AFSA Newsbriefs

May 17, 2007

Changes Planned for FICO Method
Bair: Final Lending Rules in Summer
Wide Scope in Ohio AG's Subprime Legal Plans
There's a Good Side to Subprime Lending
Congressional Bill Would Remove Mortgage Debt Forgiveness Tax Penalty

3 Lenders Up Student Loan Discounts
In Focus: Dodd Probe Into Student Lending Eyes Private Side
CIT Agrees to $3M Student Loan Settlement

ILC Waiver Idea Raises Questions
This Week: Andrew Koblenz
GMAC Could Benefit From Chrysler Under Cerberus Wing
Long Loans Put Dent in Auto Sales
Simplifying Auto Financing

New Bid for New Century
Citi Finalizes Acquisition of Grupo Cuscatlan in Central America

Senate Judiciary Committee Approves Data Security Bill
Mortgage "Suitability" Lawsuit Urges "Much-Needed... Reforms"
Alternative to Subprime Loans Bill Passes House Committee
Zandi Addresses AFSA Conference
Budget Resolution Could Include Subsidy Cuts for Student Lenders

Levin Takes Broad Aim at Card Tactics
American Banker (05/16/07) Kaper, Stacy

Sen. Carl Levin (D-Mich.) introduced sweeping credit card legislation Tuesday that would outlaw several common fees and interest rate tactics. While Levin's bill is given much less chance of eventual passage than the less aggressive bill expected to be sponsored by Senate Banking Committee Chairman Christopher Dodd (D-Conn.), Levin's effort could still affect the final bill's particulars. "The introduction of Mr. Levin's bill might give Mr. Dodd that much more leverage to compel the industry to do things voluntarily to change behavior--and then if he feels compelled to pass legislation, to work with the industry to come up with some good, responsible legislation," said Charles Gabriel, a senior vice president at Prudential Equity Group. In a statement issued Tuesday, Dodd reiterated his position that credit cards "are a valuable and important tool to help consumers build more financially secure and prosperous lives." But, he added, "I am committed to looking at any and all ways--including introducing legislation--to ensure that consumers are adequately protected from unfair credit card practices."
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Changes Planned for FICO Method
Los Angeles Times (05/17/07) Colker, David

Fair Isaac, creator of the FICO formula used to calculate credit scores, intends to revise its FICO formula. According to Fair Isaac, the modified formula will be better at assessing risk profiles for individuals with past credit problems, people with slight credit histories, and new mortgage seekers. However, the company maintains that the formula's change is not connected to the growing number of sub-prime defaults in the industry. Rather, the adjustment is intended to repair weaknesses in high-risk borrowers' scores, says Ron Totaro, vice president of Fair Isaac's Global Scoring Solutions. Totaro argues that high-risk lenders are to blame for the way that they use, or ignore, the FICO scores.
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Bair: Final Lending Rules in Summer
American Banker (05/16/07) P. 20; Adler, Joe

The release of final subprime mortgage guidance by federal banking regulators is slated for this summer, according to Federal Deposit Insurance Corp. Chairman Sheila Bair. She told attendees of a recent National Association of Realtors conference that the rules would be finalized in June or July. The guidelines, proposed in early March, call for subprime lenders to use the fully indexed interest rate when underwriting loans and beef up disclosures of the payment shock that adjustable-rate mortgage borrowers might face. Bair also hopes to add language requiring lenders to provide ARM borrowers with the costs of a similar fixed-rate loan so that they are aware of their options.
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Wide Scope in Ohio AG's Subprime Legal Plans
American Banker (05/15/07) P. 1; Berry, Kate

Focusing on fraudulent mortgages and home loans written without taking into consideration the borrower's repayment ability, Ohio Attorney General Marc Dann expects to file lawsuits during the next few weeks against mortgage lenders and investment banks. The litigation will be filed on behalf of mortgage borrowers and subprime-mortgage-backed bond investors, namely the Ohio Public Employees Retirement System. It accuses lenders and investment banks of violating the state Consumer Sales Practices Act by engaging in "unfair or deceptive" sales tactics. According to Dann, "There wasn't just one actor in this. There were decisions being made, and bonds marketed to bondholders who were left holding the bag." A recent report reveals that the state had the highest serious delinquency rate in the country, reaching 3.4 percent in the fourth quarter of 2006.
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There's a Good Side to Subprime Lending
Marketplace (05/15/07) Ryssdal, Kai Ryssdal, Kai

New York City-based economist Susan Lee says subprime lending is "plagued with fraud and abuse," and yet subprime loans enable many people to become homeowners, especially minority buyers and lower-income buyers. Lee argues that subprime lending has boosted U.S. homeowner levels by "several percentage points" to 69 percent. She says that before subprime lending began in earnest about 17 years ago, only the U.S. middle and upper classes could afford homes. Today, however, the subprime lending market is experiencing a retraction. In April, lenders foreclosed on 147,000 homes as their borrowers defaulted. However, even if 20 percent of subprime borrowers default, that means 80 percent have been able to own and keep a home, Lee says.
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Congressional Bill Would Remove Mortgage Debt Forgiveness Tax Penalty
Realty Times (05/14/07) Harney, Kenneth R.

