,. . ·-· -. \-, . . .. ,,. 

Federal De00slt Insurance Corvoratlon 

550 171h Street NW, Washington, DC 20429 Office ct Legislative Affairs 

Honorable Christopher J. Dodd 

Chairman 

January 24, 2008 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

Washington, D.C. 20510 

Dear Mr. Chairman: 

Thank you for the opportunity to respond to questions submitted by Senator Shelby and Senator 

Crapo subsequent to recent testimony before the Committee by John Bovenzi, Chief Operating 

Officer and Deputy to the Chairman, on "Examining the Regulation and Supervision of 

Industrial Loan Companies." 

The Federal Deposit Insurance Corporation's answers to the questions arc enclosed. If you have 

further questions, the Office of Legislative Affairs can be reached at (202) 898-7055. 

Enclosure 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
Response to Questions posed by Senator Shelby 

from John Bovenzi 

Deputy to the Chairman and Chief Operating Officer 

Federal Deposit Insurance Corporation 

Ql. A 2006 report from the FDIC's Office o(ln.spector General detaJ.1.ed the widespread " 

use of non-standard conditions in granting deposit insurance. The State of Utah also 

includes certain conditions In its orders approving new industrial Joan company or 

industrial bank (colJectiveJy, ILC) charters. 

• Is there any question regarding the enforceability of these conditions .ID a legal 

context? 

• CouJd the FDIC simply withdraw its deposit insurance if the ILC does not honor the 

conditions? 

Al. When an insured state nonmember bank, including an ILC, violates a condition imposed in 

writing in connection with a grant of deposit insurance, the FDIC may pursue various types of 

enforcement actions under section 8 of the Federal Deposit Insurance Act (FDI Act). The 

criteria for use of the FDIC's enforcement authorities are specified by the various subsections of 

section 8. The most common criteria include violations oflaw, rule, or regulation; unsafe or 

unsound banking practices; and violations of written agreements, orders, or conditions imposed 

in writing in the granting of applications or other requests. The statute does not distinguish 

between "standard" and "non-standard" conditions. 

The criteria are prerequisites for the pmsuit of a cease-and-desist action under section 8(b ), a 

removal and prohibition action under section 8( e) (if evidence satisfies the effect and culpability 

prongs of the statute as well), and a civil money penalty action under section S(i). These 

enforcement actions can be pursued directly against the depository institution, including ILCs, 

and their institution-affiliated parties (IAPs). In some circumstances, the FDIC may pursue an 

action against an institution's parent company, that is not a bank or thrift holding company, as a 

result of its status as an IAP. Tho~e parent companies that are established bank or thrift holding 

companies may be subject to actions by the Federal Reserve Board or Office of Thrift 

Supervision, respectively. 

Historically, the enforcement authorities described above have been sufficient to ensure 

compliance with the conditions imposed in connection with the grant of deposit insurance. 

However, a depository institution's insured status also may be terminated by the FDIC Board of 

Directors under section 8(a)(2) of the FDI Act after a hearing if the institution is found to have 

engaged in violations of a condition imposed in writing in connection with the approval of any 

application or other request by the depository institution or written agreements entered into with 

the FDIC. 

For insured depository institutions for which the FDIC is not the primary federal regulator, the 

primary federal regulator can enforce conditions imposed by the FDIC in connection with 

deposit insurance approvals. In such situations, the FDIC also has the authority to either 
terminate deposit insurance or exercise its backup enforcement authority under section 8(t) of the 

FDIAct. 

Q2. In a 2006 hearing before the House Financial Services Committee, the FDIC appeared 

to qualify its previous position on the adequacy of the bank-centric regulatory approach 

from a safety and soundness perspective. 

• Please explain the rationale for this apparent reversaJ. 

Al. The FDIC's response to the Government Accountability Office's (GAO) September 2005 

report on ILCs (GAO-05-621) noted that the bank-centric approach to supervision ofILCs has 

been a proven model for protecting the Deposit Insurance Fund. The authorities available to the 

FDIC to supervise ILCs have been adequate thus far for the size and types of ILCs that currently 

exist. 

However, the number, size, and types of non-financial 1LC applicants have changed significantly 

in recent years, causing the FDIC to carefully examine this new environment. The business 

plans for ILCs controlled by non-financial companies tend to be more complex and differ 

substantially from the consumer lending focus of the original ILCs. In many instances, these 

ILCs directly support one or more a.ffiliate's non-financial activities or serve a particular lending, 

funding, or processing function within the larger organizational structure. Some observers, 

including the GAO, have raised concerns that the supervisory infrastructure may not provide 

sufficient safeguards to identify and avoid or control all safety and soundness risks and risks to 

the Deposit Insurance Fund. Although our experience to date indicates that these risks are not 

unique to the ILC charter, the FDIC determined that it was appropriate to provide Congress with 

a reasonable period to consider these developments and, if necessary, to make revisions to 

existing statutory authority. 

Since 2006 when the FDIC imposed its moratorium, applications for deposit insurance and 

change in control have been on hold. 

• What is the legal basis for the FDIC's moratorium? 

The FDIC imposed a moratorium to evaluate (i) developments in the industrial bank industry; (ii) 

the various issues, facts, and arguments raised with respect to the industrial bank industry; (iii) 

whether there were emerging safety and soundness issues or policy issues involving industrial 

banks or other risks to the Deposit Insurance Fund; and (iv) whether any changes should be made 

in the FDIC's oversight of industrial banks in order to protect the Deposit Insurance Fund or 

achieve other congressional objectives. In summary, the moratorium was administratively 

necessary to achieve or preserve the FDIC's broader statutory objectives to promote safety and 

soundness and maintain the public's confidence in the nation's banking system. 

Courts have upheld an agency's authority to impose a moratorium when administratively 

necessary to achieve or preserve the agency's broader statutory objectives. This has occurred 

when emerging or changed circumstances prompted an agency to reevaluate its standards for 

decision making. See, e.g., Western Coal Traffic League v. Surface Transportation Board, 216 

F.3d 1168 (D.C. Cir. 2000) (upholding the agency's 15-month moratorium on processing 

railroad merger applications in order to reevaluate standards for approval when the agency was 
required by statute to consider the effect of a proposed merger on competition and approve 

mergers that were consistent with the public interest; recent mergers had increased consolidation 

in the industry and caused service disruptions). The legal reasoning of Western Caal and other 

·cases provide legal support for the FDIC's decision to impose its moratorium. 

• On what grounds was the change in control application for GMAC Automotive 

Bank exempted from the moratorium? 

