Divisions, Frustration over Hybrid Guidance: Regulators, Split on Approach, Draw Criticism from Dodd

By Adler, Joe; Kaper, Stacy | American Banker, February 15, 2007 | Go to article overview

Divisions, Frustration over Hybrid Guidance: Regulators, Split on Approach, Draw Criticism from Dodd


Adler, Joe, Kaper, Stacy, American Banker


WASHINGTON -- Federal regulators disagree on how to respond to Senate demands to clamp down harder on hybrid loans not covered by guidelines released last September.

The Federal Reserve Board and the Office of Thrift Supervision are said to be pushing to keep this second round of lending guidance broadly worded, while the Federal Deposit Insurance Corp. wants to single out particular products. The Office of the Comptroller of the Currency is said to be staking out a middle ground.

Forced to respond to lawmakers demanding some answers, the agencies have agreed to concede that hybrid products such as 2/28 loans are a concern, but they continue to negotiate a solution.

"The agencies are discussing various approaches that can be taken to ensure that these types of loans are originated in a safe and sound manner," the regulators wrote in a draft letter dated Feb. 12. (The final letter is expected to be sent as soon as all the agency heads sign it.)

That answer did not satisfy Senate Banking Committee Chairman Christopher Dodd, who joined five other committee members in December to ask regulators to make the hybrid loans -- popular with subprime borrowers -- part of their earlier guidance on alternative mortgage products. Since then, the Connecticut Democrat has complained that the regulators have been dragging their feet.

"The letter we got back was inadequate," he said Wednesday at a hearing. "The answer was basically, 'We're thinking about it,' " he told reporters later.

Sen. Dodd confirmed that one of the agencies, widely believed to be the FDIC, is holding out for more specific guidance.

"I can't tell you which one, but one of the regulators was not happy about the letter at all -- wanted to be a lot more forthcoming," he said. "But apparently there was some difficulty negotiating the language of the letter. When you ask the agencies to write a letter, obviously you have different opinions about all of this."

Sen. Dodd encouraged the agencies to work out their differences.

"The alternative is legislation," he said. "And frankly, I'm not as enthusiastic about legislating in this area as I am the regulators doing their job. So I found the letter disappointing."

Industry and consumer group representatives said the agencies appeared at odds over how extensively to regulate products not covered by the September guidance on exotic loans. The guidance required stricter underwriting for payment-option and interest-only adjustable-rate mortgages and required that lenders assess a borrower's payment ability using the fully indexed rate, rather than introductory rates.

"There are differences among the regulators on how far they should actually intervene in the market and how much the market is capable of correcting itself without regulatory intervention," said Kurt Pfotenhauer, the head lobbyist for the Mortgage Bankers Association.

Consumer groups had urged regulators last fall to expand the guidance to cover 2/28s, products that adjust after two years of fixed "teaser" rates. …

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