Archive for the ‘Regulators and Regulations’ Category

Anonymous Banker: FDIC Chairman Sheila Bair’s speech portends the end of the era of “too big to fail”

Friday, October 30th, 2009

Today, FDIC Chairman, Sheila Bair presented on Systemic Regulation, Prudential Measures, Resolution Authority and Securitization before the Financial Services Committee and U.S. House of Representatives.  It’s a must read for those of us who favor the philosophy that no institution should be ‘too big to fail’ or allowed to act  in ways that can threaten the financial stability of our country and the global economy. 

She stated, quite eloquently, the need for a system that makes our regulators accountable both for their actions and their inactions.  She proposes that a Council be established that would effectively ‘regulate the regulators’.

Primary regulators would be charged with enforcing the requirements set by the Council. However, if the primary regulators fail to act, the Council should have the authority to do so.

As always, with grace under pressure, Ms. Bair has publicly acknowledged the need for our regulators to practice their authority outside the sphere of political influence.  As we await implementation of this proposal that will surely strengthen the future economic stability of our nation, it would help if our current regulators would stop “asking” the financial institutions to comply with their directives and instead, use their powers of enforcement to make them comply.

In designing the role of the Council, it will be important to preserve the longstanding principle that bank regulation and supervision are best conducted by independent agencies. Careful attention should be given to the establishment of appropriate safeguards to preserve the independence of financial regulation from political influence.

On one major issue, I do beg to disagree.  Whether Ms. Bair likes it or not, our Regulators -  the FDIC, the OCC, the FRB and the OTS,  DID, in fact, identify the systemic risks of sub-prime and non-conventional real estate lending and they knew it was wide-spread.  Our regulators addressed this issue with ALL banks in 2005 through an interagency regulation that was put out by the  FDIC, FRB, OTS and OCC , the regulating authorities of all banking institutions and which came about through Regulation H.    Our regulators recognized the extreme risks of the sub-prime and non-traditional mortgage products and they failed to exercise their authority and curtail the banking industry’s careless lending practices.  Instead, the Regulators chose to merely issue guidance letters to the banking institutions in 2005 and then again in 2006.  The links I have provided in this paragraph are essential to understanding exactly how badly our Regulators failed us.  It proves that they knew the extreme consequences of the banks continued participation in sub-prime and non-conventional mortgages products and moreso, that the banks lax lending standards represented a systemic risk.  For Ms. Bair to publicly state that the regulatory supervisors failed to identify the systemic nature of the risks is simply not true.  I’d prefer if she would simply acknowledged that our regulators did a piss-poor job of stopping the banks from doing what they knew they shouldn’t be doing, instead of saying:

Supervisors across the financial system failed to identify the systemic nature of the risks before they were realized as widespread industry losses. The performance of the regulatory system in the current crisis underscores the weakness of monitoring systemic risk through the lens of individual financial institutions and argues for the need to assess emerging risks using a system-wide perspective. The current proposal addresses the need for broader-based identification of systemic risks across the economy and improved interagency cooperation through the establishment of a new Financial Services Oversight Council.

If you believe what Ms. Bair said, then our regulators were ill-prepared to recognize the systemic risks of unsafe and unsound real estate lending practices.  In my book, that is called incompetent.   However, if you subscribe to my position:  the regulators knew it and failed to act, then that makes them complacent.

Either way, our nation cannot afford to have  incompetence or complacency in our regulatory system.  While I agree with the need for the Council that Ms. Bair describes, I have to wonder who will be regulating the new regulators of our old regulators and will they be armed to act swifter and surer the next time around.

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Anonymous Banker: Small Business takes it on the chin from our Congressional Leaders and Regulators

Tuesday, October 27th, 2009

I recently posted a blog saying that our Congressional leaders and regulators needed to redefine the term small business.   Over the next weeks, I’ll be following up with more blogs on that theme.  Here’s my first:

Our President, Treasury Secretary Geithner and our Congressional leaders have all, during the course of this economic crisis, blathered on about their commitment to small business.  For once, I’d like to see them put their laws and regulations where their mouths are.

Congress passed consumer credit card regulations designed to stop deceptive practices in credit card lending.  Yet Congress intentionally left  out all business credit cards that can be peddled to the 26 MILLION small business owners across the United States. One can only assume that this means that it’s still okay for the banks to be deceptive when issuing credit cards to these valued members of society that are the backbone to our economic recovery.   And banks certainly will…. I promise you that.

Let’s remember, that banks do not issue business credit cards without the support of personal guarantees of the small business owners, who I might add could also be referred to as ‘consumers’.   

Well, let me correct that.  Many banks do issue “Commercial Credit Cards”, which should not be confused with “Small Business Credit Cards”.  Commercial Credit Cards are reserved for corporations with revenue typically in excess of $2 Million dollars, and then, only if the entity isn’t privately owned and operated.  Commercial Credit cards are reserved for businesses like not-for-profit corporations, where personal guarantees would not be available since there is not direct private ownership.  But if a personal guarantee is available from the business owner, the banks take it. 

The banks themselves differentiate a “Commercial Credit Card” from a “Small Business Credit Card”, so WHY aren’t our Congressional leaders doing the same? 

Probably because they don’t really have any interest in protecting the small business owner and just like to hear themselves talk.

I dare Congress to prove me wrong and amend the new protective credit card laws to include Small Business credit cards.  Till then, I will continue to advise all my small business customers NOT to apply for any small business credit cards, but to apply instead for a consumer credit card and use that card only for business expenses.  It does not change the deductibility of the expenses.  And, at least then, the business owner will get the benefit of the new protective regulations when they go into effect next year.

On the question of direct personal liability vs. personal guarantee:  You can’t be half pregnant, my friend.

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Anonymous Banker asks you to write your Congressional Leaders in Support of the Federal Reserve Transparency Act – HR 1207

Sunday, October 18th, 2009

In July I wrote to the Federal Reserve Bank of New York and asked them which banks divested themselves of $31 billion dollars of toxic credit card and auto loans through the TALF program. After all, if my tax dollars will ultimately be used to offset losses from these portfolios financed on a non-recourse basis by the FRBNY,  then surely I must have the right to know who’s creating them and who’s selling them.

Not so…..

Reply from TALF@NY.FRB.ORG (cut and paste – actual response)
Thank you for your inquiry. This information is not publically available. We do not disclose specific borrowers of any 13.3 loans.

If ever there was a time for the people of this country to band together in support of legislation, this is it. Please  write your Congressional Leaders (links provided here on AB blogsite). Let them know that if they are representing YOU, then they need to support HR 1207

Original Message from Anonymous Banker to FRBNY
07/22/2009 10:28 PM
To TALF@ny.frb.org
Subject:  Questions on TALF

I’ve been following TALF and I’ve noticed that there is no information on which financial institutions are selling the assets, only the cumulative total of assets purchased under the program.  I would like a breakdown of TALF assets sold by financial institution and then by asset class.  Please let me know what I need to do to obtain this information.