On May 31, 2006 a consortium of investors headed by Stephen A. Feinberg. the founder of 

Cerberus Capital Management, L.P .• filed a change in control notice for the acquisition of 

GMAC Automotive Bank (Bank), an industrial loan company that specializes in the purchase of 

automobile loan and lease contracts. The change in control notice was required due to the 

consortium's planned acquisition of 51 percent of GMAC, a parent company of the Ban1c. 

GMAC is a $310 billion financial services subsidiary of General Motors Corporation (GM). 

On July 28, 2006 the FDIC Board of Directors imposed a moratorium on ILC applications for 

deposit insurance and change in control notices with respect to ILC. The moratorium (as 

modified in January 2007) expires on January 31, 2008. 

On November 15, 2006 the FDIC Board approved the Cerberus change in control. The-FDIC 

acted on this change in control notice prior to the expiration of the moratorium because of the 

unique circumstances of the case. The FDIC Board wanted to avoid the potential for substantial 

interference with a major restructuring by GM. and waiting to act until after the expiration of the 

moratorium could have had a significant adverse impact on GM's restructuring and GM's 

subsidiaries. 

The action was conditioned on the consortium entering into a written agreement with the FDIC 

ensuring that the Bank will be subject to whatever changes the FDIC might make to the 

regulation and supervision of ILCs going forward. Specifically, the consortium committed to the 

FDIC that within two years after the date of approval they will divest control of the bank; 

terminate the bank's insured status; become a registered bank or thrift holding company, or be 

subject to the same applicable laws and regulations as other similarly situated companies at that 

time. 

The Board's action permitted. GM' s broader corporate restructuring to go fmward while 

preserving the purposes and goals of the moratorium. 

Following its moratorium, the FDIC sought comment on a number of issues related to 

ILCs. Did these comments or the FDIC's own internal review suggest any inadequacies 

with the FDIC's existing regulatory powers over ILCs? 

In its Notice and Request for Comment on issues related to industrial banks, the FDIC posed the 

following question: "Given that Congress has expressly excepted owners of ILCs from 

consolidated bank holding company regulation under the Bank Holding Company Act, what are 

the limits on the FDIC's authority to impose such regulation absent further congressional 

action?" Commenters filing substantive responses to this question consistently noted that, while 
the FDIC could not impose restrictions th.at would effectively repeal the exemption of ILCs from 

the BHCA, it might impose conditions in the application approval process to ensure the safety 

and soundness of the n,c_ In fact, the FDIC has used such conditions for a number of years to 

achieve that result. 

The FDIC's proposed regulation, Part 354, is intended to provide, in a more systematic fashion, 

safeguards to identify and avoid or control any safety and soundness risks and risks to the 

Deposit Insurance Fund that may result from ownership by a financial company not subject to 

consolidated federal bank supervision. The proposed rule would provide enhanced transparency 

and a system of controls to address the potential risks posed by such ownership structures. 

What percentage of the total insured deposits in the United States are held by ILCs? What 

percentage of the total insured deposits are held by ILCs not already subject to the 

consolidated supervision of either the Federal Reserve Board or the Office of Thrift 

Supervision? What percentage of the total insured deposits are held by ILCs owned by 

commercial firms? 

The volume of total insured deposits in the United States held by ILCs was approximately $163 

billion as of September 30, 2007, constituting about 2 percent of total insured deposits. 

Approximately $58 billion or 0.7 percent of total insured deposits are held by ILCs not already. 

subject to consolidated supervision by either the Federal Reserve Board or the Office of Thrift 

Supervision. Approximately $25 billion or 0.3 percent of total insured deposits are held by ILCs 

owned by firms that engage in activities that are not permissible for a financial holding company 

or a thrift holding company. 

Q3. Is the key issue in the ILC debate the commercial ownership of a banking charter or 

the commercial ownership of a federally-insured entity? 

A3. Both issues have been raised and argued frequently by various interested parties during the 

course of the long-running debate over ILCs. From the FDIC's perspective, the threshold issue 

in all cases is that subsidiary institutions operate in a safe and sound manner without undue risk 

to the Deposit Insurance Fund. 
Response to Questions posed by Senator Crapo 

from John Bovenzi 

Deputy to the Chairman and Chief Operating Officer 

Federal Deposit Insurance Corporation 

Ql. As I said in t&e opening statement, I am bearing a lot of praise about Britain's 

approach to replation as a model for an effective but not onerous system to oversee banks, 

brokers and investment funds, and one that could improve the competitive position of U.S. 

financial markets globally. When was the last time Congress did a thorough evaluation of 

our financial services regulatory structure answering these types of questions? 

• Does our imanciaJ services regulatory structure correspond to the needs and 

problems? (Relevance) 

• Does our imanciaJ services regu]atory structure achieve Its objectives? 

(Effectiveness) 

• Does our financial services regulatory structure achieve its objectives at reasonable 

costs? (Efficiency/cost-effectiveness) 

Al. Toe Government Accountability Office (GAO) issued a report (Financial Regulation: 

Industry Changes Prompt Need to Reconsider U.S. Regulatory Structure, GA0-05-61 (Oct. 6, 

2004)) responding to a request by the Chairman of the Senate Committee on Banking, Housing, 

and Urban Affairs to analyze the existing financial services regulatory structure. In that report 

the GAO suggested that Congress might want to consider some consolidation or modification of 

the existing regulatory structure to (1) better address the risks posed by large, complex, 

internationally active fums and their consolidated risk management approaches; (2) promote 

competition domestically and internationally; and (3) contain systemic risk. 

In response to a mandate in the Financial Services Regulatory Relief Act of 2006, Pub. L. No. 

109-351, § 1002, the GAO conducted a study of the regulatory structure for financial services and 

trends in the financial services industry. In October 2007, the GAO submitted its report 

(Financial Regulation: Industry Trends Continue to Challenge the Federal Regulatory Structure, 

GA0-08-32 (Oct. 12, 2007)). The report: 

• describes measurements of the costs and benefits of financial regulation in general and 

current efforts to avoid excessive regulatory burden; 

• describes financial industry trends and the challenges that these pose to the federal 

financial regulatory structure; and 

• discusses various options to enhance the efficiency and effectiveness of the federal 

financial regulatory structure. 

Although the report did not offer any new recommendations, it suggests a critical first step to 

modernizing the regulatory system and enhancing its ability to meet the challenges of the 

dynamic financial services industry includes clearly defining regulatory agencies' goals and 

objectives. The GAO believes such goals and objectives could help establish agency priorities as 
well as define responsibility and accountability for identifying risks, including those that cross 

markets and industries. 

