e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN April 7, 2008 

Honorable Ben S. Bemanke 

Chainnan 

Board of Governors of the Federal Reserve System 

20th Street and Constitution Avenue, N.W. 

Washington, D.C. 20551 

Re: Request for Comment on the Proposed Amendments to the Mortgage Provisic:>ns of 

Regulation Z (Docket No. R-1305) 

Dear Mr. Chairman: 

On behalf of the Federal Deposit Insurance Corporation, we commend the Board of 

Governors of the Federal Reserve System (FRB) for proposing amendments to Regulation Z, 

which implements the Truth in Lending Act (TU.A) and Home Ownership and Equity Protection 

Act (HOEPA), to help address the numerous consumer protection concerns that have arisen in 

the context of residential mortgage lending. In recent years, a wide segment of the U.S. 

residential mortgage market experienced a systematic breakdown in lending standards-fed in 

large part by regulatory arbitrage between bank and nonbank originators. This breakdown in 

standards has harmed the nation as a whole, and has triggered a severe disruption in global credit 

markets. The uncertainty that now pervades the marketplace-which is directly attributable to 

weak underwriting practices-has seriously disrupted the functioning of the sccuritization 

markets and the availability of mortgage credit. Lax underwriting contributed to the housing 

market bubble.just as widespread foreclosures are now contributing to the market's precipitous 

decline. creating Iong-tenn adverse consequences for communities across the country. 

These events demonstrate that credit provided on irresponsible or abusive terms does not 

benefit consumers, and does not provide a firm foundation for economic growth or stability. 

Restoring the mortgage credit markets to their proper functioning requires clear definition and 

enforcement of the principles of sound underwriting for mortgage loans. Thus, the FRB has an 

important opportunity with this rulemaking to establish strong, clear standards for responsible 

mortgage lending practices that will help prevent these problems from recurring. The FDIC 

appreciates the opportunity to provide the following comments on the proposed amendments: 

1. Scope of the Proposed Rules 

The FDIC agrees that the definition of a higher-priced mortgage Joan should include 

transactions secured by the consumer's principal dwelling for which the annual percentage rate 

(APR) on the loan exceeds the yield on comparable Treasury securities by at least three 

percentage points for first-lien loans, or five percentage points for subordinate lien loans. We 
think that the APR triggers arc appropriate and the FRB should not consider raising them. 

However, the FDIC recommends that the FRB also incorporate an alternative fee trigger into the 

definition of a higher-priced mortgage loan, similar to the one currently applicable to HOEPA 

loans. The risk is great that creditors will circumvent the proposed APR restrictions by lowering 

interest rates below the APR trigger and instead charging consumers more and higher fees on 

their loans. This would significantly harm consumers. 

As noted above, HOEPA loans as currently defined have not only an APR trigger but alio 

an alternative points and fees trigger to help avoid circumvention. The points and fees trigger 

defines a HOEP A loan as one in which total points and fees paid by the consumer exceed the 

greater of 8 percent of the loan amount or a set dollar amount ($561 for 2008). 1 Points and fees 

are defined to include all finance charges except interest, as well as non-finance charges, such as 

closing costs paid to the lender or an affiliated third party.2 In fact, because HOEPA coverage is 

based not only on the APR but also on points and fees charged by the lender, some loans qualify 

only because of the fees charged. Thus, including a fee trigger for higher-priced loans will 

eliminate the ability oflenders to shift charges to fees not included in the calculation of the APR, 

thereby avoiding the APR trigger for higher-priced mortgage Joans and circumventing the 

intended protections of the new rules. 

In addition, the FDIC recommends that the prohibitions against extending credit without 

considering a borrower's ability to repay, stated income underwriting, and teaser rate 

underwriting should apply to negative or deferred amortization products such as the interest-onJy 

and payment-option adjustable rate mortgages (ARMs) described in the interagency 

nontraditional mortgage guidance, regardless of whether they would meet an interest rate or fee 

trigger. 3 These points are discussed in more detail below. 

Finally, the FDIC recommends that the FRB consider extending the protections proposed 

in§ 226.35(b) to reverse mortgages. The FRB excJuded reverse mortgages from this proposal 

because it has not identified significant abuses in the reverse mortgage market.4 However, there 

is evidence that significant abuses do exist in the reverse mortgage market and are on the rise.5 

Reverse mortgages are becoming increasingly popular with seniors, and unscrupulous lenders are 

taking advantage of that fact by prom9ting products that are not always in their best interest. 

This is reminiscent of the behavior of unprincipled subprime and nontraditional mortgage lenders 

as those products gained in popularity. Because reverse mortgages present some unique 

potential drawbacks for seniors, including high costs that are not clearly disclosed or understood, 

the FRB should address these problems sooner rather than later. If the FRB does not reconsider 

1 The exact dollar amount is adjusted annually, based on the Consumer Price Index. 1 The fee-based trigger also includes amounts paid at closing for optional credit life, accident. health. or loss-ofincomc insurance, and for other debt-protection products written in connection with the credit transition. 3 Sec lnteragency Guidance on Nontraditional Mortgage Product Risks (Nontraditional Mortgage Guidance), 71 

Fed. Reg. 58609, 58617 (Oct 4, 2006). 

' 73 Fed. Reg. 1672, 1682 (Jan. 9, 2008). 

s For example, on December 12, 2007, the Senate Special Committee on Aging held a hearing on reverse 

mortgages, during which Committee members and witnesses discussed the increase in abusive practices directed 

towards seniors, panicularly with respect to advertising. Also, the AARP recently released a report on reverse 

mortgages, finding that loan costs arc extremely high. See Donald L. Rcdfoot, Ken Scholen, and S. Kathi Brown, 

"Reverse Mortgages: Niche Product or Mainstream Solution?" Report on the 2006 AARP National Survey of 

Reverse Mortgage Shoppers. AARP Public Policy Institute, Washington, DC. December 2007. 
including reverse mortgages in this proposal, then at the very least the FRB should quickly 

analyze the abuses associated with reverse mortgages and provide timely regulations and 

guidance so that it can curtail those abuses before they become widespread. 

2. Ability to Repay 

The FRB's rulemaking proposes prohibiting creditors from engaging in a .. pattern or 

practice" of extending credit for higher-priced mortgage loans without regard to a borrower's ; 

ability to repay the loan. The FDIC strongly urges the FRB to eliminate the pattern or practice 

requirement of this provision and simply prohibit outright the practice of making higher-priced 

mortgage loans without taking into account consumers' ability to repay.b As indicated above, we 

recommend that the FRB extend this prohibition to include all nontraditional mortgages, even 

those that do not qualify as higher-priced mortgage loans. 

The preamble to the FRB's proposal describes the significant injuries that unaffordable 

loans inflict on individual borrowers, neighborhoods, and all consumers who are in the market 

for a mortgage loan. The FRB concludes that "[t]here does not appear to be any benefit to 

consumers from loans that are clearly unaffordable at origination or immediately thcreafter."7 

The FDIC strongly agrees with this point and believes this is exactly why the pattern or practice 

requirement should be dropped. 

Moreover, the pattern or practice requirement inappropriately limits regulatory 

enforcement as well as civil liability. The FRB's existing commentary indicates that fattem or 

· practice violations depend on the totality of the circumstances in each particular case. Further, 

pattern and practice violations cannot be established by isolated or individual acts. Thus, proof 

of a pattern or practice violation requires a wide-ranging or institutionalized policy of making 

loans without considering a borrower's ability to repay. Meeting this high standard is difficult 

and costly for both regulatory agencies and consumers. 

9 Though the FRB indicates that the 

pattern or practice requirement is intended to balance potential costs and benefits of the rule, '

0 it 

clearly favors lenders by limiting the number of individual consumer lawsuits and the ability of 

regulators·to pursue individual violations. 

6 Though the Truth in Lending Act (TILA), as amended by the Home Ownership and Equity Protection Act 

(HOEPA), currently prohibits lenders from engaging in a pattern or practice of extending HOEPA loans based on 

consumers' collateral without regard to their repayment ability, the FRB's rulemaking authority allows it to prohibit 

outright acts or pnctices that are unfair, deceptive, or designed to evade the provisions of HOEP A. See Section 

129(h), 15 U.S.C. § 1639(h); Section l29(1X2), 15 U.S.C. § 1639(1)(2). 7 73 Fed. Reg. at 1687. 

• See Official Staff Interpretations of 12 C.F.R. § 226.34(a)(4). · 

' Stte National Consumer Law Center, Truth in Lending Manual § 9.5.2 (6"' ed. 2007), observing that the 

requirement that a lender engage in a pattern or practice ofmalcing HOEPA loans without regard to the borrower's 

repayment ability "makes such cases difficult and expensive by extending the scope of relevant discovery in an 

individual case to include the lender's general underwriting practices, and, essentially, its entire loan portfolio." 

Also see Baher Azrny and David Reiss, Modeling a Response to Predatory lending: The New Jersey Home 

Ownership Security Act of 2001, 35 Rutgers L. J. 645, 695 n. 242 (2004), explaining that .. [t]raditionally, the 

~ttem or practice" element of the prohibition has been a hard one for plaintiffs to satisfy, requiring proof of 

several instances of prohibited conduct in a short period of time." 10 73 Fed. Reg. Hi72, 1688 (Jan. 9, 2008). 
A substantial proportion of subprime mortgage loans made during the past few years 

were undecwritten without adequate consideration of the borrowers• ability to pay their mortgage 

and other housing-related expenses, such as real estate taxes and insurance. This has led to 

widespread turmoil in the residential mortgage markets and is resulting in significant losses to 

consumers, lenders, and the secondary market. Thus, we believe lenders shou]d not make loans 

that they know or have reason to believe a borrower cannot repay. Indeed, recent guidance 

issued by the federal financial regulators instructs lenders to evaluate a borrower's "ability to 

repay the debt by its final maturity at the fully indexed rate, assuming a fully amortizing : 

repayment schedule." 11 By incorporating this guidance into its regulation, the FRB will be able 

to help level the playing field for bank and nonbank lenders. 

While we recognize the FRB's concern for potential civil liability that lenders may face if 

making unaffordable loans is prohibited outright, we believe those concerns can be substantially 

mitigated by clarifying in the final regulation that: (1) a subsequent default, in and of itself. 

could not constitute evidence of inability to repay; and (2) borrowers are presumed to have the 

ability to repay if their ratio of housing-related and all recurring monthly debt to income (DTI) is 

no more than 50 percent at mortgage origination. (See the discussion below regarding the use of 

a SO percent, or alternative, DTI ratio to measure repayment ability in the context of mortgage 

lending.) We believe this approach would better balance the possible adverse consequences of 

such civil liability with the very real injury that will result from failing to establish an 

enforceable legal standard. 

~ noted above, we also recommend making the ability to repay requirement applicable 

to nontraditional mortgages. Nontraditional mortgage products, such as payment option ARMs 

and interest-only mortgages, carry inherent risks of payment shock and !legative amortization. 

While some institutions have offered these products with appropriate risk management and 

sound portfolio performance, in recent years more lenders have offered nontraditional mortgages 

to a wider spectrum of borrowers without adequate risk management, including failure to 

detennine whether borrowers can repay these mortgages assuming a fully amortizing repayment 

schedule. The combination of risk layering with the broader marketing of nontraditional 

mortgage loans significantly increases the risk for both consumers and lenders. Requiring 

lenders to consider repayment ability for nontraditional mortgages within Regulation Z would 

ameliorate this risk. · · 

Therefore. the FDIC recommends that the FRB utilize its broad rulemaking authority 

under section 129(1)(2) of TILA to apply the ability to repay standard to both higher-priced 

mortgage loans and nontraditional mortgage loans without requiring that borrowers or regulators 

establish a "pattern or practice" of unaffordable lending. 

3. Debt-to-Income Ratio 

The FRB's proposal also makes a "pattern or practice" of failing to consider DTI a 

presumptive violation of the proposed prohibition against engaging in a pattern or practice of 

11 See Statement on Subprime Mortgage lending (Subprime Statement), 72 Fed. Reg. 37569, 3 7574 (July I 0, 2007); 

/nterngency Guidcmce on Nontraditional Mortgage Produce Risks (Nontrndirional Mortgage Guidance), 71 Fed. 

Reg. ~8609, 58617 (Oct. 4, 2006). 
making higher-priced mortgage Joans without regard to borrowers• repayment ability. 12 We 

commend the FRB for recognizing the importance of a borrower's DTI ratio, and we agree that 

consideration of a borrower's DTI ratio "generally is part of a responsible determination of 

repayment abi]ity.''13 However, we believe that the FRB's proposal does not go far enough. 

Specifical1y. we recommend that the FRB also eliminate the "pattern or practice" 

requirement in connection with consideration of a borrower's DTI ratio and instead require 

lenders to consider a borrower's DTI ratio when determining repayment ability for al) higher- ~-

priced mortgage loans, as well as for nontraditional mortgage loans. The primary way lenders 

ascertain ability to repay is by determining if a borrower has sufficient income to meet his or her 

housing~related and other recurring monthly expenses.

14 Moreover, quantifying a borrower's 

repayment capacity by the DTI ratio is a widely accepted approach in the mortgage industry. 

To that end. the FRB could set forth a presumption that borrowers have the ability to 

repay if their DTJ ratio is no more than 50 percent at mortgage origination. A Joan with a backend DTI ratio above 50 percent is generally recognized within the industry as one that merits 

additional scrutiny. Such mortgages also are deemed unaffordable under a number of state 

laws, 15 and HO EPA currently prohibits prepayment penalties for covered loans where the 

borrower's DTI ratio at consummation exceeds 50 percent. 16 As an alternative DTI measure, the 

FRB could consider using the back-end DTI ratios specified under the mortgage loan programs 

of the government-sponsored enterprises (GSEs), the Federal Housing Administration (FHA) or 

the Department of Veterans Affairs. 17 In view of the common use ofDTI ratios as a guide to 

affordability, it seems incongruous that there is not a DTI-based presumption of affordability in 

the FRB's proposed rule for higher-priced mortgage loans, as well as for nontraditional 

mortgages. We note that a presumption-based approach provides appropriate flexibility to allow 

higher DTI ratios in certain limited circumstances, such as where a borrower's disposable 

income after payment of back-end debt is substantial or where a borrower has significant capital 

assets or net worth. Conversely, a borrower might be able to show a violation with a lower DTI 

ratio where, for instance, the lender knew the borrower's income would be declining through an 

impending divorce or job change. At the same time, the presumption would provide greater 

12 12 CFR § 226.34(a)(4); 73 Fc:d. Reg. at 1725. 

n 73 Fed. Reg. at J689. 14 The Subprime Statement specifies that institutions should maintain qualification standards that include: a credible 

analysis of, borrower's capacity to repay the loan according to its terms. 15 As of February 2008, 11 states had specified that a DTJ ratio of more than 50 percent rendered a loan 

unaffordable. See National Conference of State Legislatures 

http://www.ncsl.org/programs/banking/predlend_intro.htm#Laws, accessed on March 17, 2008. 16 Section 129(c) orTILA. 15 U.S.C. § 1639(c). 11 For example, the GSEs and FHA have established back-end DTI ratios ranging from 36 percent to 45 percent for 

various loan programs. A back-end DTI ratio is calculated by adding monthly housing-related expenses to the total 

of other monthly obligations and dividing it by monthly gross income. The maximum back-end DTI ratio for 

Freddie Mac is 45 percent See. Freddie: Mac Singlc:-Family Seller/Servicer Guide. ch. A34.9(d). Fannie Mae's 

"benchmark debt-to-income ratio is 36 percent of the borrower's stable monthly income," however, it "may 

occasionally specify a maximum allowable debt-to-income ratio for a particular mortgage product." Fannie Mac 

Selling Guide, Part X, 703. Moreover, Fannie Mae recognizes that a DTI of 45 percent or greater "significantly 

incn:ases risk." Id. at 302.08. The back-end ratio for mortgages insured by the Federal Housing Administration 

caMot exceed 43 percent unless the lender explains in writing why the mortgage presents an acceptable risk. See 

HUD Mortgagee: Letter 2005-16 & HUD Handbook 4155.1, REV-5, Paragraph 2-12 and 2-13. 
clarity for both borrowers and lenders in meeting the ability to repay standard to help address the 

FRB's concerns about litigation risk. 

The FDIC also recommends requiring disclosure of the DTI ratio to borrowers if it is 

greater than 50 percent. The inclusion of this information in loan disclosure documents would 

not only benefit consumers by helping them determine the affordability of loan products, but 

would facilitate investors' ability to conduct due diligence and identify riskier loans, which 

would help restore credibility and discipline in the secondary market 

4. "Stated Income" Loans 

The FDIC recommends that the FRB prohibit "stated income" underwriting outright for 

higher-priced first- and second-lien mortgage loans, as well as nontraditional mortgage loans 

such as interest-only loans and payment-option ARMs. The proposed rule currently requires 

creditors to verify income or assets before making higher-priced mortgage loans. However, the 

rule provides a safe harbor for creditors who fail to verify income or assets before extending 

credit if they can show thc1t the amount of income or assets relied on was not materially greater· 

than what the creditor could have documented at consummation. We strongly recommend that 

the FRB eliminate this safe harbor. Verifying a borrower's income and assets is a fundamental 

principle of sound mortgage Joan underwriting that protects borrowers, neighborhoods, 

investors, and the financial system as a whole. The proposal does not explain why the safe 

harbor is necessary or what potential problem it is designed to remedy. We believe the safe 

haroor is unnecessary, particularly given ~e flexibility that the FRB has built into the 

verification requirements. In our view, the safe harbor creates a loophole that will undermine 

the effectiveness of the stated income prohibition. 

.•· 

_, 

Information about income is critical for establishing a reasonable basis that a borrower 

has sufficient capacity to repay the loan, particularly in the case of subprime and nontraditional 

Joans. The more risk a loan presents, based on its features or the borrower's credit 

characteristics, the more important it becomes to verify the borrower's repayment capacity. 

Furthermore, as the FRB points out, consumers typically "pay more for [stated income] loans 

than they otherwise would" if they had simply provided documentation verifying their income. 11 

And brokers and other participants in' the mortgage origination process have failed to infonn 

many consumers of that cheaper alternative, even though most borrowers can readily document 

their income through W-2 statements, pay stubs, bank statements, or ta>.. returns. 

Both the Subprime Statement and the Nontraditional Mortgage Guidance caution lenders 

against making .. stated income" loans. l-lowever, these guidelines set forth a minimum standard 

and permit exceptions when "there are mitirting factors that clearly minimize the need for 

direct verification of repayment capacity."1 We believe the FRB should eliminate the proposed 

safe harbor and stand finn in requiring lenders to adequately verify borrowers' income and 

assets. Requiring borrowers to document their income will make it far less likely that consumers 

will receive loans that they cannot afford to repay. Documentation also will provide the markets 

with greater confidence in the quality of pools of higher-priced and nontraditional mortgage 

11 73 Fed. Reg. al 169]. 

'" 71 Fed. Reg. al 58614; 72 Fed. Reg. at 37573. 
loans and their projected income streams. Thus, both consumers and the economy as a whole 

will benefit. 

lf the FRB does not eliminate the safe harbor, the FDIC recommends requiring 

disclosures for stated income loans regarding the availability of lower cost fully-documented 

loans. This disclosure would help give consumers enough infonnation to choose the most 

appropriate loan product for their needs and would facilitate investors' ability to conduct due 

diligence and identify riskier loans, which would help restore credibility and discipline in the , 

secondary market. 

S. Underwriting for Interest-Only Loans and Payment-Option ARMs 

In addition to the preceding recommendations, the FDIC proposes that the FRB prohibit 

underwriting based only on the initial "teaser rate" for all mortgages described in the 

Nontraditional Mortgage Guidance, such as interest-only mortgage loans and payment-option 

ARMs. Over the past few ye~, lenders have offered an increasing variety of mortgage 

products-including interest-only loans and payment-option ARMs-to a broader spectrum of 

borrowers. A substantial number of these loans were underwritten without adequate 

consideration of the borrowers" ability to repay over the entire tenn of the loan. Instead, 

borrowers were qualified at low introductory or teaser rates. Such loans have proven to be 

unstable long-tenn financing structures for homeownership, particularly for new or 

unsophisticated homeowners. 

So-called "teaser rate" underwriting is a pervasive and dangerous practice. In effect, it is 

tantamount to not considering affordability. Many consumers do not understand the payment 

shock features of their ARMs. Qualifying borrowers based on a low introductory payment rather 

than a fully indexed, fully amortizing repayment schedule is almost invariably a fatal 

underwriting flaw that is harmful to both consumers and lenders. Indeed, as previously 

mentioned, both the Subprime Statement and the Nontraditional Mortgage Guidance instruct 

lenders to evaluate a borrower's "ability to repay the debt oy its final maturity at the fully 

indexed rate, assumif!g a fully amortizing repayment schedule."20 Thus, the FRB should exercise 

its rulemaking authority and prohibit "teaser rate" underwriting outright for interest-only loans 

and payment-option ARMs. " 

6. Prepayment Penalties 

The FDIC believes that the FRB should consider banning prepayment penalties outright 

for higher cost loans. Prepayment penalties can cause substantial financial injury as borrowers 

· are faced with the difficult choice of either: (1) paying a large penalty to refinance their loan; or 

(2) continuing with a loan they cannot afford and, by doing so, stripping their home of equity or 

losing their home through foreclosure. As the FRB observed, "[t]he injuries prepayment 

penalties may cause consumers are particularly concerning because of serious questions as to 

whether borrowers knowingly accept the risk of such injuries."21 These risks are particularly 

devastating to borrowers.trapped in mortgages that are, or shortly will be, unaffordable because 

30 Id. 11 73 Fed. Reg. at 1694 
they can significantly hinder efforts to refinance or otherwise structure Joan work outs. As a 

practical matter, many subprime borrowers are not offered the choice of a loan without 

prepayment penalties. Moreover, unlike the prime market, most subprime loans include a . 

prepayment penalty. For example, whereas about 70 percent of the balance of subprimc loans 

over the past four years included a prepayment penalty, prepayment penalties are comparatively 

rare (about 3 percent) among prime mortgage loans.22 Therefore, banning these penalties wilJ 

ensure that consumers-particularly subprime consumers-will be able to refinance or sell their 

homes within a reasonable amount of time. 

