Legislation Unveiled to Reform U.S. Financial System

Senate Banking Committee Chairman Chris Dodd (D-CT) joined by fellow committee members Jack Reed (D-RI), Charles E. Schumer (D-NY), Robert Menendez (D-NJ), Daniel K. Akaka (D-HI), Jon Tester (D-MT), Mark Warner (D-VA), Jeff Merkley (D-OR) and Michael Bennet (D-CO) unveiled a bill today to reform the way that our financial system is regulated.  Enclosed below is a summary of the highlights of the bill provided by the press office of the Senate Banking Committee.

Senator Christopher Dodd

Summary: Restoring American Financial Stability – Discussion Draft

HIGHLIGHTS OF THE DISCUSSION DRAFT

Consumer Financial Protection Agency: Creates an independent watchdog to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, while prohibiting hidden fees, abusive terms, and deceptive practices.

Ends Too Big to Fail: Prevents excessively large or complex financial companies from bringing down the economy by: creating a safe way to shut them down if they fail; imposing tough new capital and leverage requirements and requiring they write their own “funeral plans”; requiring industry to provide their own capital injections; updating the Fed’s lender of last resort authority to allow system-wide support but not prop up individual institutions; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Protects Against Systemic Risks: Creates an independent agency with a board of regulators to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the financial system. The agency could require companies that threaten the economy to divest some of their holdings.

Single Federal Bank Regulator: Eliminates the convoluted system of multiple federal bank regulators to increase accountability and end unnecessary overlap, conflicting regulation, and “charter shopping;” keeps in place the healthy dual banking system that governs community banks.

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and director nominations.

Closes Loopholes in Regulation: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated – including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Protects Investors: Provides tough new rules for transparency and accountability from investment advisors, financial brokers and credit rating agencies to protect investors and businesses.

Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.

For more information on the proposed legislation click here.

Financial Services Committee Approves Maloney-Frank bill to Speed Up Credit Card Reforms

The Financial Services Committee unanimously passed H.R. 3639, the Expedited CARD Reform for Consumers Act of 2009, which would move up the effective date for credit card reforms from February 22 to December 1. The bill, sponsored by Rep. Carolyn Maloney (D-NY) and Financial Services Committee Chairman Barney Frank (D-MA), changes the date by which banks and credit card issuers would have to comply with the remaining provisions of the Credit CARD Act, new consumer-friendly legislation signed by President Obama earlier this year. The bill now moves to the House floor for consideration.

Rep. Carol Maloney

Rep. Carolyn Maloney (D-NY) said: “This marks a step forward in bringing consumers badly-needed relief,” Maloney said. “Just in time for the holidays, Congress can lock in a ban on interest rate hikes on existing balances and the tricks that have kept far too many consumers trapped in a never-ending cycle of debt: tricks like double-cycle billing, due-date gamesmanship, and applying payments to lowest rates first.”

“The card companies brought this on themselves, by using the time between when the bill was signed by President Obama and when it goes into effect to ‘get in under the wire’ with a last gasp of unfair practices,” Maloney said. “Today’s action shows Congress can act with speed when necessary to provide consumers the protection they need.”

In reporting the bill out, the committee voted to keep the original effective date of February 22, 2010 for prepaid gift cards (which are now all printed and on the way to retailers for the holiday season), and for small credit card issuers with under 2 million cardholder accounts. The six largest card issuers control over 80% of the credit card market.

Congressional Oversight Panel Releases Report on TARP Use for Auto Industry

The following was issued by the press office of the Congressional Oversight Panel.  The Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program (TARP) funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA) and to provide recommendations on regulatory reform. 

The Congressional Oversight Panel today released its September oversight report, “The Use of TARP Funds in Support and Reorganization of the Domestic Automotive Industry.” In protecting the interests of taxpayers, the Panel found Treasury negotiated aggressively with all the players in the automotive industry. While Treasury has conceded that it is unlikely to recover the entire amount invested, other goals also influenced Treasury’s overall strategy. 