With regard to the Financial Services Authority (FSA) in the United Kingdom, the FSA and 

other regulators in the United Kingdom currently are reviewing aspects of their regulatory 

system in light of the questions raised by the turmoil surrounding a troubled bank, Northern 

Rock, which experienced a depositor run earlier this year. The FSA and the Bank of Eng]and ' 

had to step in to provide extraordinary liquidity support and broadly guarantee deposits for 

Northern Rock- in part due to questions about the effectiveness of the U.K. 's deposit guarantee 

system and the processes available to protect depositors in the event of a bank failure. Since 

th.en, the FSA in. concert with. the Bank of En gfand lUld the Treasury have been reviewing 

whether the FSA or the deposit in.surer, the Financial· Services Compensation Scheme, should 

have powers similar to those provided under U.S. law to the FDIC in conducing bank 

resolutions. In particular, the U.K. authorities are examining whether stronger legal powers are 

necessary to better protect the public while minimizing losses. The FSA also has been reviewing 

its risk and liquidity monitoring processes to enable it to better respond to future issues. 

Q2. It is my understanding that the Financial Services Authority in the United Kingdom 

not only requires a cost-benefit analysis for proposals before going forward, but it is 

required to report annually on its costs relative to the cost of regulations in other countries. 

How does this contrast with our system? 

A2. Although the FDIC is required by the FDI Act, 12 U.S.C. § 1827(a), to submit an annual 

report ofits operations to Congress, there is no corresponding requirement that the FDIC 

compare the cost of its regulations with those imposed by agencies in other countries. However, 

the federal banking agencies are subject to a number of federal laws that address the impact of 

their regulations: 

• The appropriated agencies file cost/benefit analyses of their regulati_ons with the Office of 

Management and Budget (0MB) for inclusion in an annual report issued by 0MB in 

compliance with section 624 of the Treasury and General Government Appropriations 

Act, 131 U.S.C. § 1105 note. 

• The federal banking agencies are subject to the Administrative Procedures Act, 5 U.S.C. 

§§ 551, et seq., which requires certain rules to be published in the Federal Register for 

comment prior to implementation. The proposed rules typically are accompanied by an 

explanation of the reasons for the proposed rule. 

• When rules contemplated by a federal banking agency involve a collection of 

information, the agency considers the implications of the Paperwork Reduction Act, 44 

U.S.C.§§ 3501, et seq. The Paperwork Reduction Act was enacted to minimize the 

burden on individuals, small businesses and other regulated entities, as well as the cost to 

the federal government, while ensuring the greatest public benefit of the information 

collected by federal agencies. 

• Like other banking agencies, the FDIC also complies with the Regulatory Flexibility Act, 

5 U.S.C. §§ 601, et seq., as amended by the Small Business Regulatory Enforcement 

Fairness Act, 5 U.S.C. § 801, et seq., to ensure that the impact of its proposed rules on 

small businesses, including banking organizations, is considered and minimized. 
• The FDIC and the other federal banking agencies invite comments on the use of"plain 

language" in their rulemakmg, as required by the provisions of the Gramm-Leach-Bliley 

Act, 12 U.S.C. § 4809. 

• In addition, the FDIC, lilce other federal banking regulators, is subject to provisions of the 

Economic Growth and Regulatory Paperwork Reduction Act That Act, in relevant part, 

requires federal banking regulators not less frequently than every ten years to review their 

existing regulations to identify and eliminate those that are outdated, unnecessary, or --

unduly burdensome on insured depository institutions. 12 U.S.C. § 331 l(a). 

In addition to complying with the federal laws that govern its rulemaking, the FDIC also is 

guided by an internal statement of policy that addresses the development of its regulations and 

policies, Development and Review of FDIC Regulations and Policies, 63 Fed. Reg. 25157 

(May 7, 1998). The statement of policy emphasizes the FDIC's commitment to improving the 

quality of its regulations while minimizing regulatory burden on the public and the banking 

industry. It states that, prior to issuance, the FDIC will weigh the potential benefits associated 

with a regulation or statement of policy against the potential costs. 

Q3. I am very appreciative of all the hard work and cooperation of your agencies in 

reviewing and preparing a matrix of all the regulatory relief recommendations and 

positions for this committee. In order to get this legislation signed into law, all sides 

compromised and didn't let the perfect stand in the way of what was possible. I would 

appreciate if each agency would get back to me and the Banking Committee with a list of 

their top two or three priorities from this list that would meaningfully reduce regulatory 

burden for Institutions they regulate. 

AJ. Attached is the FDIC's letter dated November 8, 2007, wherein the FDIC responded to 

Senator Crapo' s previous request for recommendations for legislative changes that we believe 

would increase regulatory efficiency without compromising safety and soundness or important 

consumer protections. 

Attachment 
-FDl8 

Federal DeoosH Insurance Con>0ration 

550171h street WW, Washilgton, DC 20429 

Honorable Christopher Shays 

Repres~e, U.S. Congress 

1 O Middle Street, 11th Floor 

Bridgeport, Connecticut 06604 

Dear Congressman Shays: 

Office cl \.egislalive Affairs 

February 13, 2008 

Thank you for your letter mi behalf o======== gal!iing an application for 

deposit insurance filed on__bebaJf o{Jiil G.J ! ~ticut.~s~ several concerns re 

Federal Deposit Insurance Co:rporation's review of the application. 

· As you are aware, the FDIC is required to assess each application for deposit insurance relative 

to the seven statutory factors cnumerat:cd in section 6 of the FDI Act While this assessment 

must consider the unique nature and complexity of each proposal, please be assured that the 

FDIC strives to process applications within a reasonable time, given the facts and circumstances 

of the application. The FDIC is actively reviewing this case and will inform the applicant of our 

decision as soon as it is complete. 

Your interest in this matter is appreciated. H you have further questions, the Office of 

Legislative Affairs can be reached at (202) 898-7055. 

~incerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
02/04/2009 15:16 2033571058 a:J.lGRESSMAN SHAYS PAGE 02/10 

L4 oi-03~ 

CONC~RESS OF TI-IE UNITED STATES 

February 4, 2008 

Mr. Eric Spitler, 

Director of the Office of Legislative Affairs 

Federal Deposit Insurance Corporation 

550 17th Street NW 

Viashington, DC 20429-000 l 

FDIC· 

fffj - 5 2008 

Dr!ar Mr. Spitler: OFFICE OF LEGISLATIVE AFFJ 

insurance. 

According t 

applied for a national thrift charter on May 25, 2007 and received 

preliminary approval from the Office of Thrift Supervision on 

N,Jvember 19, 2007. On July 9, 2007, the bank also submitted an 

application to the Federal Deposit Insurance Corporation (FDIC). 

The bank's senior officers and organizers were interviewed by 

FDIC field personnel during September, 2007. After numerous 

m~etings with FDIC personnel, the FDIC area office in Braintree 

and the FDIC regional office in New York City forwarded bank's 

application with a recommendation for approval to the FDIC in 

\Vashington, DC during the week of January 71 2008. 