If the FRB does not prohibit prepayment penalties outright, it should at least reduce the 

amount of time that prepayment penalties are pennittcd for higher-priced mortgage loans from 

five years, as is currently proposed, to two years. The proposal explains that a five-year period 

.. wou]d_prevent creditors from 'trapping' consumers in a loan for an exceedingly long period.''23 

We believe that five years is an exceedingly long period. 

One of the reasons that the agencies issued the Subprime Statement was their concern 

about the growing popularity of ARM products that had low initial payments based on an 

introductory rate, which expired after a short period of time and adjusted to a variable rate for the 

remainder of the loan.24 Many lenders aggressively marketed these loans as "credit repair" 

products. They assured consumers that they would qualify for a lower-priced product at the time 

that the introductory rate expired-often in two years. Prepayment penalties that extend beyond 

that timefrarne have made such representations illusory. Borrowers who have demonstrated a 

positive payment history and could qualify for a lower interest rate are not likely to be able to 

refinance their loans due to the sheer cost of prepayment penalties, which often can amount to 

six months' worth of interest. In addition. many fixed subprime loans currently have prepayment 

penalties with terms of25 to 36 months.25 Therefore, we recommend alternatively that the FRB 

limit prepayment penalties for higher-priced mortgage Joans to two years or less. 

Further, if prepayment penalties are not banned altogether, the FDIC recommends that 

the FRB prohibit them for higher-priced mortgage loans at least 180 days before the reset date, 

rather than 60 days as currently proposed. This longer period provides a more realistic 

tirneframe than 60 days, particularly for subprime borrowers, because it affords consumers more 

time to refinance into a mortgage product that meets their financial needs. Unlike the prime 

market where interest rates are widely published, interest rates iri the subprime market are 

nontransparent, making it more difficult and time-consuming for consumers to determine the 

costs of refinancing. Finding competitively priced refinancing is particularly challenging when 

housing prices are decreasing or mortgages are less available. In recognition of that fact, HOPE 

NOW Alliance members have agreed to contact at-risk borrowers 120 days prior to the initial 

ARM reset for all 2/28 and 3/27 products. 

21 FDIC calculations using the Loan Performance Securities Database. Data for prinie loans represent nonagency 

originations. 

u Id 

?• 72 Fed. Reg. at 37569. 

?J FDIC calculations using the Loan Performance Securities Database. 
7. Yield Spread Premiums (YSPs) 

The FDIC recommends that the FRB prohibit the use of YSPs to compensate mortgage 

brokers. The current proposal merely provides for additional disclosures and the consumer's 

written consent to the maximum amount of compensation that he or she will pay the broker. We 

do not believe that such disclosUTes will be effective. Disclosures alone will not address the 

fundamental problem with YSPs, which is that they provide an inappropriate financial inc~ntive 

for mortgage brokers to steer consumers to unaffordable loans. The FRB describes a yield ,; 

spread premium as "the present dollar value of the difference between the lowest interest rate the· 

wholesale lender would have accefted on a particular transaction and the interest rate the broker 

actually obtained for the lender."2 We think a ban on YSPs, as the FRB has defined them, 

would eliminate compensation based on increasing the cost of credit and make the amount of the 

compensation more transparent to consumers. 

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 ample 

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

amount of the mortgage, which 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. Thus, the.FRB 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. 

8. Advertising 

While the FDIC generally supports the advertising provisions proposed by the FRB, we 

recommend that the FRB restrict use of the term "fixed," or similar terms, in marketing 

information for adjustable rate or hybrid mortgage products. The term "fixed" has long been 

used to describe traditional mortgage products with no payment shock features. Using the term 

to describe adjustable rate products, which have "fixed" rates for only a few years, or interestonly products, which may have "fixed" rates but also the potential for significant payment shock, 

can be inherently misleading. 

9. Escrows 

The FDIC strongly supports the FRB 's proposal to require escrows for real estate taxes 

and insUTance and believes it would be appropriate to extend the time period to opt out b~yond 

the 12-month period currently proposed. Real estate taxes and insurance are required expenses 

that lenders should always consider in evaluating a borrower's capacity to repay a mortgage 

loan. The failure to pay taxes and insurance is a form of default that can lead to foreclosure, 

causing substantial financial injury to borrowers. Requiring escrows ensures that borrowers will 

26 73 Fed. Reg. at I 698. 
have sufficient funds set aside to meet their obligations and avoid the potentially dire 

consequences for failing to pay their taxes and insurance in a timely manner. The requirement 

also benefits the economy overall, as fewer foreclosure actions will result if borrowers are able to 

afford all housing-related expenses, not just principal and interest. We applaud the FRB for 

making this proposal. 

10. State Law 

The FDIC also agrees that the proposed rules should not preempt state laws unless they 

are inconsistent. Many states have proven to be innovative laboratories for the development of 

consumer protections in recent years. They have been especially active in efforts to address 

predatory mortgage lending, loan flipping, prepayment penalties, the fiduciary obligations of 

mortgage brokers, and many other areas. States should not be prevented from providing their 

citizens with strong consumer protections, and we applaud the FRB for allowing them to 

continue to do so. 

We appreciate the opportunity to comment and encourage the FRB to consider the 

FDIC's recommendations, which will help eliminate the mortgage lending practices that have 

hurt so many consum~ and led to deterioration and uncertainty in our financial markets. We 

commend you for your leadership in moving decisively to apply common sense rules of 

underwriting to all mortgage originators, as well as your advocacy for market innovations to 

serve the mortgage credit needs of low and moderate income communities. We believe that 

these simple, basic rules will allow substantial flexibility and latitude to provide affordable 

mortgage options to lower income populations within a prudential framework that will assure 

their long term affordability. 

cc: Jennifer J. Johnson 

Secretary 

Sincerely, 

Sheila C. Bair 

Board of Governors of the Federal Reserve System 

Washington, D.C. 20551 

~-

-~ 
e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Christopher J. Dodd 

Chairman 

Committee on Banking, Housing 

and Urban Affairs 

United States Senate 

Washington. D.C. 20510 

Dear Mr. Chairman: 

May l, 2008 

Thank you for your recent letter enclosing questions subsequent to my testimony on the 

"State of the Banking Industry .. before the Committee on March 4, 2008. 

Enclosed is my response to your questions. Also enclosed are responses to questions 

from Senators Crapo and Recd. 

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

898-6974 or Eric Spitler, Director of ~gis]ative Affairs, at (202) 898-3837. 

Sincerely. 

Sheila C. Bair 

Enclosure 
Response to questions from the Honorable Christopher J. Dodd 

· from Shella C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

01: Anti-Union Regulation 

Last year, the Department of Labor issued a regulation drastically expanding the personal 

financial information union officers and employees. must submit to the Department. The 

new LM-30 rule will require more than 150,000 union volunteers, employees, and their 

families to report the terms of mortgages, car loans, and even student loans. To determine 

whether they must report such interests, these individuals must ascertain (1) whether the 

bank providing a loan does any business with the person's union, or (2) whether the bank 

does 10 percent of its business with firms whose employees are in the same union. The 

regulation requires individuals to write to banks asking for this info, and, then, if banks 

won't provide such information, to contact the Department of Labor for assistance. In the 

meantime, individuals are required to make good faith estimates of the bank's business 

with their unions and unionized firms. 

• Given your agency's expertise in the regulation and practices of banks, do you 

believe that banks are able-and willing-to inform their customers whether they do 

business with particular unions and bow much of their "business" and "business 

receipts" are with particular unionized firms? 

• Are banks obligated or prohibited by any federal or state law to disclose to their 

customers bow much "business" or "business receipts" they have with particular 

unionized fu-ms? Can banks simply refuse to answer these written inquiries? 

• What type of administrative burden will this LM-30 rule, and the hundreds of 

thousands of resulting inquiries, place on banks and are banks currently prepared 

to respond to these inquiries?·· 

• If banks don't provide this non-public information, is there any "information 

reasonably available" to the public that union officers, employees, a~d members 

could use to make good faith estimates? 

Al: The Labor-Management Repo~ing and Disclosure Act (LMRDA) requires public 

disclosures of certain financial transactions and financial interests of labor organization officers 

and employees (other than employees performing clerical or custodial services exclusively) and 

their spouses and minor children. It is our understanding that the purpose of this disclosure is, 

among other things, to make public any actual or potential conflict between the personal 

financial interests of a labor organization officer or employee and his or her obligations to the 

labor organization and its members. 

The U.S. Department of Labor's Office of Labor-Management Standards (OLMS) issued a final 

rule in 2007 implementing section 202 ofLMRDA. See 72 FR 36106 (July 2, 2007). The final 
rule revised Form LM-30, Labor Organization Officer and Employee Report and its instructions. 

The final rule became effective for fiscal years beginning August 16, 2007, although no reporting 

is due under the rule until November 16, 2008. See 72 FR 38484 (July 13, 2007). 

The FDIC understands that financial institutions are expressly relieved of any reporting 

responsibilities of payments or loans under section 203 of the LMRDA (see 72FRat36119 and 

36136). Therefore, banks are not required to report customer information. 

The final rule deaJs with Form LM-30, which requires reporting by the union officers and 

employees covered under the LMRDA. The final rule, as revised, does not require union officers 

to report most bona fide loans, interest, or dividends from financial institutions. However, the 

final rule may require that union officers report these types of transactions if the bank does a 

specified level of business with a company that employs members of the same union. The 

OLMS is the agency responsible for implementation and interpretation of this regulation and the 

FDIC defers to its determination of the exact parameters of the categories where union 

employees are required to report bank loans. 

We know of no federal law 'that either requires or forbids a financial institution from informing 

its customers whether they deal with businesses that are unionized and what union represents the 

employees of those businesses, assuming that no customer information is disclosed. We see 

nothing in the Department of Labor rule that would require financial institutions to make those 

disclosures. We note, however, that banks typically build certain reporting codes into their 

information management systems to facilitate the creation of both regulatory related filings, such 

as call reports, as well as internal management reports. The basis for distinguishing and 

reporting based upon the type of union-related activity at issue here would not be a part of this 

reporting framework thereby creating issues regarding the practicality of disclosure. 

The FDIC will continue to analyze the impact of the final rule on our supervised banks as we 

approach the November 2008 reporting deadline. 

Q2: Commercial Real Estate 

In December 2006, three agencies, the FRB, OCC, and FDIC, issued fmal guidance 

highlighting the risks to banks from concentrations in commercial real estate. In issuing 

the guidance, the regulators specifically emphasized that they were not setting any limits on 

banks' commercial real estate lending. Yet now we understand from the Comptroller of 

the Currency and the Chair of the FDIC that over a third of community banks have 

commercial real estate concentrations exceeding 300 percent of their capital. 

• Are any community banks going to fail because of their overexposure to commercial 

real estate, including commercial real estate mortgage backed securities? 

• Was it the correct policy not to set concentration limits in the guidance? 

• What are examiners doing when they find these levels of concentrations? 

• What off-balance sheet vehicles are banks using to invest in commercial real estate? 

• Are the regulators approving these kinds of transactions? 
A2: As noted in the FDIC's testimony, weakness in the housing market will affect institutions 

with significant exposures to commercial real estate (CRE) loans -- particularly construction and 

development loans. Given deteriorating conditions and excess supply in certain housing markets 

such as Florida, California, Arizona, and Nevada, construction and development lending could 

cause some community banks to fail in 2008 and 2009. While we do not currently anticipate a 

sharp increase in failures, the protracted nature ofreal estate downturns may challenge the 

earnings capacity and capital levels of institutions with concentrated exposure to construction . 

and development projects. At present, the various sectors of the commercial real estate market 

including apartments, office buildings, retail, and industrial have performed adequately and are 

not expected to cause bank failures in the near term. However, ifwe experience a significant 

economic downturn, commercial real estate mortgages could cause losses for insured institutions 

that may lead to failures. 

The December 2006 interagency commercial real estate guidance provided an appropriate,. 

timely message to the industry regarding risk management standards, loan concentration 

reporting thresholds, and capital adequacy. Bankers are very aware of the monitoring thresholds 

stated in the guidance, and the document positively influenced commercial real estate credit risk 

management. The establishment of specific concentration limits would have been prescriptive 

and could have caused an unintentional aversion to commercial real estate lending. A limit on 

commercial real estate lending would have had negative consequences for the market and 

exacerbated the credit availability challenges in the current environment. 

In March 2008, the FDIC issued a Financial Institution Letter (FIL) to all banks under its 

supervision re-emphasizing the importance of strong capital and loan loss allowance levels, and 

robust credit risk-management practices for state nonmember institutions with significant 

concentrations of CRE loans, and construction and development loans. The FIL recommends 

that state nonmember banks with significant CRE loan concentrations increase or maintain 

strong capital levels, ensure that loan loss allowances are appropriately strong, manage portfolios 

closely, maintain updated financial and analytical information, and bolster loari workout 

infrastructures. 

FDIC examinations of institutions with significant commercial real estate loan concentrations, as 

defined by the 2006 interagency guidance, focus on each bank's credit risk management 

program, internal measurement and reporting on concentrations, examiner review of individual 

credit relationships, and an assessment of capital and loan loss reserve adequacy. Examiners 

undertake a thorough review of commercial real estate lending policies and underwriting 

processes and gain an understanding of management's risk-taking philosophy. Departures from 

prudent policies, underwriting, risk selection, or concentration management may be subject to 

examiner criticism. Significant deficiencies related to commercial real estate loilll concentrations 

sometimes result in formal or informal enforcement actions. 

From an investment standpoint, banks are generally limited in their acquisitions of commercial 

real estate to property that will only be used as bank premises. There are certain exceptions to 

this limitation that are permitted under the investment authorities for national banks. Otherwise, 

a bank must apply to the FDIC (under section 24 of the Federal Deposit Insurance Act (FDI 

Act)) for permission to invest in commercial real estate on the balance sheet. An off-balance 

sheet investment in commercial real estate would be unusual_ 
From a lending standpoint, commercial real estate loans or interests therein are typically 

originated and held directly by the bank, or a bank subsidiary, on the bank's balance sheet. Offbalance sheet holdings of interests in commercial real estate loans are generally rare and limited 

to the largest institutions that securitize such Joans. In a commercial mortgage backed security, a 

bank that securitizes commercial real estate loans sells the Joans (on a non-recourse basis) to a 

trust that then distributes these credits on to third party investors. Depending on the governing.-

securitization documents, the bank that originated a commercial real estate loan could be liable 

for the loan• s performance under certain circumstances, as well as be required to prudently carry 

out the duties of special servicer if the bank retained servicing. It is theoreticalJy possible that 

sold loans could be put-back to the originating bank if the governing documents or courts 

permitted such recourse. Such situations are relatively rare. The bank regulators do not approve 

securitization transactions, which are accounted for as loan sales. Large institutions that trade 

credit derivatives also could have a commercial real estate credit exposure off-balance sheet. 

However, most derivative positions are now booked on the balance sheet according to 

accounting rules. 

Q3a: Basel II 

There was extensive conversation on what would have been the capital status of banks 

going into this crisis period bad Basel II capital standards been in effect. Fed ViceChairman Kohn said that if, "we had the same safeguards in place, and if we started 

implementing in 2004 with the same safeguards that are in place in 2008 and 2009, I do 

think on balance we would have been better off." Mr. Gronstal answered differently, 

stating: "I think the answer to your second question is that we probably would have bad 

lower dollar amounts of capital per auet, and that makes it more challenging to deal with 

issues when times get rough." 

Can you explain in writing, whether you believe that banks would have had more or less 

capital in place for this current down turn had Basel Il been implemented during the time 

frame that Vice-Chairman Kohn mentioned in his response? Can you also explain why you 

believe that to be the case, citing any empirical data on both the effects of Basel II on 

capital requirements and what we have experienced during this economic crisis, as it 

relates to assets? 

A3a: I believe that banks would have had Jess capital in place for the current downturn had 

Basel II been implemented during 2004. The U.S. Quantitative Impact Study-4 (QIS-4) 

estimated the advanced approaches would reduce capital requirements for mortgages and home 

equity loans by 73 percent to 80 percent. In addition, for certain securitization exposures, the 

advanced approaches slash the capital requirements significantly compared to the current rules 

and would have encouraged banks to hold more highly rated collateralized debt obligations 

(CDOs) and other complex securities that have caused losses in the tens of billions of dollars for 

large financial institutions. Fotmany of these exposures, the capital requirements are reduced by 

almost two thirds--from 1.6 percent to 0.56 percent of face value. 
There is every reason to assume that banking organizations would have reduced their actual 

regulatory capital holdings in an amount commensurate with this reduction in minimum capital 

requirements. A case in point is given by Northern Rock, the British bank with assets of about 

$200 billion that was recently nationalized. We understand that the British regulators provided 

banks that were interested, and deemed ready, the opportunity to implement certain aspects of 

the advanced approaches in 2007. In reference to the 44 percent reduction in risk-weighted 

assets Northern Rock reported using the advanced methodologies for its retail portfolio, its CEO 

wrote: 

We are pleased to have achieved approval for use of our Basie II rating systems. This 

means that the benefits of Bas le II enable us to increase our 2007 interim dividend by 30 

percent. Going forward our dividend payout rate increases to 50 percent of underlying 

EPS from around 40 percent. Future capital planning, including the reduction of capital 

hungry assets, will allow us to return capital to shareholders through a share buyback 

programme. The medium term outlook for the Company is very positive. 

- CEO Adam Applegarth, Northern Rock Interim Results, June 30, 2007 

Q3b: During the discussion of Basel Il, Comptroller Dugan told the Committee: "The 

irony of this whole situation is that the very high-most highly rated best securities, the ones 

that were thought to be least likely to default was where all the-a huge share of the losses 

have been concentrated." Given Basel II's reliance on ratings of securities, does this · 

observation give you reason for concern over the current Basel II structure? If so, what do 

you recommend be done; if not, why not? 

AJb: The unprecedented downgrades and massive losses incUITed by banks on AAA rated 

structured securities such as CDOs and asset backed securities (ABS) are a prime example why 

models cannot be relied upon to set capital requirements that.are meant to protect and preserve 

the solvency of our nation's financial institutions. The models used to assign a AAA rating to 

these securities were no more than estimates that attempted to apply past performance to predict 

future events. However, the assumptions used to assign these ratings did not capture the true 

stresses that accompanied the current credit market crisis. 

In some cases, the models that failed the ratings agencies are similar to the models used by banks 

to set capital requirements on a wide range of exposures under Basel II. What is even more 

troubling is that these AAA rated structured securities that played a prominent role in 

contributing to the hundreds of billions of dollars in write-downs have been awarded sizable 

. capital reductions under Basel II. Under the new rules, the capital requirement for these 

securities is a mere .fraction of the losses incurred to date with banks only required to set aside 56 

cents for every $100 in exposures. Under the existing U.S. rules that apply to all but the largest 

banks, the capital requirement for these same securities is $1.60 for every $100 in exposures. 

The Basel Committee has acknowledged some of the deficiencies with the Basel II framework, 

especially as it relates to the complex structured securities discussed above. However, the lesso~ 

to be learned from the credit market turmoil should be applied well beyond CDOs. The major 

issue is that the models did not perform adequately, and Basel II is heavily reliant upon models 
for determining capital requirements. Fixing the risk weights on complex securities is a good 

start but that alone will not address the larger scale problems with Basel II. 

In this respect, U.S. bank regulation benefits considerably from our statutory framework of 

Prompt Corrective Action (PCA), including regulatory constraints on bank balance sheet 

leverage. The PCA framework provides a base of capital to absorb losses in the event the riskbased models are overly optimistic and helps limit the exposure of governmental safety nets 

during difficult times. In addition, a leverage ratio, or similar clear-cut supplementary capital 

requirement to complement the risk-based approaches and constrain excessive leverage, would 

greatly benefit the effectivenes~ of g]obal financial regulation. 

As you know, the regulation issued by U.S. banking agencies does not allow any bank to exit its 

risk-based capital floors until the completion of an interagency study on the impact of the new 

advanced approaches. This interagency study will be extremely important in that it provides a 

structured. process for the agencies to evaluate potential weaknesses of these new rules and 

decide how to address them. 

Q4: Too Big to Fail 

I am concerned about the potential ramifications of the failure of a very large institution. 

Is your agency prepared today to handle the failure of a large systemicalJy significant 

insured financial institution? What steps are you taking to prepare for this contingency? 

A4: The FDIC has been taking a number of steps to ensure our ability to handle the failure of a 

large financial institution. For example, several years ago we started a project to facilitate the 

claims process at the very largest and most complex banks. This includes a process to hold some 

fraction of large deposit accounts in the event of failure, to have the ability to produce depositor 

data for the FDIC in a standard format, and to be able to automatically debit uninsured. deposit 

accounts to share losses with the FDIC. In January 2008 we issued a notice of proposed 

rulemaking to solicit comments in consideration of a final rule. We hope to issue a final rule as 

early as mid-year. 

In recent months, the FDIC also has begl.in hiring additional staff to ensure that we are prepared 

for any type of increased bank resolution activity. This hiring is a mix of temporary 

appointments that can lapse once any problems are addressed., retirees who can provide 

experience from past failures, and new skill sets (such as capital markets expertise) that are 

relevant to resolving troubled. institutions in today's market. 

Finally, the FDIC has been working with other regulators to improve information sharing 

processes and procedures regarding troubled financial institutions to ensure that all of us have the 

information we need to fulfill our roles in the event of bank failures. Our participation as part of 

the President's Working Group is a welcome improvement to this communication. 
QS: Data on Loan Modification 

Please provide comprehensive data on mortgage delinquencies, foreclosures, repayment 

plans and modifications for the mortgages being serviced by the institutions you regulate 

for the past 12 months. Please provide this information by the following loan categories: 

subprime, Alt-A, and prime. Please describe the types of repayment plans and 

modifications that servicers are employing and the numbers of loans in each category. 

AS: Because most FDIC~supervised institutions do not service securitized loan pools, we do not 

coJlect data for the categories requested. Nevertheless, the available data sci far seems to indicate 

that too many modifications involve repayment plans that only act to defer problems rather than 

create long-term sustainable mortgages. 

Publicly available data from the HOPE NOW Alliance estimate that, on an industry-wide basis, 

mortgage servicers provided loan workout plans for over 2 million loans during 2007 and first 

quarter 2008. Subprime loans account for the majority of these workouts, at 60 percent of the 

total. Prime Joans account for the remainder; there is no breakout for Alt-A loans. Loan 

workouts have numbered nearly three times more than foreclosure sales. 1 

The foJlowing tables summarize borrower foreclosure sales and loan workout plans on an 

industry-wide basis from first quarter 2007 through first quarter 2008. 