Even before last year’s financial crisis, the American automotive industry was facing severe strains. In 2008, U.S. automotive sales fell to a 26-year low. By the end of the year, a long-term slump became an acute crisis, with Chrysler and General Motors (GM) unable to secure credit and facing reduced consumer demand. Without new financing, they faced collapse – a potentially crippling blow to the American economy that could eliminate nearly 1.1 million jobs. Facing this prospect, the Troubled Asset Relief Program (TARP) was used to provide American automotive companies with short-term financing and additional loans to finance the bankruptcy reorganizations of Chrysler and GM.

Elizabeth Warren, Chair, Congressional Oversight Panel

American taxpayers now own 10 percent and 61 percent of the new Chrysler and GM companies respectively. Treasury’s support for the automotive industry differed significantly from its assistance to the banking industry. The bulk of the funds were available only after the companies had filed for bankruptcy, wiping out their old shareholders, cutting their labor costs, reducing their debt obligations and replacing some top management. The government’s role raises serious oversight issues, particularly Treasury’s conflict between competing objectives.

The Panel recommends that, to mitigate the potential conflicts and political issues inherent in owning Chrysler and GM shares, Treasury should take exceptional care to explain its decision making and provide a full, transparent picture of its actions. The Panel also recommends that Treasury consider placing its GM and Chrysler shares in an independent trust that would be insulated from political pressure and government interference.

Given the questions about whether Treasury had the authority to use of TARP funds to aid the ailing domestic automotive industry, Treasury should provide a legal analysis justifying this decision. The Panel found that further questions about the propriety of the bankruptcy proceedings – accusations of illegal behavior and allegations that statutory bankruptcy priorities were overturned – are overblown and inaccurate. The full report can be found at cop.senate.gov.

The Congressional Oversight Panel members are: former Securities and Exchange Commissioner Paul S. Atkins, Congressman Jeb Hensarling (R-TX), Richard H. Neiman, Superintendent of Banks for the State of New York, Damon Silvers, Associate General Counsel of the AFL-CIO and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School. 

Marketing of Consumer Debt to America Focus of September 7 Economic Perspectives

Charles Geisst, author of COLLATERAL DAMAGED: The Marketing of Consumer Debt to America, will be the September 7 guest on Economic Perspectives.  Geisst believes today’s credit crisis  is the result of Wall Street’s orchestrated maneuvers to fuel what he calls “cannibal consumption.” In COLLATERAL DAMAGED Geisst explains how a nation of savers became a nation of consumers and how Wall Street turned Americans addiction to spending into the toxic securities that have crippled the global economy. A thorough and penetrating analysis of how the marketing of consumer debt has radically transformed global economics, COLLATERAL DAMAGED connects the dots from consumer spending, to credit cards, to home equity loans, and beyond.

Geisst is a professor of finance at Manhattan College and author of eighteen books on finance and economics.  His books include Wall Street: A History, Wheels of Fortune: The History of Speculation from Scandal to Respectability, and Undue Influence: How the Wall Street Elite Put the Financial System at Risk.  His books have been on the Wall Street Journal, BusinessWeek, and New York Times best-seller lists.

Best Sources for Small Business Loans Focus of August 3 Economic Perspectives

Even during these turbulent times, many financial institutions are still making small business loans.  Learn about some of the best sources for small business loans on the August 3 edition of Economic Perspectives on KAZI 88.7 FM.  The guests will be Theresa Lee, chief lending officer for the Texas Mezzanine Fund (TMF), Jaime Noyola, director of lending for the PeopleFund, Cindy Solano, Lead Lender Relations Specialist for the San Antonio District Office of the U.S. Small Business Administration, and Michelle Frith, outreach and marketing coordinator for the City of Austin Small Business Development Program (SBDP).

Texas Mezzanine Fund

Founded in 1998, TMF is a statewide community development financial institution that provides financing for businesses located in distressed areas, minority-owned businesses, and small businesses that create jobs for low and moderate-income people. It makes loans from $50,000 – $500,000 in tandem with other financial institutions and up to “stand alone” loans up to $300,000.  

PeopleFund

Since 1995 PeopleFund has strive ed to promote lasting economic vitality for low-income people by implementing strategies that create jobs, provide safe and affordable homes, and promote good economic policy decisions for communities.  It provides loans and revolving lines of credit from $20,000 – $200,000.