Please take a moment to watch this You Tube Video

Services Subcommittee on Oversight and Investigations hearing of May 5, 2009.
Rep. Alan Grayson asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the trillions of off balance sheet obligations. Inspector General Elizabeth Coleman responds that the IG does not know and is not tracking where this money is.

and read this Article on Bloomberg

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Anonymous Banker: Please join me and Congressman Alan Grayson in Taking on the Fed

Tuesday, October 13th, 2009

I know I’ve been harping on  the TALF program which  is divesting banks of toxic credit card and autoloans.  TALF was supposed to get credit flowing  by breathing life into the securitization market for bank loans. Our country’s economic system became dependent on the securitization process to manage the flow of credit.  Securitization translates into banks initiating  loans, then packaging them together and selling them off through a product called Asset Backed Securities (ABS). 

The ABS’s are purchased by investors such as insurance companies, mutual funds and pension plans.  Ultimately, we, as individuals are the purchasers through these other investors.

If you were going to buy a pool of assets, and in this case I focus on credit card and auto loans, what level of due diligence would you expect the bank to perform in evaluating these loans?  Most banks today have a pre-programmed “scoring” system.  It puts significant weight on the credit score of the borrower. In large part, this scoring process is governed by Regulation B, the Equal  Credit Opportunity Act.

During the years of sub-prime mortgage lending, what the banking industry did was grant loans on what was called “stated income”.  The borrower simply “told” the bank what they earned and the bank simply took their word for it.  Today, we are calling these loans “liar loans”.  The banks failed to apply even the most basic of credit underwriting processes to these loans:  income verification.   Banks simply stopped caring because they knew they would be divesting themselves of these loans when they sold them to Fanny Mae and Freddie Mac.  We all know how that turned out.

You’d think we would have learned our lesson.  But we have NOT!!

Go into a bank today and apply for a credit card or go into a car dealership and apply for an auto loan.  All you need is a credit score over 680 and you are likely to be approved.  You will be asked for your basic information:  Name, address, social security number, phone number, date of birth, etc. 

Then you will be asked to “state your household income” and if it’s a business credit card you will be asked to “state your annual revenue”.   The bank does not verify this information.  They ask for no tax returns, they ask for no pay stubs.  They ask for NOTHING!! 

In the August 18, 2009 Term Asset-Backed Securities Loan Facility: Frequently Asked Questions, it states:

What types of non-mortgage receivables are TALF eligible?

Auto-related receivables will include retail loans and leases relating to cars….

Eligible credit card receivables will include both consumer and corporate credit…

How are subprime versus prime defined for auto loan, auto lease, and credit card ABS?

Auto loan and lease ABS are considered prime if the weighted average FICO score of the receivables is 680 or greater. Commercial receivables can be excluded from this calculation if historic cumulative net losses on these accounts have been the same or lower than those on receivables to individual obligors and this information is available in the prospectus.

Credit card ABS are considered prime if at least 70 percent or more of the receivables have a FICO score greater than 660. FICO scores must reflect performance data within the last 120 days. For credit card trusts where the percentage of receivables with a FICO score of greater than 660 is not disclosed, the subprime haircut schedule will apply.

Consider this:  Small Business working capital lines of credit issued by banks cannot be sold through TALF.   And early on in this financial crisis, the banking industry systematically cancelled credit lines across the nation to the small business community.  No warning.  They simply mailed the customer a letter stating that their credit line had been cancelled.  These decisions were not based on any repayment history and point-in-fact, many of these borrowers never missed a payment.  The banks decision was based primarily on the credit score they pulled.  If the score was less than 720, the line was cut.   This was the banks way of divesting itself of risk on these lines.

These lines, over at least the last five years, were granted to businesses without the banks verifying any financial information on the companies or the owners that personally guarantee these loans.  Lines of $5000 to $100,000 were the most affected.  The banks wrote to the customers and said they could reapply, if and only if they submitted current financial information to the bank.  The reconsiderations were done on a case by case basis.  Today, all new credit applications to small businesses require tax returns, both personal and business, for proof of revenue and proof of income.  Thank goodness!

Over the last year, over $21 Billion dollars in credit cards and over $10 Billion dollars in auto loans have been sold by the banks through the TALF program.  And these loans were ALL granted without any form of income verification.  Yet the amounts are the same  ($5000 to $50,000) as those of the working capital lines which are held to a much different credit underwriting standard.

Our bank regulators, all of them, have put in place regulations regarding safety and soundness in lending.   The foundation of these regulations come from  the Federal Deposit Insurance Corporation Act of 1931.   Included in these regulations are guidelines on lending which speaks to loan documentation and credit underwriting.  The regulations state:

C.  Loan documentation. An institution should establish and maintain loan documentation practices that:

1.  Enable the institution to make an informed lending decision and to assess risk, as necessary, on an ongoing basis;

2.  Identify the purpose of a loan and the source of repayment, and assess the ability of the borrower to repay the indebtedness in a timely manner;

D.  Credit underwriting. An institution should establish and maintain prudent credit underwriting practices that:

1.  Are commensurate with the types of loans the institution will make and consider the terms and conditions under which they will be made;

2.  Consider the nature of the markets in which loans will be made;

3.  Provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed;

Here is  the thorn that pricks me each and every day as I witness the banks granting credit cards and auto loans to so many borrowers that have no hope of ever repaying this debt and to those that continue to incorrectly state their level of income.  This  interagency regulation governing safety and soundness does NOT state that the banks don’t have to apply the basic rules in lending  if they are going to sell off the loans through TALF and stick the taxpayer with the risk.   Yet, in the face of this regulation, which is supposed to be enforced by our bank regulatory agencies:  FDIC, OTS, OCC, and FRB, there comes along a program, TALF, which ENCOURAGES the banks to violate the most basic directive for safety and soundness:  income verification.

And the banks flaunt this behavior in their Regulating Agency’s  face.  With one hand, banks pull back credit to the small business community, because these loans must  continue to be carried on the banks books.   Banks are  now (thank goodness!) requiring tax returns for all business loans.  They generally refuse to lend to a business whose owners have a  credit score of under 720.  Some banks even set different underwriting criteria for “customers” and for “non-customers”.  Chase Bank, for example defines a business customer as one who banks with them for more than six months and maintains average deposit balances in excess of $5000.  Their approval rate for non-customer loans is a mere fraction of those for customer loans.  (I have to wonder if this special evaluation criteria would be supported by CRA which is designed to ensure that banks lend in the communities in which they do business and not just to the customers with whom they do business….. but that is for a different article).