The Mortgage Cancellation Relief Act of 2007, sponsored by Reps. Robert Andrews (D-N.J.) and Ron Lewis (R-Ky.) would eliminate taxes on any primary mortgage debt forgiven by lenders. Presently, homeowners who sell at a loss to avoid foreclosure must pay taxes on the difference between the mortgage balance and the sales price. Not covered by the legislation are second liens obtained as part of "piggyback" mortgages and "soft seconds" used to pay for home repairs. The legislation is currently under consideration by the House Ways and Means Committee.
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3 Lenders Up Student Loan Discounts
USA Today (05/16/07) P. 1B; Chu, Kathy

As the student-loan sector undergoes investigation, a minimum of three lenders are improving their discounts on loans, possibly reducing prices for millions of students. College Loan Corp., Nelnet, and Sallie Mae say they have opted to make their loans more attractive due to strong competition in the sector. The discounts occur, though, as regulators are looking into whether students and alumni have been paying steeper loan fees due to advantageous deals in which certain colleges get cash and vacations if they direct students to particular lenders. College Loan is providing a rate reduction of a point after 48 back-to-back on-time payments, in addition to a cash rebate of as much as 2 percent of principal after nine consecutive on-time payments. Meanwhile, Nelnet will provide a rate reduction of a point on new Stafford federal loans beginning in July if payments are debited from a bank account, versus a quarter-point discount now. Also in July, Sallie Mae will provide a reduction of a half percentage point on its Stafford loans for students who set up automatic payments, and will give a discount of a half-percentage point to those who apply for private loans. FinAid's Mark Kantrowitz predicts that other lenders will take similar action since investigators are studying the lenders' practices and Congress is thinking about reducing subsidies.
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In Focus: Dodd Probe Into Student Lending Eyes Private Side
American Banker (05/14/07) Kaper, Stacy

Senate Banking Committee Chairman Christopher Dodd is set to launch an investigation into the private student lending industry, the Connecticut Democrat's office confirmed on May 11. Dodd's investigation will focus on underwriting standards, fees, interest rates, and how lenders market themselves. The senator and presidential hopeful is particularly interested in whether private lenders use the information they collect through the government student loan program and credit card solicitations to market other products to students. Private student loans currently account for as much as one-fifth of the student loan market and could continue to grow because lawmakers, including Sen. Edward Kennedy (D-Mass.) and Rep. George Miller (D-Calif.) are pushing for deep cuts in lender subsidies and the government's guarantee on Federal Family Education Loans. If those cuts are approved, a Senate aide said, "more lenders will move themselves out of the guaranteed market and into the private-lending market, where the revenues and the returns may be greater"--a possibility that has caught Dodd's attention. Although the prospect of an investigation is daunting for the private student loan industry since it has already been the subject of a number of hearings and bills, a lobbyist for a large banking company engaged in student lending said that private loans are needed to supplement other student loans, given tuition costs, and banks are well-regulated. "We think our products would stand up to scrutiny," the lobbyist said.
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CIT Agrees to $3M Student Loan Settlement
CNNMoney (05/10/07)

New York Attorney General Andrew Cuomo has orchestrated settlements with several student lenders for activities undertaken to achieve "preferred lender" status at colleges and universities. The most recent settlement involves CIT Group Inc. and its Student Loan Xpress subsidiary, which have agreed to contribute $3 million to a financial-aid education fund, revamp business practices, and provide the state with information to further its investigations. Student Loan Xpress allegedly gave gifts, meals, free printing services, free training seminars, and consulting fees to financial aid officers at several schools. In addition to seeking settlements, Cuomo has penned a code of conduct that has been embraced by nearly two dozen colleges and universities.
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ILC Waiver Idea Raises Questions
American Banker (05/17/07) Adler, Joe