Small Business Administration

 The San Antonio District Office of the SBA provides financial assistance, business counseling and training and government contracting help to small businesses that are located in its area of operation which covers 55 counties in central and southwest Texas including the cities of Austin and San Antonio.  The SBA ’s most popular loan program is the 7 (a) program which may guaranty up to 90 perccent of a loan for a participating lender.  The maximum loan eligible for guaranty is $2 million.

City of Austin Small Business Development Program

The City of Austin SBDP provides counseling and assistance to small businesses.  It is hosting the 6th annual Meet the Lender Business Loan Fair on August 6 3 p.m. – 7 p.m. at the Palmer Events Center, 900 Barton Springs Rd.  This is an opportunity to meet, network, and learn from area lenders about the loan process for your small business.

Federal Reserve Chairman Testifies to Congress on U.S. Economic Condition

The following written testimony was provided by Federal Reserve Board of Governors Chairman Ben Bernanke to the U.S. House of Representatives Committee on Financial Services on July 21.

Chairman Frank, Ranking Member Bachus, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress.

Ben Bernanke

Economic and Financial Developments in the First Half of 2009
Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system, an event that would have had extremely adverse and protracted consequences for the world economy. Even so, the financial shocks that hit the global economy in September and October were the worst since the 1930s, and they helped push the global economy into the deepest recession since World War II. The U.S. economy contracted sharply in the fourth quarter of last year and the first quarter of this year. More recently, the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization. The labor market, however, has continued to weaken. Consumer price inflation, which fell to low levels late last year, remained subdued in the first six months of 2009.

To promote economic recovery and foster price stability, the Federal Open Market Committee (FOMC) last year brought its target for the federal funds rate to a historically low range of 0 to 1/4 percent, where it remains today. The FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period.

At the time of our February report, financial markets at home and abroad were under intense strains, with equity prices at multiyear lows, risk spreads for private borrowers at very elevated levels, and some important financial markets essentially shut. Today, financial conditions remain stressed, and many households and businesses are finding credit difficult to obtain. Nevertheless, on net, the past few months have seen some notable improvements. For example, interest rate spreads in short-term money markets, such as the interbank market and the commercial paper market, have continued to narrow. The extreme risk aversion of last fall has eased somewhat, and investors are returning to private credit markets. Reflecting this greater investor receptivity, corporate bond issuance has been strong. Many markets are functioning more normally, with increased liquidity and lower bid-asked spreads. Equity prices, which hit a low point in March, have recovered to roughly their levels at the end of last year, and banks have raised significant amounts of new capital.

Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve to encourage the flow of credit. For example, the decline in interbank lending rates and spreads was facilitated by the actions of the Federal Reserve and other central banks to ensure that financial institutions have adequate access to short-term liquidity, which in turn has increased the stability of the banking system and the ability of banks to lend. Interest rates and spreads on commercial paper dropped significantly as a result of the backstop liquidity facilities that the Federal Reserve introduced last fall for that market. Our purchases of agency mortgage-backed securities and other longer-term assets have helped lower conforming fixed mortgage rates. And the Term Asset-Backed Securities Loan Facility (TALF), which was implemented this year, has helped restart the securitization markets for various classes of consumer and small business credit.

Earlier this year, the Federal Reserve and other federal banking regulatory agencies undertook the Supervisory Capital Assessment Program (SCAP), popularly known as the stress test, to determine the capital needs of the largest financial institutions. The results of the SCAP were reported in May, and they appeared to increase investor confidence in the U.S. banking system. Subsequently, the great majority of institutions that underwent the assessment have raised equity in public markets. And, on June 17, 10 of the largest U.S. bank holding companies–all but one of which participated in the SCAP–repaid a total of nearly $70 billion to the Treasury.

Better conditions in financial markets have been accompanied by some improvement in economic prospects. Consumer spending has been relatively stable so far this year, and the decline in housing activity appears to have moderated. Businesses have continued to cut capital spending and liquidate inventories, but the likely slowdown in the pace of inventory liquidation in coming quarters represents another factor that may support a turnaround in activity. Although the recession in the rest of the world led to a steep drop in the demand for U.S. exports, this drag on our economy also appears to be waning, as many of our trading partners are also seeing signs of stabilization.

Despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.

In conjunction with the June FOMC meeting, Board members and Reserve Bank presidents prepared economic projections covering the years 2009 through 2011. FOMC participants generally expect that, after declining in the first half of this year, output will increase slightly over the remainder of 2009. The recovery is expected to be gradual in 2010, with some acceleration in activity in 2011. Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above FOMC participants’ views of the longer-run sustainable rate. All participants expect that inflation will be somewhat lower this year than in recent years, and most expect it to remain subdued over the next two years.

To read the rest of the testimony click here.

Treasury Official Updates Congressional Oversight Panel on the Nation’s Financial System

On June 24 Herbert Allison, Jr., the U.S. Department of the Treasury’s Assistant Secretary for Financial Stability, updated the Congressional Oversight Panel on the department’s efforts to repair the nations financial system. The Congressional Oversight Panel was established by Congress to review the current state of financial markets and the regulatory system

Chair Warren, Representative Hensarling, Senator Sununu and members Neiman and Silvers, Last October, Congress established the Troubled Assets Relief Program (TARP), and gave Treasury the necessary tools to help break a downward spiral in our financial system that was causing tremendous  harm, not only to financial firms of all sizes, but also to ordinary families and businesses across the country.

Herbert Allison

Our mandate is two-fold: Stabilize the system while protecting the financial interests of the taxpayer.

Although our work is far from finished, Treasury has accomplished a great deal in a short amount of time. It has:

• Invested nearly $200 billion in 633 financial institutions through the Capital Purchase Program.
• Helped to re-start securitization markets, which are vital in enabling consumers and businesses to borrow.
• Helped begin the difficult, but necessary process of re-making our nation’s auto industry, which is at the heart of our industrial base.
• Helped tens of thousands Americans stay in their homes by securing modifications of their at-risk loans to lower their monthly mortgage payments and making their mortgages more affordable.

To manage these complex efforts, Treasury has built the Office of Financial Stability from the ground up. Last October, the OFS staff was zero. As of Monday, it numbered 166.

There are tentative signs that the financial system is beginning to stabilize, and that our efforts made an important contribution. Key indicators of credit market risk, while still elevated, have dropped substantially.

More than 30 firms have repaid $70 billion in CPP investments. In addition, the taxpayer has received an estimated $5.2 billion in dividend payments from CPP investments.

There are also some signs that the economy is beginning to mend. Consumer confidence rose to its highest level in eight months in May. Housing starts rose at an annual rate of 17% in May, and house purchases have begun to pick up in some parts of the country.

But our financial system and our economy remain vulnerable, with unemployment still rising, house prices falling and pressure on commercial real estate continuing to build.

This is why we must remain vigilant. We must press ahead with our financial stabilization and our economic recovery efforts.

At the same time that Congress established the TARP, it established the Congressional Oversight Panel, an independent group drawn from both major political parties, Congress, the states and public interest groups to ensure that in every step we take, we keep firmly in mind the best interests of the American people.  I applaud the Panel for its work to date, and look forward to a continued strong relationship.

Let me briefly describe my own background and offer a few thoughts that will guide me in my new assignment.  I believe that my views on finance, management and governance, which have not always been stylish, square with what the crisis has taught us is necessary for a financial system that’s both stable and innovative.

I began my career as an officer in the U.S. Navy, spending four years on active duty, including one year in Vietnam. After business school, I joined Merrill Lynch and spent 28 years there, leaving as president in 1999.

I learned from my experiences at Merrill that the long-term success of financial institutions depends on sound corporate governance, including independent checks and balances, tight control over risk, and executive compensation geared to long-term performance on behalf of clients, as well as shareholders. I believe that I contributed to strengthening Merrill’s governance practices in the 1990s.

Since leaving the firm a decade ago, I’ve led two other major financial institutions through transitions necessary for their long-term success.