Fonclosure Sales (thousands of resldenllal loans) 

2007 01 200702 200703 2007 04 2008 Q1 Total 

Foreclosure Sales 

Total 110 117 135 151 205 718 

Prime 48 49 54 60 84 295 

Subprlme 62 69 82 92 121 426 

Borrow•r Loan Workout Pl•,,. (thousands of residential loans) 

200701 200702 2007 03 200704 2008 01 Total 

Borrower Workout Plans• 

Total 324 340 399 475 503 2,041 

Prime 135 132 150 173 206 796 

Subprlme 189 208 248 301 296 1,242 

Fonnal Repayment Plans Initiated 

Total 271 275 323 333 323 1,525 

Prime 111 102 120 136 159 628 

Subprime 160 173 203 197 165 898 

Loan Modifications Completed 

Total 54 ·65 76 141 179 515 

Prime 24 30 30 37 48 169 

Subprime 29 35 46 104 132 346 

• Workout plans are the sum of formal repayment plans Initiated and loan modifications completed. 

Note: Numbers may not add due to rounding. 

Source: HOPE NOW ARiance. 

1 HOPE NOW mortgage servicers cover almost two-thirds of the mortgage industry for both prime and subprime loans. All data 

are from their release of quarterly 2007 and 2008 data at: 

http://www.csbs.org/Contcnl/NavigationMcnu/Homc/StateForeclosurcApril2008.pdf. 
According to the Mortgage Bankers Association's National Delinquency Survey, the 

perfonnance of prime mortgages deteriorated from the prior quarter. In fourth quarter 2007, 5.82 

percent of all mortgage loans were 30 days or more past due. The percentage of all mortgages 

that were seriously delinquent Ooans that are 90 days or more past due or in the process of 

foreclosure) was 3.62 percent. The smvey reported that 3.24 p.ercent of COl)Ventional prime 

mortgages were 30 days or more past due. The percentage of prime mortgages that were 

seriously delinquent was 1.67 percent. 

Delinquency and foreclosure rates for subprirne mortgages continue to rise. In fourth quarter 

2007, 17.31 percent ofsubprirne mortgages were 30 days or more past due, while 14.44 percent 

of these mortgages were seriously delinquent. Subprime ARMs continue to experience the 

greatest stress. In fourth quarter 2007, 20.02 percent ofsubprime ARMs were 30 days or more 

past due, while 20.43 percent of these mortgages were seriously delinquent. The Mortgage 

Bankers Association does not provide a breakout for Alt-A loans. 

At FDIC-insured banks and thrifts, the ratio ofnoncurrent (90 days or more past due or on 

nonaccrual) 1-4 family residential mortgage loans increased to 2.06 percent in fourth quarter 

2007. This level is double that of one year ago, when the ratio was 1.05 percent, and is the 

highest noncurrent level since at least 1991. 
Response to questions from the Honorable Mike Crapo 

from Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Thank you for getting back to me and Senators Johnson, Hagel, and Tester on items that _ 

you believe should be included in a regulatory relief package. At the ILC markup, I filed 

and talked about a regulatory relief amendment that I think should be the starting point 

for discussions of a package that we should move this year. It included items that would 

expand community development investments, relief from privacy notifications for financial 

institutions that have not changed their policies in the past year and do not share personal 

consumer information, and a combination of items for community banks and credit unions. 

Ql: Although not all the items that you suggested were included in this package and there 

might need to be a few tweaks, are there any items in this package that your agency cannot 

support or are these all items that would increase regulatory efficiency without 

compromising safety and soundness and important consumer protections? 

Al: With one exception discussed below, the package of regulatory burden relief amendments 

generally does not raise significant safety and soundness or consumer .protection concerns for the 

FDIC. In addition, our staff has identified a few technical issues that may merit further staff-tostaff discussion. FDIC staff will contact your staff to address issues regarding the bill's 

provisions that would eliminate the current statutory requirement for notice to the FDIC of 

certain public welfare investments by banks. We also would like to discuss some technical 

drafting suggestions to avoid unintended consequences from the bill's provisions regarding the 

applicability of section 404 of the Sarbanes-Oxley Act to small banks. 

The one provision the FDIC does not support is the proposal to raise the small institutions 

exception threshold for annual examinations from less than $500 million to less than $1 billion in 

total assets. Current law requires the billlking agencies to conduct a full-scale, on-site 

examination of the depository institutions under their jurisdiction at least ~very 12 months. 

There is an exception for certain small institutions (i.e., institutions with total assets of less than 

$500 mi1lion) that requires examinations of these qualifying smaller institutions at least every 18 

months. At this time, the FDIC would not support raising the threshold and extending the 

examination cycle for institutions of$500 million or more. The threshold was only raised to 

$500 million in late 2006 and it would be useful to have more experience with this change, 

especially in the current challenging economic times, before considering expanding the 

exception. 

Q?: Since all of these items have been vetted and reviewed in past hearings before the 

Banking Committee, is there any reason to not move quickly forward with a package along 

these lines? · 

A2: With the exception of the issues regarding increasing the exception threshold for annual 

exams for small institutions, it is likely that remaining issues regarding the regulatory relief 
proposal could be resolved fairly easily. In addition, we would recommend consideration of 

items from the legislative package provided to you by the FDIC in response to your previous 

request that should help reduce regulatory burden and improve regulatory efficiency. 
Response to questions from the Honorable Jack Reed 

from Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Ql: How accurate and predictive were the risk models used by banks and ratings agencies 

in identifying the risks now unfolding in the current market turmoil? 

Al: Banks, ratings agencies, and regulators vastly underestimated the risks in mortgage markets 

and in complex highly-rated securities. Even today, it is difficult to quantify these risks. Models 

did not forecast the significant deterioration in the credit markets, nor did they predict the fact 

that adverse events would be high.]y correlated, making a bad situation worse. The models failed 

to capture what is referred to as "tail risk," the risk of loss associated with extreme events. Yet it 

is those same events that can threaten the solvency of our financial system. The models that wi11 

be used by banks in determining capital requirements under the advanced approaches are based 

largely on the same models that are used by the ratings agencies that failed to capture the 

massive losses in the credit markets. 

If the advanced approaches could have been put in effect immediately after they were 

published by the Basel Committee in June, 2004: 

Q2a: Would banks using these approaches have been required to bold more capital against 

their mortgage portfolios? 

A2a: No. The U.S. Quantitative Impact Study-4 (QIS-4) estimated the advanced approaches 

would reduce median capital requirements for mortgages and home equity loans by 73 percent 

and 80 percent respectively. If banks had been allowed to implement such reductions in capital 

requirements for their mortgages, they would have been much more vulnerable going into the 

current problems. 

The QIS-4 result likely reflects that the formula underlying the advanced approach mortgage 

capital requirements was developed during a period of benign credit conditions and historically 

robust house price appreciation. Banks calculate their mortgage capital requirements in the 

advanced approaches by inputting certain key parameters (probability of default (PD), loss given 

default (LGD) and exposure at default (EAD)) for the various pools of mortgages they hold, 

reflective of their own historical credit loss experience for similar mortgages, into a function 

prescribed in regulation. 

Some have argued that the advanced approaches would require more capital than QIS-4 

estimated. No one has disputed. to our knowledge, that any reasonable approach to estimating 

historical mortgage credit losses over a long period of time prior to the current crisis would result 

in PD, LGD and BAD values that, if input into the advanced formula, would result in extremely 

large reductions in mortgage capital requirements compared to Basel I levels. The problem with 

this result, as we have seen in the current environment, is that perceptions of minimal risk based 

on historical statistics can induce lenders to change underwriting standards and develop new 

products that may sharply elevate losses compared to historical norms. 
Q2b: Would the advanced approaches have generated sufficient capital requirements to 

account for the risks present in highly rated CDOs and other complex securities that have 

caused losses in the tens of billions for large financial institutions? 

A2b: No. The advanced approaches reduce the capital requirements significantly compared to,· 

the current rules and could well have encouraged banks to hold more AAA-rated CDOs. For 

many of these exposures, the capital requirements are reduced by almost two thirds -- from 1.6 

percent to 0.56 percent of face value, or equivalently from a 20 percent risk weight down to a 7 

percent risk weight. This result is not unique to CDOs. Under the advanced approaches most 

AAA-rated securities are expected to receive this same reduction in capital requirements. The 

new framework thus risks giving banks an incentive to rely on ratings to an even greater extent 

than before. 

The Basel Committee recently announced that it will revisit the 7 percent risk weight for certain 

types of resecuritized assets such as CDOs. While worthwhile, it is noted that this effort should 

be considered a response to current events rather than an aspect of the advanced approaches that 

would have forestalled or mitigated the development of those events. 

Q2c: Would the advanced approaches have provided a regulatory capital incentive for 

banks to avoid the use of off-balance sheet conduit fmancing arrangements such as SIVs? 

A2c: No. The advanced approaches require no capital for bank SIV structures in which the 

bank has no legal commitment to support such entities. In recent months we have seen banks 

around the world take large volumes of assets back on their balance sheets -- assets that were 

held in SNs or other conduits. In many cases it appears there was no contractual legal 

obligation for banks to do this and, consequently, the banks were not required to hold capital 

against these exposures. There is nothing in Basel II that would require banks to hold capital 

before the fact against off-balance sheet entities in cases where the bank has no contractual legal 

obligation to provide support. After the bank has provided support, supervisors can determine 

the bank has de facto risk exposure and can require capital, yet even this is not a hard and fast 

requirement. 

The advanced approaches treatment of off-balance sheet entities where the bank does have a 

legal obligation to provide support also is of interest. Historically, Basel I provided a loophole 

where banks were required to hold capital against off-balance sheet liquidity facilities with 

maturities of one year or more but were not required to hold capital where the liquidity facilities 

had maturities ofless than one year. Not surprisingly, many banks began using 364-day maturity 

renewable liquidity facilities to avoid the capital requiremenL The U.S. banking agencies closed 

this loophole in 2004. Outside the U.S., however, the loophole remained open, and Basel Il does 

have the advantage in those countries of closing that loophole. 

With respect to the amount of capital required for off-balance sheet exposures, extreme caution 

is warranted in asserting Basel II is an improvement. FDIC calculations based on the QIS-4, for 

example, showed that the total amount of capital required for off-balance sheet exposures was 
considerably Jess under the advanced approaches than under the current rules. This reflects the 

greater flexibility banks have in the advanced approaches both to model the amount of their 

exposure and to use their own risk estimates to determine the appropriate risk weight for the 

exposure. 

Q2d: Would the advanced approaches have provided a regulatory capital incentive for ,· 

banks to avoid excessive dependence on bond insurers? 

A2d: No. The advanced approaches give significant new capital relief for banks entering into 

credit default swaps with bond insurers. Under the advanced approaches, banks wou]d be able 

gain significant capital benefits under the assumption that they can transfer significant amounts 

of their credit risk to insurance companies and other parties through complex structures such as 

credit derivatives. The new rules also provide capital benefits that assume that there is very little 

correlation between the creditworthiness of the insurer and that of the banks' exposure. During 

the recent credit market turmoil, we have witnessed a significant deterioration in the 

creditworthiness of many of the financial guarantors that banks rely upon to cover losses. 

Further, the fortunes of both the banks' exposures and that of the insurer appear to be tied much 

more closely than we had anticipated. Under these conditions, the capital requirements might 

not fully be capturing that connection and might not fully reflect this risk. 

Q2e: Would the advanced approaches have required banks to hold more capital against 

commercial real estate? 

A2e: No. The QIS-4 estimated banks would have to hold about half the capital (median decline) 

against their commercial real estate (CRE) exposures. As described above for mortgages, banks 

calculate their CRE capital requirements by inputting their own estimates of the PDs, LGDs and 

EADs applicable to their CRE exposures into supervisory formulas. The capital requirements 

generated by such formulas depend upon these inputs, which in tum are heavily influenced by 

historical credit loss experience. · 

The roughly 50 percent median reduction in capital requirements for CRE estimated by the QIS4 was surprising to many observers because CRE is historically a relatively risky bank asset 

class. However, a large reduction in CRE capital requirements is exactly what the advanced 

approaches can be expected to deliver during a period of strong economic conditions. If such a 

reduction in CRE capital requirements had been put into effect in the years leading up to the 

current crisis, banks would be much less well positioned to deal with credit losses. 

Q2f: Would the advanced approaches have required banks to hold more capital against 

leveraged commercial loans? 

Alf: Capital for C&I loans, in general, declined (median) in the QIS-4 by about a third. In 

addition, please see our answers to questions 2a and 2e. 
Q2g: Would the advanced approaches have required more capital overall, so that large 

banks would have been better capitalized going into the current market turmoil? 

Alg: No. The median decline in risk-based capital requirements reported by the 26 U.S. banks 

in QIS-4 was 26 percent, with a number of banks reporting declines of 30 percent to 50 percent 

Significant reductions in capital requirements were reported across all major loan categories with 

the exception of credit cards. Significant reductions in capital requirements also were reported" 

for securitization exposures. The 26 percent median reduction in capital requirements includes 

the effect of Basel II's new capital charge for operational risk, indicating that the additional 

capital reported for the new charge was swamped by the large reductions in capital requirements 

for credit risk. The 26 percent median reduction in capital requirements did not include the 

effect of a 1.06 "scaling factor" applied to the credit risk charge under the final rule that would 

dampen these reported capital reductions but not qualitatively change the overall result of large 

reductions in capital requirements. 

To reiterate points made in responses to earlier questions, had large U.S. banks been permitted 

during the years leading up tp the current crisis to implement reductions in capital requirements 

of the magnitudes suggested by the advanced approaches, the banking system would be much 

more vulnerable today. 

Q3: Would banks reduce their actual capital in response to the advanced approaches? 

A3: Yes. We believe the evidence suggests banks would use the leeway available to them under 

the advanced approaches to reduce their capital. . 

A comparison of the capital levels oflarge European banks versus large U.S. banks provides 

strong evidence that banks will reduce their capital levels when given a regulatory opportunity to 

do so. Ratios of tier 1 capital to balance sheet assets of large European banks typically are in the 

range of two percent to four percent, with the very largest institutions typically being closer to 

two percent. These banks have no direct regulatory constraint on financial leverage. U.S. banks, 

in contrast, do face leverage ratio requirements under the Prompt Corrective Action regulations, 

and the insured b~ hold tier 1 capital well in excess of five percent of balance sheet assets as a 

direct result of these regulations. 

Capital regulation matters a great deal for the capital banks actually hold. Throughout the 

development of Basel II, most banks involved in the discussions understood Basel II and 

especially the advanced approaches to be an opportunity to lower their capital requirements. 

This accounts for the almost universal endorsement by large banks of the core elements of Basel 

II, which was tempered when constraints on capital reductions became part of the U.S. 

discussions. 

A case in point is given by Northern Rock, the British bank with assets of about $200 billion that 

was recently nationalized. We understand that the British regulators provided banks that were 

interested, and deemed ready, the opportunity to implement certain aspects of the advanced 

approaches in 2007. In reference to the 44 percent reduction in risk-weighted assets Northern 

Rock reported using the advanced methodologies for its retail portfolio, its CEO wrote: 
We are pleased to have achieved approval for use of our Basie II rating systems. This 

means that the benefits of Basie II enable us to increase our 2007 interim dividend by 30 

percent. Going forward our dividend payout rate increases to 50 percent of underlying 

EPS from around 40 percent. Future capital planning, including the reduction of capital 

hungry assets, will anow us to return capital to shareholders through a share buyback 

programme. The medium term outlook for the Company is very positive. 

- CEO Adam Applegarth, Northern Rock Interim Results, June 30, 2007 

Q4: Would the advanced approach require banks to raise capital substantially during a 

downturn? 

A4: The advanced approaches capital requirements could rise sharply during a downturn 

compared to pre-downturn levels. This could cause banks to be either out of regulatory 

compliance or forced to raise substantial capital when they are least able to do so. 
Response to questions from the Honorable Michael B. Enzi 

by Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

QJ. I was happy to note in your testimony that you discussed the need to stop 

unnecessary foreclosures. You mentioned the FDIC's work as conservator oflndyMac and 

your participation in the Hope for Homeownership program as recent examples of your"' 

effort. Does the FDIC plan to develop a new program to extend Joan modifications to a 

broader pool of mortgages than those held by IndyMac? How would such a program work 

and what would its impact be on mortgage investors? Where would the FDIC derive 

authority for such a program? 

Al. In mid-November, the FDIC announced a new proposal for loan modifications that is 

similar to the program we developed at IndyMac. Both target borrowers who are 60 days or more 

past due, and both seek to apply a·consistent standard for affordable first-lien mortgage payment 

The new FDIC proposal has a 31 percent debt-to-income ratio, whereas IndyMac modifications 

are designed to achieve a 38 percent debt-to-income ratio, but can go as low as 31 percent. 

The FDIC's proposal is designed to promote wider adoption of systematic Joan modifications by 

servicers through the use of payment incentives and loss-sharing agreements, and thus reach 

more troubled borrowers. Specifically, to encourage participation, funds from the Troubled 

Asset Relief Program (TARP) would be used to pay servicers $1,000 to cover expenses for each 

loan modified according to the required standards. In addition, TARP funds would be used to 

provide guarantees against the losses that lenders and investors could experience if a modified 

loan should subsequently redefault. The guarantee would be paid only if the modification met all 

prescribed elements of the loan modification program, if the borrower made at least 3 monthly 

payments under the modified loan, and if the lender or servicer met the other elements of the 

program. 

The impact of this new proposal will be less costly than the lengthy and costly alternative of 

foreclosure, where direct costs can total between 20 and 40 percent of a property's market value. 

We expect about half of the projected 4.4 million problem loans between now and year-end 2009 

can be modified. Assuming a redefault rate of33 percent, this plan could reduce the number of 

foreclosures during this period by some 1.5 million at a projected program cost of $24.4 billion. 

We believe that Section 109 of the EESA provides authority for this proposal. Section 109 

provides that "the Secretary may use loan guarantees and credit enhancements to facilitate loan 

modifications to prevent avoidable foreclosures." 

Q2. Has the FDIC given any further consideration to the FDIC's own Home Ownership 

Preservation Loan program? I believe this program is a good way to avoid foreclosures 

and severe mortgage modifications at the same time. If this program is no longer being 

considered, why? 
QS. Each agency represented at the hearing has aggressively used the tools at their 

disposal in dealing with the crisis. However, sometimes the use of those tools bas Jed to 

unintended consequences. For instance, when the Treasury Department guaranteed money 

market funds, it led to a concern on deposit insurance and bank accounts. When the FDIC 

guaranteed bank debt, it had an effect on GSE borrowing costs, which in turn directly 

affects mortgage rates. 

Acknowledging that there is often a need to act quickly in these circumstances, please 

explain what steps and processes you have employed to inform other agencies about 

significant actions you undertake to ensure that there are not serious adverse unintended 

consequences and that your actions are working in concert with theirs. 

AS. The FDIC's Temporary Liquidity Guarantee Program was created during intensive 

discussions between the FDIC, the Department of the Treasury and the Federal Reserve over the 

Columbus Day weekend (October 11 - 13) and announced on October 14. Over the next several 

weeks, the FDIC adopted an Interim Rule, an Amended Interim Rule and a Final Rule. The 

FDIC's Interim Final Rule adopted on October 23 specifically requested comments on the 

Temporary Liquidity Guarantee Program and the FDIC received over 750 comments, including 

comments from other government agencies. During this process, the FDIC had frequent 

discussions with the Treasury, the Federal Reserve, the Office of the Comptroller of the 

Currency and the Office of Thrift Supervision about various aspects of the program and its 

potential consequences. 

With regard to concerns that the actions by the FDIC to guarantee bank debt had an effect on 

GSE borrowing costs, as discussed above, the spread of debt issued by Government-sponsored 

enterprises (GSEs), including Fannie Mae, Freddie Mac, and Federal Home Loan Banlcs 

(FHLBs), over Treasuries increased considerably in October and November although the overall 

cost of funding declined. According to Merrill Lynch data on U.S. bond yields, the spread 

between AAA-rated agency debt and Treasuries increased by nearly 40 basis points between 

September and November 2008. We believe these developments primarily reflect broad 

financial market uncertainty and a generally unfavorable market sentiment towards financial 

finns. In fact, the spread of debt guaranteed by the FDIC under the Temporary Liquidity 

Guarantee Program over Treasuries is larger than the spread on GSE debt. 

Financial firms, including those with a AAA-rating. saw their borrowing costs increase sharply, 

both in absolute terms and relative to Treasury yields, during the same two months, even as the 

Federal Reserve continued to lower the federal funds target rate. Merrill Lynch data show that 

the effective yield on AAA-rated corporate debt issued by financial finns increased by 140 basis 

points between September and October, before declining somewhat in November. Lower-rated 

corporate debt experienced even more significant increases over the same period of time. The 

primary purpose of the FDIC's Temporary Liquidity Guarantee Program is to provide liquidity 

in the inter-bank lending market and promote stability in the long-term funding market where 

liquidity has been lacking during much of the past year. While the FDIC's action was focused 

primarily on helping to restore a stable funding source for banks and thrifts, we believe that such 

liquidity can, in tum, help promote lending to consumers and small businesses, which would 
have a considerable benefit to the U.S. economy, in general, and financial firms, including 

mortgage lenders and GSEs. Nevertheless, partly to mitigate any potential effect of the FDIC 

guarantee on fundil)g costs for GSEs, the federal banking agencies have agreed io assign a 20 

percent risk weight to debt guaranteed by the FDIC (rather than the zero risk weighting that is 

assigned to debt guaranteed by a U.S. Government agency that is an instrumentality of the U.S. 

Government and whose obligations are fully and explicitly guaranteed as to the timely 

repayment of principal and interest by the full faith and credit of the U.S. Government). 
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COMMITTB: ON BANKING, HOUSING. AND 

URBAN AFFAIRS 

WAsHINGTON, OC 2051~75 

April 8, 2008 

FDIC 

APR - 8 ,JO~ 

The HoDOiablc Sheila C. Bair 

Chaizman 

Fcdcral Deposit Insurance Corporation 

SSO 17~ Street, NW 

Washi:n~~ DC 20429 

Dear Ma. Bair= 

OFFICE OF LEGISLATIVE AFFAIRS 

Thank you for testifying before. f;he ~mmittee on B~g. Housing, ancl Urban Affitl.rs. 

on March 4~ 2008. In onic:r to-complete the hearing record, wc·would 1q>prcciatc your answers to 

the-~ questions as soop as possible. · 

Please repeat the question. then )'Ol1r answer, single spacing both question and answer. 

