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Due to the Thanksgiving holiday, AFSA Newsbriefs will not be published next week. The newsletter will resume on Thursday, Dec. 1.

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Top Story
Will CFPB Make Policy via Rules – or Enforcement?
American Banker (11/14/11) Vartanian, Thomas P.

Whether the Consumer Financial Protection Bureau (CFPB) will be a rules-based or enforcement-based agency will impact its relationship with the entities it regulates and its role in the marketplace. Financial institutions are accustomed to the rules-based policies that are common among federal banking agencies, which consist of formal administrative rulemaking with the opportunity for public comment and strict standards regarding how the agency analyzes and evaluates public input. In the final regulation, the agency is required to explain their final positions in a statement of basis and purpose. Final regulations are then subject to a challenge in federal court, which can be brought by a wide array of parties, such as trade associations. On the other hand, enforcement-based agencies create de facto rules through targeted enforcement actions or litigation actions that do not need to be based on previously publicized rules. While they are also subject to challenge in federal court, mounting a challenge can be more complex because of the continuing impact they may have on the reputation of the financial institution involved, the greater legal hurdles that must be met to set aside formal enforcement and litigation actions, and the fact that legal challenges may only be brought by the financial institution that is the target of the enforcement action. This results in most cases being settled before a court decision is made and in effect establishing the agency’s view of the law as the standard.

The approach the CFPB takes to defining “unfair, deceptive or abusive practices” under the Dodd-Frank Act will be particularly important. If the CFPB promulgates formal administrative rules to define such practices, it will be subject to limitations not generally imposed on other federal bank regulatory agencies. For example, the CFPB is required to balance the costs and benefits to financial service providers and consumers, “including the potential reduction of access by customers to consumer financial services,” and is also required to consult with the appropriate prudential federal regulators. However, taking the enforcement route, which does not require these checks and balances, could create an internal agency bias in certain circumstances.

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AFSA Provides Feedback on CFPB Prototype Mortgage Closing Forms

On Nov. 16, AFSA submitted a letter to the Consumer Financial Protection Bureau (CFPB) on the two prototypes of a model form to be used at a mortgage closing. The multi-page documents are intended to combine and replace the existing Truth in Lending Disclosure and the HUD-1 Settlement Statement. The two forms are entitled “Ironwood” and “Hornbeam.”
In the letter, AFSA stated its agreement with the CFPB’s goals to give borrowers a clear understanding of the final loan terms and costs in one place and to give lenders and settlement agents a well-organized form to make compliance easier. However, AFSA noted that most of the information that is required by statute to be prominent in current disclosures does not appear until the last or second-to-last page of the forms, and that neither of the proposed forms comply with the statutory requirements of TILA. “Without a safe harbor, using either of the proposed forms to attempt to comply with TILA will cause the creditor to be exposed to potential damages for each and every transaction made using these forms,” AFSA stated.

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AFSA Discusses Vehicle Financing at Electronic Signature & Records Association Conference

Three AFSA representatives discussed the electronic aspects of a vehicle finance transaction during a panel at the Electronic Signature & Records Association (ESRA) Annual Conference, held Nov. 9-10 in Washington, D.C. Mark Zalewski, AFSA staff liaison to the National Title Solutions Forum Committee, moderated the panel and served as a speaker, along with Gail Andrews, Program Manager of Policies & Procedures, Florida Department of Highway Safety and Motor Vehicles; Mark Furcolo, Senior Vice President, Processing Solutions, DealerTrack; and Sarah Hunsicker, Government Relations Director, VINtek.

The panelists overviewed a model of the life cycle of a dealer financed vehicle sale with a focus on the stakeholders in the transaction and the components of esignatures, erecords and edocuments that are used, transferred, maintained, stored and destroyed by all of the stakeholders in the transaction.

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Inside the Beltway
Will the CFPB Regulate Wal-Mart?
American Banker (11/14/11) Adler, Joe

Wal-Mart’s money service products – which include credit and debit card products through third-party institutions as well as check-cashing, bill pay, and money transfer services – may mean it will come under the supervision of the Consumer Financial Protection Bureau (CFPB). Whether Wal-Mart becomes a regulated entity depends partly on the outcome of the CFPB rule that will define the scope of nonbanks under its supervision and also if and when a director is confirmed to run the bureau. Once the bureau has a director, it will have authority to regulate and define "larger participants" as well as set the parameters for the markets it monitors. The “notice and request for comment” that the bureau issued in June indicated the type of nonbank sectors it could examine, including money transmitters and prepaid card providers. Some question whether the CFPB would be interested in Wal-Mart’s financial services since the company is not involved in direct lending through its U.S. operations and the products it offers have significantly low prices. But others say that “based on the proposed large participant rule and to the extent that Wal-Mart cashes checks and wires money, Wal-Mart seems to fit under the CFPB’s purview,” said Ann Jaedicke, managing director of Promontory Financial Group. According to Ben Jackson with the Mercator Advisory Group, the bureau’s interest in the card products offered by Wal-Mart depend on “whether or not the CFPB would expect Wal-Mart to be responsible for the different aspects of the program such as terms and conditions and fees, or whether they would look toward Wal-Mart’s [third-party] providers.”

