Over the last two years, lawmakers in at least eight states have voted to increase the fees or the interest rates that lenders can charge on certain personal loans used by millions of borrowers with subpar credit, the New York Times reported today. This overhaul of certain state lending laws comes after a lobbying push by the consumer loan industry and a wave of campaign donations to state lawmakers. In North Carolina, for example, lenders and their lobbyists overcame unusually dogged opposition from military commanders, who two years earlier had warned that raising rates on loans could harm their troops. The lenders argued that interest rate caps had not kept pace with the increased costs of doing business, including running branches and hiring employees. Unless they can make an acceptable profit, the industry says, lenders will not be able to offer loans allowing people with damaged credit to pay for car repairs or medical bills.
Daniel Tarullo, governor of the Federal Reserve, said that banks may face tougher regulations if they fail to crack down on market misbehavior and other misconduct that has continued with “disturbing regularity,” Bloomberg News reported yesterday. “If banks do not take more effective steps to control the behavior of those who work for them, there will be both increased pressure and propensity on the part of regulators and law enforcers to impose more requirements, constraints and punishments,” Tarullo said. “For a time, these stories were the legacy of pre-crisis errors and misdeeds, with a focus on the mortgages and mortgage-related products that lay at the heart of the crisis,” Tarullo said. “But soon they were accompanied by allegations of post-crisis actions.” He cited Libor and foreign-exchange rate-fixing scandals, inadequate money-laundering controls and efforts by some traders to use private exchanges to trade ahead of other investors, a practice known as front-running. http://www.businessweek.com/news/2014-10-20/fed-s-tarullo-says-wall-str…
In related news, William C. Dudley, the president of the Federal Reserve Bank of New York, yesterday stepped up his campaign to improve the ethical culture of large banks. Dudley told bankers assembled at the New York Fed that continued ethical lapses would be a sign that their institutions were too big to manage — and that they might need to be reduced in size. “If those of you here today as stewards of these large financial institutions do not do your part in pushing forcefully for change across the industry, then bad behavior will undoubtedly persist,” said Dudley. “If that were to occur, the inevitable conclusion will be reached that your firms are too big and complex to manage effectively.” Dudley focused in particular on how to structure Wall Street compensation so that banks could recoup pay at a later date if a bank decided an employee needed to be held accountable for ethical lapses. http://dealbook.nytimes.com/2014/10/20/regulator-tells-banks-to-clean-u…
Melvin L. Watt, director of the Federal Housing Finance Agency, announced a program yesterday offering more reassurances to mortgage lenders that fear they could suffer unpredictable losses on the loans they sell to the government, the New York Times reported today. The move in large part is intended to reassure banks that have had to pay tens of billions of dollars to settle legal cases arising from the housing boom and bust and to buy back bad loans sold to Fannie and Freddie. To avoid having to make those payments again, many lenders now demand that borrowers meet stricter requirements for loans, known in the industry as overlays. Separately, Watt disclosed that efforts are underway to allow borrowers to receive government-backed loans with much smaller down payments than are now required.
Corporate-bond investors have struggled this week to find trading partners for some large orders, causing unusual price drops and raising concerns that trading could freeze in future market turmoil, the Wall Street Journal reported today. Many large banks have reduced bond inventories in recent years in response to new capital rules and other measures. Traditionally, large banks and brokerage firms have acted as middlemen in the bond market, matching buyers and sellers and sometimes buying and selling from their own holdings to keep trading going. Their pullback now is playing out in the market, along with other factors such as diminishing Federal Reserve purchases of bonds, declines in stock and commodity prices and investor concern over economic data, the Ebola virus and geopolitical tumult. Trading is far from frozen, but choppy conditions have spooked investors. A pullback by banks is leading to a “quest for liquidity,” said Scott Colyer, chief executive of Advisors Asset Management Inc., which oversees $15 billion.
The team winding down Lehman Brothers Holdings Inc. is accusing some of the nation's financial institutions of trying to freeze billions of dollars of Lehman cash earmarked for other creditors to "coerce" a favorable settlement in their fight with the failed investment bank over soured mortgage loans, Dow Jones Daily Bankruptcy Review reported today. In a bankruptcy court filing on Wednesday, lawyers for Lehman blasted the trustees responsible for some 255 individual residential mortgage-backed securities trusts that purchased mortgage loans from Lehman before the financial crisis. The trusts have said that Lehman needs to set aside $12.14 billion to settle claims over certain soured mortgage loans, more than double the amount that the failed investment bank has put aside for the dispute.