On the other hand, compare the underwriting standards used by these same banks for credit card loans to businesses and consumers and consumer auto loans.  The amounts of the loans are, again, in the same range:  $5000 to $50,000.  Yet the banks refuse to apply ANY safety and soundness standards in underwriting these credits simply because …. they are going to absolve themselves of the risk when they sell them off through TALF.  Additionally, they are granting these loans to borrowers that have credit scores as low as 660 and 680, again, because they are going to divest themselves of the risk through TALF and those scores make the loans eligible for the TALF program.

What can you do about this? 

The New York Fed has  established a 24-hour telephone and internet-based hotline for reporting of fraudulent conduct or activity associated with the TALF.  The hotline can be reached at 1-866-976-TALF (8253) or www.TALFhotline.com.

I seriously have no personal vested interest in correcting this situation.  In fact, I probably risk losing my job each time I write one of these articles.  But I feel quite strongly about TALF’s  risks to us, as taxpayers, and to the future of our country’s economic recovery.  We cannot recover if we continue to allow the banks to make the same mistakes over and over.   

As citizens of the United States, we enjoy a democracy that provides us with a level of freedom not experienced elsewhere in the world. Written into the framework of our constitution is the idea that if we, as a people, demand a change, it must be made. The change may not be the will of Congress, but if the people call for a change in a law that they feel is unfair and detrimental to the health of our nation’s economic foundation, then it is incumbent upon our Congress to listen and to act.

I hope after reading this article you will take a moment to send your email to the TALF hotline, protesting both the use of our taxdollars to divest the banks of these new toxic credit cards and auto loans and demanding that our Regulators force the banks to apply reasonable verification of income for all forms of credit, not just the loans the banks will hold on their books.   I will also provide links on my website that will guide you through the process of writing to your Congressional leaders.  You may feel free to use this Anonymous Banking article to express your concerns.

When you write to the TALF police, please also ask them why, in this new age of so-called transparency, the TALF rules do not require the disclosure of the names of the banks that are selling these assets, how much each bank is selling and what form of credit they are selling.  I asked them.  They emailed me back and said TALF rules don’t require them to share this info.  Transparency?????

Let’s be heard on this issue. If you don’t do it for yourself, then please consider doing it for the security of our future generations.

Please share this article with your friends, family and business associates.

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Anonymous Banker: The foundation of this Economic Crisis: The Community Reinvestment Act or the Regulators that enforce it?

Sunday, October 4th, 2009

Several months back, I wrote an article:  Our Nation’s Ball-less Wonders in which I lambasted our Regulators for not enforcing Federal Reserve Regulation H  that governs safety and soundness in lending.  That regulation sets forth guidelines that banks must follow in evaluating mortgages.  I proposed that it was our Regulators’  failure to enforce these guidelines that caused our nation’s economic crisis.

Over the last months, as I listened to various news interviews on our economy, I kept hearing commentary on how the CRA, the Community Reinvestment Act, played a large role in this crisis.  For the most part, I discounted this as rhetoric.

Then, while clicking around various government sites, I accidentally came upon a “corrective action directive” put out by the Office of Thrift Supervision.  Reading this document brought my focus to bear down on CRA’s possible effect on the state of our economy.  Before I share my findings, I must first apologize to the now defunct Guaranty Bank of Austin, Texas.  This bank is the winner of my web-surfing lottery.

Follow me on this:

The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low-moderate income neighborhoods, consistent with safe and sound banking operations.  It was enacted by Congress in 1977.

It is a good Act that prevents banks from red-lining and discrimination.  It ensures that low-income communities will be afforded access to banking services, including loans.  The banks receive CRA ratings from their respective Regulatory agency:  FDIC, OTS, FRB and OCC If the bank receives a good report card, then the regulators support, for example, the bank’s applications to open or close branches or to merge with or acquire other financial institutions.  Conversely, if a bank receives a bad report card, they are prohibited from merging with or acquiring other banks.  Over the last fifteen years, with the birth of regional and national banks, getting a good CRA report became an ever-increasing priority within the banking industry as it was a key to their ability to expand through acquisition.

What the Regulating authorities fail to remember is that the Community Reinvestment Act was designed to ensure that low to moderate income neighborhoods, previously abandoned by most banking institutions, would have equal access to financial services.  But at CRA’s core, in each pronouncement of its rules and intent, it states that the bank’s practices must be “consistent with safe and sound banking operations”.

Reflecting on this, CRA was to-be to lending in the low to moderate income communities what the SBA is to Small Business Lending.  The SBA doesn’t allow banks to abandon all reasonable credit criteria.  Quite the contrary. They relax certain standards to make it easier for the small business owner to obtain financing, perhaps extending repayment terms or providing lower rates.  SBA borrowers still must be able to support their ability to repay these loans. 

Likewise, CRA standards, as I remember them, provided for lower down-payments (10% instead of the conventional 20%), lower rates and lower closing costs.  The borrower still needed to show their capacity to repay.  It was never intended to be,  by any stretch of the imagination of our dillusional regulators, a give-away program.  It was designed to help a lot of worthy, qualified low to moderate income people buy their first home.

In fact, the regulation itself  states,

“Banks are permitted and encouraged to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals, only if consistent with safe and sound operations.”

It was the banks greed that morphed this excellent law into the disaster that occurred over the last years.  Where were the regulators, the protectors of the public, in this equation?  It remains my humble opinion that our Regulators WERE INDEED our nation’s ball-less wonders.  They allowed the banks to take this perfectly sound and necessary program and bastardize it into a free-for-all by the greedy bankers.

Not only did our regulators fail to impose penalties on the banks that continually reduced all reasonable loan evaluation criteria in violation of Federal Reserve Regulation H, they praised them for it.

Take the CRA report, dated December 28, 2007 issued by the Office of Thrift Supervision for Guaranty Bank in Austin, Texas.   The first interesting observation is the disclaimer that appears on the first page of the report: 

“The rating assigned to this institution does not represent an analysis, conclusion, or opinion of the federal financial supervisory agency concerning the safety and soundness of this financial institution.”

Come ON!!!!!  Our regulator’s first priorty is to ensure the safety and soundness of our financial system.  They can’t be out there writing reports on CRA compliance that issue disclaimers for themselves.  How utterly ridiculous, not to mention dangerous.

In this CRA report, Guaranty Bank received the HIGHEST CRA rating.  Overall rating:  Outstanding.  Lending test rating:  Outstanding.  Remember, this report covered the time period from January 1, 2005 to June 30, 2007 and was released on December 27, 2007.

