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May 10, 2007
Experts: Easing Standards Like PCI DSS a Bad Idea
Massachusetts Law Aiding Banks in TJX Case?
Bankers Find Plenty Not to Like in Loan Guidance
Subprime Woes Hit Buyers
HUD to Seek Ban on Mortgage 'Aid'
Predatory Lending: Hard to Tame
Panel: Expand FHA Role in Subprime Lending
Bill Would Bar Gifts to School Officials
Student Loan Probe Widens to Alumni Groups
Suit Over 'Rent-to-Own' Agreements Settles for $109 Million in New Jersey
Senate Panelists Introducing ILC Bill
Auto Loan Rates Higher for Blacks
Chase Custom Auto Finance Reaps Benefits From Expansion
For GE, No Lack of Ideas
Citi Targets $50 Billion Over 10 Years to Address Global Climate Change
3rd Update: Wells Fargo to Buy Greater Bay Bancorp
AFSA Comment Letter Notes Limited Refinancing Options
Dodd Principles Should Help Distressed Borrowers Avoid Foreclosure
AFSA to Host 17th Finance Industry Conference for Fixed Income Investors
The Role of Secondary Market in Subprime Mortgage Lending Hearing
"Bundled" Security Data Bill Passes Committee but Fate Still Uncertain
Experts: Easing Standards Like PCI DSS a Bad Idea
SearchSecurity.com (05/09/07) Brenner, Bill
Companies are struggling to comply with such mandates as the Payment Card Industry's Data Security Standard (PCI DSS). During a recent conference focused on PCI DSS, First Data CISO Phil Mellinger, who developed the precursor to the current rules, called for an overhaul of PCI DSS to eliminate subjectivity and ease restrictions to help more merchants comply. But financial services practitioners speaking at a panel discussion at RSA's eFraudNetwork Live event held this week in New York warned that easing the rules could be harmful. During a roundtable discussion on identity fraud, panelists were asked if industry standards and government regulations should be relaxed to help more companies comply. The panelists asserted too much is at stake to relax some of the rules because of the difficulties in heeding them.
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Massachusetts Law Aiding Banks in TJX Case?
American Banker (05/09/07) Kuehner-Hebert, Katie
In a lawsuit filed last month against TJX Cos. for the security breach that it disclosed earlier this year, three New England banking trade groups--the Massachusetts Bankers Association, the Connecticut Bankers Association, and the Maine Bankers Association--along with several banks are suing the retailer on the grounds that it engaged in unfair trade practices, a claim that lawyers and industry officials say could stick, unlike the breach of contract charge leveled against BJ's Wholesale Club in 2004. Under the unfair trade practices claim, the bankers do not need to have a contract with TJX Cos. to prove that they were damaged by its negligence. In addition, Massachusetts law does not require actual proof of damages, and plaintiffs do not have to prove the defendants intentionally tried to deceive them. According to Daniel J. Forte, the Massachusetts's trade group's president, more retailers could begin taking the Payment Card Industry standards more seriously if the bankers' suit is successful. Only 36 percent of major retailers across the country are in compliance with the standards. TJX was not in compliance with the standards when it suffered the security breach, which took place in 2005.
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Bankers Find Plenty Not to Like in Loan Guidance
American Banker (05/10/07) Hopkins, Cheyenne
The banking industry is not satisfied with subprime mortgage guidelines proposed by federal regulators in March that would require them to beef up disclosures and ensure that borrowers can afford the loans at fully indexed rates. There are concerns that bombarding borrowers with additional disclosures about possible payment shock, prepayment penalties, balloon payments, and other issues would overwhelm them. The industry also opposes a broad definition of "subprime" that includes all borrowers with credit scores below 660. Such a definition, say comment letters from numerous industry representatives, could leave borrowers with fewer credit options. Lenders are also concerned about a credit crunch, and they want regulators to clarify the guidelines' scope. According to the Financial Services Roundtable, 40 percent of consumers who currently have subprime adjustable-rate mortgages would not qualify for credit under the guidelines. "It is our judgment that there will be tens of thousands of potential subprime borrowers who will be unable to qualify under an inflexible interpretation of the standards established for the loans addressed in this statement or for alternative loans in the same amount," wrote John Dalton, president of the organization's Housing Policy Council, in a letter dated May 7.
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Subprime Woes Hit Buyers
Boston Globe (05/10/07) Blanton, Kimberly
Turmoil in the subprime lending market is now affecting borrowers with good credit, who achieved homeownership during the housing boom without a down payment by obtaining two mortgages to sidestep private mortgage insurance. Those still able to secure a second mortgage now will pay a full percentage point more in interest than they would have in January, but most buyers with credit scores of 620 and 679 who lack down payments have no other option but to obtain a single loan and purchase mortgage insurance separately. According to Rosella Campion of Boston-based Summit Mortgage, "There are people who have done everything right, and they're still going to pay more." Tighter underwriting standards by conventional lenders are primarily impacting wealth professionals with minimal savings, college graduates with high debt loads and scant credit histories, and buyers with unique financial situations.