In 2002, I became chairman and C.E.O. of TIAA-CREF, a leading provider of retirement and asset management services. We adapted the company to changing markets, created independent risk management and doubled the company’s capital so we could withstand a harsh investment climate. As a result, TIAA-CREF is now one of very few financial companies that carry triple-A ratings. And during my tenure, TIAA-CREF became the first company in the Fortune 100 to allow its stakeholders an advisory role on executive compensation. Last September, I was named C.E.O. of the Federal National Mortgage Association as that company was placed into government conservatorship.

The work of OFS, which I now head, is essential to President Obama’s and Secretary Geithner’s plans for recovery.

Our economy declined sharply last year, in substantial measure, because credit stopped flowing. Without access to credit, small businesses cannot buy the new equipment, raw materials and inventory that they need to expand. Larger businesses cannot make the continuous adjustments required to function in a changing global marketplace.

In overseeing the office, I will keep in mind that ending the financial crisis isn’t chiefly about helping banks. It’s about alleviating the real hardships that Americans face every day. I will strive to be a prudent investor on behalf of the American people; to protect the taxpayers who’ve entrusted us with so much of their money.

In pursuing the goal of being a prudent investor for the public, my top priorities will be the following:

First, I will carefully review the controls over taxpayers’ money, giving special attention to compliance with laws and directives, managing risks and internal audits. I will work closely with your panel and all other oversight bodies.

Second, I will strive to maximize the effectiveness of financial stability programs, restoring soundness to financial institutions and liquidity to our markets.

Finally, I will emphasize transparency and interaction with Congress so that the American people will know what we’re doing with their money; why we’re doing it, and how it’s helping the financial system, the economy and their lives.

Thank you. I look forward to your questions.

As Assistant Secretary for Financial Stability, Allison is responsible for developing and coordinating Treasury’s policies on legislative and regulatory issues affecting financial stability, including overseeing the Troubled Assets Relief Program (TARP).

President Obama’s Speech on Financial Regulatory Reform

On June 17 President Obama announced his plans to reform the regulation of the nation’s financial system.  Enclosed below are the unedited remarks he made at the press conference announcing his plans for reform.

President Obama speaking at June 17 press conference

Since taking office, my administration has mounted what I think has to be acknowledged as an extraordinary response to a historic economic crisis. But even as we take decisive action to repair the damage to our economy, we’re working hard to build a new foundation for sustained economic growth. This will not be easy. We know that this recession is not the result of one failure, but of many. And many of the toughest challenges we face are the product of a cascade of mistakes and missed opportunities which took place over the course of decades.

That’s why, as part of this new foundation, we’re seeking to build an energy economy that creates new jobs and new businesses to free us from our dependence on foreign oil. We want to foster an education system that instills in each generation the capacity to turn ideas into innovations, and innovations into industries and jobs. And as I discussed on Monday at the American Medical Association, we want to reform our health care system so that we can remain healthy and competitive.

This new foundation also requires strong, vibrant financial markets, operating under transparent, fairly-administered rules of the road that protect America’s consumers and our economy from the devastating breakdown that we’ve witnessed in recent years.

It is an indisputable fact that one of the most significant contributors to our economic downturn was a unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess. A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th century economic crisis — the Great Depression — was overwhelmed by the speed, scope, and sophistication of a 21st century global economy.

In recent years, financial innovators, seeking an edge in the marketplace, produced a huge variety of new and complex financial instruments. And these products, such as asset-based securities, were designed to spread risk, but unfortunately ended up concentrating risk. Loans were sold to banks, banks packaged these loans into securities, investors bought these securities often with little insight into the risks to which they were exposed. And it was easy money — while it lasted. But these schemes were built on a pile of sand. And as the appetite for these products grew, lenders lowered standards to attract new borrowers. Many Americans bought homes and borrowed money without being adequately informed of the terms, and often without accepting the responsibilities.

Meanwhile, executive compensation — unmoored from long-term performance or even reality — rewarded recklessness rather than responsibility. And this wasn’t just the failure of individuals; this was a failure of the entire system. The actions of many firms escaped scrutiny. In some cases, the dealings of these institutions were so complex and opaque that few inside or outside these companies understood what was happening. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators lacked accountability for their inaction.