~ is hoping for a Febroary 20, 2008 

opening and would probably be appy with a February 27 or 

March 5 opening. The bank was told last summer that the FDIC 

w.:>1tld complete th.e field review on their application in four 

months and then make a decision on their application in · 

~•proximately six weeks. The bank will experience significant 

expense if they cannot open their doors within the next few 

w,?eks. The bank has been hiring staff and incurring costs for 

facilities and computer equipment. 

Coniresstnan Christopher Sha)i'. Fourth District Connecticut 

tJ2fi umgwortb House Office Building. W.ubillga>n. DC 2DSl.5--070C 

lh.n,<;~11.T• .579-~7D • NOll.'W,\,ll::: ~ • RlocEftnl;l- -t.'\6-595l • SAaTm-1: '4112--0425 

STAMF1".,._~ .l57--1277 • WA...-.mtJc:m,,t. OC.:1 20l/22S-~'i'4l 

E-m.aH: r9uhays@nuil.hr:i0sc.iov • Internet: .,.;..,,.._hous:e.fcYV/sh&~ 
021041200a 1s:16 2033s110s0 l?AGE 03/10 

Mr. Eric Spitler, . - February 4, 2008 -:- Page 2 · 

as told last summer that the 

FDIC would complete the review on their appli~tion in four 

m-=,nths and then make a decision on the application six weeks 

subsequent to that I would appreciate your review of the 

er.closed correspondence and any assistance you can provide to 

assist my constituent, · 

Please direct your reply to: 

Congressman Christopher Shays 

Attention: Vincent Chase 

Reference: #114223 

io Middle Street, 11th Floor 

Bridgeport, <;onnecticut 06604-4223 

Thank you for your time and attention to this matter. . . 

CS:jvc 

Enclosure 
ron ••«1ctiontract ,, •• , 

At this point in this docwaent 1 

withheld totally because of th4--follow1ng: page{s) have/has been 

' 

~] Tha information was withheld pursuant to the following su.bseotlon of the Freedom of Information Act: 

P1 

M 

lXf 

[ ] 

(b) ( 4) 

(b) (5). 

(b) (6) 

(b) . (7) 

(b) ( 8) 

(A) (B) (C) (D) (E) 

Tha· paga(s) being withheld may be referred to as: 

COMMENTS: 

{F) 
atnngress nf f4e lllnittil .§fates 

l!Imdfingtnn, D« 21l515 

February 20, 2008 

Mr. James H. Freis, Jr. 

Director 

Department of Treasury 

Financial Crimes Enforcement Network 

2070 Chain Bridge Road 

LAO'i-01/.? 

FDIC 

FEB 2 6 2008 

Vienna, VA 22182 OFFICE OF LEGISLATIVE AFFAIRS 

Dear Director Freis, 

We, as Chair of the House Financial Institutions and Consumer Credit subcommittee and 

as a Member of the House Committee on Foreign Affairs respectively, and as co-chairs of the 

Americans Abroad Caucus, are very concerned over the reports that American citizens living 

abroad are being denied access to United States banks. 

According to diff etent organizations representing Americans abroad, a large number of 

American citiz.ens residing abroad have been denied new accounts with American banks and in 

some instances accomts that ~ve existed for some time are being tenninated by the bank over 

the objections of the account holder. The banks involved reportedly attribute their activities to 

the Know Your Customer requirements of the Patriot Act. 

It is our view that neither the Patriot Act nor the regulations thereunder preclude an 

American citiz.en living abroad from having an account with an American bank. That view is 

.apparently shared by the State Department which has issued a letter for American c:itizens living 

abroad to give to their bank stating· that the Patriot Act does not explicitly prohibit American 

banks from having American clients who reside overseas. Apparently, several overseas residents 

have shared this letter with their banks but the banks still close their accounts citing regulatory 

guidance. 

We would very much appreciate your guidance on how we can resoJve this issue. As the 

agency responsible for coordinating regulatory implementation of the Know Your Customer 

provisions, the Financial Crimes Enforcement Network should be working with the other federal 

banking regulators to make sure their guidance does not prevent Americans living abroad from 

having United States bank accounts. We look forward to your timely response. 

Member of Congress_ 

Sincerely, 

l'RINTED ON RECYCLED !'APER 

JOE"WaSON 

Member of Congress 
CC: Secretary Henry M. Paulson (Department of the Treasuzy) 

Chairman Ben Bemanke (Federal Reserve Board) 

Comptroller John C. Dugan (Office of the Comptroller of the Currency) 

Chairwoman Sheila C. Bair (Federal Deposit Insurance Corporation) 
L LEVIN Ml~CWC 

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February 26, 2008 

Eric J. Spitler, Director 

Office of Legislative Affairs 

WASHINGTON, DC 20510-U02 

Federal Deposit Insurance Corporation 

550 1? Street, N.W. 

Washington,D.C.20429 

Denr Mr. Spitler: 

FDIC 

FEB 2 7 2008 

OFFICE OF LEGISl.ATIVE AFFAIRS 

The Fair Trade Commission has designated the week of March 2 through 8 as National 

Consumer Protection Week and is seeking every opportunity to bring vital information to 

the general pubhc, but more specifically, to those communities at greatest risk of fallmg 

pry to unethical financial solicitations. Our residents arc prime targets of some of these 

credit and loan opportunity schemes. With our high unemployment a.nd mortgage 

foreclosure rates, residents are responding to many of these solicltations as an answer to 

their indebtedness and financial debacle. -I believe it-is imperative tlpt the community be 

armed with information that will help them to make sound decisions when it comes to 

their finances. This is an opportunity for us to do that. 

I am writing to invite F.D.I.C. to participate as a partner and cosponsor of the financial 

Iitcrai:y workshop for residents of the Greater Metropolitan Detroit Area. I have inVlted 

and received commitments from the Federal Trade Commis.sion and several local 

relevant organizations including-the Detroit Alliance for Fair Banking. the Michigan 

Poverty Law Program, ELE Wealth Management and Wayne County Community 

College District FTC suggests that the Ccnporation would have significant resources and 

information to contribute to this effort. · 

The half-day, free workshop WI11 be held on Saturday, March 8 from 9:00 am- 12 noon, 

at the downtown campus of the Wayne County Community College District. I hope you 

will join me in this community education opportunity. Please contact Cassandra Woods, 

in my Detroit office for further disc:ussion or questions. She_ can be reached at 313-226-

6020. 

Thank you in advance for your attention and cooperation. 

cc. Ka~ecn S. Bruegcr 

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OIT ALLIANCE 

R FAJR BANKING Jl :.1 

oit1 

. . .. 