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HUD to Seek Ban on Mortgage 'Aid'
Baltimore Sun (05/09/07)
HUD could seek public comment this week on a proposal to ban seller-financed downpayment assistance, such as through programs offered by nonprofit groups like Nehemiah Corp. of America in Sacramento, Calif., and AmeriDream Inc. in Gaithersburg, Md. Foreclosure on homes obtained with such seller-financed aid is more than two times that of other loans sponsored by the Federal Housing Administration, according to agency audits. The assistance programs are "a contributing factor of increased risk in our portfolio" of loans, said HUD spokesman Lemar Wooly in an e-mail. HUD data shows that the number of FHA-backed homes purchased with nonprofit assistance rose to 102,921 in 2006 from 14,603 in 2000, to account for 33 percent of its loans last year.
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Predatory Lending: Hard to Tame
Wall Street Journal (05/07/07) P. A5; Conkey, Christopher
Federal legislators pushing for a national anti-predatory-lending law are looking to a measure implemented in North Carolina in 1999 that, among other provisions, imposes a suitability standard requiring mortgage lenders to take a borrower's repayment ability into consideration and outlaws loans with points and fees higher than 5 percent of the mortgage amount unless the borrower has the means to repay the mortgage at the time it is made. While the legislation did not dry up credit or spark a flood of lawsuits from borrowers insisting that their lenders failed to abide by the suitability standard, it also failed to completely eradicate predatory lending--with some lenders offering initial "teaser" rates on adjustable-rate mortgages that enabled the loans to sidestep the 5-percent threshold. North Carolina banking commissioner Joseph Smith Jr. believes a measure mandating licenses for all mortgage originators has been more helpful in curtailing predatory lending. With regard to the federal debate over suitability standards, the Mortgage Bankers Association--arguing that such a move would boost costs and shrink credit--states, "Even if the facts suggest that a lender is in compliance with both fair lending rules and a suitability requirement, borrowers who go into default are likely to claim that the loan was unsuitable."
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Panel: Expand FHA Role in Subprime Lending
Boston Globe (05/04/07)
The House Financial Services Committee on Thursday okayed a bill introduced two months ago by Reps. Maxine Waters (D-Calif.) and panel chairman Barney Frank (D-Mass.) that would enable the Federal Housing Administration (FHA) to refinance the mortgages of struggling subprime borrowers and boost the maximum loan amount in pricey housing markets in an effort to curtail foreclosures. Frank says the agency would do well in "supplementing the market," and he believes higher-risk borrowers would benefit more in obtaining mortgages from the FHA than from subprime lenders and other funding sources. However, Rep. Judy Biggert (R-Ill.) and other Republicans were strongly opposed to a provision that will move FHA surplus revenue into an affordable-housing fund at a time when the agency is expanding into the subprime sector. Biggert believes "taking the funds out of the FHA and using them for a purpose unrelated to its core mission would threaten the solvency of the FHA fund and its ability to pay out insurance claims."
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Bill Would Bar Gifts to School Officials
USA Today (05/10/07) Chu, Kathy
The House has passed a measure that prohibits lenders from offering gifts to colleges to garner student business and mandates that schools reveal any financial connections to lenders. Legislators have censured the Education Department's lax oversight of the federal student loan program, and have accused the department of being overly close with lenders. New York Attorney General Andrew Cuomo alleged that lenders used cash and trips to get on colleges' "preferred lender lists," which the majority of students use when selecting a lender. The department has begun its own investigations of conflicts of interest, and has restricted lenders' access to the student loan database. Today, Education Secretary Margaret Spelling will disclose an internal task force's recommendations for revising preferred-lender lists.
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Student Loan Probe Widens to Alumni Groups
Wall Street Journal (05/04/07) P. B1; Sataline, Suzanne
The New York Attorney General's office is investigating whether Nelnet, the nation's second-largest college loan consolidator, paid alumni associations to steer student business to the company. The company acknowledges that it has license and "affinity" agreements with 120 alumni organizations. The contracts enable Nelnet to use alumni logos and mailing lists for marketing purposes in exchange for annual fees, or a fee per application. Nelnet claims these agreements are legal, but has decided to disclose such deals to students in the future, to avoid any "perceived conflicts of interest." While some alumni associations view their collaboration with Nelnet as lawful, others, like the City College Alumni Association, have terminated their contract with Nelnet. For its part, the University of Minnesota Alumni Association recently ended its agreement with Nelnet after receiving almost $130,000 over a three-year period for allowing Nelnet to market the association's services.