Former American International Group Inc. Chief Executive Officer Edward Liddy will face key questions on the witness stand in a trial over claims that shareholders were cheated of at least $25 billion in the insurer’s bailout, Bloomberg News reported today. The U.S. had a hand in everything from press releases to selection of board members after the Federal Reserve Bank of New York loaned the company $85 billion and took most of its stock, according to testimony and documents in the case brought by Maurice “Hank” Greenberg’s Starr International Co. With Liddy’s testimony set for today, Starr’s lawyer, David Boies, has confronted witnesses this week with documents to bolster his case that the government illegally took control of the company rather than acting as a detached steward. Starr, AIG’s biggest shareholder before the 2008 bailout and led by former CEO Greenberg, accuses the U.S. of imposing illegally severe conditions that included failing to compensate shareholders. Starr contends that the government wanted control of AIG’s assets to facilitate a “backdoor bailout” of the insurer’s investment bank trading partners, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., and that it manipulated the company’s governance to avoid a shareholder vote on the rescue package.
Citigroup Inc., the U.S. lender that gets the most revenue from overseas markets, announced plans to exit consumer banking in 11 markets as Chief Executive Officer Michael Corbat seeks to simplify the firm and boost returns, Bloomberg News reported yesterday. The sale of the businesses, a majority of which already are under way, are expected to be completed by the end of next year, the bank said yesterday. The units will be moved into the lender’s collection of unwanted assets for reporting purposes in the first quarter of 2015. With today’s announcement, New York-based Citigroup will exit consumer banking in Costa Rica, El Salvador, Guatemala, Nicaragua, Panama, Peru, Japan, Guam, the Czech Republic, Egypt and Hungary, as well as the consumer-finance business in Korea.
The Doomsday Book, a collection of legal opinions that describe and delineate the Federal Reserve’s ability to fight financial crises, along with a variety of related documents, has popped into public view because a group of investors suing the government over the terms of the AIG bailout say some Fed memos show that the Fed broke its own rules, the New York Times reported today. Last week, in a courtroom overlooking the White House, government lawyers took a break from defending the government against the $40 billion lawsuit, and instead pressed a judge to keep the contents under seal and to limit references to its contents by lawyers and witnesses participating in the weeks-long trial. “Of the tens of thousands of documents that we have produced in this case, the Federal Reserve Bank of New York has sought to retain confidentiality because of the internal sensitivity of only this one,” a lawyer for the New York Fed, John S. Kiernan of Debevoise & Plimpton, told the U.S. Court of Federal Claims.
The housing bust ended several years ago, but the big mortgage banks are still acting as if the home loan business were fraught with peril, the New York Times reported today. Executives from Wells Fargo, the nation’s biggest mortgage bank, said yesterday that important changes had to be made before they might consider increasing the flow of credit. In the third quarter, Wells Fargo’s mortgage banking income totaled $1.63 billion, a small rise from the $1.61 billion in the third quarter of 2013. Since the financial crisis led the Federal Reserve to cut interest rates, Wells Fargo has made billions of dollars in its mortgage unit, as mortgage borrowers rushed to the bank to refinance. Wells Fargo does not hold most of the mortgages it makes. Instead, it books a profit when it packages the loans into bonds and sells them to investors. An increase in the profitability of such sales is a reason Wells Fargo’s mortgage banking revenue went up in the third quarter even as the bank underwrote far fewer loans.
Mortgage lenders and housing investors are squaring off in Nevada over a court decision that has allowed thousands of foreclosed homes to be sold for pennies on the dollar, in a case that could have big implications on an already-tight home-loan market across the country, the Wall Street Journal reported today. At issue are homeowners associations and the liens they put on properties when a homeowner stops paying dues. Homeowners associations enforce rules in a community and collect dues to maintain common areas and pay for repairs. Like lenders, homeowners associations can foreclose on homes to recoup delinquent payments, an option that many have taken after waiting years for lenders themselves to foreclose, a scenario that has left homes without dues-paying owners and some HOAs strapped for cash. Nevada and about 20 other states have laws that allow HOA liens to get priority over first mortgages. The result, according to a recent state court decision, is that homes can be put up for auction by HOAs—without the blessing of the mortgage lender—and sold, extinguishing the first mortgage and allowing the investor to get title to the home. Such sales often are for an amount equal to or slightly above the HOA dues in arrears. In a court filing yesterday, the Mortgage Bankers Association wrote that because of the decision, “mortgage lenders stand to lose millions—perhaps even billions—of dollars in security interests.” Lenders nationwide have argued that HOAs should have to foreclose through the court system and shouldn’t have the power to wipe away entire mortgages. But in a closely watched case in September involving Bank of America Corp. , the Nevada Supreme Court said that they can do so, and sent the case back to a lower court. Last week, Bank of America requested that the state Supreme Court reconsider.
