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Current Events - 01/14/2002

Banking Brief

The San Francisco Business Journal published a brief profile on Dick Kovacevich of Wells Fargo in its January 4 issue, claiming he was a “person to watch.” The article discussed the large hits on bad loans made by big banks and the return to the “basics” of banking as a result. The article also predicted a merger of Wells and North Carolina-based Wachovia Corp…The same SFBJ article tagged Bank of America as the “company to watch,” predicting that a major merger with NY-based Merrill Lynch may be in the works. Second choice for merger: JP Morgan…Mercantile Bancorp acquired South Bay Bank of Torrance on December 18. South Bay will continue to operate under its own name…American Banker reported that the FDIC is investigating a reinsurance option in case of massive banking failures. It is reported that the FDIC could get up to $5 billion of coverage.

Senate Banking hearing on yield spread premiums

Senate Banking Chairman Paul Sarbanes (D - MD) wasted no time continuing his crusade against abusive lending practices by scheduling a hearing on yield spread premiums on January 8 — before most of his colleagues were scheduled to return to Washington.

Yield spread premiums are controversial. The originator pays all closing costs, but in return, the mortgagor pays a higher interest rate (the yield spread). HUD recently overturned a federal court ruling that yield spread premiums are per se violations of RESPA, stating that such determinations should be made on a case by case basis and that if fees were reasonable and customary compensation for the service provided, RESPA would not be violated. Sarbanes has made no secret of his disagreement with HUD’s ruling. The January 8 hearing featured witnesses from the industry, consumer groups and academia. This hearing is part of a series of hearings Sarbanes has in mind for the panel. They began last year when the subject was predatory lending.

FHA Limits rise 9 percent

HUD announced recently that mortgage loan limits under its standard single family mortgage insurance programs were adjusted upward, effective January 1, 2002, by 9 percent. By law, the single family FHA ceiling is set at 87 percent of the conforming loan ceiling, which also rose to above $300,000 as of January 1. The new high-cost FHA ceiling (applicable to a substantial portion of California) is $261,609 for single-family loans and $502,990 for four-unit dwellings. The California Association of Realtors is seeking federal legislation to provide even higher Fannie-Freddie limits in California and other high housing cost areas. The realtors contend that the conforming loan ceiling should be the same as the one prevailing in Alaska and Hawaii which would hike the limit to more than $440,000. The FHA ceiling would be 87 percent of this ceiling, if the realtors are successful.

WalMart pressing forward

Reports persist that WalMart is pressing forward with an application to OTS to form a joint venture with Toronto-Dominion Bank of Canada whereby Dominion would establish branches in WalMart facilities across the country. WalMart’s effort to acquire a thrift charter in the late 90s was a principal reason for the provision in Gramm- Leach-Bliley to restrict the chartering of new unitary thrift holding companies, and OTS ruled earlier in 2001 that WalMart’s plan, as presented then, crossed the line between banking and commerce because WalMart employees would have been involved performing ministerial and even managerial functions. WalMart withdrew the application at the time, but the company is apparently pushing ahead. Clearly, WalMart could lease space in its stores to a financial institution which operates a branch at each location, but it appears to want to do more than simply collect rent. There will be intense industry pressure on OTS to say no to any arrangement under which WalMart plays any active role in the operation of the branches.

Terrorism package files to clear Senate; state commissioners authorize exemptions

The Senate did not clear the terrorism insurance bill prior to its recess, despite the prediction that it would in the last issue of Current Events. Agreement was not reached on key issues, especially tort reform, which the GOP insists be a part of any package. Sensing they may have the upper hand, Republicans say that federal funds should not be used to pay damages awarded in private actions where property owner or employee negligence is deemed to be a contributing cause to damages suffered from acts of terrorism.

Meanwhile, the pressure is on because in recent days, insurance commissioners in several states have authorized property and casualty companies to exclude acts of terrorism from policies offered or renewed subsequent to January 1, 2002. Banks which require business borrowers to have insurance against acts of terrorism may cease making or extending loans on properties and businesses considered to be vulnerable to attacks. Nevertheless, there have been no reports of banks in large numbers refusing to extend existing loans or make new ones. This issue will confront the Senate when it returns later this month, but there is no sign yet of a breakthrough.

OCC steps hard on payday lender in Pennsylvania

Late last week, the Comptroller ordered Eagle National Bank of Upper Darby, Pennsylvania (with branches in other middle Atlantic states) to sever its ties to a payday lender which was closing loans in the bank’s name, reportedly without knowledge of the bank. Ruling that the lender was, in effect, renting Eagle’s charter and that Eagle failed to maintain adequate supervision over its activities, the OCC ordered Eagle to cease all arrangements with the lender. Unclear is the status of similar arrangements between other national banks and consumer lenders. Consumer lenders frequently enter into such relationships to take advantage of the law of the state where the national bank is headquartered rather than having to comply with stricter laws in other states where the national bank does business. OCC has not indicated what it will look to in determining the propriety of such arrangements. Unlike the Eagle facts, in other cases, the loans are reviewed and made by the national bank itself and then sold to the consumer lender.