Please do not.use an ctq>i~ 

Send your reply to Ms. Dawn4 ~ thecq~ec•l Cbicf'Clerk. She. W.ill:transmit 

copies to the tipproprlatc-offi~ including the committee's publications •office; Due to current 

p.rocc;durcs ngarding_ Scna.te mail. it is n,commended that you send replies via c-niail in a MS 

Wo~ WordPafcct or .pdf aU4chmcnt to Dawn R-atliff@banking.scnal'C.goy. 

CJD/dr 

If you hi!VC any questions about this lettc::r, pl~ contact Ms. Ratliff:at (202)224-3041. 

CHRISTOPHER]. DQDD 

Chairman 
Question, fOl" ~e Hearing o.n "The State ~r the Banking hulu$y". 

Mar¢h 4, 2008 

Ouetdou for111e Hoaorabfl.:Sheila Bair, Cllafrman, Federal Deposit"Ilfsu.nuu:e 

Cor-pontion, from-Senator Cnpo: 

Thabk you f'9r ,getting back tp me encl S~a JQbnson. Hagel. and T~ on ~ that you 

believC:abould be inclwfed in a ~ryrcliefpackaga At the ILC marlrup, I filed apd talbd 

about a :regulatory relief ~t th.at l think .shc,uld be the starting point for discussions of• 

p~qe fhat we spould move this~- It incl11ded items~ would.expand community· 

development in-vestment:&; relief ftom,privity notifications for financial institutions that have not _ / 

cb.a;nged their policies in thc:pastyear and dp_ 11ot-sha(c personal ccnsmner infoimatia.n;- and a L pJ,../1/\ 

combination of items for commumty baok5 and cr¢it mrions. - 0 

1. Alt;hough not all the. i~ thal you sμggestcd wr,:rc inclu,ilcd in t,bis ~ ~ there might 

need to be a few tweaks, arc there an.y items in this package that your agency cannot-support 

or are these all ·itCIJ1J that would increase regulatory em·cicncy without eompromising safety 

and soundness mul importantconsumer pl"!)tQCtion&? 

2. Since all oftl'u:sc items ~vc been vetted and micwed in past.hcadngs before the Banking 

Committee, is tlH3 any reason to not move quickly forward with a package alo.rig thcai: 

lines? 
' 

Questions fur t~ Hearing on "The State of the Banking Industry" 

l\farch 4, 2008 

Questions for the Honorable Sbeila Bair, Chafniwl,. Fed.eraJ Deposit lnmnmte 

-Comradon. from Senator Reed: 

I. How llCCUl'at:c and wcdictiye w~ the risk.modcls:U$Cd by bank$ and ratings agencies in 

identifying tho risks now unfolding. in the current market turmoil? 

2. If the-.adv~ appro:acbes·coμld have been p~t in effect immediately after they were 

published by the Basel Committee in June., 2004: 

a) Would.'baob using thcs'c approaches have been reqtilicd to bQld mprc capital again¢ 

their mortgage. portfolios? 

b) Would the advaru:cd apprcaclio have generated. sufficient capital requircmdrts to 

account for thc·risk.s-~ in-highly rated-Ci:>Or and. other complex s~mitics that have 

caosed losses iii 1hc1CJ1S afbillions for wge-financial institutions? 

c) Would lhc ad~ appro~ have pt'9vidcd a .rcgwatory aq,ital incentive for banks 

to. avoid the use: of off-balance shct:t conduit ,finmcing arrangements such as SJVs? 

d) Would the :advanced appn>aehcs bav~ provided a regμlatory capital incentive for b~ 

to avoid exe~ve dcpcndc:ncc.on bond ina'l1rcm? 

e) Wc,uld the advanced.approaches-have xequircd baiib to bold mote capital against 

commercial real estate? 

l) Would the ad.Ya:ticcd . .appro=u:hc:s.havc tcqμircd. banks to hold rttorc capital against 

leveraged conunc:rcial loan,? 

g) Would the uvauced approaches have required more capital ovt:rall, so that large b.anlcs 

would have been bctt~ capitalized going into the current ~et turmoil? · 

3. Woul!i b~ reduce their aetual capital in response to the advanced approaches? 

4. Would the adYBllCed .approach require banb to raise capital substanully during a downturn? 

3 
Questions for the Hearing on "The State of the Banking Industry" 

March 4, 2008 

Oaestlcm1 for tbe Honorable Shefla Bair, Chairman, .Federal Deposit Insurance 

Corporation, from Chsfnmm Dodd: 

Anti-Union Regalation 

Last year, the. Department of Labor issued a rcgu]atitm datstically expanding_ fhc personal 

financial infimnation union officers ,um employees. must submit to the Dcpartmcmt. The ucw· 

LM-30 nilc will ~uirc mme than 150,000 union vol~ emplo~ and their families. to 

report the tcma of mortgages, car loans, lind even student loans. To determine whether they 

mu.st rcgort ~--hm2ests, these individuals must~ (1) whether tlic bank providing a.loan 

d<>CB any business with the pcrsan'a. μnion, or (2) whcth~ t;hc bank docs. I() pcrcc:nt t?f iJs . C 

b~ines-s with firms w:boM employeci. ate in the same union. The .regulation tequitcs individuals Li ,,AM 

to write to ba,nks B$king for this info, and. then. ifblDD won•t provi~ ~h information, to - 0 

contacttbc: Dq;artmcnt of Labor for assis1ancc.. In the meantime. individuals arc.rcquirtd to 

make good faith CB.timatc:s of'thc ba;ok's business with their unions ~ unionized firms. 

• Given your agcoc.)"1 cxpcrtisc in the rcgulaoon and p.racfjccs of banks. do you belicv-e 

that banks-~ fible-and willing-to mfQIJit their r.nstomcr,a ~ they do business. with 

partiawir unions and how much ~f thcir "businC$5" and "business rccciP.ts" are with 

particular unionized fum.s? 

• Are banks obliga;lef;I or proln"bited by any federal ar ~fate law to disclose to their 

c:ustomcn how much ~usincss•• or "business receipts'' they have-with particular 

unionlzcd firms? Can banlcs·simply re.fuse to BDSWe:r thc$c written inquiries? 

• What type of mhninistrativc burden will this LM-30 rule. ana the htmdteds of thousands 

of ~ting inqlriri.es, place on ~llllks and arc: banks c:um:ntly prq,arcd to respond ~ these . . . ,, mqmnes. 

• Hbanks dQn't provide this :non-public information, is. there any "information reasonably 

ava,ilaqlcu ~ tfic publie; that union ·officers, employees; ~d·memQers could QSe to make 

gQOd faith estimates? 

Co'illlllen:ial Real Estate 

In December 2006. three agcocics,. tht,. FRB .. OCC. and FDIC, issued .final guidance fiig1ilighting 

•f;bc rim ta banks ~ concentrations in CQmmCfCial real estate. In issuing thc-~c, the '"'· ~c.. 

regillatoi:s specifi'cally empba.~zcd that they were not setting any limits on banks• commetcial _y J 

real ~tc lending. Yet now we-understand fi'Q_m thc·Comptrolle:r of the Carrcncy and the Chair 

·of the FDIC that over a third of -cnmmmrltybanks have-commercial real c$tc,~nceb1:ra~ons 

exceeding 100 P-~ of their capital. 

4 
Q~9tiom fpr the He•rlng on "Th~ State ef the Banking Industry" 

March 4, ZOOS 

• Are ·any aunrnnuity banks going to fail because Gitlieir ovcrcxposorc to commercial real 

estate, including~ real mate mortgage backed securities? . 

• Was _it the correct policy npt to. ~c;t ~()11 Iiml'l;s.in tbo--~7 

• What arc exmnii1ers doing wlieo they find thi;:sc lcvell. of conCQltrationa? 

• What off-.lialancc sheet vehicles ar'c-banks ~g fo invc:stin commctcial real c:statc? Arc. 

the regulatma apgmving these kinda of tra,nsactions? 

Buelll 

Then: was atensivc conversation on what would havc'been the capital status of banks going.into 

thi.s crisis period had Basel II capital standards·l?ccn in effect Fed Vicc-Chaimum. Kohn said 

that it 'we had the .mnc-·safcguanh in place; and if we started. implementing in 2004 with the 

same s~guaIJJJ 1bat are in placcin 2008 and 2009, I do. think oo balance we would have be.en 

·better off" Mr. Gronstal s:QSW~_diffctcntly, stlUing: "Ithinklho answer to your second 

question it that wr. probably would lutvc had lower dollar amount.a of capital per, asset, and that 

makes it mmc cb:allc:nging·tQ ~ with issues when times get rough."'· 

Can you explain in writing, whether yoii believe that ·banb would ~~ had more Q.r les.s capital 

in place fur this~ down bml ha4 Base~ II been implemented~ the·time frame that 

Vi~ Kohn mc:o.tiancd. in.his response? Can you also cxp]ajn why you believe that to 

be the case. citing !IJ1Y empirical ~ on'both tbe·cffccts ofB~l .II on capital req~ and 

what we have. experienced during. thi~ ecooomic ·crisis. as it relates to assets? 

During t;h.c discussion of Basel II, CQmptroller Dugan told th~ Committee.: '7bc irony of~ 

whole situation is·that the·vcry high-mosthigh)y rated best securities, the ones that were thought 

to ~l~ likely to dcfiuilt y,u where all the-a huge, share of the I~ ~ve bei:m 

cona:ntrated.... Given Basel n•s reliaocc on ratinP. of securities, docs this ob~on give you 

reason fbr conccm over the cum:nt Baael II atro.cturc? If B(\), what do you ll!COJDlDcnd be done; if 

not, why not? 

Too Big to Fail. 

I am concerned about the poJcntial rn.mifi•ns of the ~lw-c Qf a very large Ul$tituti.on. Is your .-J) ,R 

agency prepared today to handle the fiilure of a large..systemically significant insurtd financial ..V" 

mstitutio1;1? What stepa are you taking to prepare for this contingency? 
Questions {Qr the Hearing o• "The State of the Ba"Qklng Industry" 

· March 4, 2001 

Data on Loan Modification 

fl.~ provide comprchcnsivc data on mortgage delinqucnci~. forccl~ repayment plans -~\ '2 

aiid modifications fur the mortgages· being serviced by the institutions you ~ for the past y 

12 m.cmths. Please prm,ide this infoonltion by the-following.loan catcgori~: .subpriine. Alt-A, 

-and prime. Please dcscn'be the type:s ¢'rcpaymc:bt plans and modifications.~ se:rviccrs a,re 

employing_ and the DIJJJlllC['S of loans in each category. 

6 
Federal OeoosJt Insurance Con:,ontlon 

550 171h S11111t tfW, Walbmgtln. DC 20429 

. Honorable Marcy Kaptur 

House afReprescntatives 

Washington. D.C. 20515 

Dear Rcpresc:ntative Kaptur: 

· May 2 • 2008. 

Thank you for your letter with questions regarding the former Superior Bank of Hinsdale, 

IlliDois. 

The Federal Deposit Insurance Corporation's Legal Division prepared the enclosed response. 

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

Legislative Affai:n can be reached at (202) 898-7055. 

Enclosure 

Sincerely, 

Eric I. Spitler 

Director 

Office of Legislative Affairs 
Q6. Which attomey(s) or accounting firms created the securitization process that Superior 

employed? Did Superior deveJop the process internally or contract the development of its 

process externally? H externally, with whom? · 

A6. The accounting fum of Ernst & Yol.lllg audited the secwitization process that Superior ,.. 

employed. Superior personnel created the securitization process intern.ally. 

Q7. Please provide a list of the majority and minority shareholders of Superior Bank 

during its existence. Alliance Funding? Coast-To-Coast Financial? 

A 7. Alliance Funding was a division of Superior, and Coast-To-Coast Financial was Superior's 

holding company. AJ; of July 2001, the Pritzker family owned 50 percent of Coast-To-Coast and 

the'Dworman family owned the other 50 percent Additional information may be available from 

theOTS. 

Q8. Please provide a list of the earnings and other benefits (compensation, stock options, 

dividends, etc.) of Board members and shareholders of each during those years. 

AS.- The records of the FDIC indicate that as of February 2001, Superior's Board of Directors 

had five members. These members were Neal T. Halleran, the President of Superior; Monte N. 

Kurs, the President of the Consumer Finance Division of Superior; Stephen T. Mann. the 

Chairman of the Board of Directors; Glen Miller and Marc Weisman. Nelson Stephenson was a 

director until January 14, 2001. Directors' fees for each director were $24,000 a year as of 2001. 

Total compensation for Mr. Halleran included a salary of$170,000 and other remuneration 

totaling $129,359 and for Mr. Kurs, a salary of $280,000 and other remuneration of $606,421. 

Additional information may be available from the OTS, the primary regulator of Superior during 

its existence. 

Q9. During the 1990's, Superior grew from $200 million in loan volume to $2.2 billion by 

1999. The value of its securities reached $9.4 billion, and the return on its assets averaged 

12 times that of the industry. How was it possible that the Office of Thrift Supervision and 

the Federal Deposit Insurance Corporation allowed these fraudulent practices to continue 

for almost a decade with no effective regulatory oversight? 

A9. In the Department of Treasury's Material Loss Review, the Office of Inspector General 

indicated that Superior's primary regulator, the OTS, did not reflect supervisory concern over 

Superior's risk exposure until 2000. Examination staff believed that Superior's management had 

the expertise to manage and monitor the activity, with Superior enjoying high earnings and 

adequate capital. In addition, as noted in the same review, there was no uniform federal 

guidance on subprime lending issued by the Federal regulators until March 1, 1999. Toe 

Material Loss Review states that ''OTS generally accepted Superior's assurances that residual 
Response to an Inquiry by 

The Honorable Marcy Kaptu.r 

The following _information is provided by the Federal Deposit Insurance Corporation's 

Legal Division 

The Federal Deposit Insurance Coxporation was appointed Receiver for Superior Bank on 

July 27, 2001 by the Office of Thrift Supervision (OTS), Superior's primary regulator. 

Superior Bank was originally established in 1988 when certain investors acquired Lyons Bank of 

Countryside, Illinois. The acquisition was made possible with assistance from the former 

Federal Savings and Loan Insurance Coxporation (FSUC). Superior was a wholly owned 

subsidiary of Coast-To-Coast Financial Cozporation. As of July 2001, Coast-To-Coast Financial 

was owned by the Pritzker and Dworman families. At the time of its closing in July 2001, 

Superior had.just over $1.9 billion in recorded assets, with FDIC insured deposits of about $1.5 

billion. Following are the FDIC's responses to each of the questions in your April I st letter. 

QI. Are all legal issues of a federal nature resolved concerning Superior Bank, Hinsdale, 

Illinois related to the subprime mortgage market crisis? 

Al. The FDIC has resolved a number oflegal issues related to the failure of Superior Bank. 

including settlements of several professional liability claims. A contract claim against the FDIC 

relating to the sale of various Superior assets by the Receiver remains pending in the United 

States District Court for the District of Columbia. Beal Bank, S.S.B. v FDIC as Receiver for 

Superior Bank, Civ. Action No. l:02CV02146 (D.CD.C.). The causes of Superior's failure 

were determined by the Inspector General of the Department of the Treasury to be improper 

accounting and inflated valuation of residual assets, asset concentration, rapid growth, deficient 

risk management systems, liberal underwriting, unreliable loan loss provisioning. economic 

factors and non-responsive management A copy of the Material Loss Review of Superior Bank, 

FSB, is attached. 

Q2. Please summarize, by year, the criminal and civil charges brought against Superior, 

those resolved and those pending. This bank also had two subsidiaries, Alliance Funding 

alld Coast To Coast FinanciaL Were any charges filed against these instrumentalities and, 

if so, are those charges resolved or pending? 

A2. To our knowledge, there have not been any criminal charges brought against Superior, or 

against Superior's holding company, Coast-To-Coast Financial or Alliance Funding, a division 

of Superior. Our :records do not indicate any civil actions pending against Coast-To-Coast 

Financial as of the date the FDIC was appointed Receiver, but there was an action filed against 

several entities, including Coast-To-Coast Financial, after Superior's failure. Courtney v. 

Ha/Zeran, 485 F.3d 942 (7th Cir. 2007). Toe claims filed in that action were dismissed by the 
court, and that case is now closed. Our records indicate thirteen cases pending against Alliance 

Funding as of the date of the Receivership and. two cases pending against Superior. The Alliance 

Funding matters are no longer open matters on our records and only one of the two cases shown 

as pending against Superior is shown as open on our records. Toe FDIC does not know if CoastTo-Coast Financial is still a corporation active in any state. 

Q3. The largest insured U.S. financial institution to fail between 1992 and 2000 was 

Superior B.ank, Hinsdale, Illinois. Please provide a name list of that Bank's Board of 

Directors, Board Committees, and Chief Executive Officer for each year from 1988-2002. 

_,.,. 

A3. Toe records of the FDIC indicate that as of February 2001, Superior's Board of Directors 

had five members. These members were Neal T. Halleran, the President of Superior; Monte N. 

Kurs, the President of the Consumer Finance Division of Superior; Stephen T. Mann, the 

Chairman of the Board of Directors; Glen Miller and Marc Weisman. Nelson Stephenson was a 

director until January 14, 2001. Stephen Mann, Glen Miller, and Neal Halleran were members 

of the Audit Committee and Stephen Mann, Monte K.urs, and Neal Halleran were members of 

the Executive Committee. The Asset Review Committee was led by Neal Halleran, with officer 

Walter Rusnak as the other member. The Benefits Committee members were Neal Halleran and 

Monte Kurs, with officer Linda Jelinek as the third member. Information concerning members 

of Superior's Board and Board Committees prior to the date of the FDIC's appointment as 

Receiver may be available from the OTS, the primary regulator of Superior during its existence. 

Q4. In the sub prime abuse of mortgage securitization, how significant was Superior Bank 

among the U.S. firms that-engaged in these fraudulent practices during the 1990's? Would 

you say it was "an industry leader," and what evidence do you have to justify your reply? 

A4. Superior began to shift its focus to nationwide subprime mortgage banking in 1992, 

packaging and securitizing loans in the secondary market. Superior ended its securitization 

activities by June-of 2000. There is no indication in the findings oftbe Treasury Department's 

Inspector General that Superior engaged in any fraudulent activities related to its mortgage 

securitization activities or that it was an industry leader in mortgage securitizations. 

QS. Was Superior the first, or among the first such U.S. banking institutions, to engage in 

these fraudulent securitization practices at such significant volumes? 

AS. There is no indication in the findings of the Treasury Department's Inspector General that 

Superior engaged in any fraudulent activities related to its mortgage securitization activities or 

that it was an industry leader in mortgage securitizations. 
assets would be sold or upstreamed to the holding company and, if not, the residual assets would 

be properly managed. Besides relying on management commitments, examiners and senior OTS 

officials believed that the principal owners would provide financial assistance should the risks 

adversely affect Superior." 

QlO. When Superior opened for business in 1988, as part of the Federal Home Loan Bank--

Board's Resolution Trust Corporation's refinancing of Lyons Thrift, how was it that 

Superior received $645 million in federal tax credits as incentives to buy Lyons? Was that 

tax benefit negotiated administratively as part of the purchase agreement within the 

purview of the RTC, or was that incentive the result of separate legislation passed by 

Congress? 

AlO. The history of the acquisition of Lyons Thrift is set forth in great detail by the United 

States Court of Federal Claims in its decision in Coast-To-Coast Financial Corp. et al. v. United 

States, 52 Fed.Cl. 352 (Ct. Fed. CJ. 2002). A copy of that decision is attached. As l:he court 

noted, the provision of tax benefits was explicitly discussed by negotiators for the former Federal 

Savings and Loan Insurance Corporation (FSLIC) as an incentive to acquirors of Lyons Savings. 

The benefits as discussed were based on three provisions of the Internal Revenue Code of 1986 

referenced in the court's opinion. 

Qll. Name the specific individuals at the Resolution Trust Corporation, and any 

regulatory agencies involved in the Lyons-Superior transaction, responsible for negotiating 

that tax incentive. 

All. The FDIC was not a party to these negotiations. The negotiation is described ui some 

detail in the court's opinion in Coast-To-Coast Financial Corp. et al. v. United States, with 

representatives of FSLIC meeting with potential investors to discuss the terms of any acquisition 

of Lyons Savings. 

· Ql2. Superior began specializing in selling securities backed by subprime mortgages in 

1992 through Alliance Funding Corporation. Please name the individuals on this 

Corporation~s Board of Directors and its chief executive officers from 1992 to the present. 

A12. Alliance Funding Corporation was a division of Superior Bank and was part of the Bank's 

corporate structure. It did not have a separate Board of Directors. 

Q13. Did Superior/Alliance/Coast To Coast Financial sell tranches of subprime mortgage 

instruments to Fannie Mae and Freddie Mac during its existence? U so, can your agency 

provide a paper trail for these transactions including the year and date of such sales, the 

dollar volume of each transaction, and which individuals at Superior and the secondary 

markets signed these transactions? 
A13. The FDIC is not aware of any such sales during Superior's existence. Superior's primary 

regulator, the OTS, may have additional information that could be responsive to this question. 

Ql4. In what year, and by what means were Superior's mortgage securities moved to 

market through Merrill Lynch? Who were the individuals involved in those transactions 

at Superior and at Merrill? Were third parties or other brokerages or investment banks ; 

employed to move this paper? If so specify. By year, what volume and amount of such 

mortgage securities were sold to Merrill Lynch? Were Fannie Mae and Freddie Mac 

engaged, and how and when? 

Al4. The court's decision in Merrill Lynch Mortgage Capital, Inc. v. FDIC, 293 F.Supp.2d 98 

(D.C. D.C. 2003) references the agreement between Merrill Lynch and Superior entered into in 

2001 that allowed Merrill Lynch to purchase pools of residential loans originated by Superior. A 

copy of that decision is attached. 

Q15. In 1986, Congress passed a new Tax Reform Act which created the Real Estate 

Mortgage Investment Conduit to facilitate collateralized mortgage obligations. Knowing 

everything your agency knows today about the subprime crisis, to what ertent did this act 

contribute to the mortgage crisis America is facing today? Why? 