We all know the financial world has changed dramatically.  I just had to know how Guaranty Bank fared through this crisis after receiving such glowing CRA reports from the Office of Thrift Supervision.  In August 2009, the OTS issued the sad-but-true “prompt corrective action directive”.  Guaranty Bank was failing.  They were prohibited from making most loans.  One exception was that they could originate Qualifying Mortage loans underwritten in accordance with criteria established for residential loans eligible for purchase by the FHLMC or the FNMA.  But they were prohibited from participating in any Sub-prime Lending Program.

This directive equates to closing the barn door after the horse already ran off.  I understand the need for the regulators to have taken these steps.  After all, this institution was FDIC insured and was clearly at risk.  Still, it is my belief that, today, the regulators are being reactionary to the crisis they themselves created.  Instead of always remaining centered on reasonable core practices that ensure safety and soundness in lending, they’ve swung the pendulum so far in the opposite direction that the banks are unable or unwilling to meet the credit needs of ANY community, never mind low and moderate income communities.  It’ll be interesting to see the CRA ratings of the banks across our nation that cover the years 2008, 2009 and 2010.  I’ll be watching for these reports.

The ultimate fate of Guaranty Bank

“On Friday, August 21, 2009, Guaranty Bank, Austin, TX was closed by the Office of  Thrift Supervision, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver.

All deposit accounts, excluding certain brokered deposits, have been transferred to BBVA Compass, Birmingham, AL (”assuming institution”). 

I had to look further.  I could not help myself.  Interestingly, Compass Bank received a CRA rating of  “Satisfactory” from their regulator, the Federal Reserve Board.  This was one notch below the “Outstanding” rating received by the now defunct Guaranty Bank.

I’ll be doing more homework on this new theory I have:  Perhaps the banks that received lower CRA ratings remain in a position to acquire the failing bank institutions that received the highest CRA ratings.  Perhaps our regulators created a crisis that can be directly measured, even anticipated, by reviewing the CRA reports they themselves produced.  The higher the CRA rating, the more likely the bank is to fail.  The lower the CRA rating, the more opportunity a bank will have today of obtaining approval to merge and acquire other banks. 

This would be a situation that is in direct conflict with what CRA intended.  And it’s all the regulators’  fault!!!  The ball-less wonders!

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Anonymous Banker: Office of Thrift Supervision says SOME crooks can remain as bankers

Thursday, October 1st, 2009

I was browsing through the  the Federal Register, to see what new rules were being implemented by our Regulators, when I came across an extension of an existing  rule that just baffled my mind. 

Apparently, the Office of Thrift Supervision (OTS) has a rule in place that “prohibits persons who have been convicted of certain criminal offenses or who have agreed to enter into a pre-trial diversion or similar program in connection with a prosecution for such criminal offenses from occupying various positions with a savings and loan holding company.”  The foundation of this rule is in The Federal Deposit Insurance Act, so this rule is in place as a direct result of a law that governs of our financial institutions.

Sounds like an excellent rule if our Regulators are to ensure the safety and soundness of our financial institutions.  After all, who wants to see banks run by a bunch of crooks?  (are you smiling yet?)

What I found baffling, is the fact that the update to the rule was about how and when our Regulators, like the Office of Thrift Supervision, could issue a directive…… EXEMPTING someone from this rule so that they can continue in the employment of the bank.

Now why in heavens name would any Regulator want to do that?  I throw this question out to the blogging universe and encourage everyone to call over to Donna Deale, Director, Holding Companies and International Activities, Examinations, Supervision and Consumer Protection at  202-906-7488 or to Marvin Shaw, Senior Attorney, Regulations and Legislation Division at 202-906-6639 who are listed in the Federal Register as those employees of the OTS that can answer this question.

By the way, this is not the first time the OTS extended their ability to exempt certain people from this rule.  According to the Federal Register, “This temporary exemption originally was scheduled to expire on September 5, 2007.  OTS has extended the expiration date several times, most recently to September 30, 2009.”  Their most recent action extends it again to September 30, 2010.

These questions beg to be asked and perhaps one or two of our esteemed journalists might want to place a phone call and pose the following questions:

  1. How many exemtions have been granted?
  2. Exactly who is the OTS protecting?  I, for one, want names.  I want names of the bank employees that were granted these exemptions and the positions they hold and the names of the banks they work for that are, by the way, FDIC insured Thrift Institutions.
  3. How long does the OTS expect to allow them to continue in their employment, despite the rule in effect that prohibits them from holding these positions?  Is the OTS planning on extending the exemption each year until someone, the media or perhaps a group of concerned citizens holds them accountable?
  4. Who is being paid off to champion these extensions?  (Do I go to far to imagine that this could actually happen?)

My final comment is this:  With the deterioration of confidence in our banking industry, in our Regulators and in our Government, does the OTS really believe that NOW is the time to extend this rule?

Perhaps this type of action is the perfect argument in favor of our administrations efforts to bring banks under one new single bank regulatory authority.  Perhaps, through that agency we will see some streamlining in the rules and the ways in which they are enforced throughout our financial market.  Perhaps a new Regulating Agency will actually enforce the very rules designed to protect the safety and soundness of our financial industry and will be less inclined to issue rules year after year that allow crooks to continue working for the banks.

One can only hope!

(As an aside, I would recommend that everyone browse through the Federal Register.  You’ll be amazed at what you’ll find and it will give you a much clearer understanding of  what is really happening)

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Anonymous Banker weighs in on Financial Regulatory Agencies: Our Nation’s Ball-less Wonders!

Monday, June 22nd, 2009

The Fed failed us in the past.  What makes us think they will do a better job as the mega-regulator?

In light of Obama’s new Financial Regulatory Reform Plan, I feel the need to reiterate my comments on our financial industry’s regulators, which I refer to as our Nation’s Ball-less Wonders. In this article I explained how our laws are converted to regulations and the responsibility of our regulators to protect our country by actually enforcing these regulations.

The debate should not be over whether the Fed should become the mega-regulator, but rather whether the Fed has, in the past, performed its job to protect this country and our economy by actually enforcing the regulations that exist.

When we evaluate the benefits of a mega-regulator, I would say that any consolidation that reduces expenses and thereby saves taxpayer dollars, is a good plan. That being said, the Fed has failed us miserably in the past and I have no reason to believe that they will perform any better in the future.

My fear is that transferring this authority to one agency only dilutes the systems of checks and balances and reduces the possibility that some agency, any agency, will cry foul and take action when the financial companies fail to follow our laws.  Perhaps the plan might work, if, in addition to the consolidation, the people were also represented by an ombudsman to act as watchdog when the Fed fails to do its job, as it surely will.

Regulators:  Our Nation’s Ball-less Wonders!!