The House Financial Services Committee continues to debate an exemption for auto manufacturers that would allow them to continue earning over 15 percent of their revenue from commercial activities in an industrial loan company (ILC). The current ILC bill under discussion says firms with ILCs may not earn more than 15 percent of their revenue from commercial activities. Critics are concerned that the language of an exemption could be interpreted broadly by the courts, allowing Home Depot and Wal-Mart to claim they are also exempt from the ban. Rep. Barney Frank (D-Mass.) says that the exemption language would not be specific to an industry but would be "an economic profile." Automakers continue to lobby for an exemption because their foreign competitors already own ILCs. Furthermore, some auto lenders that already own ILCs back the exemption because there banks were chartered after a key date--October 2003; a provision in the House bill would prohibit ILCs chartered after that time from pursuing certain activities. "The sympathy comes down to domestic versus foreign manufacturers," says American Financial Services Association Executive Vice President of Federal Government Affairs Bill Himpler. "Even in the foreign auto manufacturers category, you have disparity between some that had their charter prior to 2003, and those that had it afterwards." The bill is expected to be voted on by the full House the week of May 21.
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This Week: Andrew Koblenz
Dealer Weekly (05/15/07)

National Automobile Dealers Association (NADA) Vice President and General Counsel Andrew D. Koblenz says that "Industry sales are robust at 16 or 17 million a year overall, but certain segments, particularly the Detroit 3, are under a lot of pressure. That puts pressure on the new vehicle side, but it also puts pressure on the financing side." He adds that in 2007 and 2008, dealers will face data access issues as new rules about consumer identity and identity theft are issued under the 2003 FACT Act. NADA and the American International Automobile Dealers Association recently announced that they both support the idea that dealers must have open access to data in dealership management systems. Koblenz says NADA will also continue to educate the public about vehicle financing.
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GMAC Could Benefit From Chrysler Under Cerberus Wing
Dow Jones Newswires (05/14/07) Koons, Cynthia

Cerberus Capital Management's acquisition of Chrysler Group is likely to have a number of financial effects. One area of the deal that analysts are watching most closely is the acquisition of Chrysler's lending unit, Chrysler Financial Corp. Because Cerberus also controls GMAC, the General Motors auto-financing unit, the synergy between the two units could create significant gains for Cerberus, General Motors (which retains a 49 percent stake in GMAC), or both. Auto finance units have continued to be profitable even as automobile manufacturing has floundered in the recent economy. The union of Chrysler Financial and GMAC may result in decreased operating costs for both companies and additional profit as a result. Cerberus has not yet spoken about how it plans to manage the integration of the two units, but some analysts predict the GMAC platform will be used to fill in gaps in Chrysler Financial's back-office resources and to originate assets.
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Long Loans Put Dent in Auto Sales
Chicago Tribune (05/13/07) Popely, Rick

Sales of new vehicles are down nearly 3 percent so far this year, despite the fact that both the U.S. population and the number of licensed drivers are at all-time highs. According to analysts and auto manufacturers, there are several factors driving the downward trend in new vehicle sales, including high gas prices, declining home values, and slow economic growth. But some say that perhaps the biggest reason why new auto sales are trending downward is the fact that consumers are stretching out their car loans over such a long period of time that some can no longer afford to replace their vehicle. According to CNW Marketing Research, which studies consumer buying trends, the average term of a new vehicle loan this year is nearly 71 months, up from 52.4 months in 1998. These longer loans take more time to build equity usable for a down payment on another vehicle, which forces some buyers to delay their next vehicle purchase. However, some say that longer loans are not keeping buyers from dealer showrooms. Edmunds senior analyst Jesse Toprak said he believes big rebates, offered primarily by domestic automakers, are coaxing buyers with negative equity in their vehicles into the market.
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Simplifying Auto Financing
Oakland Press (MI) (05/13/07) Szczesny, Joseph

Route One is committed to streamlining the credit application process for consumers, car dealers, and financial institutions. The company is a joint venture developed by Ford Motor Credit, GMAC, DaimlerChrysler, and Toyota Financial Services in response to customer dissatisfaction with the slow loan application process; now, approvals can be obtained in minutes with RouteOne's system. Nationwide, over 20,000 automobile dealers and 175 banks employ RouteOne's services to manage approximately 80 percent of the car loans made in the United States, according to Brad Rogers, vice president of sales and marketing. The neutral service does not prefer any specific lender. "We just offer a safe access point," says Rogers. RouteOne offers a Web-based system enabling dealers and banks to handle the application and financing process online. In addition, RouteOne aims to expand its client base to include dealers of recreational vehicles, boats, and power sports, and is also running pilot programs for electronic contracting and other new services.
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New Bid for New Century
New York Post (05/17/07)