AlS. The passage of the Tax Reform Act of 1986 created the Real Estate Mortgage.Investment 

Conduit or REMIC. REMICs cm be used to structure a mortgage-backed securities offering as a 

sale of assets, thereby removing, for accounting purposes, the loans from the originating lender's 

balance sheet. They consist of a fixed pool of mortgages with the principal and interest 

payments sold to investors as individual securities. The Tax Reform Act eliminated the double 

taxation of the income earned by an issuer at the corporate level and the dividends paid to the 

holders of the securities held in a REMIC. These financing structures have been used for more 

than 20 years and they have increased the sources of capital available to the mortgage markets. 

There is no question that private mortgage-backed securities (MBS) have been. an engine of 

growth for subprime and Alt-A mortgages in recent years. However, a number of factors 

contributed to the ensuing creμit problems in these portfolios; including weak underwriting 

practices, poor consumer disclosure practices, mispricing of the credit risk, and faulty risk 

management practices in general. Given these diverse contributing factors, it is difficult to single 

out REMICs as a primary cause of the current mortgage crisis. 

Q16. During its existence, do records indicate Superior, or any of its subsidiaries, 

conducted any major financial transactions through or with the following firms: 

Wassentein Perella, Dresdner Bank, Carlyle Group? 

A16. The FDIC is not aware of any transactions between Superior and the named fums. 

Attachments 
MATERIAL LOSS REVIEW 

OF 

SUPERIOR BANK, FSB 

OIG-02-040 February 6, 2002 

Office of Inspector General 

******* 

The Department of the Treasury 

_. 
~ '--- . 

52 Fed.Cl 352 

52 Fed.CL 352, 89 A.F.T .R2d 2002-2175 

(Cite as: 52 Fed.CL 352) 

H 

Coast-To-Coast Financial Corp. v. U.S. 

Fed..Cl.,2002. 

United States Court ofFcderal Claims. 

COAST-TO-COAST FINANCIAL CORPORATION, Coast Partners, UBH, Inc., Plaintiffs, 

Federal Deposit ToSW1lnce Corporation, as Receiver 

for Superior Bank FSB, Hi11$dale, Illinois, Substituted Plaintiff, 

v. 

THE UNITED ST A TES, Defendant 

No. 95-525C. 

April 18, 2002. 

Investors who acquired an ailing thrift brought suit 

against the Un.itcd States, alleging that enactment of 

a section of the Omnibus Budget Reconciliation 

Act of 1993 breached agreements entitling tpem to 

take tax dednctions for losses incurred as the result 

of the sale of certain thrift assets. Akr the thrift 

wu placed in receivership, the Federal Deposit Insurance Corporation (FDIC), was substituted as 

plaintiff. On cross-motions for summary judgment, 

the Court of Federal Claims, Brugginlc. J., held that: 

(1) government breached implied covenant of good 

faith and fair dealing when, after inducing investors 

to enter into· a contract to acquire ailing thrift. in 

part by advertising the availability of a covered asset loss tax deduction, Congress targeted the same 

deduction for retroactive appeal when it passed the 

Guarini legislation in 1993; (2) govemmcnt was 

precluded from asserting defense of prior material -

breach to thrift's claim that government breached 

covenant of ·good fa.Hh and fair dealing; and (3) 

breach of contract claim asserted by the Federal 

Deposit Insurance Corporation {FDIC), as receiver 

of insolvent thrift, against the United States presented a "case-or controversy." · 

Plaintiffs' motions granted; defendant's cross-moti on denied. 

West Headnotes 

[I l Contracts 95 C:=168 

95 Contracts 

95U Construction and Operation 

95II(A) General Rules of Construction 

Pagel 

95kl 68 Jc. Terms Implied as Part of Contract Most Cited Cases 

Every contract has an implied condition that neither 

party to the contract will do anythlng to prevent 

pcrfo~ance thereof by the other party or that will 

hinder or delay him in its performance. 

(2) United States 393 €:==173(1) 

393 United States 

393IIl Contracts 

393k73 Performance or Breach of Contracts 

393k73(1) k. In General. Most Cited 

Cases 

When the government is one of the parties to a contract, it impliedly promises to act in good faith and 

invoke its great power of a sovereign act when and 

only when and to the extent necCSSB.I)' to cany out 

its essential governmental functions. 

[JJ United States 393 ~73(22) 

393 United States 

393III Contracts 

393k73 Performance or Breach of Contracts 

393k73(22) Jc. Acts or Conduct Constituting Breach in General Most Cited Cases 

Government breached implied covenant of good 

faith and fair dealing when, after inducing investors 

to enter into a contract to acquire ailing thrift, in 

part by advertising the availability of a covered asset loss tax deduction, Congress targeted the same 

deduction for retroactive appeal when it passed the 

Guarini legislation in 1993. Omnibus Budget Reconciliation Act of 1993, § 13224, 26 U.S.C.A. § 

165 note; 26 U.S.C.A. §§ 362,597. 

[4] United States 393 ~73(3) 

0 2008 Thomson/West No Claim to Orig. U.S. Govt. Worlcs. 
293 

~ F .SUpp.ld 91 

293 F.Supp.2d 91 

(Cite u: 293 F.Supp.ld 98) 

C 

Marill Lynch Mortg. capital, Inc. v. F .D.LC. 

DD.C.,2003. 

United States District Court,Dbtrict of ColumbiL 

MERRILL LYNCH MOR.TOAG.E CAPITAL, 

INC., Plaintiff, 

v. FEDERAL DEPOSIT INSURANCE. 

CORPORA 110N, Defendant. . 

Na. CIV ,A. O'l-01 Jl3(HHX). 

Nov. 6, 2003. 

Backfro•nd: Depositor brought suit dwl=ging. 

dctamlaation by Fcdc:nLI Deposit Insurance 

Corparaticm (FDIC). IS receiver of defunct savings 

and lom institutiao,· that depositor'• custDdia1 

account' was gcn,:m dcpo,it_ subject 1D pro rata 

n:covcsy, md not special deposit, subject to full 

r=OYCI)' before other c:rcdillffl. 

BoldJnp: On cross-motions for summary 

.judgment. the District Court. .ICcnnedy, J, held that 

(l) New York Jaw, and Dot fcdenJ rules 

pn:,111Ulplcd tmdi:r Iha Federal Deposit lmruancc 

.4ct (FDlA) and Office of Thrift Supemsjon 

(OTS), applied JO dc:b:rmination of whc!her 

depositor's custodial account constisntr:d special 

deposit, and 

(2) depositor's custodial accocm1 constituted direct 

deposit. as evinced by agreement between depositor 

and savmp 1111d loan instillltion. 

Plalntiff's motion gmitcd. 

West Hcadaotcs · 

\l) Baaks alld Buakin1 52 C:=>129 

S2 Banks and Banlclng 

mn Functioai and Dealings 

52ID(C) DepositJ 

S2ltl21 Title to md Dispositl.011. of Deposits 

521:129 k. In General. Most Ci~d 

Page 2 of 14 

Cases 

Banks ud liallklD1 S1 ~lSJ 

S2 BanJcs and Bankiq 

52lll Functiaus md Dealings 

S2ID(C)Dq)auts 

Page 1 

52tlS3 k. Special Depo1its. Most· Cited 

Cases 

Specific bm deposits are lilce. bailmcnts in which 

bank becomes bailee and ~positor retains title to 

~p or mODC)' de.posited; special deposits are not 

property of bank. 

12) Bub a11d Bankinz 5l C:=>77(.5) 

52 Banks and Bmkin& 

S2II BaoJdng Corpontioas and AssociatiDllS 

S2IJ(E) lrisolvmcy and Dissolution 

S21t77 AssdS ad R.ecdvr:rs on Insolvency 

S2k77(.S) t. In Gcnenl. Most Cited 

. Banks and 8aDJdnc ~ c:=so(6) 

52 Baab and Banldng 

52D Bmkinc CorpantiaDS and Asmc:iations 

52ll{E) Insolvcncy IDd Dissohnion 

. mao PresentatiDD and Payment af Claims 

Slltl0(6) k. Spc:cla) or Segregated 

Deposits. Most Cited Cases 

If bank fails, •ipecia.l deposits" do not become part 

of receivership estate, and lht:Rfcr: special 

depositors are cntitl~ 1D be paid in full bcf~ other 

creditors of the bank. 

(3J Banb and Bu.kine S2 C=>129. 

S2 Banks and Bmkiag 

S2IIl Fimctio115 and Dealings 

S2DI(C) Deposits 

S2kl21 Title to 111d Dlsposh.lon afDcposib 

-Slk 129 t, In Ocncnl. Most Cited 

0 2007 lbomson/West. No Cfaim Ix> Orig. U.S. Govt Works. 

http-J/wcb2 wcstlaw.com/print/printstream.aspx?sv==Split&prft=HT'MLE&mt=Wcstlaw&fu._ 9/5/2007 
CoMMITJlo:F. ON APPROPRIATIONS 

Suht.-ommittec nn Defense 

Subcommiucc: on Tr.m.-.ponatiun. HUD. 

and Related Agencie.,; 

WASHINGTON, D.C. OFFICE 

2186 Rayburn Building 

Wai.hingtun, DC 20515-3509 

(202) 225-4146 

Fax: (202) 22.5-77 JI 

Subcommittee un Agriculture, 

Rural Development, OHIOOFF1CE 

FDA and Related Agencies One Maritime Plaza 

CoMMnTEE ON TRE Buoc.1-:r 6th Aoor 

. DF.MOCRATIC Sn:1-:RlNG ANIJ POI.ICY 

Toledo, OH 43604-11!53 

(419) 2.'i9-7500 

MARCY KAPTUR (KOOi 964-4699 

Fax: (419) '.!55-96'.!J 

~ 01!,"flUlT. Omo http://kaptur.bouse-~o,· 

The Honorable Sheila C. Bair 

Chairwoman 

April 1, 2008 

Federal Deposit Insurance Corporation 

550 17th Street NW 

FDIC 

J 

APR - 8 2008 

Washington, DC 20429-9990 OFFICE OF LEGISLATIVE AFFAIRS 

Dear Chairwoman Bair: 

As the subprime mortgage securitization crisis deepens, Congress is evaluating 

various measures to deal with its financial impact on our citizens and economy. 

In order to gain a more thorough understanding of the process that led our nation to 

this juncture, I am writing to determine if your agency may have information that can 

enlighten my understanding. I am particularly interested in obtaining more information 

about one of the early and more publicized cases ~t has been litigated, Superior Bank of 

Hinsdale, Illinois. Any information you can provide in response to the questions that 

follow will be appreciated. 

1. Axe all legal issues of a federal nature resolved concerning Superior Bank, 

Hinsdale, Illinois related tp the subprime mortgage market crisis? 

2. Please summarize, by year, the criminal and civil charges brought against 

Superior, those resolved and those pending. This bank also had two subsidiaries, 

Alliance Funding Corporation and Coast to Coast Financial. Were any charges 

filed against these instrumentalities and if so, are those charges resolved or 

pending?. 

3. The largest insured U.S. financial institution to fall between 1992 and 2000 was 

Superior Bank, Hinsdale, Illinois. Please provide a name list of that Bank's Board 

of Directors, Board Committees, and Chief Executive Officer for each year from 

1988-2002. 

4. In the subprime abuse of mortgage securitization, how significant was Superior 

Bank among the US firms that engaged in these fraudulent practices during the 

PRINTED ON RECYCLED PAP£R --·"!• 11 
l 990's? Would you say it was "an industry leader," and what evidence do you 

have to justify your reply? · 

5. Was Superior the first, or among the first such US banking institutions, to engage 

in these fraudulent securitization practices at such significant volumes? 

6. Which attomey(s) or accounting firms created the securitiz.ation process that 

Superior employed? Did Superior develop the process internally or contract the 

development of its process externally? If externally, with whom? 

7. Please provide a list of the majority and minority shareholders of Superior Bank 

during its existence. Alliance Funding? Coast to Coast Financial? 

8. Please provide a list of the earnings and other benefits (compensation, stock 

options, dividends, etc.) of Board Members and shareholders of each during those 

years. 

9. During the 1990's, Superior grew from $200 million in loan volume to $2.2 

billion by 1999. The value of its securities reached $9.4 billion, and the return on 

its assets averaged 12 times that of the industry. How was it possible that the 

Office of Thrift Supervision and the Federal Deposit Insurance Corporation 

allowed these fraudulent practices to continue for almost a decade with no 

effective regulatory oversight? 

10. When Superior opened for business in 1988, as part of the Federal Home Loan 

Bank Board's Resolution Trust Corporation's refinancing of Lyons Thrift, how 

was it that Superior received $645 million in federal tax credits as incentives to 

buy Lyons? Was that tax benefit negotiated administratively as part of the 

purchase agreement within the purview of the RTC, or was that incentive the 

result of separate legislation,passed by Congress? 

11. Name the specific individuals at the Resolution Trust Corporation, and any 

regulatory agencies involved in the Lyons-Superior transaction, responsible for 

negotiating that tax incentive. 

12. Superior began specializing in selling securities backed by subprime mortgages in 

1992 through Alliance Funding Corporation. Please name the individuals on this 

Corporation's Board of Directors and its chief executive officers from 1992 to the 

present. 

13. Did Superior/Alliance/Coast to Coast Financial sell tranches of subprime 

mortgage instruments to Fannie Mae and Freddie Mac during its existence? If so, 

can your agency provide a paper trail for these transactions including the year 

and date of such sales, the dollar volume of each transaction, and which 

individuals at Superior and the secondary markets signed these transactions? 
® FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN. 

Honorable Barney Frank 

Chairman 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chainnan: 

May 5, 2008 

I appreciated the opportunity to testify before the Committee on Financial Services on 

April 9, 2008, at the hearing "Using FHA for Housing Stabilization and Homeownership 

Retention." 

Enclosed are responses to questions received from Congressman Barrett following my 

testimony. 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 

Enclosure 
Response to questions from the Honorable J. Gresham Barrett 

from Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Ql. What should be the goal of federal regulations? Should we just aim to ensure that 

fraud and malfeasance are punished? Or should the goal in regulations be stable growth? 

Al. Federal banking regulations should not have a single focus. The central objectives of ~-

federal banking regulations are to maintain public confidence in the banking system; to support 

financial intermediation, credit availability, and competition; to enforce the public laws; and to 

protect consumers and encourage compliance with the Community Reinvestment Act. Capital 

requirements and other prudential regulations arc tools used by bank regulators to promote safe 

and sound banking operations and to discourage excessive risk-taking. Banking regulations also 

attempt to minimize the risk of fraud. 

Maintaining economic stability is a consideration in bank supervision, and the federal banking 

agencies recognize the importance of encouraging credit availability during periods of slower 

economic growth. While the Federal Reserve Board, in its domestic monetary role, is the federal 

entity primarily concerned with economic growth and stability, the other federal banking 

agencies also have a role by encouraging financial institutions to make credit available in the 

communities they serve on appropriate terms. 

Ql. How much do you think our current mortgage crisis was caused by regulatory failures 

or lack of enforcement? 

A2. As I mentioned in my testimony, the problems facing the U.S. markets are attributable to a 

complex set of interrelated causes. These include weakened lending standards, inadequate 

consumer protections, regulatory arbitrage, and speculative activity, as well as deficient 

surveillance by rating agencies and inadequate due diligence by originators and investors. The 

current turmoil in the credit markets also has been exacerbated by liquidity troubles that typically 

are 11ot identifiable until funding problems emerge. 

A significant volume of subprime mortgages were originated by companies (primarily mortgage 

brokers and stand-alone finance companies) not subject to federal supervision. In 2005, 52 

percent of subprimc mortgages were originated by companies not subject to federal supervision. 

An additional 25 percent were made by lenders affiliated with a regulated, deposit-taking bank or 

thrift, and 23 percent by regulated banks and thrifts. The FDIC estimates that the share of such 

loans made by non bank entities not subject to f cdcral supervision in 2006 was 46 percent 

For mortgage loans made by federalJy supervised depository institutions, the federal banking 

agencies issued a number of cautionary statements beginning in 1999 on a number of topics, 

including subprime lending, non-traditional mortgage lending, and commercial real estate loan 

concentrations. The pmposc of these statements was to alert financial institutions to the risks 

involved and to encourage strong underwriting policies, prudent risk selection, and robust 
concentration management procedures. Overall, the regulatory agencies strongly encouraged 

insured banks and thrifts to be cautious in their origination and management of subprime and 

non-traditional mortgage products. 

From an enforcement standpoint, Congress has mandated routine on-site examinations for all 

insured institutions, which the federal ba:nlc regulatory agencies follow. Any institution that a 

regulator finds is performing poorly or has taken on excessive risk is typically directed to 

improve conditions or face enforcement action, including possible closure. 

QJ. Are there any areas where onerous regulations led to evolution towards exotic 

produ_cts helping to cause the finandal crisis? 

A3. Financial innovation (including non-traditional mortgage lending and structured financial 

instruments/vehicles) and the abundant liquidity in global credit markets together fueled the 

development of non-traditional mortgages and financial structures. The development of these 

financial products was not precipitated by onerous regulation, but by financial innovation and 

abundant capital seeking higher returns. The highly liquid credit market environment from 2005 

until mid-2007 led investors to seek higher returns by taking on increased credit risk and 

liberalizing repayment and loan tenns. 

Q4. If the government intervenes ln the private market, do we have any additional 

regulatory duties to prevent this from happening ln the future? 

A4. 1 believe that we do have the duty to prevent a recurrence of the problems we now face. As 

I mentioned in my testimony, with regard to preventing practices in the future that contributed to 

the current issues in the mortgage markets. strong final rules by the Federal Reserve Board under 

the Home Owners Equity Protection Act (flOEPA) that impose basic principles of sound 

underwriting on both bank and non-bank mortgage originators are essential. An important 

complement to these substantive rule provisions would be the creation by Congress of a federal 

entity to buttress the efforts of the states to better license and police mortgage originators. The 

House of Representatives adopted a set of strong licensing provisions as part of H.R. 3915 last 

year. Similarly, the Treasury Department bas proposed creating a Mortgage Origination 

Commission that, working with state authorities, would develop minimum national licensing 

qualifications for all mortgage market originators. Although these two approaches differ in some 

details, their best elements could be merged into a single proposal that would address this urgent 

issue and command widespread support. 

I would emphasize that there is a particular urgency for Congress to act on legislation to establish 

national licensing standards for non-bank mortgage participants. As interest rates have declined. 

advertisements arc once again promising low "teaser" rates, no-docmnentation and no-moneydown loans. as well as using the term "fixed" in potentially misleading ways to describe the 

interest rate on variable-rate mortgage loans. Banks arc not allowed to market,. originate, or fund 

loans with such weak underwriting, but no such restrictions apply to non-bank mortgage 

participants nationally. Combined with strong final HOEPA rules from the Federal Reserve 
Board. prompt passage of legislation creating a Commission to license and police mortgage 

originators would help prevent these practices from again misleading borrowers and adding more 

problems to the mortgage markets. 
@ FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Barney Frank 

Chairman 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chairman: 

May 5,2008 

I appreciated the opportunity to testify before the Committee on Financial Services on 

April 9, 2008, at the hearing ''Using FHA for Housing Stabilization and Homeownership 

Retention." 

Enclosed are responses to questions received from Congressman Barrett following my 

. testimony. 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 

Enclosure 
e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable J. Gresham Barrett 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Barrett: 

May 5, 2008 

Thank you for the opportunity to respond to questions you submitted subsequent to my 

testimony before the Committee on Financial Services on April 9, 2008, at the hearing "Using 

FHA for Housing Stabilization and Homeownership Retention." 

Enclosed are my responses to your questions. 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) 898-383 7. 

Sincerely, 

Sheila C. Bair 

Enclosure 
Response to questions from the Honorable J. Gresham Barrett 

from Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

QI. What should be the goal of federal regulations? Should we just aim to ensure that 

fraud and malfeasance are punished? Or should the goal in regulations be stable growth? _ 

Al. Federal banking regulations should not have a single focus. The central objectives of 

federal banking regulations are to maintain public confidence in the banking system; to support 

financial intermediation, credit availability, and competition; to enforce the public laws; and to 

protect consumers and encourage compliance with the Community Reinvestment Act Capital 

requirements and other prudential regulations are tools used by bank regulators to promote safe 

and sound banking operations and to discourage excessive risk-taking. Banking regulations also 

attempt to minimize the risk of fraud. 

Maintaining economic stability is a consideration in bank supervision, and the federal banking 

agencies recognize the importance of encouraging credit availability during periods of slower 

economic growth. While the Federal Reserve Board, in its domestic monetary role, is the federal 

entity primarily concerned with economic growth and stability, the other federal banking 

agencies also have a role by encouraging financial institutions to make credit available in the 

communities they serve on appropria~e terms. 

Q2. How much do you think our current mortgage crisis was caused by regulatory failures 

or lack of enforcement? 

A2. As I mentioned in my testimony, the problems facing the U.S. markets are attributable to a 

complex set of interrelated causes. These include weakened lending standards, inadequate 

consumer protections, regulatory arbitrage, and speculative activity, as well as deficient 

surveillance by rating agencies and inad_equate due diligence by originators and investors. The 

current turmoil in the credit markets also has been exacerbated by liquidity troubles that typically 

are not identifiable until funding problems emerge. 

A significant volume of subprime mortgages were originated by companies (primarily mortgage 

brokers and stand-alone finance companies) not subject to federal supervision. In 2005, 52 

percent of subprime mortgages were originated by companies not subject to federal supervision. 

An additional 25 percent were made by lenders affiliated with a regulated, deposit-taking bank or 

thrift, and 23 percent by regulated banks and thrifts. The FDIC estimates that the share of such 

loans made by nonbank entities not subject to federal supervision in 2006 was 46 percent 

For mortgage loans made by federally supervised depository institutions, the federal banking 

agencies issued a number of cautionary statements beginning in 1999 on a number of topics, 

including subprime lending, non-traditional mortgage lending, and commercial real estate loan 

concentrations. The purpose of these statements was to alert financial institutions to the risks 

involved and to encourage strong underwriting policies, prudent risk selection, and robust 
concentration management procedures. Overall, the regulatory agencies strongly encouraged 

insured banks and thrifts to be cautious in their origination and management of subprime and 

non-traditional mortgage products. 

From an enforcement standpoint, Congress has mandated routine on-site examinations for all 

insured institutions, which the federa1 bank regulatory agencies follow. Any institution that a 

regulator finds is performing poorJy or has taken on excessive risk is typically directed to 

improve conditions or face enforcement action, including possible cJosure. 