 

 

http://anonymousbanker.com/?p=234

Our regulators were armed with the laws to prevent this financial crisis.  They simply refused to act.    If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.Anonymous Banker weighs in on banks violation of law:  Regulation H

 

Recently there has been a lot of talk about the belief that there hasn’t been enough regulation to keep the banks in line.  I, personally, have been blaming Congress for not having enacted laws that would arm the banking regulators with the means to control and monitor the activities of the nation’s banks and the power to impose penalties or take punitive measures when the banks stray from their legally defined mission.  I assumed that the problems that led to our current economic crisis arose from issues that were not addressed – or inadequately addressed – in our laws and regulations.  

 

Bank regulators are our first line of defense:  Office of Comptroller of the Currency, Treasury, Board of Governers of the Federal Reserve System, FDIC, Office of Thrift Supervision. After Congress passes a law they leave it to the regulators to put the law into effect by writing  and adopting regulations.  Our regulators have one, and only one real purpose – to ensure that each and every bank operates in a safe and sound manner.  In order to accomplish this, they send out  teams of examiners – routinely, to every single bank in the country – to delve into the bank’s activities and check them against the requirements of regulations.  This whole procedure, the laws, the regulations and the agencies to examine compliance with the regulations – was put in place to protect the depositors’ money, the banks that hold that money and –  on a national scale, our country’s economic safety and soundness.  This process began 75 years ago, after the banking industry collapsed and led us into the Great Depression.       

 

Well, today I read Federal Reserve Regulation H —   Subpart E entitled “Real Estate Lending and Appraisal”, a regulation born from the Federal Deposit Insurance Corporation Improvement Act of 1991.  My eyes were opened!!!  My premise, that Congress failed to pass laws to protect us, was completely wrong!  This regulation, which has been in place for over ten years – sets forth all the appropriate guidelines and limitations that should have held the banks in check.

  

Now this question begs to be asked:  Who is making sure that our banks are complying with the regulations that already exist?  And when they are not in compliance, what actions are taken against them to bring them into line?

 

What I believe after reading this is that NO ONE is watching as the banks run amok in their quest for profits.  Really…. no one.  Did the controlling authorities  perhaps forget that this regulation existed since they authored it over ten years ago?   Or did they foolishly believe that the greedy bankers would, of their own accord,  grow a conscience and behave in a responsible manner? 

 

Federal Reserve Regulation H is a “uniform” regulation.  This means that each of the other three agencies also adopted an identical regulation at the same time.    They are found in 12 CFR 208.51;  12 CFR 34.62, 12 CFR 365 and 12 CFR 560.101.   Links to each of these are provided at the end of this article.  This is some of the content of Reg H and it is directed at all banks.

 

The Real Estate Lending Standards section requires banks to  “adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interest in real estate.  Policies should be consistent with safe and sound banking practices; appropriate to the size of the institution and the nature and scope of its operations; and reviewed and approved by the bank’s board of directors at least annually.”

 

It instructs banks to  monitor conditions in the real estate market in its lending area to ensure that its real estate lending policies continue to be appropriate for current market conditions.

 

And it requires that the adopted policies reflect consideration of the Interagency Guidelines for Real Estate Lending Policies established by the federal bank and thrift supervisory agencies.”

 

The Interagency Guidelines, which are part and parcel of the regulation,  are extensive and I’ve provided links below to the full text document.   But the following quotes will make my point.

 

“Each institution’s policies must be comprehensive, and consistent with safe and sound lending practices, and must ensure that the institution operates within limits and according to standards that are reviewed and approved at least annually by the board of directors. Real estate lending is an integral part of many institutions’ business plans and, when undertaken in a prudent manner, will not be subject to examiner criticism.”

 

“The institution should monitor conditions in the real estate markets in its lending area so that it can react quickly to changes in market conditions that are relevant to its lending decisions.”

 

“Prudently underwritten real estate loans should reflect all relevant credit factors, including—

  • the capacity of the borrower, or income from the underlying property, to adequately service the debt;
  • the value of the mortgaged property;
  • the overall creditworthiness of the borrower;
  • the level of equity invested in the property;
  • any secondary sources of repayment;
  • any additional collateral or credit enhancements (such as guarantees, mortgage insurance, or take-out commitments).”

 

Our regulators were armed with this law and these guidelines.  And yet, when they examined the banks and discovered that they were not applying a credit review process that was  consistent with safe and sound lending practices, in spirit or in fact, they failed to impose penalties that would have brought these horrific lending standards  to an abrupt end.   They had to have known that the  banks  were issuing no-asset and no-income-verification loans, delving into subprime lending markets, selling these toxic loans into the market  and subsequently repurchasing them to hold in their capital accounts.

 

Instead of taking decisive action,  they  merely issued another interagency comment to the banks (see links below for full text), urging them to cease and desist in their unrelenting participation in the subprime lending market. 

 

What should our regulators have done and what did they have the power to do?  Our regulators could have called for the firing of CEO’s of the banks and replaced the Board of Directors.  They also have the power to ban executives that are found to have violated banking regulations from ever working in the banking industry again.  Our regulators could have refused to continue their FDIC insurance for failure to comply.  They can also limit dividends paid to shareholders. If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.

 

It is interesting that one of the strongest banks in the nation, JP Morgan Chase,  states quite clearly in their 2007 Annual Report exactly how pervasive the problems were.  And we know already that the other banks behaved equally irresponsibly and equally in violation of the law and Reg H.  Some of these banks no longer exist and others will soon disappear.  After reading the following comments, can one imagine that the regulators were unaware of the banks’ violations these many past years?  Or do you have to conclude, as I have, that it was our regulators, and not Congress, that failed completely in safeguarding our county?  The law was there.  The regulators simply did not exercise their powers to enforce them.

 

JP Morgan Chase 2007 Annual Report  (released approximately one year ago)

… increasingly poor underwriting standards (e.g., loan-to-value ratios up to 100%, lax verification of income and inflated appraisals) added fuel to the speculation and froth in the markets. Many of these poor mortgage products were also repackaged and dispersed widely through various securities, thus distributing the problems more broadly.

 

…we still believe that subprime mortgages are a good product. We will continue to find a prudent way to be in this business. 

 

We should have acted sooner and more substantially to reduce the LTV rates at which we lent, given the increased risk of falling prices in a market of highly inflated housing values.  We also should have tightened all other standards (e.g., income verification) in response to growing speculation in the market and the increasing propensity of people to respond to aggressive lending standards by buying houses they could barely afford.

 

In the face of these comments and the banking industries apparent violation of Reg H, instead of being penalized,  banks were rewarded through the TARP program.   Our regulators  have done nothing to ensure that the banks meet their fundamental obligation to lend money.  They have merely asked them to do so.  And finally, our regulators are still not forcing the banks to apply income verification processes to all forms of credit including auto loans and credit cards. 