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Suit Over 'Rent-to-Own' Agreements Settles for $109 Million in New Jersey
Law.com (05/03/07) Booth, Michael
To settle a putative class action suit, Rent-A-Center will pay a total of $109 million to approximately 100,000 New Jersey customers. The settlement came on the heels of the New Jersey Supreme Court's ruling in Perez v. Rent-A-Center that the company's rent-to-own contracts fall under the umbrella of the Retail Installment Sales Act (RISA). The court also found that the company's time-price differentials surpassed the criminal usury statute's 30 percent cap, and that RISA protections were valid. The suit's plaintiffs will receive $800, on average, and prospective class members are being encouraged to come forward, as the company will otherwise keep as much as 50 percent of undistributed settlement funds.
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Senate Panelists Introducing ILC Bill
American Banker (05/10/07) Adler, Joe
Legislation to prevent commercial firms such as Wal-Mart Stores Inc. from owning industrial loan companies (ILCs) will be unveiled Thursday by Senate Banking Committee members Sherrod Brown (D-Ohio) and Wayne Allard (R-Colo.). The bill is expected to be very similar to one sponsored by House Financial Services Committee Chairman Barney Frank (D-Mass.) and Rep. Paul Gillmor (R-Ohio) that would impose an ILC ban on primarily commercial firms and give the Federal Deposit Insurance Corp. new powers to regulate certain ILC owners. Rep. Frank has expressed support for the idea of granting exceptions to some commercial firms in a final bill, including allowing automakers to continue to use ILCs to finance auto sales. Sen. Robert Bennett (R-Utah), a Banking Committee member and a key figure in the ILC debate, has said he is open to a compromise.
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Auto Loan Rates Higher for Blacks
Lakeland Ledger (FL) (05/08/07) Lester, Will
According to federal research, auto loan rates are higher for blacks than for other buyers, though recent lawsuits may close the gap. The lawsuit settlements require auto finance companies to limit dealer markups and to provide blacks and Hispanics with opportunities to obtain markup-free loans over the next few years. The settlements call for heightened transparency of interest rate terms, and consumer education for minorities. The American Financial Services Association (AFSA) is eager to educate customers, says President and CEO Chris Stinebert. Stinebert explains, "AFSA and its members believe there is no place for discrimination in the vehicle financing system."
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Chase Custom Auto Finance Reaps Benefits From Expansion
SubPrime Auto Finance News (05/03/2007) Reed, Jennifer
Chase Custom Auto Finance nearly doubled its production last year and attained record performance and production results in the first quarter of 2007. These improvements are chiefly due to the company's merger with Bank One. After the merger, the company ventured into the subprime business sector, adding at least 12 new prime/nonprime local offices and adding funding specialists and underwriters to existing centers. The company has also augmented its independent dealer base and improved relationships with the company's 15,000 existing commercial affiliations. In terms of its popular lender platforms, DealerTrack and RouteOne generate approximately 95 percent of Chase Auto Finance's business, because the platforms help dealers find Chase. In addition, Chase's underwriters and finance specialists stay in "constant contact" with dealers to help them understand what the custom sector seeks in applications. Bill Jensen, national custom executive for Chase Auto Finance, does not think the subprime mortgage market's downfall will affect the subprime auto lending market, noting many differences between the two sectors.
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For GE, No Lack of Ideas
Wall Street Journal (05/09/07) P. C1; Kranhold, Kathryn
General Electric Co., plagued by concerns about sluggish stock-price activity, has long been considering the sale of many of its subsidiary units in order to improve its overall valuation, but analysts are divided about whether this will ultimately be beneficial for the company. Some analysts say that the wide diversity of GE's units is what makes it an effective company, and that trends toward consolidation mean that GE could have an advantage if it remains as it is. GE Chairman Jeffrey Immelt has in the past favored keeping the NBC Universal entertainment unit, for example, and some observers see an upside to retaining the GE Money finance unit. In addition, analysts caution that selling these units could be premature, because they may not yet have peaked. However, other analysts say that financial units bring down the overall valuation of the company. GE Money is likely to succeed better as part of GE than as a spinoff, some observers say, because its company affiliation allows it access to high credit ratings and better loan rates. In addition, the unit's international presence makes it invaluable as a tool for spreading awareness of GE globally.
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Citi Targets $50 Billion Over 10 Years to Address Global Climate Change
Citibank News Release (05/08/07)
Citigroup has announced that it will allocate $50 billion toward global climate change initiatives over the next decade. The allocations will go toward investments, financings, and similar activities aimed at fostering the growth of clean technology and alternative energy within Citi's entire sphere of operations and the markets and clients that Citi serves. "The comprehensive program we are announcing today is not a wish-list, but a realistic, achievable plan that serves a critical global need and responds to an emerging investment opportunity," says Citi Chairman and CEO Charles Prince. The allocations will include $10 billion toward reducing Citi's corporate environmental footprint at more than 14,500 Citi facilities across the globe via the purchase of 52,283 MWh of green power for operations, environmental certification for new buildings, and the creation of a Global Energy Council. In addition, $31 billion from Citi's Markets & Banking group will be allocated to financing and investing in clean energy and alternative technology.