Q3. Are there any areas where onerous regulations led to evolution towards exotic 

products helping to cause the financial crisis? 

A3. Financial innovation (including non-traditional mortgage lending and structured financia1 

instruments/vehicles) and the abundant liquidity in globa] credit markets together fueled the 

development of non-traditional mortgages and financia1 structures. The development of these 

financial products was not precipitated by onerous regulation, but by financial innovation and 

abundant capital seeking higher returns. The highly liquid credit market environment from 2005 

until mid-2007 led investors to seek higher returns by taking on increased credit risk and 

liberalizing repayment and loan terms. 

Q4. If the government intervenes In the private market, do we have any additional 

regulatory duties to prevent this from happening in the future? 

A4. I believe that we do have the duty to prevent a recurrence of the problems we now face. As 

I mentioned in my testimony, with regard to preventing practices in the future that contributed to 

the current issues in the mortgage markets, strong final rules by the Federal Reserve Board under 

the Home Owners Equity Protection Act (HOEPA) that impose basic principles of sound 

underwriting on both bank and non-bank mortgage originators are essential. An important 

complement to these substantive rule provisions would be the creation by Congress of a federal 

entity to buttress the efforts of the states to better license and police mortgage originators. The 

House of Representatives adopted a set of strong licensing provisions as part of H.R 3915 last 

year. Similarly, the Treasury Department bas proposed creating a Mortgage Origination 

Commission that, working with state authorities, would develop minimum national licensing 

qualifications for aIJ mortgage market originators. Although these two approaches differ in some 

details, their best elements could be merged into a single proposal that would address this urgent 

issue and command widespread support. 

I would emphasize that there is a particular urgency for Congress to act on legislation to establish 

national licensing standards for non-bank mortgage participants. As interest rates have declined, 

advertisements are once again promising low "teaser" rates, no-documentation and no-moneydown loans, as well as using the term "fixed" in potentially misleading ways to descnbe the 

interest rate on variable-rate mortgage loans. Banks are not allowed to market, originate, or fund 

loans with such weak underwriting, but no such restrictions apply to non-bank mortgage 

participants nationally. Combined with strong final HOEPA rules from the Federal Reserve 
Board, prompt passage of legislation creating a Commission to license and police mortgage 

originators would help prevent these practices from again misleading borrowers and adding more 

problems to the mortgage markets. 
'·. Office of the Comptroller of the Currency 

Federal Deposit Insurance Corporation 

Board of Governors of the Federal Reserve System 

Office of Thrift Supervision ,.. 

The Honorable Barney Frank 

Chairman 

Committee on Financial SeIVices 

U.S. House of Representativt;:s 

. . JlUle 6, 2008 

2129 Rayburn Housing Office Building 

Washington, DC 20515 

Dear Chairman Frank: 

Thank you for your letter dated April 28, 2008, regarding proposed changes to the 

Interagency Questions and Answers Regarding the Community Reinvestment Act (CRA). 

Your letter raises a specific concern about a question and answer proposed by our 

agencies in July 2007 about information that could be used to demonstrate that an 

investment in a national fund meets the geographic requirements of the CRA regulation. 

(See proposed Q&A §_23 (a)-2.) 

Your letter expresses the view that the proposed question and answer limits the amount of 

favorable CRA consideration a :financial institution may.receive for its investments in 

multi-bank community developmeni fimds only to those activities that it can document 

fall within its assessment area(s ). Your letter further states the view that the question and 

answer represents a change in policy, and that previously the agencies provided CRA 

consideration for such investments without regard to geography, provided that the 

financial institution is satisfactorily meeting the credit needs within its assessment area. 

The agencies have long recognized the important role served by community development 

funds, and the fact that many of these funds operate on a statewide or multistate basis. In 

the lnteragency Questions and Answers Regarding Community Reinvestment published 

in 2001,1 the agencies indicated that they would give favorable consideration to a 

financial institution's involvement in community development activities that benefit a; 

broader statewide or regional area that includes the institution's assessment area. (See 

Q&A §§_.12(i) and 563e.12(h)-5.)2 The agencies further stated in Q&A §§ _.12(i) and 

1 See 66 Fed. Reg. 36620 (Ju1y 12. 2001). 2 See 66 Fed. Reg. 3~26-27. 
563e.12{h)-6 that the term ''broader statewi~e or regional area" could be as .large as a 

multistate area, ·for exm;nple, the Mid-Atlantic states.3 . 

As you know, the Community Reinvestment Act encourages .financial institutions "to 

help meet the credit needs of the local communities in which they are chartered consistent 

with the safe and sound operation of such institutions." 12 U.S.C. 2901(b). The goal of 

the proposed Interagency Q&A referenced in your letter, Q&A §_.23(a)-2, was to 

provide guidance to the industry and examiners alike on th~ type of information that 

· could be used to show that a loan or investment in such a fund meets the necessary 

geographic requirements of the CRA statute and implementing regulations. The agencies 

did not intend to suggest a change in position on the regulatory requirements regarding 

CRA consideration for a .financial institution;s investments outside of its assessment 

area(s), or a modification of those requirements. 

We appreciate your taking the time to write to us and bring your interest in this matter to 

our attention. Please be assured that your comments are being seriously considered by 

· the agencies. We. will be happy to notify you as soon as possible after. we have made a 

decision on any final guidance on this issue. 

If you have any additional questions or concerns, please do not hesitate to contact us. 

Ben_iBeme 

Chairman 

Board of Governors of the Federal 

Reserve System 

Sheila C. Bair 

Chairman 

Federal Deposit Ins~ce Corporation 

3 See 66 Fed. Reg. 36627. 

Sincerely, · 

omptroller 

Office of the Co 

Currency 
11.6. ~euR et Jl.tJttK\\t&ti\\u 

Contmftttt on .:f{nandal .i>erbittl 

2129 .l\11burn ~DUt '9fUtt }80Ubfn11 

tlllll~fngton, i&C 20515 . 

SPENCER BACHUS, Al. RANICINa MEMBER 

The Honorable Ben S. Bernanke 

Chairman 

Board of Governors of the Federal 

Reserve System 

20th & C Streebr, NW 

Washington, DC 20661 

The Honorable Sheila C. Bair 

Chairman 

Federal Deposit Insurance Corporation 

660 17th Street, NW 

Washington, DC 20429 

FDIC 

April 28, 2008 

'Ille Honorable John C. OFFICE OF lEGJSl.AT/Vf AFFAIRS 

Comptroller 

Office of the Comptroller of the Currency 

260 E Street, SW 

Washington, DC 20219 

'llle Honorable John~ Reich 

Director 

Office of Thrift Supervision 

1700 G Street, NW 

Wa.ahington, DC 20552 

Dear Chainnan Bemankc, Comptroller Dugan, Chairman Bair, and .Pirector Reich: 

As the Financial Services Committee focuses on legislation to help alleviate the current housing 

crisis, l am troubled by the posstbility that proposed changes to the Jntcragency Questions and 

Answers ("Guidance") implementing the Community Reinvestment Act (CRA) could undcnnine 

· efforts to expand affordable housing in the United States. 

For over twenty years, banks have successfully partnered with non~profits like Massachusetts 

Housing lnvcstmcrit Corporation, ·Mass Housing Partn~ip, Local Initiatives Support 

Corporation, and dozens of large lenders through investments in pooled debt and equity 

community development funds. Th= funds arc attractive because they spread and diversify risk 

among multiple lenders and investors, and over broad geographic areas which helps to facilitate 

the flow of private capital to undcr-s.mrcd areas and people with acute needs. Unfortunately, 

there is increasing evidence that the proposed Guidance is chilling banks' investment in certain 

funds that have been so critical to financing affordable multi-family housing projects. 

In contrast to the long-established practice of most federal banking agencies, the proposed 

Guidance limits the amount of CRA credit a bank may receive for investments in multi-bank 

community development funds only to those activities it can document fall within its assessment 

areas. I understand that regulators have traditionally granted full CRA credit for individual bank 

investments in these funds without regard to geography provided that the bank is s~sfactorily 

meeting the credit needs within its assessment areas. This policy shift, which appears to discount 

and even eliminate banks' investment in state, r:egional and national community dcvdopment 

funds, is likely to have far-reaching and negative implications for the supply of aparbnents 

affordable to low- and moderat~incomc Americans. 

At a time when losses by the nation's largest financial companies have prompted them to scale 

back their participation in the Low Income Housing Tax Credit program, regulators should put 
'nle Honorable Ban 8. Bernanke 

The Haoorable John C. Dugan 

The Honorable SheUa C. Bair 

The Honorable John M. Reich 

Page 2 

forward policies that help ameliorate, rather than exacerbate, the crisis in the multi-:fiunily, 

housing sector. I would appreciate you investigating this matter and reporting back on the efforts 

your agency and other FFIEC members arc making to address the concerns raised in ·this Jetter. 
E-Mail Viewer 

E-Mail Viewer 

'. . Message . -: ;....--De-ta_ils _ ___,, r Attachments ~ '. 

I . 

i 

I 

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Headers ·. r --Source 

1 From: •mfrancis@goJdenvalleybank.com• <mfrancls@goldenvaneybank.com> 

. Date: 3/1112009 11 :42:27 PM l To: •ca02ima@mail.house.gov" <ca02lma@mail.house.gov> 

; Cc: 

Subject: Contact fonn Yes-response 

' <APP>CUSTOM 

<PREFIX>Ms. </PREFIX> 

<FIRST>Mar1t</FIRST> 

<LAST>Francls<ILAST> 

, <AODR1>190 Cohasset Rd</AODR1> 

<CITY>Chico</CITY> 

<STATE>CA<ISTATE> 

<ZIP>95926<1ZIP> 

<PHONE>(530) 894-1000</PHONE> 

<EMAIL>mfrancla@goldenvalleybank.com</EMAIL> 

<ISSUE>Anandal Services<IISSUE> 

<MSG>Mar1t Francis 

President & CEO 

Golden VaOey Bank 

190 Cohasset Road 

Chico, CA 95926-2268 

! 

i March 5, 2009 

' The Honorable Wally Harger 

· House of Representatives 

i 242 Cannon House Office Building 

: Washington, DC 20515-0502 

! Dear Representative Herger. 

·" 

: I appreciate the opportunity to comment on the .. FDIC's interim rule that 

. would impose a special assessment of 20 basis points In the second quarter. 

I have serious concerns about this proposal, but first wanted to emphasize 

, that I fully support the :view of the FDIC that we need a strong, financial 

• secure fund in order to maintain the confidence depositors have in the 

system. However, how this is done is very Important to my bank and my 

; community. 

: The special assessment is a significant and unexpeded cost to my bank 

; that win devastate earnings. 

i Banks Dke mine that never made a subprime loan and have served our • 

! communities in a responsible way for years and years are being unfairly 

; penalized. 

! The special assessment is completely at odds with my bank's efforts to 

; help my community rebuild from this economic downturn. 

I 

I Given the lmpad that the proposed assessment will have on my bank and my I community, I strongly urge you to consider alternatives that would reduce 

; our burden and provide the FDIC the funding fts needs in the short term. 

i 

http://ca02:800/iq/view_cml.aspx?rid=5053368&oid=76065 

Page 1 of2 

HTML 

4/17/2009 
THI• -lflfflllll Cl, LLC. 

1308 Wat Elghltl Ava. ••• 0lica, CA 95826 

Phone 530-883-6940 Fee 530-S93-2943 

Wo@thomasweldngC0111 

March 11, 2009 

Congressna, wary Herger 

242 OIM:ln House Offlca Bulking 

Washbigtpn, DC 20515 

Dear C".ohgiesnan Harger. 

This letter Is to C?ffer: my_CXl_l'IVllents an ttie_FOIC's Interim_ rulethatwould Impose 

a speclal assessment cl 20 basis points In the second quarter. ·. ' 

Although I fully support the View rl the FOIC that we need a strt,,J, ftnandarty 

seen n.n1 In order to maintain the conlldence ol deposftOI s, I hiNe seriCJus 

mnmns about this proposal. 

Our Bank Is less than three years old. \Ve ;n ~ ~cnal ccmrriunlly bank that 

suppcrts local business, the mnmunlly and Its residents wfth traditional banlcln9 

services. We haYe not partSdpab!d In sub prime lending. not Invested In 

ar:,ythlng Qtf'l8I' than Government Sponsored NJerq securtdes and have been · wel embraced by cw ccmml.lllty. Last year we Increased the amount rl loans 

In .the commu,:ilty by 42% and are on Ille wrge or rrratly ber:::amlng profltable. 

lhe spedal a.s essment Is a .slgnlflcant and unecpected cost 1D my bank that will 

devastate earnings and reduce 01r capital slgnfflcantly. 

WI are already deallng Wllh I deepening recess101'1, ~ Nies that 

overstate eanxn1c losseS and unra1r1y reduQe ~~ regu1a1r:1ry pressure ID 

dassll'V assets that anh,ue ID perfarm. and I slgnlflcant lnaase In reg\!lar quarmty FO[C pnmlums. • . - . 

Eadl ~ these Is a big challenge on Its own -bot caledNely, thevsexb"emely b1,ude11s0me. Binks lice mne that IWM!I' made a sub prtme and hiM! 

ss'Yld cxr ~ In a ~ble way are being lriu1y tm1. The 

spedal assessrntrt Is tofflPleb!ly at odds with my bank's elTclb ID help my 

C0ll'l11Ul'llty rebuld from ttis economic downturn. llie reduction In earnings wll 

make It harder la buld capital when l: Is~ the most. . . . . . . 

We wll-also be rmzd to look at ways ID IQwer the cost cl atf18li expel tSl:5, whk:h 

may limit our ablllty to sponsor community actfyltles or make dlllrttable 

donations -somdhlng that~ are very compassionate about. 

"Thomas M, Dauterman 

Board Member 

Northern~ NatlOnal Bank 

TO:lm 
WALLY HERGER COMMITTEE ON 

WAYS AND MEANS 

PUASl IIEPI.Y TO: 

0 WASHl~TON OFFICE: 

242 CANNoN Housl Omcl: Bua.oM; 

12021 225-3071 ---- HEALTH 

DISiRICT OFFICES: 

0 2635 foMEsT Alll:NUE. Surfl 100 

OC:O.CA!15!121 

15301 ll93-ICl63 

D ~,o Huosn:o Oowt. SUITT ns REDIIINI"~ CA 9IIQ02 

15301223-5198 

Chairwoman Sheila Bair 

QCongress of tbt Wniteb ~tatts 

~oust of l\tprtstntatibts 

11tas1Jington, J)C 20515-0502 ----- Aprill7,2009 

~ 

'TRADE 

Federal Deposit Insurance Corporation 

550 17th Street, NW -- ...... , •• !" ...... _.._.. :r• ·i:- rr-,•-~ .. ~ .......... ~. --·--····-··· ....... ! 

Washington, DC 20429-0001 

Dear Chairwoman Bair, 

I recently received the attached correspondence from a group of my constituents, 

regarding the Federal Deposit Insurance Corporation's interim rule that would impose a special 

assessment of 20 basis points in the second quarter. I would appreciate yo~ review and 

consideration of 's concerns, and a thorough response at your earliest possible convenience. 

Thank you for your consideration of this request. I look forward to hearing· from you. 

WH:jr 

Enclosure 

WALL~~~ 

Member of Congress 
FDI• 

· Federal Deposit Insurance CorporaUon 

550 17111 Street NW, Washlnglon, D.C. 20429-9990 

Honorable James P. Moran 

House of Representatives 

Washington, D.C. 205 J 5 

Dear Congressman Moran: 

May6,2008 

Thank you for your letter to Christine Davis regarding ~e use of the Federal 

Deposit Insurance Corporation facility at Virginia Square for your government 

procurement conference. We are pleased that the FDIC was able to accommodate the 

event 

I apologize for the delay that you and~cxpcrienccd clearing security 

and entering the parking garage. Our Division of Admimstration has reviewed our 

procedures and taken the necessary corrective action to ensure that this does not happen 

again. 

We hope you and the George Mason University staff will consider using our 

· facility in the future. · 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative -Affairs 
HOUSE OF REPRESENTATIVES 

WASHINGTON, D. C. 20515 

4!2/2008 

Ms. Christine Davis 

Chief: Special Services Division 

Federal Deposit Insurance Corporation 

3501 Fairfax Dr, Room E-3084 

Arlington, VA 22206 

Dear Ms. Davis, 

Thank you so much for allowing us to use your facility at my 

recent government procurement conference. It is a wonderful 

facility, and we -u,,~re gr.it~fnl for ~n thr. as.i:ist3nc~ y~,u an.rl. you~ 

staff provided. The large crowd in attendance thoroughly enjoyed 

the networking, collaboration, and information from our 

presentations. 

l am concerned, however, that the 

was subjcc to a minute wait to Jo &J 

get into the parlcing garage espite our pre-arrangement!, and that I 

too had to wait 20 minutes. It-was the one cloud on what was 

otherwise a wonderful event 

Again, thank you~ 

James P. Moran 

Member of Congress 
e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Claire McCaskill 

United States Senate 

Washington, D.C. 20510 

Dear Senator McCaskill: 

May 12, 2008 

Thank you for your letter regarding provisions of the fiscal year 2008 

Consolidated Appropriations Act (P.L. 110-161), which direct that agencies establish and 

maintain on website homepages a direct and obvious link to the website of their Inspector 

General. 

The Federal Deposit Insurance Corporation concurs that providing a link to the 

FDIC Office of Inspector General (OIG) website is a useful tool to address fraud, waste, 

or abuse. The FDIC has placed a link to the website of the FDIC's Inspector General so 

that it appears not only on our homepage, but oh every page on our website. 

Section 534 also calls for a mechanism on the OIGs' websites by which 

individuals may anonymously report cases of fraud, waste, or abuse with respect to their 

agency. The FDIC OIG has such a link on its website. This link to the OIG Hotline 

provides individuals with infonnatfon on how they may report cases of fraud, waste, or 

abuse regarding the FDIC and provides options should the individual desire anonymity. 

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 
CLAIRE McCASKILL MISSOURI 

1202) 22-154 

F.u:(202)228--6326 

http://mccasltill.--.gov 

COMMITTEES, 

ilnitro ~tatra ~rnatt ARMED SERVICES 

WASHINGTON, DC 20510 

COMMERCE, SCIENCE ANO 

TRANSPORTATION 

HOMELAND SECURITY 

ANO GOVERNMENT AFFAIRS 

April23,2008 INDIAN AFFAIRS 

SPECIAL COMMITTEE ON AGING 

FDIC PERMA UBCOMMJTTEE 

The Honorable Sheila C. Bair ON INVE TIGATIONS 

Chairman of the Federal Deposit Insurance Corporation 

550 17th Street, NW 

Washington, DC 20429 

Dear Chairman Bair: 

··~---

MAY - 6 2008 r 

I 

I 

fFICE OF LEGISLATIVE AFF.~ 

I am writing regarding a specific provision of the Consolidated Appropriations Act for 

FY '08, which President Bush signed into law on December 26, 2007. Division D, Title 

VI, Section 534 of this Act reads as follows: 

The Departments, agencies, and commissions funded under this Act, shall 

establish and maintain on the homepages of their Internet websites--

( 1) a direct link to the Internet websites of their Offices of Inspectors 

General; and 

(2) a mechanism on the Offices of Inspectors General website by which 

individuals may anonymously report cases of waste, fraud, or abuse with 

respect to those Departments, agencies, and commissions. 

As a strong supporter of our nation's Inspectors General, I was proud to introduce this 

provision, and I am encouraged to see that many federal departments and agencies have 

already taken the necessary steps to comply with this new law. These small steps could 

prove invaluable in assisting Inspectors General identify waste, fraud and abuse within 

the federal government, as well as ensure that their findings are readily available to the 

American people. However, it appears that your department or agency has not met at 

least one of these new criteria. I would like to know how and when your department or 

agency is planning to comply with these simple and straightforward requirements. 

Again, thank you for your attention to this matter. Please direct your response to the 

attention of Peg Gustafson on my staff. 

339 llftoADW4V 

l!OOM131 

CAP£ ~u. M0&3701 

1573)11SH)!Nl,I 

FAX:1573)334-4271 

911 !:AST As>4 SnlEET 

Cow---.MOIIS201 

1573140-7130 Fu: (573144Z:.71co 

Claire McCaskill 

United States Senator 

400 E4sT !tTH STI!UT 

Suin 40 l'I.A2A LEvn KAHs.u err,, MO 641011 

1116) "21-11139 

F4X: 18111421-2562 

5850 0.LMAII louLEVAl!O 

SuinA 

ST. Louis, MO 13112 

(31') 317-13&4 

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32• p...,. ClaNTftAL WUT 

Sum101 

SrlaNGl'llu,, MO 65806 (4171.......,45 

F.u: ('17I131-1:M!I 
e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Tim Johnson 

United States Senate 

Washington, D.C. 20510 

Dear Senator Johnson: 

June 4, 2008 

Thank you for your letter regarding the interest of Dakota State University of 

Madison, South Dakota (DSU) in providing services to the Federal Deposit Insurance 

Corporation. 

DSU has been in contact with the FDIC and has offered to provide a variety of 

services relating to information assurance for financial institutions. The FDIC is 

considering various research possibilities relating to information security, such as a 

general research paper on encryption as well as other security issues that currently 

confront the banking community and regulators. 

In this connection, we are exploring whether it would be helpful to seek the input 

of an outside expert such as DSU or whether the FDIC has sufficient resources internally 

to adequately respond to these nee48. If the FD IC finds it beneficial to seek assistance 

for its reseRrch needs from one or more outside sources, DSU would be certainly be 

considered as a potential candidate. 