An absence of oversight engendered systematic, and systemic, abuse. Instead of reducing risk, the markets actually magnified risks that were being taken by ordinary families and large firms alike. There was far too much debt and not nearly enough capital in the system. And a growing economy bred complacency.

Now, we all know the result: the bursting of a debt-based bubble; the failure of several of the world’s largest financial institutions; the sudden decline in available credit; the deterioration of the economy; the unprecedented intervention of the federal government to stabilize the financial markets and prevent a wider collapse; and most importantly, the terrible pain in the lives of ordinary Americans. And there are retirees who’ve lost much of their life savings, families devastated by job losses, small businesses forced to shut their doors.

Millions of Americans who’ve worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight. Our entire economy has been undermined by that failure….Click here to read the rest of speech.

Banking Regulator Calls for More Consumer Protections on Reverse Mortgages

From the media department of the Office of the Comptroller of the Currency (OCC).  The OCC is responsible for chartering, regulating, and supervising all national banks and the federal branches and agencies of foreign banks.

Comptroller of the Currency John C. Dugan warned in a speech at the American Bankers Association Regulatory Compliance Conference on June 8th that reverse mortgages pose significant compliance risks and said regulators should get out in front of this issue, before real problems develop, so that these loans are made “in a way that is prudent for both lenders and borrowers.”

John Dugan

 “While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages – and that should set off alarm bells,” Comptroller Dugan said.  The experience with subprime mortgages “clearly demonstrates the link between compliance and safety and soundness.”

The Comptroller said the regulatory agencies should ensure that interagency guidance being worked on is sufficiently robust to ensure that consumers are adequately protected, and he said the OCC would examine national banks to ensure compliance with the guidance as well as relevant existing regulations.  But he said it may turn out that guidance alone is not enough to address the consumer protection issues surrounding this new product.

“In these circumstances, more definitive regulatory standards may need to be adopted, and the OCC is prepared to do that – even if the standards we advocate initially apply only to reverse mortgage lending by national banks,” he said in a speech to a regulatory compliance conference sponsored by the American Bankers Association.

Reverse mortgages provide a source of income or line of credit to elderly homeowners by allowing them to tap the equity in their home without having to sell or move out of the home.  The underwriting on these loans is nontraditional since no repayment is required until the homeowner dies, permanently moves out of the home, or fails to maintain the property or pay property taxes.  If the home is sold to repay the loan, the borrower is not responsible for any loan amount above the value of the home.  Any remaining equity above the amount due belongs to the borrower or the borrower’s heirs.

While some lenders offer their own proprietary products, 90 percent of all reverse mortgages are insured by the Department of Housing and Urban Development’s Federal Housing Administration, and known as “home equity conversion mortgages,” or “HECMs.”

Mr. Dugan said the ability of consumers to access their home equity through immediate and large lump sum payments can pose substantial risks.  For example, lenders may simultaneously and aggressively market investment, insurance, or annuity products or, worse, attempt to condition loan approval on the purchase of such products.  Likewise, with access to large lump sums upon closing, elderly borrowers can be particularly vulnerable to coercive sales of annuity and long term care insurance products that are expensive and may not be appropriate to their needs.

“Another risk is that reverse mortgage borrowers, because they have no immediate repayment obligations, may overlook substantial fees that are attached to the loan,” Mr. Dugan said.  “And consumers who spend their loan proceeds quickly or unwisely may end up short of the funds they need for home maintenance or property taxes, with disastrous consequences:  the failure to make those payments can result in foreclosure.”

The Comptroller also expressed concern about misleading marketing claims, especially if the product’s incentives and fees put more of a premium on making the loan than on ensuring it is appropriate for the borrower.

“Even when consumers are not subject to misleading or deceptive marketing, they still may have a hard time understanding the complex nature and costs associated with reverse mortgages,” he said.  “If a consumer doesn’t fully understand how much the loan will cost, how much can be borrowed, or all the circumstances under which the loan can become due, then the risk increases for a transaction that is not appropriate to the consumer’s needs.”

The OCC already has regulations in place to deal with deceptive marketing, the Comptroller said, and the OCC “will use this authority to require immediate correction of any potentially misleading marketing claims by a bank in connection with reverse mortgage products.”