U.S. SENATOR CARL LEVIN 

IN PARTNERSBJP WITH 

T~ FEDERAL TRADE COMMISSION, F.D.LC., 

THE DETROIT ALLIANCE FOR FAJR BANKING 

AND 

WAYNE COUNTY COMMUNITY COLLEGE DISTRICT 

Present 

A Continuing Education Opportunity for Residents of Southeast Michigan 

A Free Financial Literacy Seminar 

PREVENTING A FINANCIAL 

CRISIS!· 

An Informational Forum on how to Identify and Avoid Credit and Financial 

Fraud, PredaJo,y Lending, Student Lo,m, Business Opportunity, Credit Cari 

Scam~ and other ,msc~ulous inYestm.ent activities millions of M"ichigan. 

· consumers fall prey to every day. 

SSS$S$S 

SATURDAY, MARCH 8, 2008 

9:00 AM - 12 NOON 

WAYNE COUNTY COMMUNITY COLLEGE DISTRICT 

DOWNTOWN CAMPUS· 

1001 W. FORT STREET 

DETROIT, MI 48226 

(Free Cuipm Parking) 

General Public Invited - Participation is Free 

Special Guest Speakers: Ellis Liddell, CEO, ELE Family of Companies 

Lorray Brown, Atty, Michigan Poverty Law Program 

A Representative from the FDIC 

John Steiger, Federal Trade Commission 

RSVP by calling: 311-216-6020 or 313-871-9050 

7 '-' H~9 'ON 
- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington. oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Harry Reid 

Majority Leader 

United States Senate 

Washington, D.C. 20510 

Dear Senator Reid: 

March 27, 2008 

Thank you for your letter regarding the upcoming seminars being developed by 

the Federal Deposit Insurance Corporation and NeighborWorks America to provide 

information to agencies and community organizations working with borrowers to avoid 

foreclosure. The FDIC shares your concern about the rapid rise of foreclosures in 

Nevada and we plan to bold the first seminar in this series in Las Vegas in May 2008. 

I have asked Mr. Robert W. Mooney, Deputy Director, Division of Supervision 

and Consumer Protection, to coordinate these efforts. He has been in contact with your 

staff and will continue discussions with them as plans progress. Mr. Mooney can be 

reached at (202) 898-3911. 

If you have furthec questions, please do not hesitate to contact me at (202) 898-

6974 or Eric J. Spitler, Director of our Office of Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
HARRY REID 

HEVACIII 

MAJORllY LEADER 

Chainnan SheiJa Bair 

ilnittd ~tatts ~rnatr 

WASHINGTON, DC 2051~7012 

February 25, 2008 

FDIC 

1. 

Federal Deposit Insurance Corporation FEB ~ 6 2008'' 

S50 Seventeenth Street, NW, Room 6076 

Washington, DC 20429 

Dear Chairman Bair: 

OFFICE OF LEGISLATIVE AFfAIRS 

I understand that the Federal Deposit Insurance Corporation and NeighborWorb . 

America are planning a series of cQnfcrencc seminars for housing counseling agencies that 

assist borrowers in avoiding foreclosure. I am writing to urge you to select Nevada as one of 

the first sites for a conference. 

Nevada has been hit particularly hard by foreclosures in the past year. According to 

RealtyTrac data, Nevada had the highest foreclosure rate in the nation ]asfyear, with 3.4 

percent of its households receiving foreclosure filings. That was more than three times the 

national av~ragc. In addition, Las Vegas posted the third highest metro foreclosure rate 

among the 100 largest metropolitan areas in 2007, with 4.228 percent of its households 

entering some stage of foreclosure during the year. A total of 59,983 foreclosure filings on 

30,375 properties were reported in the metro area during 2007, up 169 percent from 2006. 

What's more, the Center for Responsible Lending has predicted that forccJosures on 

subprime loans originated in Nevada in the last ten years could result in a total loss of $3. 7 

billion in home equity statewide. That includes not just Nevada homes that have gone · 

through foreclosure proceedings. but neighboring homes a.s wc11. CJcarly, Nevada 

neighborhoods, communities, and - given the significant, economic ripple effects - our 

country al) have a stake in our responding aggressively to buffet the expected tide of future 

foreclosures. · 

. . . . 

The program that I understand is being developed by the FDIC an9 NeighborWorks 

would provide infonnation and training for agencies seeking to assist troubled borrowers in 

avoiding foreclosure. This program would be particularly valuable in Nevada, where 

foreclosure filings have reached crisis proportions, and an important complement to the funds 

that Congress appropriated for foreclosure cc,unscling. 

My office would be happy to assist you in scheduling the program and ensuring that 

it reaches as many Nevada residents as possible. Please have your staff contact Marie Wetjcn 

of my office to disc~s this matter at the earliest possible _date at (202) 224-6964. 

My best wishes to you. 

. 

! 

1 
e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN March 27, 2008 

Honorable Tom A. Coburn, M.D. 

United States Senate 

Washington, D.C. 20510 

Dear Senator Coburn: 

Thank you for your letter requesting information regarding any .. continuing earmarks" 

that might be required under the Federal Deposit Insurance Corporation's funding. 

With two minor exceptions discussed below, the FDIC does not receive annual 

appropriations that govern its operations or budget. The FDIC derives its income principally 

from earnings on investments in U.S: Treasury obligations and insurance assessments paid by 

insured banks and savings institutions. These funds are aggregated in the Deposit Insurance Fund 

(DIF) which is administered by the FDIC. The FDIC operates on a calendar year basis _and its 

budget is approved annually by the FDIC Board of Directors. Therefore, there are no continuing 

earmarks that apply to the FDIC's funding. 

One area where the FDIC has been subject to the appropriations process is for the Federal 

Savings and Loan Insurance Corporation (FSLIC) Resolution Fund (FRF), which fulfills the 

obligations of the former FSLIC and the Resolution Trust Corporation. The FRF is authorized to 

receive and utilize appropriated funds only to the extent that its other sources of funds are 

insufficient to satisfy its liabilities. Public Law 103-327 provided $827 million in funding for the 

FRF in a multi-year appropriation to be available until expended. Currently, the amount of the 

appropriation still available is $602.2 million. There are no continuing earmarks that apply to this 

funding. ., 

In addition to the FRF, the FDIC's annual budget includes planned expenditures for the 

FDIC Office of Inspector General (FDIC OIG). However, the FDIC OIG op~rates pursuant to the 

authority of the Inspector General Act. The FDIC OIG is funded by DIF through an 

appropriation under the Financial Services and General Government Appropriations Act No 

earmarks are associated with the FDIC OIG appropriation. 