Again, I appreciate your interest on behalf ofDSU and assure you that the FDIC's 

staff is reviewing DSU as a possible collaborative party in this important area 

Sincerely, 

Sheila C. Bair 
TIM JOHNSON 

SOUll4 DA.ICOT4 

AAPID CITY OFFICE: 1805) 341-3990 

PO BOX 1091, IIIJ'I> CITY, SD S770S1 

ABEIIDE9! OFFICE: 16051 22&-3440 

PO BOX 1554, 4BERDEEN, SD 57<1112 

SIOUX FALi.$ OfflCE: 1805) 332--

PO BOX 1.QC. SIOUX F41.1.S. SO 57101 

Chairman Sheila Bair 

Chairman 

ilnitrd ~tatts ~matt 

WASHINGTON, DC 20510--4104 

April 28, 2008 

Federal Deposit Insurance Corporation 

550 17th Street NW 

Washington, DC 20429 

Dear Chairman Bair: 

L/JIJk -J '-13 W4SKINGTON OffiCE: 

136 lwn- SEN4n OFFla! BUllDING 

WASHINGTON, DC 20510--4104 

(2021224-5842 

TDD:1202122~79 

TOUFREE 

'~ E•M41l: lim•lo .............. ta.gov 

WEB SITE: http-J/johnso.....-.gov 

FDIC 

---

MAY 1 2 2}JB 

OFFICE Of LEGIS!.ATIV~ /lff M~S 

I am ·writing in support of Dakota State University of Madison, South Dakota's continued 

advancement in the banking and finance industry. Dakota State University (DSU) is on ·the 

cutting edge of banking and financial security, having already been designated a Center of 

Excellence in Information Assurance Education by Department of Homeland Security and the . 

National Security Agency. I am confident in DSTJ's continued progress in advancing financial 

information security. 

In this period of globalization and heighted threat environment. the banking and finance industry 

is an increasingly critical, yet vulnerable, sector of our national economy that requires vigilant 

protection. Our country has a proud history of successful industry-government-academia 

partnerships, and I believe Dakota State University can play an integral role in safeguarding our 

nation's financial interests.- The University places such an emphasis on financial security that it 

recently began offering a new doctorate program in information systems, underscoring 

information security in relation to the banking and finance industry. This new degree further 

solidifies Dakota State's commitment to advancing the security and safety of America's 

electronic financial infrastructure. As well, DSU maintains a nationally-recognized information 

assurance program and is committed to providing information security personnel and solutions to 

the financial industry. 

Given the importance of the financial industry's impact on the economy, as well as our country's 

increased threat status, Dakota State University is well positioned to lead the charge in protecting 

sensitive financial information. I understand that the Federal Deposit Insurance Corporation is 

considering a partnership with DSU in the area of information assurance for financial 

institutions. I strongly support such a partnership; if I can provide you with any additional 

information in support of this effort, please do not hesitate to contact me or my Legislative 

Assistant, Erin Bany, at (202) 224-5842. 

·~erely, , 

... ~. 

United States Senator 

COMMITTEES: APPROPRIATIONS; BANKING, HOUSING, AND URBAN AFFAIRS; ENERGY AND NATURAL RES00URCES; INDIAN AFFAIRS 
G FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN June 4, 2008 

Honorable Carolyn B. Maloney 

Chairman. 

Subcommittee on Financial Institutions 

and Consumer Credit 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Madam Chairman: 

Thank you for your recent letter regarding the rules governing stock benefit plans 

for mutual holding companies. The Federal Deposit Insurance Corporation shares your 

commitment to good corporate governance practices and to the safety and soundness of 

the nation •s banking system. 

As noted in your letter, the FDIC has adopted mutual-to-stock conversion rules to 

prevent insiders from adopting stock benefit plans without a vo,te of the public 

shareholders. The FDIC's conversion regulations (12 C.F.R. §333.4(e)) for stock benefit 

plans provide for the voting rights of minority shareholders of both state nonmember 

banks as well as their recently formed holding companies during the first year following 

conversion to address the entirety of the immediate conversion transaction. 

As our previous letter noted, a11 conversions involving minority stock offerings 

involve the fonnation of a mutual holding company (MHC). Toe Office of Thrift 

Supervision (OTS) and the Federal Reserve System are the primary federal regulators of 

thrift and bank holding companies (including MHCs), respectively. Thus, these 

conversions must adhere to the OTS rules and the Federal Reserve guidelines and 

policies that limit the ability of insiders in adopting stock benefit plans. The FDIC defers 

to the rules and policies of those agencies as they regulate conversion matters of-thrift 

and bank holding companies. We are not aware of any MHC that is not required to 

adhere to either the OTS rules or the Federal Reserve guidelines and policies regarding . 

the adoption of stock benefit plans. In view of your most recent letter, we reviewed our 

position on this matter and continue to view our current rule as appropriate to address the 

governance issue in view of the ongoing supervisory role by either the OTS or the 

Federal Reserve. 

We recognize the complexity of this issue and appreciate the opportunity to 

address your concerns. If you have further questions, please do not hesitate to contact me 

at 898-6974 or Eric Spitler, Director of our Office of Legislative Affairs, at 898-3837. In 
addition. we will follow up with your staff to ensure we have thoroughly responded to 

your concerns. 

Sincerely. 

Sheila C. Bair 
CAROLYN B. MALONEY 14m DIS'TIIET, New VOIUI: 

2331 111.-- o,,,a BUIU:ING W-DC2Gll1~i. 

12DZ1m-7M4 

~I: 

RNANCW. SERVICES 

GOVERNMENT REFORM 

JOINT ECONOMIC COMMITTEE 

€ongress of • tbt llnittb· ~tatts 

J,oust of i\tpresmtatibes 

1111.ibington. M 20515-3214 

May 6, 2008 

LltoS-138 

IIISlllc:fCIMCB: 

0 11151 T-AWNUI 

Sl.aw311 

NewY-, NY 10121 

12,21_ 

D :.,, Ast--. llow!v...., 

AmlNo\. NV 111112 

17111 m--1IO' 

The Honorable Sheila C. Bair 

Chairman 

The Honorable John M. Reich 

Director 

Federal Deposit Insurance Corporation 

550 17th St, NW 

Washington, DC 20429 

Dear Chairwoman Bair and Director Reich: 

Office of Thrift Supervision 

1700 G~ Street, NW 

Washington, DC 20552 

Good corporate governance and safety and soundness go hand-in-hand. Safety 

and soundness arc of the utmost importance to_ me. That is why I have previously written 

to each of you regarding your agencies' rules governing the adoption of stock benefit 

plans for insiders of mutual holding companies (MHCs). I am pleased that the Office of 

· Thrift Supervision recently decided against rolling-back its longstanding rule preventing 

insiders from self-~pting their stock benefit plans, see 72 Fed. Reg. 35145 (June 27, 

2007). However, I have concerns that the Federal Deposit Insurance Corporation has 

declined to iμterpret" its analogous regulation to prevent this practice, see Letter from 

Chairwoman Bair. dated December 5, 2007. I am also concerned with the OTS's 

proposal to allow ~C insiders to adopt charter provisions disenfranchising the public 

shareholder vote on stock benefit plans, see 72 Fed. Reg. 35205 (J1n1e 27, 2007). 

The FDIC and the OTS adopted analogous rules in 1994 to prevent insiders from 

self-aiiopting stock benefit plans without a vote of the public shareholders, embodying 

the strong public policy against insider seff-enrichment at the expense of public 

shareholders. These rules are intended, as confirmed by the OTS's 2007 rule, to prevent 

insiders from ever self-adopting stock benefit plans. The one-year limitation on this rule 

by the FDIC does not appear to be consistent with a policy to prevent insiders from 

. adopting self enriching stock benefit plans ~thout a public shareholder vote. It is also 

my understanding that should the FDIC adopt a ruJe to perpetually limit this pra4ice, it 

would not interfere with any rule of any regulator. · 

As you know, many MHCs are not regulated by the OTS and the Federal Reserve 

has no rule of its own to prevent insiders from self-adopting stock benefit plans after one 

year. Thus, a loophole currently exists for OTS chartered institutions to engage in 

regulatory arbitrage and for non-OTS chartered institutions to engage it) self-enrichment 

I have concerns that unless the FDIC interprets its current regulation in harmony with the 

OTS interpretation or revises its own rules, this could create a loophole that bas the 

potential for abuse among insiders. 

__________________ .__ _________________ --·-··· ·-···-
I am equally troubled by the proposed OTS rule to permit MHC insiders to adopt 

charter provisions which would make it easier to adopt stock benefit plans by 

disenfranchising the public shareholders. 

Thank you very much for your attention to these matters. I look forward to 

hearing your solutions to these matters which are of significant concern to me. 

Member of Congress 

-----· --------
e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Charles E. Schumer 

United States Senate 

Washington, D.C. 20510 

Dear Senator Schumer. 

June 13, 2008 

Thank you for your letter expressing your concerns about the use of brokered 

deposits to fund growth. I share many of your concerns about this product. 

As you note in your letter, the Federal Deposit Insurance Corporation is closely 

scrutinizing deposit insurance applications where the proposed bank would depend 

significantly on brokered deposits to fund its growth. As I stated in my testimony to the 

Senate Banking Committee on June 5, in light of the current difficulties facing insured 

institutions and recent failures, the FDIC also is considering ways to improve the riskbased pricing system's ability to account for risk in a timely manner and provide 

appropriate incentives. We are actively reviewing whether heavy reliance on brokered 

deposits-particularly when combined with rapid gro~reates risks to the fund that 

risk-based premium rates should reflect. As you know, any changes to the current 

assessment system would have to be made ·through a formal rulemaking with an 

opportunity for public comment. We will keep you informed of our progress regarding 

this review and appreciate your interest in the subject. 

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 
CHARLES E. SCHUMER NEWYORIC 

llnittd ~tatm ~matt 

WASHINGTON, DC 20510 

June 4, 2008 

Sheila C. Bair 

Chaimian 

Federal Deposit Insurance Corporation 

550 17th Street, NW 

. Washington, DC 20429 

Dear Chairman Bair: 

I write today regarding the increasing use of brokered deposits during the credit 

bubble. I applaud the recent steps that the Federal Deposit Insurance Corporation bas 

taken to increase oversight of this financing mechanism for banks submitting new 

applications for deposit ibsurahce: However-,. over the past several weeks, the failure of a 

number of banks th~ relied heavily on brokered deposits raises serious concerns that this 

is a serious and growing problem. The savings and loan crisis taught us that these ''hot 

money" deposits can lead to widespread institution failures and I believe that further 

steps may need to be taken to mitigate losses from any future bank failures that do occur. 

In your recent statements about these deposits, you have noted that not all 

brokered deposits arc _harmful, and in some cases, may actually be an important source of 

capital for institutions. However, many banks have been using brokered deposits to · . 

finance rapid and risky expansion to take advantage of troubled credit markets. It is these 

situations that seem to be especially risky, as many of the recent bank failures fit this 

profile. I would urge you to consider using the risk-based pre~um authority given to 

FDIC in Federal Deposit Insurmce Reform Act of2005 to increase deposit insurance 

premium rates for banks that rely ~eavily on brokered deposits to finance growth. The 

risk-based pricing authority gives you the discretion to target these premium increases to 

especially risky institutions without penalizing well-managed banks. 

You have been a leader in the regulatory community's response to the subprime 

mortgage and credit crises. I know that you are working to maintain a vigilant watch over 

the deposit insurance system, and I look forward to hearing from you regarding the risks 

posed by brokered deposits and pot~tial solutions that the FDIC can implement to 

mitigate the losses of any future failures. 

JOINT ECONOMIC 

BANKING 

JUDICIARY 

RULES 

FINANCE 

Charles E. Schumer 

United States Senator FDIC 

JUN 4 2008 

OFFICE OF THE CHAIRMAN· 
@ FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Carolyn B. Maloney 

Chairman 

Subcommittee on Financial Institutions 

and Consumer Credit 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Madam Chair: 

June 20, 2008 

Thank you for your comments on the proposed revised Interagency Questions and 

Answers regarding the Community Reinvestment Act 

I appreciate your thoughtful consideration of our proposal. I can assure you that 

your views with respect to the value of Letters of Credit for supporting the development 

of affordable housing and other types of community development activities will be 

carefully considered as we work to finalize our Guidelines. 

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

898-6974 or Eric Spitler, Director of the Office of Legislative Affairs, at 898-3837. 

Sincerely, 

Sheila C. Bair 
atongr.e1111 of fJJe Bnit.ei'J §tat.en 

ma.s.t,ingtnn, IIQt 20515 

• June 6, 2008 

Office of the Comptroller of the Currency 

250 E Street, SW, Mail Stop J-5 

Washington, DC 20219 

Regs.comments@occ.treas.gov 

Docket ID OCC-2007-0012 

Mr. Robert E. Feldman, Executive Secretary 

Attention: Comments 

Federal Deposit Insurance Corporation 

550 17rh Street, NW 

Washington, DC 20429 

Comments@FDIC.gov 

RIN 3064-AC97 

Ms. Jennifer J. Johnson, Secretary 

Board of Governors of the Federal Reserve System 

20th Street and Constitution Avenue, NW · 

Washington, DC 20551 

Regs.comments@federalreserve.gov 

Docket No. OP-1290 

Regulation Comments 

Chief Counsel's Office 

Office of Thrift Supervision 

1700 G Street. NW 

Washington, DC 20552 

Rcgs.comments@ots.treas.gov 

ID OTS-2007-0030 

L __ l 

Re: Community Reinvestment Act; Interagency Questions and Answers 

Regarding Community Reinvestment; Notice: OOC-2007-0012; RIN 

3064-AC97; OP-1290; and OTS-2007-0030 

l'RIHTEO OH flfCYC.ED P'Al'EII 

L/108-11/ 
Dear Ladies and Gentlemen; 

As you consider issuing revised Community Reinvestment Act Q&As to financial 

institutions, we urge you to give Letters of Credit (LCs) the same CRA credit as loans; as 

LCs arc critical to the development of affordable housing. As Members of Congress 

representing New York who serve or have served on the Financial Services Committee, 

we support using CRA credits to encourage lenders to issue LCs in support of community 

development. 

Letters of Credit ~erve an important function in the deyelopment of affordable 

housing. LCs issued by highly rated financial institutions encourage investors to buy 

both tax-exempt and taxable bonds issued by states for the development of affordable 

housing for a broad spectrum of households. LCs provide this inducement by acting as 

credit enhancers that, in the event of a default on the real estate, require the LC provider 

to pay off the bond holders and assume the role of mortgagee responsible for working out 

the project's difficulties. 

For example,. the New York City Housing Development Corporation, the city's 

bond financing agency, has issued bonds for 98 projects with LCs from financial 

institutions totaling some $ 1.8 billion. The HDC also has 96 more projects with 

permanent LCs enhanced by financial institutions in the amount of roughly $2.5 biJlion. 

The LCs that make possible this S4 billion in financing for affordable housing in New 

York City arc provided by 14 financial institutions, including commercial banks such as 

Citi, JP Morgan Chase, and Bank of America. 

It is very important that the CRA guidelines support and encourage regulated 

banks to participate in providing these credit enhancements. Unfortunately, current CRA 

guidelines fail to recognize that LCs are most valuable when they don't tum into actual 

loans. When they don't tum into Joans, it means the LCs have spurred the development 

of successful affordable housing and the LC provider has not had to pay off the debt. 

Ironically, current Q&As appear to give less CRA credit for successful LCs and more 

credit for LCs that turn into loans to pay off the debt of troubled· developments. Thus, 

current Q&As potentially give more CRA credit for failed community development. 

This would be a pexverse outcome, indeed. 

The Community Reinvestment Act should provide incentives that consistently 

support and encourage community investment. We urge you to consider giving equal 

CRA credit to LCs as to loans. 

Sincerely, 
Member of Congress 

Member of Congress / 

Member of Congress 
© FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEIL.A C. BAIR 

CHAIRMAN 

Honorable Charles E. Schumer 

United States Senate 

Washington, D.C. 20510 

Dear Senator Schumer: 

June 30, 2008 

Thank you for your recent letter expressing your concerns and requesting 

information about the use of brokered deposits by IndyMac Bankcorp. I note that a 

number of your questions relate to the supervision of that institution and I will defer to 

the primary federal supervisor with regard to those issues. 

As you know, the Federal Deposit Insurance Corporation does not comment on 

the financial condition or supervisory activities related to open and operating institutions. 

I would be happy to arrange a briefing for you and your staff to answer any noninstitution specific questions you might have regarding our approach to the issues raised 

in your letter. I also would note, as you and I have previously discussed, with regard to 

the issue of brokered deposits, the FDIC is considering ways to improve the risk-based 

pricing system's ability to account for risk in a timely manner and provide appropriate 

incentives. We are actively reviewing whether heavy reliance on brokered deposits -

particularly when combined with rapid growth - creates risks to the fund that risk-based 

premium rates should reflect. Your letter contains insights that we will carefully consider 

as part of our ongoing review. · 

Finally, I would note that the Deposit Insurance Fund available to protect 

depositors currently exceeds approximately $52 billion. As has been true for the past 75 

years, no depositor has any reason to be concerned about the safety of their insured funds 

should their financial institution fail. 

Sincerely, 

Sheila C. Bair 
ilnittd ~tatts ~matt 

WASHINGTON, DC 20510 

June 26, 2008 

Chairwoman 

Federal Deposit Insmance Co:rporation 

550 17th St. NW 

W aslrington, DC-20419 

Dear Chairman Bair and Direcior Reich, 

John M. Reich 

Director 

Office of Thrift Supervision 

1700 G. Street, NW 

Washington, DC 105S2 

I am writing to you out of concern for the safety and soundness risks posed by 

IndyMac Banco:rp, Inc., one of the largest independent mortgage lenders in the United 

States. I am concerned that IndyMac's financial deterioration poses significant risks to 

both taxpayers and bo1T0wers, and that the regulatory community may not be prepared to 

take measures-that would help prevent the collapse of IndyMac or minimize the damage 

should such a failure occur. 

There arc clear indications that IndyMac may have serious problems with its 

current loan holdmgs, and could face a failure if prescriptive measures are not taken 

quickly. IndyMac's stock price has dropped almost 9S percent in the past year and its 

new loan production has .filllen by almost two-thirds over that time period. As you know, 

Moody1s Investors Service recently downgraded its servicer quality rating because of 

concerns about inadequate capital and warned of further downgrades. 

You may recall that I wrote to Chairmm Bair last month with concerns about the 

use ofbrokercd deposits to finance rapid and often irresponsible growth. Unfortunately, 

IndyMac seems to have followed that growth strategy with troubling results. Between 

December 2006 and March 2008, IndyMac 's overall deposits nearly doubled, with over 

643⁄4 of that growth coming in the fom1 of brokered deposits. Brokered deposits now 

make up over 37% of IndyMac's overall deposits. These are troubling figures considering 

the relatively higher risk levels associated with these types of assets. As IndyMac's 

lending portfolio delinquency rates climbed above 11 % as of March 31, 2008, I am 

concerned that a significant move by IndyMac's depositors to redeem their deposits could 

leave the firm in a disastrous financial situation. 

Therefore, I would like to know what steps the FDIC and OTS arc taking in 

response to IndyMac's financial trouble. First, has the FDIC verified that insured loans 

are not supporting· 1oans that do not meet the Joint Banking Guidelines on ability to repay 

and documentation? Second, has the FDIC considered ordering IndyMac to reduce its 

reliance on brokered deposits? Third, has there been any discussion between the FDIC 

and the OTS about IndyMac1s increased reliance on brokered deposits? Fourth. what 

steps has the ors taken in response.to IndyMac's deteriorating loan performance? 

JOINT ECONOMIC 

BANICING 

JUDICIAAY 

RULES 

PIHAHCE 
·, 

Thank )OU for your consideration of this matter, and I look forward to your 

prompt response to the concerns that I have raised. Please don't hesitate to contact 

mysc~ or David Stoopler of my staff with any information or questions at 202-224-6542. 

Sincerely, 

United States Senator 
Crampton, Lall 

From: Taylor, Jack 

Sent: 

To: 

Wednesday, April 16, 20081:24 PM 

Crampton, Lali 

Subject: FW: Questions for the record for 4/9/08 hearing 

Attachments: 

.. 

2008041611495 

9530.pdf (51 KB) 

Thanks 

Jack Taylor 

20080416114959530.pdf 

Please log these in and handle as usual. 

Federal Deposit Insurance Corporation 

Office of Legislative Affairs 

(202) 898-8915 

-Original Message--

From: Allison, Terrie [mallto:Terrie.Allison@mail.house.gov] 

Sent Wednesday, April 16, 2008 11:55 AM 

To: Taylor, Jack. 

Subject Questions for the record for 4/9/08 hearing 

Jack: 

I just received these questions from Representative Barrett's office for 

Chalnnan Bair from the 4/9/08 hearing. 

These should go with that transcript. If you have any questlons, feel 

free to contact me. 

Thanks! 

Terrie Allison 

Committee Editor 

Committee on Rnancial Services 

(202) 225--4548 

l 

LADi-rb1 
Financial Services Committee Hearing 

"Using FHA for Housing Stabilization and Homeownership Retention" 

Wednesday, April 9, 2008 

For The Honorable Sheila C. Bair, Chairman, Federal Deposit 

Insurance Corporation 

1) I_ believe strongly in the ability of the free market to correct 

. 

itself and create economic growth and prosperity. However, I also 

know that the government does have a role in policing the markets. 

• What should be the goal of federal regulations? 

o Should we just aim to ensure that fraud and 

malfeasance are punished? 

o Or should the goal in regulations be stable growth? 

• How much do you think that our current mortgage crisis was 

caused by regulatory failures or lack of enforcement? 

• Are there any areas where onerous regulations led to 

evolution towards exotic products helping to cause the 

financial crisis? 
• If the government intervenes in the private market, do we 

have any additional regulatory duties to prevent th.is from 

happening in the future? 
(I FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Michael N. Castle 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Castle: 

April 22, 2008 

Thank you for the opportunity to provide the views of the Federal Deposit Insurance 

Corporation regarding H.R. 5579, the Emergency Mortgage Loan Modification Act of 2008. 

Congressman Kanjorski and you are to be commended for introducing this legislation to provide 

a safe _harbor from liability for servicers that implement a loan modification or workout plan 

according to specific criteria. 

The FDIC strongly supports H.R. 5579. Most pooling and servicing agreements (PSAs) 

provide servicers with flexibility to modify troubled loans. While the language varies, the 

majority of PSAs require that servicers pursue strategies to maximize benefits to investors as a 

whole,.even if individual classes of bondholders are affected differently. However, despite 

existing industry standards and the flexibility provided in most servicing agreements, some 

servi.cers remain concerned about the potential for legal liability as a result of implementing loan 

modifications and indicate that this has hampered efforts to work with borrowers. H.R. 5579 

should alleviate servicers' concerns and eliminate this perceived impediment to achieving longterm, sustainable loan modifications. 

H.R. 5579 would encourage servicers to pursue appropriate loan modifications by setting 

forth an accepted industry standard for implementing a modification or workout plan for pooled 

residential mortgages and providing a safe harbor from liability if servicers adhere to that 

standard. Importantly, the bill would recognize existing contractual rights that may be contrary to 

the safe harbor standard. Because the bill would not abrogate existing contractual rights, this 

approach should avoid potential constitutional issues. 