 

Somehow I don’t think the punishment has fit the crime.    And now that I have the understanding I so desperately sought, I really wish I didn’t look so hard.  I find myself even more saddened to know that while  our country  had the structure and laws in place to prevent this economic collapse, the regulators failed to protect us and the guilty continue to be rewarded for bringing this country to its knees.

 

Sources:   12 CFR 34.62         12 CFR 208.51      12 CFR 365  

Interagency Guidance on non-traditional mortgages

Interagency Guidace on Nontraditional Mortgage Product Risks

    
	     

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Anonymous Banker says TALF is laundering bank bad debt with our taxdollars

Wednesday, June 10th, 2009

I’ve written extensively on the TALF program.   And while I always suspected as much, I now have come to the certain conclusion that TALF is the goverment’s way of laundering new and existing subprime auto loans subprime credit cards loans, that are currently on the books of the banks or their investment bank subsidiaries, with our taxdollars.  The program is complete thievery.  And shame on everyone for not being up in arms about what is happening.  Journalists… I’m putting you all on the top of that list.  You are failing this country miserably.

I, for one, don’t want my tax dollars used to purchase sub-prime car loans and credit card loans.  I don’t even want to hear the word sub-prime again, in my lifetime.  I want the banks to be responsible lenders and verify income and debt when they issue a credit card or an auto loan.  And I don’t want my office computer spurting out a pre-approved offer of a credit card to any customers.  Yes, this is still happening and will continue to happen because our Regulators are allowing it to happen in direct violation of all the laws governing safety and soundness in bank lending.  And why are the banks still willing to grant credit in this irresponsible manner?  Because they know they can sell these toxic assets off through the TALF program and any losses on these bad loans will be paid for by our taxes and the taxes paid by our children and our grandchildren, and for generations that follow.

If a bank is allowed to sell its toxic assets through the TALF program, and if the TALF program is funded with TARP funds,  then any bank that sells its assets through TALF is still benefiting from TARP.  Therefore, any bank that is selling their bad assets off through TARP  should still be subject to executive compensation limits and restrictions on dividends, among other rules.  If  banks want to be truly independent of our government’s meddling, then let them live and die by their bad lending practices and eat all the sub-prime credit card and auto loans they granted and continue to grant. 

The government has set aside $200 Billion dollars to fund the TALF program.  On June 2nd, the banks laundered $3.3 Billion dollars in auto loans and $6.2 Billion dollars in Credit Card loans (out of a total of $11 Billion dollars in total loans laundered in just that day). 

In light of President Obama’s wonderful new plan for “transparency”, I think the TALF program should publish, along with the list provided above,  the dollar amount sold by each bank in each category.    Let’s see which of our banks are truly  independent and unconcerned and don’t need to be bailed out.  Does anyone believe that JP Morgan Chase, American ExpressCo., Goldman Sachs Group Inc., U.S. Bancorp, Captial One Financial Corpl, Bank of New York Mellon Corp., and State Street Corp are NOT participating in the TALF program?  Then prove it to me.  Tell me which banks are selling these assets through TALF!!!!! 

TALF program rules require that  the “ABS have a long-term credit rating in the highest investment-grade rating category”.  How does our government dare to defend this term in light of the fact that they are using TALF to strip SUB PRIME credit card and auto loans off the banks’  balance sheets.  I’m not guessing at this.  It is on the TALF website.

Please, join me in my outrage.  Reach out to your Congressional leaders, IN PERSON.  Challenge them on these decisions.  Bring them a copy of this blog and ask them to defend the actions I’m describing.  Make them accountable for the programs they are approving.  Write to your journalists.  Demand that they give these issues the media attention deserved and needed to inspire our people into action.  Each and every one of us must take responsibility and become part of the solution.  They are counting on us to quietly follow, like sheep.  Show them that the people of this country have back-bone and will stand up for what we believe in.   If you fail to do this, then, in my opinion, you have relinquished your right to bitch.

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Anonymous Banker: Why are Working Capital Lines Disappearing?

Friday, March 13th, 2009

President Obama has put together the Financial Stability Plan, which states: “This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.”

 

President Obama, Congressional Leaders, Regulators: 

The business community of America needs your help.  You must change your focus and consider implementing lending policies and procedures that will allow businesses to remain open, allow them to continue paying their rent, paying their employees, and  paying their loans.

 

Put aside the liar loans that were granted over the last ten years to business owners that overstated their revenue and income. Those are NOT the loans I am speaking about here.  Our regulators allowed banks to violate every prudent test for safety and soundness in bank lending over the last decade.  And now that you let the proverbial horse run out of the barn, you are empowering the banks to slam the door on all the businesses that are, or may still be, credit worthy.  Your actions will directly contribute to the severity of the depression that is coming upon us so quickly. 

 

It has been stated to me, by senior credit officers in one of the largest US banks, that  40% of RENEWAL REQUESTS for business working capital lines of credit are being declined, termed out and/or called by the bank.   The loans I’m addressing in this article  are to the smaller to mid-market companies that have not missed any payments, have met all commitments as agreed and still have a chance of surviving.  These are the businesses that support the economic future of the communities across our nation.

 

These working capital lines are the lifeblood of any business.  They provide the companies with capital that they need to purchase inventory, finance production of goods, carry receivables, and during these cycles, to pay their employees and their rent or mortgages.  It is NOT term financing.  And this is a very important point.  So I will repeat it:  IT IS NOT TERM FINANCING.

 

Working capital lines are repaid by the conversion of one asset into cash in a short period of time.  It is revolving credit.  A company uses the funds to manufacture goods.  They then sell the goods and convert inventory into receivables.  Then they wait and they convert the receivables back into cash.   The difference between their cost and what they sell it for, is the profit.  From that profit, they pay salaries, rent, etc.    They do not repay working capital lines from PROFIT.  Businesses  repay working capital lines from CONVERSION of assets into cash.  Then they begin the cycle all over again.

 

A term loan, conversely, IS repaid from profits.  If a company buys a piece of equipment, they should not use their working capital to buy it outright.  They should finance it over a period of time that is typically determined by the useful life of the equipment they are buying.  A computer for example would be financed for two years, a die press machine for seven or ten years, and a building for twenty years.  These loans are paid for by profit over a specified period of time.

 

There are a number of things that go into the evaluation of a request for a working capital line to a small business owner.  We look for diversification of receivables and timely collection of receivables by our borrower.  We look at turnover of inventory as related to the type of inventory they carry. We evaluate repayment history and the company’s capital position.  Banks want  companies to retain capital and not distribute all their profits to the owners.  We look to see if they can pay the revolving line down during the course of a year.  We look at secondary sources of repayment through personal financial statements:  cash, investments and equity in the business owners’ homes.  (Thanks to the banking industries bad behavior, all business owners have less to offer the bank by way of secondary sources of repayment!)  We also look at the personal credit scores of the owners.  Gross sales and revenue trends also carry significant weight.