New Century Financial Corp. this week received a competing offer for its loan-servicing unit that tops than the initial $133.3 million bid presented by Carrington Capital Management LLC. The new offer means that an auction for the California-based subprime lender's unit will now be held on May 17. New Century won permission last month to sell the unit to Carrington unless a competing bid was made that was worth more. No official word has been given as to precisely how many offers have been made and how many have been worth more than Carrington's bid.
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Citi Finalizes Acquisition of Grupo Cuscatlan in Central America
Citibank News Release (05/14/07)

Citi has completed its acquisition of Grupo Cuscatlan, a banking firm in Central America, for $1.51 billion in cash and Citigroup stock. The unit has operations in El Salvador, Guatemala, Costa Rica, Honduras, and Panama. Citi will retain Grupo Cuscatlan CEO Mauricio Samayoa. The acquisition is expected to improve Citi's distribution abilities in Central America, particularly for retail and corporate clients.
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Senate Judiciary Committee Approves Data Security Bill

The Senate Judiciary Committee approved a bill (S. 495) sponsored by Chairman Patrick Leahy (D-VT) that AFSA staff have been following. The legislation would subject depository institutions to breach notification rules; the rules, to be written by the Federal Trade Commission, would be enforced by state attorneys general. During the vote, the panel passed an amendment that would exempt debtors from means testing in bankruptcy proceedings if their financial problems were caused by identity theft.

The Senate Commerce Committee approved a competing bill (S. 1178) on April 25 that would let consumers freeze access to their credit files. Neither the House Financial Services nor the Senate Banking committees have taken up the issue yet, but industry-backed bills have been introduced in both panels. S. 1260, The Data Security Act of 2007, for example, would retain existing security requirements for financial institutions and keep enforcement with the functional regulators.
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Mortgage "Suitability" Lawsuit Urges "Much-Needed... Reforms"

AFSA has been monitoring litigation involving mortgage lenders. The first court case to argue "suitability" standards was filed by Zamansky & Associates LLC, in New York State Supreme Court. Jacob Zamansky, a firm principal, wrote, "It is my sincere hope that a related lawsuit I filed today will similarly catch the attention of appropriate prosecutors and further fuel much-needed industry reforms, this time within the mortgage lending business." The case was filed on behalf of several homeowners from Long Island against PHH Mortgage Corp., First National Bank of Long Island, Countrywide Home Loans, Inc., Homecomings Financial LLC, Washington Mutual Inc. and IndyMac Bank. AFSA will continue to follow this case and others that may be filed.
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Alternative to Subprime Loans Bill Passes House Committee

On May 3, the House Financial Services Committee passed H.R. 1852, The Expanding American Homeownership Act. It is expected to modernize the Federal Housing Administration (FHA) by making the government mortgage insurance program more accessible. The legislation, sponsored by Chairman Barney Frank (D-MA) and Representative Maxine Waters (D-CA), would let the Department of Housing and Urban Development qualify higher-risk borrowers for FHA loans as an alternative to subprime loans. Key components of the bill include: 1) first-time homebuyers could take out FHA loans with no down payment; 2) raised loan limits in high-cost areas; 3) risk-based premiums; and, 4) eliminated cap on reverse mortgages.

The bill is expected to pass the House this spring, but it faces tougher odds in the Senate, where FHA reform efforts failed last year.
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Zandi Addresses AFSA Conference

On May 15, Mark Zandi, an economist with Moody's Economy.com, spoke at AFSA's 17th Finance Industry Conference for Fixed Income Investors in Boston. The economy, he told the group, is doing "about as well as could be expected," citing inflation figures, unemployment rates and "surging" corporate profits. Housing, though, remains a "weight" on the economy. His PowerPoint presentation can be see at: www.investinthefinanceindustry.com/pdf/07MoodysOutlook.pdf
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Budget Resolution Could Include Subsidy Cuts for Student Lenders

Representative George Miller (D-CA) and Senator Edward Kennedy (D-MA), the Democrats who chair the House and Senate Education committees, respectively--are expected to attempt to include language in the budget resolution next week that would cut subsidies to student lenders. Both chairmen have led attacks against lenders and the Education Department for the inducements lenders give college financial aid officers in exchange for "preferred lender" status, and AFSA staff has been monitoring the developments.

The House passed subsidy cuts with student loan interest rate reductions this year as part of Speaker Nancy Pelosi's agenda for the session's first 100 hours; however, both chambers are expected to seek further cuts to the Federal Family Education Loan Program, in which banks and other lenders offer student loans that are subsidized and guaranteed by the government.
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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.