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U.S. Consumer Regulator Looking at Student Loans
Reuters (11/16/11) Clarke, Dave

The new consumer financial agency is shifting its focus to the private student loan industry and is seeking information on how to oversee these lenders, the Consumer Financial Protection Bureau (CFPB) announced on Nov. 16. In its release, the agency said that “too little is known” about private student lenders and that “shedding light on this industry will benefit students, lenders, and the market as a whole.” The CFPB is seeking input from the public and the industry for the next 60 days on industry practices such as loan underwriting criteria, repayment terms and what efforts are made to prevent defaults. The bureau is required by the Dodd-Frank Act to produce a report on the private student loan industry by mid-2012.

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Auditor Says FHA Could Need Bailout
The New York Times (11/15/11) Lowrey, Annie

If the housing market deteriorates further, chances are almost 50% that the Federal Housing Administration (FHA) – which as of 2010 insured one-third of mortgages – will need a bailout, according to a report released Nov. 15 by the agency’s independent auditor. The agency’s problems originate from the national foreclosure crisis, which caused the FHA’s cash cushion to decrease because of the billions of dollars it had to pay in insurance claims against defaulting homeowners over the last three years. The audit found that the FHA’s supplemental reserve was less than one-quarter of a percentage point of its current portfolio. Legally, the agency is required to keep a two percent cash buffer, a target it has not met since 2008.
FHA officials say the likelihood that it will need a taxpayer bailout is slim because there is no evidence or widespread prediction that home prices will decline to the level that would require a bailout. And while the audit contends that “significant declines of home prices would create a situation in which the current portfolio would need additional support” from the Treasury department, FHA Acting Commissioner Carol Galante says the agency would consider several measures, including raising the FHA insurance premiums borrowers pay, before getting to that point. However, other previous independent reports have also predicted the agency’s insolvency and many housing experts have called for additional Congressional oversight of the agency due to the possibility of a bailout, even though the agency has always been subject to hearings and oversight by Congress. Others, like Ann B. Schnare, an independent housing consultant, caution that their insolvency is not a foregone conclusion, stating that “whether or not they are adequately capitalized depends on their projections.” The report comes as lawmakers are considering raising the maximum loan amount the agency can guarantee, a step that may expose the agency to more risk.

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National and State News
Michigan Supreme Court Reverses Ruling on MERS Right to Foreclose
DS News (11/16/11) Bay, Carrie

On Nov. 16, the Michigan Supreme Court ruled that Mortgage Electronic Registration Systems (MERS), as record-holder of the mortgage, has the right to initiate foreclosures in the state. The decision reversed an earlier ruling by the Court of Appeals that called into question thousands of foreclosure actions, causing title companies to refuse to handle foreclosed homes in which MERS was the foreclosing party, and HUD instructing mortgagees to re-file foreclosures that were initially carried out by MERS. The Supreme Court’s ruling means it is likely that all title underwriters’ files that were foreclosed in the name of MERS can proceed and litigation challenging the validity of a foreclosure based on the appeals court’s ruling will now be dismissed, said Randall S. Miller, Esq. of Randall S. Miller & Associates.
The decision validates MERS’ right to foreclose both judicially and non-judicially by advertisement. “This will allow homeowners to resolve title issues and buyers to move forward with the purchase of foreclosed properties, which is good for neighborhood stability,” stated Bill Beckmann, president and CEO of Merscorp, the parent company of MERS. “The [appellate court’s] ruling caused considerable confusion, delayed property transactions, and triggered unnecessary litigation.” In the Supreme Court’s order, the justices stated that the Court of Appeals’ decision “erroneously construed” Michigan’s law governing real property.

