reported that not only is the mortgage
market working well but also that Wall Street was reacting to their proposal by strengthening underwriting standards. The
regulators were committed to the principles of establishing an ability to repay standard and enhanced disclosures.
Lawmakers expressed concern that rising foreclosures were due in part to the increased securitization activity and
broker compensation incentives. Representative Spencer Bachus (R-AL) noted that his legislation last year would have codified
the North Carolina "anti-predatory lending law" with the addition of a private right of action and state enforcement.
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AFSA Urges Caution on CRL Paper
This week, the Center for Responsible Lending (CRL) released a paper that concludes that "subprime lending
is a net drain on homeownership." The paper--posted on the CRL Web site--is timed to coincide with testimony being given this
week by CRL president, Michael Calhoun. The paper reports that subprime loans made during the years 1998-2006 have led or
will lead to a net loss of homeownership for almost one million families. Click: www.afsaonline.org/sitepages/docs/CRLAnalysisStatementMarch2007.pdf to see AFSA president and CEO, Chris Stinebert's
comments regarding this latest CRL paper.
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Henry B. Goodman, M/V Acceptance Ltd., Named "Outstanding Independent"
The Outstanding Independent Award is presented at the Annual AFSA Independents Conference to honor an
individual who has contributed to the success of the financial services industry and Independents Section through active
involvement and participation at the community and association levels. This year, the award went to Henry B. Goodman,
President, M/V Acceptance Ltd. who was also recognized for his company's 50th anniversary of membership in AFSA.
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Robert T. Rawl Named Chairman of the AFSA Independents Advisory Board
On March 24, Robert T. Rawl, President & CEO, Regency Finance Company, was named the 2007-2008 Chairman of
the AFSA Independents Section Advisory Board. In addition, Mr. Rawl also serves on the AFSA Board of Directors and Executive
Committee; the AFSA Professional Development Committee; The National Institute on Consumer Credit Management at Marquette
University (NICCM); and the Management Development Program at the University of North Carolina. Mr. Rawl also teaches
strategic planning at NICCM.
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Abstract News © Copyright 2007 INFORMATION INC.
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In This Issue:
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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