If you have further questions or comments, please do not hesitate to contact me at (202) 

898-6974 or Eric Spitler, Director of Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
COMMITTcE ON INDIAN AFFAIRS . tlnittd ~tatt.s. ~rnett COMMfTTEE ON HEAL TH, EDUCATION, 

LABOR, AND PENSIONS 

COMMITTEE ON HOMB.ANO SECURITY 

AHO GOVERNMENTAL AFFAIRS Senator Tom Coburn, MD 

Ru11SBII Senate Office Building, Room 172 

Washington, DC 20510-3604 

Phone: 202-224-5754 

COMMITTEE ON THE JUDICIARY 

. IWIUIG _.. 

SUIICOM_... ON i:.-&. FlliANaAL M.ua,t.aa,en", 

GovEIINMINf lNfollMATION ANO 

!Nmu,A"TIONAL S&cullnY 

Sheila C. Bair 

Chairman 

Fax: 202-224-6008 

February 28. 2008 

Federal Deposit Insurance Corporation 

550b 17th Street, NW . 

; 

.. '"':· ~·-. ., ~ . ' W ashingto~ DC 20429 -.9990 

OFFICE OF THE __ CHAlRMAN 

Dear Chairman Bair, 

Congress ~ent more than $18 billion on earmarked project.c:; in the cu.,,-ent fisciil 

year. Many of these are new projects but this number also includes "continuing 

earmarks," that is Congressional spending initiatives that receive ftmding over a period of 

years. 

Please provide the following infonnation regarding your agency's/department's 

annual appropriations: 

1) A list of all "continuing eannarks," defined as earmarks funded in at least three of 

the last five fiscal years, including FY 2008; 

2) The name and location of the recipient of each of the "continuing earmarks" 

identified; 

3) The total dollar amount spent to date and by fiscal year for each of the continuing 

earmarks identified; 

4) A summary of the specific objectives and goals that are expected to be achieved 

for each continuing eannarlcs.identified; 

S) A list of notable accomplishments, if there are any, that can be directly attributed 

to each of the continuing earmarks; 

6) A list of any grant programs within your agency/departments that provide federal 

assistance for purposes similar to the activities being funded for each of the 

continuing earmarks; 

7) A determination as to whether or not the recipient of each of the continuing 

earmarks applied for any of the available grants. 

~&,: 

~-~~ilqv-
Thank you for you assistance with this request Please do not hesitate to contact me 

or Drew Berky of my staff at (202) 225-5754 if you have any questions. 

j 
FDII 

Federal Deoosit Insurance Corooratlon 

550 171h Street NW, Washington, DC 20429 

Honorable Eleanor Holmes Norton 

House of Representatives 

Washington, D.C. 20515 

Dear Congresswoman Norton: 

Office of Legislative Atfm 

March 27, 2008 

Thank you for your invitation to participate in the Access to Capital Fair scheduled to be 

held on April 8 at the Washington Convention Center. 

We are pleased to accept your invitation. Ms. Velda Fludd of the Federal Deposit 

Insurance Cmporation's Minority and Women Outreach Program in the Office of 

Diversity and Economic Opportunity completed the required registration process for the 

FDIC's participation in this event. Ms. Fludd can be reached at (703) 562-6071 or 

VFludd@fdic.gov. 

If you have further questions, the Office of Legislative Affairs can be reached at (202) 

898-7055. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
~ 

... . . ff_-

~ 

• ..:...;.,, .. ,.~ 

.Dlst,.,-a,~- ~-~ 

SUBCOMr.'ITT'T!E&: 

~ • nf ""~ 5bttts Jlpttst;J.tf~fb!g 

•s~an;U. ZlTll!i, 

Ms. Linda 0. Washington M.a-rchS,200!· 

Mi,zwrity.and Women Outreach~ Speci11li$t 

Oit1.ec of Diversity 8'8.r.i :Economic: OppmtunitY. 

-~ Deposit ~~e Corporation 

Jc!iOl FAJRFAXDR.RM,.E2016 

Arlington, VA 22226 

Dear Ms. Wo.sbington: 

JlfirL 

stJICOMl,f(flEEBl 

~~flOSTAL. 

~--..Cl>~ Qf Cl)LU'4111A 

• ~ ~ OFClill,,IJllllll~ 

On Toesday1 April ~ l808, I wm h6s't an all-day .. Access to Capital Fair" .&om 8:00 a.m. to 4:00 p.lll. in the 

... WashingtQ.a Co'D'llcntion Center (SQl Mouctt Voruon.Placc, NW) for D:C. tes.idau.s lWd stnaUbu's.jn~seii-. ~ Fair 

· r~ds to the two issues·D.C. husi:nessi,s mo.st often lul\re raised with me·- the inability to. pin access I.a sufficient 

capital ond the prohli;ms associatml w!th a~ to Federal govttnmc:-m ~ opportlir\jties,.. 

Because tho .im:ie of gainiag capital is perlr.lps the single most important challeqe. for small businesses., [ want t.o 

personally askyw to partic;i_pate in my Fair to give D.C. iunall bwinosscs the opportunh;y to le.am ~ut the ~cti.ng 

OJIP(lt1Un.iaes available with '/Ottr agea,;y. I ui askin_g you to pa,,t;icf:p'1fe in o~ cq~eIJng, sessions, fflJ;icl1 

WJ°9 begin at 1:4$ pm, wit'h O.C. small l,~ also that r.in Jtith . a 1M, ·· .contracts Chat 

oal' is let m that · • can . :ar af--tllese o ~ a.ad lelim from 

vou the~--form,e•ufhJlr._ ¥ddbir on ag~ winning sw:h eo11~ Th1, event has been very wcU at1.cnded 

in.-the piist-almost 400 small business people attended last·year. Wc.c;q,cc;,=: rea,r, to repeat this success and build 

upon it. 

Attached ltTe Ihe Exhibitor Registration Fann and Tenfative Agenda for the Eiay. If you apcc,. to participate, as l 

sinc:ercly hope YOlJ will, p~ plan to arrive no l.ater ~ 1 :00 p.19. :hi ,mler- to set \IP )ll)W" table. Nease reply to ud 

address your qucsti~ to Gwd:l BGn.SOn-Walker at Gwen.BensonW•lker@MaiU-latJH.Gov or{202) 783-5065. 

l look forward lo seeing you on April If"'. 

ehn:ls 

Enclosures; Exhibitor Registration Form 

T cntativc. Agcnda 

S:incercfy • 

Eleanor~Norton 

Merow of Cl:lngress 

Thi$. Mailing was Prepared, Published, and MaHed at T~yer Expense. 
CONGRESSWOMAN ELEANOR HOLMES NORTON'S 

Small Business Access to Capital Fair 

Tentative Agenda 

Time Activitv Comments 

8:00 am - 9:00 am Check-in/On-site Registration Arrive earty for check-in.to avoid 

last minute seating delays. 