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Credit Card Delinquencies Rise, But Remain Near Record Lows: TransUnion
Collections & Credit Risk (11/15/11)

The credit card delinquency rate (the ratio of borrowers 90 or more days past due) rose for the first time since the fourth quarter of 2009, according to a report released by TransUnion LLC on Nov. 15. Consumers’ outstanding credit card debt also increased, with the average credit card debt per borrower rising $63 to $4,762. However, the level still remains near record-low levels. “This is the first quarterly increase we’ve seen in almost two years,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “Even so, we are still well below historical norms. In fact, we’re at the second lowest delinquency rate nationwide that we’ve seen in the past 16 years.” TransUnion predicts that credit card borrower delinquency rates may continue to rise in the short term. They attribute the rise partly to less prime customers opening new credit card accounts, resulting in lenders gradually shifting their focus to the subprime market.
Consumers with a VantageScore lower than 700 that are opening new credit card accounts rose to 25.2% of all new card accounts in the third quarter of 2011 from 23% for the third quarter of 2010. The proportion of new credit card accounts given to customers with a VantageScore of 800 or more dropped from 49.7% to 45.9%. “When more high-risk customers are opening cards and fewer low-risk consumers are doing so, it is inevitable that delinquency rates will increase. In one sense this is good news: those consumers who are most affected by the continuing tough economy are gaining better access to the credit ‘breathing room’ they need to make ends meet,” said Becker.

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Fannie and Freddie Detail New HARP Guidelines
DS News (11/15/11) Bay, Carrie

On Nov. 15, Fannie Mae and Freddie Mac released details of the modifications and procedural changes made to the Home Affordable Refinance Program (HARP), which has been extended through Dec. 31, 2013. The key revisions to the program include the elimination or rise of the loan-to-value (LTV) cap, and relaxed representation and warranty stipulations. These changes are expected to at least double the number of homeowners in the program. LTV restrictions will be eliminated for fixed-rate mortgages for terms up to 30 years, which will allow homeowners severely underwater because of plummeting property values to take out new loans at today’s low interest rates. However, to qualify for the program, borrowers must have an LTV ratio higher than 80 percent, and the original mortgage must have been sold to Fannie or Freddie before April 1, 2009. One of the most important components of the new program is the elimination of the risk associated with representations and warranties, whether transferred from the existing or the refinanced loan, a move Administration officials hope will spark healthy competition among lenders to help homeowners participate in the program. The GSEs are also changing their policies to allow lenders to solicit borrowers with Fannie- and Freddie-owned mortgages for a refinance, as long as the lender meets certain conditions relating to “advertising and solicitation activities.” The requirement that the borrower (on the new loan) meet the standard waiting period following a bankruptcy or foreclosure also will be removed.

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Lawmaker Wants to Allow Only 1 Payday Loan at a Time
The Salt Lake Tribune (11/16/11) Davidson, Lee

At the Interim Business and Labor Committee meeting on Nov. 16, Utah Rep. Brad Daw proposed the creation of a database of consumers who have high-interest payday loans. Payday lenders are against the proposal because it is “a matter of invasion of privacy for consumers,” Wendy Gibson, a district manager for Check City, said on behalf of the Utah Consumer Loan Association. However, Daw says that the people defaulting on these loans, which can include interest rates of around 520 percent on an annual basis, are spiraling into a cycle of debt because they are pressured to get additional loans to pay off earlier ones. Daw pushed a similar bill – without success – in the legislative session earlier this year. When approaching the committee this week, he said he had made revisions to the idea and pointed out that databases in other states, like Florida, have worked well enough that the legislature has not had payday loan bills. Mike Hanna with Veritec Solutions, which operates these databases in several states, told the committee that while payday lenders have opposed such databases in most states, the industry has been able to function and that the database helped decrease the number of money-losing loans they must write-off. However, Gibson stated that payday lenders have already supported new laws to protect borrowers and that a database is not needed.

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Ford Credit Appoints Marketing Exec as COO
Auto Remarketing (11/17/11)

On Nov. 16, Ford Motor Credit Co. announced that Bernard Silverstone has been appointed as chief operating officer and elected a corporate officer of Ford Motor Co. Silverstone, who is currently the president of marketing and sales for Ford Credit, will move into his new position Jan. 1. In the newly created position, Silverstone will head Ford Credit’s operations in North America, Europe, Asia Pacific and Africa, and Latin America. He will also lead marketing, sales and brand, business center operations, quality and process management and insurance operations. “Bernard’s global operating experience and deep knowledge of the financing business will serve us well as Ford Credit grows its business to support Ford’s growth plans,” said Mike Bannister, Ford executive vice president and Ford Credit chairman and CEO. “He’ll sharpen our focus on further aligning our operations globally and provide strong leadership as we continue to profitably support Ford, its dealers and customers.”

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November 17, 2011

Forward To A Colleague

ParaData Financial
Carleton, Inc
GoldPoint Systems
Counselor Library
Life of the South
Balboa Insurance
Allied Solutions
Wells Fargo Preferred Capital
AFSA Newsbriefs

AFSA Newsbriefs is a weekly executive summary of AFSA initiatives and consumer credit articles. AFSA Newsbriefs is free for members. Send an email to newsbriefs@afsamail.org to subscribe.

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.