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3rd Update: Wells Fargo to Buy Greater Bay Bancorp
Dow Jones Newswires (05/04/07) Urbanowicz, Nicole
Wells Fargo & Co. and Greater Bay Bancorp. have reached an agreement in which Wells Fargo will acquire Greater Bay for approximately $1.5 billion in stock, with the exact value depending on the average Wells Fargo stock measurement price during the 10 trading days before the Greater Bay shareholder meeting when the transaction will be voted on. The deal values Greater Bay stock at $28.50 a share, currently a discount to the stock's trading price of $29.54. Analysts said that the deal was an intelligent move on Wells' part, comprising just 1.25 percent of its market cap and providing some strong synergy via Greater Bay's insurance brokerage unit. The acquisition provides Wells with $7.4 billion in Greater Bay's assets, as well as access to the markets of Greater Bay's 41 banking locations in the San Francisco Bay area.
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AFSA Comment Letter Notes Limited Refinancing Options
While commending the federal regulators that have issued proposed guidelines for mortgage lending, AFSA president and CEO, Chris Stinebert, pointed out that homeowners who have an adjustable-rate mortgage (ARM) could face limited refinancing options if the proposed guidelines go forward in their current format. The AFSA letter was submitted to the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration, which issued a proposed Statement on Subprime Lending for public comment on March 8.
A copy of AFSA's comment letter is posted at www.afsaonline.org.
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Dodd Principles Should Help Distressed Borrowers Avoid Foreclosure
Led by Senator Chris Dodd (D-CT), the Senate Banking Committee has developed a set of principles that AFSA believes should help distressed borrowers stay in their homes. "We appreciate Senator Dodd's efforts in this area, as foreclosure is a result that neither borrowers nor lenders want," AFSA president and CEO, Chris Stinebert, said in a recent press release.
The principles call for, among other items, the formation of dedicated teams or resources to work with distressed borrowers and, if necessary, the creation of new products and programs by lenders and Government Sponsored Enterprises (GSEs) to allow borrowers to refinance out of resetting subprime ARMs.
To see the complete press release, go to the AFSA Web site at www.afsaonline.org.
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AFSA to Host 17th Finance Industry Conference for Fixed Income Investors
Professionals responsible for credit and investment decisions and senior management of finance companies, banks and rating agencies should attend the upcoming AFSA conference in Boston. The dates are set for May 14-16, 2007, and will include presentations from 20 companies. For more information, go to www.investinthefinanceindustry.com.
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The Role of Secondary Market in Subprime Mortgage Lending Hearing
On May 8, AFSA staff attended the House Financial Institutions Subcommittee hearing--the Role of Secondary Market in Subprime Mortgage Lending. Witnesses included not only an originator, a servicer, a rating agency and consumer advocates but also attorneys who are industry experts. Members questioned witnesses whether Wall Street's appetite for hybrid ARMs and nontraditional mortgage products enticed lenders to relax their underwriting standards. Industry witnesses answered that investor demand and incentives for unregulated entities--such as brokers--fostered an unhealthy environment that undermined sustainable home ownership for some riskier borrowers.
In addition, the imposition of assignee liability was raised as a way to discourage investors from buying poorly underwritten loans. Industry witnesses, however, noted that this approach had failed in Georgia. Ultimately, the secondary market refused to purchase loans from the state, and the legislature had to amend its law, curtailing the assignee liability provisions significantly.
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"Bundled" Security Data Bill Passes Committee but Fate Still Uncertain
The Senate Judiciary Committee unanimously approved an amended version of S. 495, The Personal Data Privacy and Security Act, chiefly sponsored by Patrick Leahy (D-VT) and Arlen Specter (R-PA). The two essentially bundled the bill with S. 239, The Notification of Risk to Personal Data Act, which had been proposed by Senator Dianne Feinstein (D-CA). At this time, however, it's unclear whether the bill will head to the Senate floor for a vote anytime soon.
The measure represents just one of several competing bills that both chambers of Congress have tried to pass recently. They reflect the continuing public outcry over a series of high-profile breaches, most recently with the records stolen from TJX Companies. AFSA staff will continue to watch these and a number of competing measures, including S. 1178, the Identity Theft Prevention Act. That bill cleared the Senate Commerce Committee last week and prescribes notification requirements, prohibits collection of fees for credit freezes on identity theft victims, and other items.
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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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