9:00 am - 10:45 am GENERAL SESSION Opening Remarks: 

Congresswoman Eleanor 11 ACCESS TO CAPITAL" Holmes Norton; 

Kevnote Address 

* Additional questions will be 

addressed individually at the 

Exhibitor Tables from 1 :45 pm to 

4:00 pm (following the final 

workshoot 

10:45 am -11:00 am BREAK/Networkino 

11:00 am-12 noon Concurrent Momina Workshoos 

12 noon- 12:30 om LUNCH (on your own) 

12:45 pm-1:45 pm Concurrent Afternoon Workshops * Additional questions will be 

addressed individually at the 

Exhibitor Tables ~m 1 :45 pm to 

4:00 pm (following the final 

workshoo). 

1 :45 pm - 4:00 pm Ona-on-One meetings with bank, 

credit union and contracting officer 

officials to discuss loan deals and 

contracts 

4:00 pm Fair Concludes 

/ 

THIS MAluNG WAS PREPARED, PuBUSHED, AND MAILED AT TAXPAYER ExPENSE 
CONGRESSWOMAN ELEANOR HOLMES NORTON'S 

Small Business Access to Capital Fair 

Exhibitor Registration Form 

Date: April 8, 2008 

Time: 

Place: 

1 :45 pm - 4:00 pm 

Washington Convention Center 

801 Mount Vernon Place, NW 

Washington, DC 20001 

Please Affix Your Business Card Hete. 

Type o,: Print Clearly. lncqmplete Forms Cannot Be Accepted. 

Name: D Mr. D Ms. D Other. _____ _ 

IIS (Middle Initial) (Last) 

Business Title: 

Business Name: 

Address: 

State: _______________ _ Zip Code: 

Phone: Voice: _________ _ Fax: ------------ Email: __________________ @ __________ _ 

Type of Business: _____________________________ _ 

Ste 1 

Step 2 

Ste 3 

Action to Take Comments 

Com lete this Re istratlon Form. 

Immediately fax or mall this completed Fax to: (202) 783-5211 

Form to register. 

Direct 

Mall to: Cong. Eleanor Holmes Norton 

ATTN: Gwen Benson-Walker 

529 14TH ST NW STE 900 

Washington, DC 20045-1928 

Re istratlon Form must be received 

uiries to: Gwen Benson-Walker at 202 783-5065. 

ll'tt'"fentative Agenda on Reverse_. 

THIS MAIUNGWAS PREPARED, PuBUSHEO, AND MAILED AT TAXPAYER B<PENSE 
FDII 

Federal Deooslt Insurance Corooration ~

550 17th Slreet NW, Washington, DC 20429 Division d Supervision aoo Consumer Protection 

Mr. Aaron Santa Anna 

Assistant General Counsel 

Regulations Division, Office of the General Counsel 

Department of Housing and Urban Development 

451 Seventh Street, S.W., Room 10276 

Washington. D.C. 20410 

Re: FR-5180-P-01- Request for Comment on the Real Estate Settlement Procedures Act 

(RESPA) Proposed Rule 

Dear Mr. Anna: 

On behalf of the Federal Deposit Insurance Corporation. I commend the Department of Housing 

and Urban Development for proposing revisions to _the RESP A regu]ations to address certain 

consumer protection concerns that have arisen in the context of the residential mortgage lending 

and settlement process. 

Expanding consumer protections at this time is crucial. Over the past two years. poor 

underwriting and abuses in the subprime mortgage market have led to significant negative 

impacts on consumers, housing markets, and the U.S. economy. As large numbers of subprime 

adjustable rate mortgages continue to reset to higher in~t rates, and a growing number of 

homeowners face foreclosures, we have overwhelming evidence of the effects of inadequate 

disclosures. It is therefore critically important, going forward, to ensure that consmners are 

informed in a clear and simple manner of how the financial products they use work, and what the 

costs and tradeo.ffs of different options arc. · 

Overall, we believe that HUD's proposal would result in consumers receiving more effective 

information about settlement and other third-party charges than they do under the cunent rule. 

Toe proposed revisions also should help consumers better understand how origination and other 

fees can impact the cost of a mortgage loan. The earlier availability of and more relevant 

information on the Good Faith Estimate (GFE) should promote comparative shopping that will 

enable consumers to make more informed .financing decisions. Finally, the revisions should 

assist consumers in identifying differences between the estimates provided on the GFE and 

actual costs charged at closing. 

However, as discussed in more detail below, we have concerns about the length of the proposed 

GFE and the fact that it does not contain important information about certain loan costs. In 

addition. the proposed GFE does not explain that yield spread premiums (YSPs) are lender 

payments to brokers that encourage brokers to place consumers into loans with higher interest 

rates. We believe that the interests of consumers would be best protected if HUD bans YSPs and 

allows brokers to be fairly compensated by alternative means. 
1. Proposed GFE Forms 

We commend HUD for testing the proposed standard GFE with consumers, and we consider it to 

be an improvement over the current model form. However, we are concerned about whether the 

proposed GFE truly provides information that consumers need in an easily understandable 

format. 

This observation is primarily a result of our involvement in an interagency project to develop 

model privacy notices for consumers. We tested model forms through a variety of methods -

focus groups, preference testing, and diagnostic utility testing. These.different methods enabled 

the agencies to explore how and why consumers understand and make sense of information 

provided to them. We learned that additional information often makes a form less useful because 

the basic concepts arc overlooked, and that items of interest to policy experts often do not 

convey information that consumers use. At four pages, the proposed GFE may be too long and 

provide too much information for it to be understood and appropriately used by COil$UID~. 

ln addition, at least two important facts related to the cost of a loan are not communicated by the 

proposed GFE. The first omission is information regarding payment shock - a significant 

increase in the amount of the monthly payment that gcnc:rally occurs as the interest rate adjusts to 

a fully indexed basis or when principal begins to be amortized. Given lhe potential for payment 

shock embedded in nontraditional and subprime adjustable rate products, the GFE should explain 

when an initial rate expires and when monthly payments can or will increase. As propos~ the 

GFE lists the initial interest rate and monthly p~yment, and states whether they can rise, md the 

maximum to which they can rise. However, there is no information about when this can happen. 

The second important omission is that the proposed GFE docs not inform borrowers that there 

are additional costs associated with '1ow-doc" or ''no-doc" loans. Typically, these additioria1 

costs arc reflected in a higher annual percentage rate (APR) than what is available for a 

comparable "full documentation" loan. It is essential for consumers to be aware of the true cost 

of ••iow-doc" or ''no-doc" loans. 

2. Ten Percent and Zero Tolerances 

At settlement, the proposed rule prolnoits loan originators from increasing certain settlement 

charges that exceed the sum of 10 percent of the charges first identified on the GFE, absent 

unforeseeable circumstances. Certain other settlement charges may not exceed the amount 

provided on the GFE, absent unforeseeable circumstances. Failure to comply with tolerances 

would be a violation of Section 5 of RESP A. 