 

I’m not here to give our leaders a lesson on bank lending.  But perhaps it would be wise if you at least understood the principals that should be applied to lending.  You need to understand this in order to understand what is happening that is going to kill this country.

 

Regulators are now requiring the banks to evaluate existing and new working capital line requests in the following way:    First pass, we look at all the typical things we looked at before as defined above.  But now, Regulators are adding another pass by requiring banks to determine what would happen if the customer could not pay back their working capital line through normal asset conversion.  Regulators are requiring the banks to evaluate if these same customers can repay the debt, at the time the line is made or renewed, from profits over a three to five year period. 

 

This is determined through a ratio called ‘debt service coverage’.  A business that can and does repay working capital lines from the conversion of assets, oftentimes cannot pass the debt service coverage evaluation criteria.  A $250,000 working capital loan cannot always be repaid if it is converted to a five year term loan, particularly in a declining revenue and profit environment.  Using this as a standard for evaluation means that most companies no longer qualify for their working capital lines and our Regulators are giving the banks a perfect excuse to cancel the lines of credit and demand payment.

 

Each and every day, in my work as a business banker, I am addressing this issue.  These are not customers that are late on their payments, delinquent in any way, or not meeting their obligation.  These are customers who, without a credit line will be OUT OF BUSINESS.  Their workers will be unemployed and their commercial real estate left vacant.   

 

Is this your vision of Economic Recovery?    I don’t think it is.  I just think that you are so focused on the big picture that you are not seeing what is actually happening in the real world today. 

 

 

This must not be allowed to happen.  Right now there are only two categories of loans on the books of the banks. The good loans and the bad loans.  There are test standards that determine where each  loans fits.  Today, there must be a third category for loans that are being paid and that support those companies that have exhibited every ability to pay.  These companies still have a fighting chance.  Directly addressing the small business owners’ needs will bring a much needed level of confidence to the people of this country.

 

Give the bank lenders the ability to do our job.  Let us document a file and explain why, in spite of a company not passing the “debt service ratio” the banker still believes that the working capital request represents a viable deal.  And make our regulators live with that decision until we are proven wrong and the loan starts to actually show real signs of default in the form of slow or late payments.  The bank can always classify the loan at a later time and it will be in no worse position than it is now.  I recently challenged one such decision, and I was told by a Senior Lender in my bank that they perceived a deterioration in the credit based on the “debt service coverage” and it would be better to grab any money we can now while the getting is good!  This is the philosophy that the banks are using while they spew their deceitful claims that “they are still making loans”. 

 

In the rare cases where the lines are being renewed,  the banks are increasing  the interest rates across the board.  Banks are enjoying a historically low cost of funds.  They borrow  through the Fed at zero to ¼% and they pay their depositors between zero and 1%.  Yet businesses  that were previously being charged Prime + 1% or Prime + 2% are now having their rates increased to Prime + 6% to Prime + 11%.  The banks are clobbering the business owner with higher rates at the very time that these businesses need to be cut a break.  I propose that they are doing this to offset all their losses on the liar business loans they made over the last ten years that have no chance of being repaid.  And you, our leaders, are doing nothing to stop them.

 

I beg our leaders to see the truth in what I am saying.  I know that I am only one person, but perhaps Congress should call various bank lenders into a closed session and have them testify about what is REALLY happening in the industry.  And I don’t mean the CEO’s of the banks and the Senior Risk officers.  I mean the seasoned,  mid-level lenders.  We certainly could tell you a lot, if you would just give us an opportunity to communicate with you.  You will not believe how bad it is out here. 

 

I urge you all to focus on the details and on implementing effective lending policies and programs that will keep our businesses open and our citizens employed.  Irving Fisher, one of America’s reputed economists, outlined the factors that contributed to the length and severity of the Great Depression.  Fisher saw it as a chain of events that started with debt liquidation and distress selling, the contraction of the money supply as bank loans were paid off and a deterioration of confidence.  Will you allow the banks to create the scenario where history will repeat itself?   Or will you ensure that when history unfolds and our future generations look back at this period of time, that they can say that YOU had the strength of character to make the tough decisions that brought us quickly out of this crisis?  We are all depending on it.

 

Readers:  Please, take a moment to send YOUR story to President Obama, the Senate and House Banking Committees and your Congressional Leaders. 

 

http://change.gov/page/s/yourstory

http://banking.senate.gov/public/index.cfm?FuseAction=Contact.ContactForm

http://financialservices.house.gov/contact.html

http://www.senate.gov/general/contact_information/senators_cfm.cfm

https://writerep.house.gov/writerep/welcome.shtml

 

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TO FDIC: Issue Cease and Desist orders on dividends and bonuses

Saturday, January 31st, 2009

I read Joe Nocera’s column and recent blog on Wall Street bonuses and quite honestly, I was distressed by his headline titles, “It’s not the bonuses, it’s the principal” and “Bankers gone Bonkers”.   For me, it minimizes the severity of the crime.  There’s an awful lot of whining going on about this issue, but so far, except for verbal “spankings” not much is being done to change it.

 

There is something truly unseemly about seeing Wall Street executives taking down millions after driving the economy over the cliff. Which is why President Obama called them on their behavior this week in a remarkable scolding.

 

Bonuses and dividends should not be allowed.  The banks need to recapitalize.  They need to retain earnings.  When a bank makes a loan to a business,  they often write capital requirements into their loan documentation.  These covenants prohibit companies from distributing income, in the form of dividends or bonuses or salaries,  when that income is NEEDED to sustain the business’s operations and protect the bank’s loan.

 

Well, the people of this country have LENT our tax dollars to these banks and investment companies.  And we should restrict, as part of that loan agreement, the distribution of cash through bonuses and stock dividends, by these institutions.

 

(more…)

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Regulators – Our nation’s ball-less wonders!

Wednesday, January 28th, 2009

Our regulators were armed with the laws to prevent this financial crisis.  They simply refused to act.    If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.Anonymous Banker weighs in on banks violation of law:  Regulation H

 

Recently there has been a lot of talk about the belief that there hasn’t been enough regulation to keep the banks in line.  I, personally, have been blaming Congress for not having enacted laws that would arm the banking regulators with the means to control and monitor the activities of the nation’s banks and the power to impose penalties or take punitive measures when the banks stray from their legally defined mission.  I assumed that the problems that led to our current economic crisis arose from issues that were not addressed – or inadequately addressed – in our laws and regulations.  