The OCC will also use existing authority to ensure that national banks do not condition the availability of a reverse mortgage on the borrower’s purchase of certain nonbanking products, such as an annuity or life insurance.

Mr. Dugan said one area that deserves particular attention is whether to impose additional requirements with respect to escrows of taxes and insurance.  Nonpayment of taxes or insurance can trigger foreclosure.  However, the new Federal Reserve Board escrow requirements for “higher-priced” mortgages do not apply to reverse mortgages, and HUD does not require escrows to be established in connection with HECMs.

“Given the predominance of the HECM product in reverse mortgage lending, I think it would be a major step forward for HUD to issue guidelines or requirements addressing the escrow issue for HECMs, and I would like to begin a dialogue with them on the issue,” he said.  “Once they set the standards for escrows, we would ensure that they are followed by national banks for HECM products, and would ensure – by regulation, if necessary – that comparable standards apply in connection with proprietary reverse mortgages offered by national banks.”

In closing, Comptroller Dugan said that while much attention still needs to be focused on dealing with the economic downturn, regulators can’t afford to ignore consumer issues.  “We need to be on constant alert to emerging risks and vigilant in our regulatory compliance responsibilities,” he said.

Needed for America: A New Commitment to National Financial Literacy

Enclosed is an excerpt from testimony given on May 13, 2009 by Susan Keating, president and CEO of the National Foundation for Credit Counseling to the U.S. House of Representatives Committee on Financial Services Subcommittee on Housing and Community Opportunity calling for increased congressional support of financial literacy.

…Today, we are focused largely on damage control. But looking beyond the current crisis, the NFCC feels strongly that we need to do a better job of preventing personal financial problems through financial literacy programs that provide consumers with basic money management skills and the financial know-how to take charge of their personal finances and use credit responsibly. While good money management cannot offset the impact of external events such as losing a job or a costly health problem, it can help consumers to better weather economic ups and downs and enable them to avoid the types of financial mistakes that lead to mortgage defaults, bankruptcy, and general problems with credit. Better outcomes for individuals and families will collectively add strength to our national economy. 

Susan Keating

A recent Wall Street Journal article speculated that people tend to think they understand money because they’ve been handling it since grade school. “More likely,” the Journal added, “they have a basic understanding of spending, which is why so many households are in such dire straits these days.”

 Whatever the reason, it is clear to us, from both our counseling experience and the NFCC’s Financial Literacy Survey, that too many Americans lack the financial skills they need and too few are stepping forward to get help. 

For example, our recent Financial Literacy Survey found that 41 percent of Americans grade themselves as a C, D, or F on personal financial knowledge; only 42 percent keep close track of their spending; and more than quarter say they do not pay their bills on time. As noted earlier, 28 percent of mortgage holders admit that their mortgages have turned out to be different than expected when they took out the loan. Numbers like these scream of the need for better financial education.

Toward that end, the NFCC believes that basic finance and money management should become a mandatory part of the standard school curricula in every state. Surveys show that financially literate consumers are more likely to make their loan payments on time and less likely to default. That should be a powerful incentive to everyone, especially creditors, to promote financial education. At a time when lenders are trying to reduce their risk, it is a good time for them to promote proven risk-reduction strategies such as financial education by offering incentives such as better credit terms to consumers who have completed such programs. Consumers, too, would certainly avoid problems if they took part in financial education before their finances deteriorated.

A number of organizations, including the NFCC, have been working on financial literacy for some time. Collectively, we’ve developed effective and relevant course materials and other education tools. What we don’t have is a true national strategy or a national delivery system. If we are serious about financial education, we need to provide consumers as well as lenders and other third-parties involved with incentives to attend classes, secure funding to support education services, and also find a way to measure results so we know what works and what doesn’t.

We are further convinced that the federal government can and must provide leadership in this area. Both Congress and the President support legislation to extend consumer protection by requiring new disclosure requirements for credit cards and restricting some practices that have made it easier for consumers to accumulate excessive debt and harder to pay it back. But no legislation can do more for consumers than they are willing to do for themselves. That is why we feel so strongly about financial education. Ultimately, financial education IS consumer protection, and it must be a priority.

To read the entire tesimony click here.