Avoiding unnecessary foreclosures benefits individuals, their communities, and the 

economy. To the extent that H.R. 5579 provides greater assurance to servicers that they will not 

incur legal liability for participating in loan modifications with troubled borrowers, it will make a 

valuable contribution to efforts to address current problems in the mortgage markets. 
The FDIC stands ready to assist Congress in developing solutions to any remaining 

obstacles to loan modifications. 

Sincerely, 

Sheila C. Bair 
@ FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Paul E. Kanjorski 

Chairman 

Subcommittee on Capital Markets, Insurance and 

Government Sponsored Enterprises 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chairman: 

April22,2008 

Thank you for the opportunity to provide the views of the Federal Deposit Insurance 

Corporation regarding H.R. 5579, the Emergency Mortgage Loan Modification Act of 2008. 

Congressman Castle and you are to be commended for introducing this legislation to provide a 

safe harbor from liability for servicers that implement a loan modification or workout plan 

according to specific criteria. 

The FDIC strongly supports H.R. 5579. Most pooling and servicing agreements (PSAs) 

provide servicers with flexibility to modify troubled loans. While the language varies, the 

majority of PSAs require that servicers pursue strategies to maximize benefits to investors as a 

whole, even if individual classes of bondholders are affected differently. However, despite 

existing industry standards and the flexibility provided in most servicing agreements, some 

servicers remain concerned about the potential for legal liability as a result of implementing loan 

modifications and indicate that this has hampered efforts to work with borrowers. H.R. 5579 

should alleviate servicers' concerns and eliminate this perceived impediment to achieving longterm, sustainable loan modifications. 

H.R. 5579 would encourage servicers to pursue appropriate loan modifications by setting 

forth an accepted industry standard for implementing a modification or workout plan for pooled 

residential mortgages and providing a safe harbor from liability if servicers adhere to that 

standard. Importantly, the bill would recognize existing contractual rights that may be contrary 

to the safe harbor standard. Because the bill would not abrogate existing contractual rights, this 

approach should avoid potential constitutional issues. 

Avoiding unnecessary foreclosures benefits individuals, their communities, and the 

economy. To the extent that H.R. 5579 provides greater assurance to servicers that they will not 

incur legal liability for participating in loan modifications with troubled borrowers, it will make a 

valuable contribution to efforts to address current problems in the mortgage markets. 
The FDIC stands ready to assist Congress in developing solutions to any remaining 

obstacles to loan modifications. 

cc: Honorable Deborah Pryce, 

Ranking Minority Member 

Sincerely, 

Sheila C. Bair 
e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN. 

Honorable Barney Frank 

Chairman 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chainnan: 

May S,2008 

I appreciated the opportunity to testify before the Committee on Financial Services on 

April 9, 2008, at the hearing "Using FHA for Housing Stabilization and Homeownership 

Retention." 

Enclosed are responses to questions received from Congressman Barrett following my 

testimony. 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 

Enclosure 
Response to questions from the Honorable J. Gresham Barrett 

from Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

QI. What should be the goaJ of federal regulations? Should we just aJm to ensure that 

fraud and malfeasance are punished? Or should the goal In regulations be stable growth? 

Al. Federal banking regulations should not have a single focus. The central objectives of 

federal banking regulations are to maintain public confidence in the banking system; to support 

financial intermediation. credit availability, and competition; to enforce the public laws; and to 

protect consumers and encourage compliance with the Community Reinvestment Act Capital 

requirements and other prudential regulations arc tools used by bank regulators to promote safe 

and sound banking operations and to discourage excessive risk-taking. Banking regulations also 

attempt to minimize the risk of fraud. 

Maintaining economic stabilit)' is a consideration in bank supervision, and the federal banking 

agencies recognize the importance of encouraging credit availability during periods of slower 

economic growth. WbiJe the Federal Reserve Board, in its domestic monetary role, is the federal 

entity primarily concerned with economic growth and stability, the other federal banking 

agencies also have a role by encouraging financial institutions to make credit available in the 

communities they serve on appropriate terms. 

Q2. How much do you think our current mortgage crisis was caused by regulatory failures 

or lack of enforcement? 

A?. As I mentioned in my testimony, the problems facing the U.S. markets are attnoutable to a 

complex set of interrelated causes. These include weakened lending standards, inadequate 

consumer protections, regulatory arbitrage, and speculative activity, as well as deficient 

surveillance by rating agencies and inadequate due diligence by originators and investors. The 

current turmoil in the credit markets also has been exacerbated by liquidity troubles that typically 

are not identifiable until funding problems emerge. 

A significant volume of subprime mortgages were originated by companies (primarily mortgage 

brokers and stand-alone finance companies) not subject to federal supervision. In 2005, 52 

percent of subprime mortgages were originated by companies not subject to federal supervision. 

An additional 25 percent were made by lenders affiliated with a regulated. deposit-taking bank or 

thrift, and 23 percent by regulated banks and thrifts. The FDIC estimates that the share of such 

loans made by nonbanlc entities not subject to federal supcivision in 2006 was 46 percent. 

For mortgage loans made by federally supervised depository institutions, the federal banking 

agencies issued a number of cautionary statements beginning in 1999 on a number of topics, 

including subprime lending, non-traditional mortgage lending. and commercial real estate Joan 

concentrations. The pmpose of these statements was to alert financial institutions to the risks 

involved and to encourage strong underwriting policies, prudent risk selection, and robust 
concentration management procedures. Overall. the regulatory agencies strongly encouraged 

insured banks and thrifts to be cautious in their origination and management of subprime and 

non-traditional mortgage products. 

From an enforcement standpoint, Congress has mandated routine on-site examinations for all 

insured institutions, which the federal bank regulatory agencies follow. Any institution that a 

regulator finds is performing poorly or bas taken on excessive risk is typically directed to 

improve conditions or face enforcement action, including possible closure. 

Q3. Are there any areas where onerous reaulatlons led to evolution towards exotic 

products helping to cause the financial crlsh? 

Al. Financial innovation (including non-traditional mortgage lending and structured financial 

instruments/vehicles) and the abundant liquidity in global credit markets together fueled the 

development of non-traditional mortgages and financial structures. The development of these 

financial products was not precipitated by onerous regulation, but by financial iruJovation and 

abundant capital seeking higher returns. The highly liquid credit market environment from 2005 

until mid-2007 led investors to seek higher returns by taking on increased credit risk and 

liberalizing repayment and loan terms. 

Q4. If the government intervenes in the private market, do we have any additional 

regulatory duties to prevent thb from happening In the future? 

A4. I believe that we do have the duty to prevent a recurrence of the problems we now face. As 

I mentioned in my testimony, with regard to preventing practices in the future that contnl>uted to 

the current issues in the mortgage markets. strong final rules by the Federal Reserve Board under 

the Home Owners Equity Protection Act (HO EPA) that impose basic principles of sound 

underwriting on both bank and non-bank mortgage originators are essential. An important 

complement to these substantive rule provisions would be the creation by Congress of a federal 

entity to buttress the efforts of the states to better license and police mortgage originators. The 

House of Representatives adopted a set of strong licensing provisions as part of H.R. 391 S last 

year. Simiiarly, the Treasury Department bas proposed creating a Mortgage Origination 

Commission that, worlcing with state authorities. would develop minimum national licensing 

qualifications for all mortgage market originators. Although these two approaches differ in some 

details, their best clements could be merged into a single proposal that would address this urgent 

issue and command widespread support. 

1 would emphasize that there is a particular urgency for Congress to act on legislation to establish 

national licensing standards for non-bank mortgage participants. As interest rates have declined, 

advertisements are once again promising low "teaser" rates, no-documentation and no-moncydown loans, as well as using the tenn "fixed" in potentially misleading ways to describe the 

interest rate on variable-rate mortgage Joans. Banks are not allowed to market, originate, or fund 

loans with such weak underwriting, but no such restrictions apply to non-bank mortgage 

participants nationally. Combined with strong final HOEPA rules from the Federal Reserve 
Board, prompt passage of legislation creating a Commission to license and police mortgage 

originators would help prevent these practices from again misleading borrowers and adding more 

problems to the mortgage markets. 
@ FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Barney Frank 

Chairman 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chairman: 

May 5, 2008 

I appreciated the opportunity to testify before the Committee on Financial Services on 

April 9, 2008, at the hearing "Using FHA for Housing Stabilization and Homeownership 

Retention." 

Enclosed are responses to questions received from Congressman Barrett following my 

testimony. 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 

Enclosure 
Response to questions from the Honorable J. Gresham Barrett 

from Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Ql. What should be the goal of federal regulations? Should we just aim to ensure that 

fraud and malfeasance are punished? Or should the goal in regulations be stable growth? 

Al. Federal banking regulations should not have a single focus. The central objectives of 

federal banking regulations are to maintain public confidence in the banking system; to support 

financial intermediation, credit availability, and competition; to enforce the public laws; and to 

protect consumers and encourage compliance with the Community Reinvestment Act Capital 

requirements and other prudential regulations are tools used by bank regulators to promote safe 

and sound banking operations and to discourage excessive risk-taking. Banking regulations also 

attempt to minimize the risk of fraud. 

Maintaining economic stability is a consideration in bank supervision, and the federal banking 

agencies recognize the importance of encouraging credit availability during periods of slower 

economic growth. While the Federal Reserve Board, in its domestic monetary role, is the federal 

entity primarily concerned with economic growth and stability, the other federal banking 

agencies also have a role by encouraging financial institutions to make credit available in the 

communities they serve on appropriate terms. 

Q2. How much do you think our current mortgage crisis was caused by regulatory failures 

or lack of enforcement? 

A2. As I mentioned in my testimony, the problems facing the U.S. markets are attributable to a 

complex set of interrelated causes. These include weakened lending standards, inadequate 

consumer protections, regulatory arbitrage, and speculative activity, as well as deficient 

surveillance by rating agencies and inadequate due diligence by originators and investors. The 

current turmoil in the credit markets also has been exacerbated by liquidity troubles that typically 

are not identifiable until funding problems emerge. 

A significant volume of subprime mortgages were originated by companies (primarily mortgage 

brokers and stand-alone finance companies) not subject to federal supervision. In 2005, 52 

percent of subprime mortgages were originated by companies not subject to federal supervision. 

An additional 25 percent were made by lenders affiliated with a regulated, deposit-taking bank or 

thrift, and 23 percent by regulated banks and thrifts. The FDIC estimates that the share of such 

loans made by non bank entities not subject to federal supervision in 2006 was 46 percent. 

For mortgage loans made by federally supervised depository institutions, the federal banking 

agencies issued a number of cautionary statements beginning in 1999 on a number of topics, 

including subprime lending, non-traditional mortgage lending, and commercial real estate loan 

concentrations. The purpose of these statements was to alert financial institutions to the risks 

involved and to encourage strong underwriting policies, prudent risk selection, and robust 
concentration management procedures. Overall, the regulatory agencies strongly encouraged 

insured banks and thrifts to be cautious in their origination and management of subprime and 

non-traditional mortgage products. 

From. an enforcement standpoint, Congress has mandated routine on-site examinations for all 

insured institutions, which the federal bank regulatory agencies follow. Any institution that a 

regulator finds is performing poorly or has taken on excessive risk is typically directed to 

improve conditions or face enforcement action, including possible closure. 

Q3. Are there any areas where onerous regulations led to evolution towards exotic 

products helping to cause the financial crisis? 

A3. Financial innovation (including non-traditional mortgage lending and structured financial 

instruments/vehicles) and the abundant liquidity in global credit markets together fueled the 

development of non-traditional mortgages and financial structures. The development of these 

financial products was not precipitated by onerous regulation, but by financial innovation and 

abundant capital seeking higher returns. The highly liquid credit market environment from 2005 

until mid-2007 led investors to seek higher returns by taking on increased credit risk and 

liberalizing repayment and loan terms. 

Q4. If the government intervenes in the private market, do we have any additional 

regulatory duties to prevent this from happening in the future? 

A4. I believe that we do have the duty to prevent a recurrence of the problems we now face. As 

I mentioned in my testimony, with regard to preventing practices in the future that contributed to 

the current issues in the mortgage markets, strong final rules by the Federal ReseIVe Board under 

the Home Owners Equity Protection Act (HOEPA) that impose basic principles of sound 

underwriting on both bank and non-bank mortgage originators are essential. An important 

complement to these substantive rule provisions would be the creation by Congress of a federal 

entity to buttress the efforts of the states to better license and police mortgage originators. The 

House of Representatives adopted a set of strong licensing provisions as part of H.R. 3915 last 

year. Similarly, the Treasury Department has proposed creating a Mortgage Origination 

Commission that, working with state authorities, would develop minimum national licensing 

qualifications for all mortgage market originators. Although these two approaches differ in some 

details, their best elements could be merged into a single proposal that would address this urgent 

issue and command widespread support. 

I would emphasize that there is a particular urgency for Congress to act on legislation to establish 

national licensing standards for non-bank mortgage participants. As interest rates have declined, 

advertisements are once again promising low "teaser" rates, no-documentation and no-moneydown loans, as well as using the term "fixed" in potentially misleading ways to describe the 

interest rate on variable-rate mortgage loans. Banks are not allowed to market, originate, or fund 

loans with such weak underwriting, but no such restrictions apply to non-bank mortgage 

participants nationally. Combined with strong final HOEPA rules from the Federal Reserve 
Board, prompt passage of legislation creating a Commission to license and police mortgage 

originators would help prevent these practices from again misleading borrowers and adding more 

problems to the mortgage markets. 
The Honorable Sheila Bair 

Chairman 

F~ Dq:,osit ~ Co.tpO[lltion 

550· 17a Street, NW 

Washington, DC 20429 

Dear Ma. Bair. 

1:lnittd ~mtrs ~matt 

COMIMllcE ON BANICJNG, HOUSING• AND 

\,JRBAN APFA1RS 

WASHINGTON, DC 20510--6075 

JIJllC 12,2008-

FDIC 

JUN 2 0 2008 

OFFICE OF LEGISLATIVE AFFAIRS 

Tha,nk yon for tcatifying.baf~ tha Committee OD Banking. Housing. and .Uiban Affairs 

on iune S, 200& In order to complete the hearing ~ we would appreciate your anawc:,:s ta 

the cnc.lcsed qUC$tions as ~ IIS paatblc. 

Pleasi: npeat the qiJcliOinn, then your iinswcr, iihgle,spacms bo~ question and ail.swer. 

Pl~ do not~ all eapijak. 

Send ybur reply to Ms~Dawn L. R.at1ifl: ~co•@)ittl".C'sCbiefCJ.cn. She will transmit 

copi~ to the app:opriatc ofiiGes, including th.et~..._ publieaticms oft.ice. Due: to current 

proecdurcs :regarding Senate mail. it is n:txit 111 ,•endca tbaf you sc:lid. rc=plic:s via--ermail in a_ MS 

Wonl WordP~or .pdfattad:tmcntto Dawn RatJjfl@hpntrj,,gp;npte BPY· 

CJD/~ 

Ifyouh&ve myqw:stiODB abtnittbia 1~, pleasocontactM1. R.atliffat (202)224-3043. 

CBRIST0PHER J. DODD 

Chainnan 
Questions fot the Hearing on "The State of the Banklng Indutry: Part Iltt 

Junes, 20Q3 

Questions -for The Honorable Sheila Bair, Chmmua, Federal Deposit Insu-rance 

CorporaUon, from Senator Dog 

In Marth, the.Attorney General of New Y ~ OFHBO, and 1he GSE~s entered irito an agreement 

creating.new appra,jser requirements ~_.arc inconsistent with existing practices. Last month, I 

inlroduced an am:cnmncait to the Federal Howμng:F'mance ~ry :aefunn Act-of 2008 that 

would require the Director of OFHEO to mae- a regulation establishing appraisal standards for 

mortgages pW'GJ]ased or guaranteed b.y FJglllle aμd Freddie. It would establish a common set of 

appl'ai.saI standards governing mortgage lenders that are -federally ·supervised and regu)$d. In 

yoμr opinio~ would~ amendment strengthen-the appraisal standards of fedetally regulated 

mortpgcs? 

2 
Question& f~ the Bearing on "T~ State -,f the Banking Industry: Part II" 

June~2008 · 

Questions for The Honorable. Shtfta Bair, Cllalrman1 Federal Deposit Insurance 

Corporation, from Sea.tor Bllllllhtg: 

There was an article ih the-June 4-, 2008, Financial Times{~ that said banks could be 

forucd to bring up to S trillio.n dollars-of assets ~Y held off their boob onto their balance 

sheets. This mises many questi~ but I will m.rt with three. First, in the cmtent marlcets can 

· the banks raise tht capital they need to hold -a.i,ilnst these ~ts?. Seco~ since you are their 

regulators, do you know IIDd have you.known all along_wbat those assets are? And ~-why 

were they allowed to move .trillions of <4>~ of wh_at ~ out tQ bc·"the riskiest assets off-thexr 

books to avoid capital chatges? 

3 
Questions for the- Hearbig on "The State of the Banking Industry: Part ll" 

June 5_, 2n(l8 

Attachment for Senafor Bunning"s ~on: 

US banks fear being force.d to take $5,000bn back on balance sheets 

Accoumlng ~~ could force US banks it) 1ake thouwld$ of blllbna of oo.Dars ~ on to lhelr bafatlca sheets In 

the earring month& In a fflDY8 that Is likE!ly to ~rb further their landing and could push them Info new capital ralslrigs, 

~ have warned. 

·The off-balance.sheetvehiclas-have been~ by flnana-d ~s to keep spnwi-~ off their bal;;mce ~ 

tt,e.r&by .ayoldhy,i 1he ne"ed 1D hold regula\tiry caplfal agamt tham. 

Bicg_it spedtt..head d ~ ~-at Citigroup, said: "Wettmk it Is 'very likely-that these vehicles will come 

back_ on ba~-JheE,l 

"Thrs will not affect liquldlly because~ ~fundftd, ~ lt-wll .affael debMo-eqully rallaa·[al ban~] and so 

slgnffic&i ltl) Impact banks' abDlty to lend.· 

Ms"_Specht 1Dld a~ at a confw8nce on asset-backed 88CUrities in Cannes 1hat tut uncertainly about what· 

mlght-chafll9. was making bank& UONFY-~bcilut ~r lrJves.1rAema. •Banksa,:e nat. lnw..ting Iln ·assets] right now 

because.df funding lial8S,and regulatory uncer1afntv." 

The comments come as n,gulatoisend central bankers ara lritenslfylng behlnd-lhe-scen d!SCUSSl)nsabout l,he 

-~ of th& fl11a1K:ialarchllecf1n·1r1 ~-'° the credit turmoll. 

A key component-of th~ g!oJ,al talks - which~ ~ 1D-a,me to .a naad In the ~ couple.of mo!llhs -'#ju be tha 

acoouniinu 18Qin8 b' otJ.baJance sheet vehicles, wlth some aenlor 1"8Ql.1~ pllilS&qJ for a.gb~I initiative to bring 

these vehicles back on to the balanc:9-aheat, not Just In the.US but in "Europe as wel. 

www.ft.com/usbanks 

4 
FDl8 

Federal Deposit Insurance Corporation 

55017th Street JM, Washington, D.C. 20429-9990 

The Honorable James B. Lockhart ill 

Director 

Office of Federal Housing Enterprise Oversight 

1700 G Street, N.W. 

Washington, D.C. 20552' 

Dear Director Lockhart: 

Division cl Supervision and Consumer Protection 

June 20, 2008 

Thank you for the opportunity to comment on the Home Valuation Code of Conduct ("Code") 

and the Home Valuation Protection Program and Cooperation Agreements ("Agreements") 

entered into by the New York Attorney General, Fannie Mae, Freddie Mac, and the Office of 

Federal Housing Enterprise Oversight (OFIIBO). As federal deposit insurer, receiver, and 

supervisor of state nonmeID.ber banks, the FDIC has significant interest in changes to standards 

for real estate appraisals that affect the banking industry. 

The FDIC believes that an effective, independent appraisal process is in the best interest of 

financial institutions to ensure quality collateral valuations and implementation of successful real 

estate lending program$. Since 1990 (pursuant to the Financial Institutions Reform, Recovery 

and Enforcement Act of 1989), insured depository institutions have been subject to minimum 

federal real estate appraisal standards for approaches to value, professional competency, 

appraiser independence, and the Uniform Standards of Professional Appraisal Practice (USP AP). 

These rules promote effective appraisal processes for mortgage underwriting and can be enforced 

by the federal banking agencies if institutions fail to comply. Appraisers employed by financial 

institutions or their affiliates are also subject to these directives and federal oversight. The Code 

and Agreements would overlay this long-standing set of federal regulations and professional 

appraiser practice. 

The FDIC strongly supports the concept of appraiser independence and believes that lenders 

should ensure that appraisers adhere to federal banking requirements and USP AP. The Code 

proposes strict new limitations on bank-affiliated appraisers at insured depository institutions and 

on appraisers selected, retained, and compensated by third parties. There may well be benefits to 

these new limitations, but there could also be unintended costs and consequences. We believe 

that both bank-affiliated and independent appraisal finns can be subject to undue influence; 

therefore, it is not clear that forcing business along rigid organizational demarcations is more 

suitable. It is also important to note that most depository institutions also do portfolio lending 

and the inherent financial and safety and soundness considerations that attach to their 

underwriting processes provide strong incentives to receive high-quality valuations, regardless of 

the proyidcr. The use of bank-affiliated appraisers should not be tainted because of abuses 

observed in individual enforcement cases. Accordingly, we recommend permitting flexioility for 
The Honorable James B. Lockhart m June 20, 2008 

appraiser independence that would accommodate professional practice standards and could be 

appropriately scaled to correspond with the wide variety and size of mortgage lending 

institu.tions. 

Finally, although we understand OFHEO's need to act expeditiously in executing the 

Agreements and adopting the Code, we believe that the best way to establish comprehensive 

appraisal and appraiser standards that affect both insured depository institutions and other 

mortgage lenders nationwide is through notice-and-comment rulem.aking. The FDIC would be 

supportive of such an interagency rulemaking process. We very much appreciate, however, the 

opportmrity for comment you afforded for the Code and Agreements, as well as the recent public 

comments by your General Counsel indicating that OFHEO takes the comment process seriously 

and may pursue amendments to the Code and Agreements based on the comments received. 

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