These provisions may help prevent some consumers from being surprised by higher costs at 

closing; however, they will not go far enough if the final rule does not provide a mechanism to 

enforce the applicable tolerance. Accordingly, the sample closing scripts also should provide 

information about what will be done to remedy the overcharge or where to file a complaint about 

the overcharge. 
The proposal states that IBID is considering including in the final rule a provision that allows a 

loan originator to be in compliance with Section 5 if, within a specified period (such as 14 

business days) after the closing, a loan originator repays the excess amount to the consumer. We 

suggest that the most effective and direct way of enforcing the tolerance requirements would be 

to require the settlement agent to subtract from the lender's service charge at closing any 

amounts that exceed the tolerance. This would provide an incentive for the lender to provide 

accurate estimates about third party charges and serve as a sufficient remedy for consumers. 

Certainly, a monetary remedy to consumers-for excess charges needs to be a part of the 

regulation. lithe only remedy is for a consumer to walk away from the settlement table after the 

loan has been processed and the consumer is about to be given the keys to the house, the 10 

percent tolerance requirement will not ~mplish HUD's objectives. 

3. Closing Script 

HUD' s proposal to add a "closing script" addendum to the HUD-1 form is an innovative 

approach for informing consumers about their mortgage at closing. The proposal would require 

a settlement agent to orally apprise a borrower of the mortgage loan terms at settlement. 1bis 

type of approach could encourage borrowers to ask questions and help inform them of the costs 

and terms of the loan before consummating the transaction. For example, one good feature of 

the closing script is the requirement to have the settlement agent disclose and explain any 

inconsistencies between the GFE and HUD-1 disclosures. This will help ·a borrower understand 

why there might be any variations between prices quoted on a GFE and prices quoted at 

settlement. The script is especially helpful in making plain the negative financial consequences 

for a consumer of entering into an unconventional lom product such as an interest-only loan. 

However, as discussed previously, one major shortcoming is that there is no information in the 

script or other materials about what a consumer can do if the loan originator exceeds the 

pemriSSI"ble tolerance. 

4. Average Cost Pricing/Negotiated Discounts 

The FDIC understands ffiJD's intent to facilitate arrangements that benefit consumers by 

interpreting RESP A requirements to permit the use by lenders of pricing mechanisms such as 

average cost pricing and volume-based discounts. We agree with the HUD Secretary's 

determination that the agency's implementation ofRESPA should permit greater flexibility for 

cost pricing formulas that bring more innovation and increased price competition to the 

settlement process. We recognize the value ofHUD's proposal to amend the definition of the 

tenn "thing of value" for purposes of section 3500.14 to exclude discounts among settlement 

service providers. The FDIC particularly supports the proviso to the revised definition that no 

more than the discounted price may be charged to a borrower and disclosed on the HUI).. I form. 

We are concerned generally, however, with the use of mechanisms rucb as average cost pricing 

on the following grounds: 
1. We are not aware of an appropriate means of evaluating whether overall consumer costs 

would decline as a result of average cost pricing. 

2. Even if the practice should result in reduced overall costs for mortgage settlement 

seivices for some borrowers, other borrowers will pay more for a service than is 

warranted by the circumstances of their particular Joan. 

3. The proposal does not include controls to ensure fairness, for example, to ensure that 

lenders ca1culate average costs appropriately . 

. 5. Yield Spread PremillJDS (YSP) 

We support HUD' s objective to provide information about lender payments to mortgage brokers 

known.as YSPs. The proposal would require brokers to disclose such payments as a credit for 

the specific interest rate chosen by a borrower. However, as explained below, the FDIC has · 

some fundamental concerns about the proposal's approach to YSPs. 

First, the proposed GFE docs not clarify th.at a YSP is a payment made by a lender to a mortgage 

broker in exchange for referring a borrower willing to pay an above par interest rate. Nor does 

the GFE state the amount of the YSP to be paid to a broker. Instead, the GFE seems to presume 

that the lender will apply the YSP as a "credit" that will lower settlement costs by a 

corresponding aJJlount However, the proposal does not impose the condition that a YSP must 

actually function as a credit to a borrower as a requirement on lenders or brokers. While the 

proposal's effort to provide borrowers with more information about the tradeoff between interest 

rates and settlement costs is positive, this information alone does not provide bonowers with an 

understanding of the economic incentives motivating the lenders and brokers with whom they 

arc dealing. 

The inherent conflicts presented by a broker compensation system that rewards increasing the 

cost to the borrower have been debated for years. To be sure, mortgage brokers can provide 

valuable services and should receive fair compensation. However, there are alternative means of 

compensation available, such as flat fees or fees based on the total principal amount of the 

mortgage, that would not present skewed incentives to increase borrower costs and which would 

be much more transparent and understandable to borrowers. The same can be said for 

commissions paid to loan officers. 

Borrowers should continue to have the option to finance the broker's compensation. However, a 

ban on YSPs will ensure that broker compensation will not be based on steering the consumer to 

a loan that is more expensive than one for which he or she would otherwise qualify. HUD 

should modify its longstanding interpretation that YSPs are not prohibited under RESP A. 

Accordingly, HUD should ban any amount of compensation based on increasing the cost of 

credit, including compensation that is tied to the APR, or that is not a flat or point-based fee. 

If YSPs continue to be permitted. their purpose and cost should be disclosed clearly. The 

disclosure should inform the consumer that the broker is receiving a payment from the lender for 

placing the consumer in a loan with a higher interest rate. A YSP should not be identified as a 

'"credit" on the GFE form because such language would tend to make consumers believe that 

they are deriving a .financial benefit from a YSP. In addition, the statement, .. This credit reduces 
your upfront charge" should be deleted because it is not balanced by a corresponding statement 

that informs consumers that the YSP will result in them paying a substantially higher interest rate 

over the life of the loan. 

6. Increased Enforcement Authority 

The FDIC recognizes the value of the proposal to scclc legislative changes that would provide 

HUD with uniform enforcement authority and protect consumers in the real estate settlement 

process. The lack of enforcement authority and clear remedies for violations of RESP A 

negatively impacts consumers and diminishes the effectiveness of the statute. HUD' s proposed 

legislative changes would provide additional protections for consumers in the mortgage 

origination and real estate settlement process, and would level the playing field between 

federally regulated banks and thrifts and other lenders. 

We appreciate the opportunity to comment and encourage HUD to consider the FDIC's 

recommendations to help clarify the settlement process for consumers. 

Sincerely, 

Sandra Thompson 

Director 

Division of Supervision and Consumer Protection