 

Bank regulators are our first line of defense:  Office of Comptroller of the Currency, Treasury, Board of Governers of the Federal Reserve System, FDIC, Office of Thrift Supervision. After Congress passes a law they leave it to the regulators to put the law into effect by writing  and adopting regulations.  Our regulators have one, and only one real purpose – to ensure that each and every bank operates in a safe and sound manner.  In order to accomplish this, they send out  teams of examiners – routinely, to every single bank in the country – to delve into the bank’s activities and check them against the requirements of regulations.  This whole procedure, the laws, the regulations and the agencies to examine compliance with the regulations – was put in place to protect the depositors’ money, the banks that hold that money and –  on a national scale, our country’s economic safety and soundness.  This process began 75 years ago, after the banking industry collapsed and led us into the Great Depression.       

 

Well, today I read Federal Reserve Regulation H —   Subpart E entitled “Real Estate Lending and Appraisal”, a regulation born from the Federal Deposit Insurance Corporation Improvement Act of 1991.  My eyes were opened!!!  My premise, that Congress failed to pass laws to protect us, was completely wrong!  This regulation, which has been in place for over ten years – sets forth all the appropriate guidelines and limitations that should have held the banks in check.

 

 

 

Now this question begs to be asked:  Who is making sure that our banks are complying with the regulations that already exist?  And when they are not in compliance, what actions are taken against them to bring them into line?

 

What I believe after reading this is that NO ONE is watching as the banks run amok in their quest for profits.  Really…. no one.  Did the controlling authorities  perhaps forget that this regulation existed since they authored it over ten years ago?   Or did they foolishly believe that the greedy bankers would, of their own accord,  grow a conscience and behave in a responsible manner? 

 

Federal Reserve Regulation H is a “uniform” regulation.  This means that each of the other three agencies also adopted an identical regulation at the same time.    They are found in 12 CFR 208.51;  12 CFR 34.62, 12 CFR 365 and 12 CFR 560.101.   Links to each of these are provided at the end of this article.  This is some of the content of Reg H and it is directed at all banks.

 

The Real Estate Lending Standards section requires banks to  “adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interest in real estate.  Policies should be consistent with safe and sound banking practices; appropriate to the size of the institution and the nature and scope of its operations; and reviewed and approved by the bank’s board of directors at least annually.”

 

It instructs banks to  monitor conditions in the real estate market in its lending area to ensure that its real estate lending policies continue to be appropriate for current market conditions.

 

And it requires that the adopted policies reflect consideration of the Interagency Guidelines for Real Estate Lending Policies established by the federal bank and thrift supervisory agencies.”

 

The Interagency Guidelines, which are part and parcel of the regulation,  are extensive and I’ve provided links below to the full text document.   But the following quotes will make my point.

 

“Each institution’s policies must be comprehensive, and consistent with safe and sound lending practices, and must ensure that the institution operates within limits and according to standards that are reviewed and approved at least annually by the board of directors. Real estate lending is an integral part of many institutions’ business plans and, when undertaken in a prudent manner, will not be subject to examiner criticism.”

 

“The institution should monitor conditions in the real estate markets in its lending area so that it can react quickly to changes in market conditions that are relevant to its lending decisions.”

 

“Prudently underwritten real estate loans should reflect all relevant credit factors, including—

  • the capacity of the borrower, or income from the underlying property, to adequately service the debt;
  • the value of the mortgaged property;
  • the overall creditworthiness of the borrower;
  • the level of equity invested in the property;
  • any secondary sources of repayment;
  • any additional collateral or credit enhancements (such as guarantees, mortgage insurance, or take-out commitments).”

 

Our regulators were armed with this law and these guidelines.  And yet, when they examined the banks and discovered that they were not applying a credit review process that was  consistent with safe and sound lending practices, in spirit or in fact, they failed to impose penalties that would have brought these horrific lending standards  to an abrupt end.   They had to have known that the  banks  were issuing no-asset and no-income-verification loans, delving into subprime lending markets, selling these toxic loans into the market  and subsequently repurchasing them to hold in their capital accounts.

 

Instead of taking decisive action,  they  merely issued another interagency comment to the banks (see links below for full text), urging them to cease and desist in their unrelenting participation in the subprime lending market. 

 

What should our regulators have done and what did they have the power to do?  Our regulators could have called for the firing of CEO’s of the banks and replaced the Board of Directors.  They also have the power to ban executives that are found to have violated banking regulations from ever working in the banking industry again.  Our regulators could have refused to continue their FDIC insurance for failure to comply.  They can also limit dividends paid to shareholders. If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.

 

It is interesting that one of the strongest banks in the nation, JP Morgan Chase,  states quite clearly in their 2007 Annual Report exactly how pervasive the problems were.  And we know already that the other banks behaved equally irresponsibly and equally in violation of the law and Reg H.  Some of these banks no longer exist and others will soon disappear.  After reading the following comments, can one imagine that the regulators were unaware of the banks’ violations these many past years?  Or do you have to conclude, as I have, that it was our regulators, and not Congress, that failed completely in safeguarding our county?  The law was there.  The regulators simply did not exercise their powers to enforce them.

 

JP Morgan Chase 2007 Annual Report  (released approximately one year ago)

… increasingly poor underwriting standards (e.g., loan-to-value ratios up to 100%, lax verification of income and inflated appraisals) added fuel to the speculation and froth in the markets. Many of these poor mortgage products were also repackaged and dispersed widely through various securities, thus distributing the problems more broadly.

 

…we still believe that subprime mortgages are a good product. We will continue to find a prudent way to be in this business. 

 

We should have acted sooner and more substantially to reduce the LTV rates at which we lent, given the increased risk of falling prices in a market of highly inflated housing values.  We also should have tightened all other standards (e.g., income verification) in response to growing speculation in the market and the increasing propensity of people to respond to aggressive lending standards by buying houses they could barely afford.

 

In the face of these comments and the banking industries apparent violation of Reg H, instead of being penalized,  banks were rewarded through the TARP program.   Our regulators  have done nothing to ensure that the banks meet their fundamental obligation to lend money.  They have merely asked them to do so.  And finally, our regulators are still not forcing the banks to apply income verification processes to all forms of credit including auto loans and credit cards. 

 

Somehow I don’t think the punishment has fit the crime.    And now that I have the understanding I so desperately sought, I really wish I didn’t look so hard.  I find myself even more saddened to know that while  our country  had the structure and laws in place to prevent this economic collapse, the regulators failed to protect us and the guilty continue to be rewarded for bringing this country to its knees.

 

Sources:   12 CFR 34.62         12 CFR 208.51      12 CFR 365  

Interagency Guidance on non-traditional mortgages

Interagency Guidace on Nontraditional Mortgage Product Risks

    
	     

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