Mar. 28: The CFPB on payday lending & FCRA; increasing focus on 2nds and HELOCs – are we talking not enough or too much?

My cats Myrtle and Gusto are keenly aware that I use a credit card to buy their salmon-infused kibble when it runs low. And so they were very interested to learn that JPMorgan reported the top 5 credit card lenders in the U.S., in order and their market share percentage, are American Express (25%), JPMorgan Chase (21%), Bank of America (12%), Capital One (9%) and Citibank (8%). Hey, no Wells Fargo! Speaking of comparisons, the SFIG (Structured Finance Industry Group) put out a great comparison of the three leading GSE proposals. It is worth a skim, or weekend reading, depending on your inclination:


Not all bank deals go through as hoped. For example, Indiana’s Citizens Bank ($331mm) said it has called off its proposed merger with Merchants Bank of Indiana ($1.2B), citing delays in obtaining regulatory approval. But announced bank mergers continue. Auto Club Trust FSB ($66mm, MI) will acquire American Midwest Bank ($465mm, IL) for an undisclosed sum. This reverse acquisition is by an AAA club where the insurance company seeks to increase its financial services network. In Tennessee First Citizens National Bank ($1.2B) will acquire Southern Heritage Bank ($237mm) for about $32.2mm in cash and stock. Salisbury Bank and Trust Company ($586mm, CT) will acquire Riverside Bank ($221mm, NY) for about $28mm in stock or roughly 1.09x tangible book. In Virginia Xenith Bank ($679mm) will acquire Colonial Virginia Bank ($115mm). And In Illinois Urban Partnership Bank ($982mm) has sold a Chicago branch to Hinsdale Bank & Trust Company ($1.6B).


I continue to receive questions about the CFPB’s stance on kickbacks and referrals. I usually tell the person to write to the CFPB directly, but as a reminder, a couple months ago a mortgage lender did pony up $81k for kickbacks. A CFPB press release announced the agency issued a consent order that required a Missouri mortgage lender, Fidelity Mortgage Corporation, and its former owner and current president, to pay $81,076 for funneling illegal kickbacks to a bank in exchange for real estate referrals.


As I have written in the past, payday lending has been, and will continue to be, the focus du jour of the CFPB. The Bureau has been building a case against what it sees as, not only a pervasive problem, but a systemic problem as well. It is expected that the Bureau, will issue a notice of proposed rulemaking in which it concludes that repeated payday loan borrowing is “unfair” or “abusive” under the Dodd-Frank Act. On the same day of Director Cordray’s speech at a field hearing on the issue, the CFPB released a payday lending report, in which it addressed “loan sequencing,” which ultimately is at the heart of the issue. Ballard Spahr writes, “ In conjunction with a hearing in Nashville, the CFPB Office of Research has released another payday lending report, this one focused on measuring “loan sequences,” which it defines as “a series of loans taken out within 14 days of repayment of a prior loan.” Specifically, the CFPB considers a renewal to mean either rolling over a loan for a fee or re-borrowing within 14 days after repaying a loan. The Bureau likely will use this new, broad definition of “renewal” to prevent consumers from repeatedly borrowing within the same pay period that they repay a prior loan.” Many expect the CFPB will move forward with their rulemaking efforts irrespective of alternative credit options, which may be available to payday consumers. Director Cordray’s remarks.


I’m not sure I’d want to be reminded twice by the CFPB to do anything, let alone be in compliance of the Fair Credit Reporting Act (FCRA). But such appears to be the case with the Agencies recent bulletin. Back in September, the CFPB released a bulletin to companies that furnish information to consumer reporting agencies (CRA) reminding them of their obligation under the FCRA to investigate consumer disputes forwarded by a CRA and that they have an obligation to “review all relevant information” relating to the dispute; warning that it will take “appropriate supervisory and enforcement actions to address furnisher violations of the FCRA or other federal consumer financial laws, including requiring restitution to harmed consumers.” In this most recent bulletin, the CFPB yet again reminds such business’ of their obligation to remain compliant under the FCRA, and to investigate disputed information referred to them and it is not sufficient under the requirements of the FCRA to simply direct the consumer reporting agency to delete the item without first conducting an investigation.


MountainView Capital Group spread the word that “Second Lien and HELOC Demand Exceeds Supply in Secondary Market”. As veteran LOs and industry observers can predict, a lot of homeowners with very low fixed-rate 1st liens are going to want to refinance out of them, and the demand for 2nd mortgages (HELOCs, TDs, whatever) will only increase as homes appreciate. MountainView says, “Very few packages of home equity loans, including second liens and home equity lines of credit, were offered in the secondary market during 2013, according to a market activity analysis by residential whole loan sales advisor MountainView Capital Group. The lack of offerings was in spite of investor demand and an uptick in new origination. ‘Second lien trading activity during 2013 was light and down from 2012 levels, both in total unpaid principal balance and number of transactions,’ said Jonas Roth, a managing director at MountainView Capital Group and an author on the company’s latest market activity analysis. ‘This was primarily due to a finite number of sellers, and 2014 looks like more of the same,’ added Roth.” MountainView saw its share of second lien deals, but the report notes that, “Non-performing second liens had higher demand than performing second liens during 2013. However, large financial institutions, the major holders of non-performing second liens, were unmotivated to sell these assets, even though massive amounts are migrating to an out of statute category…Bright spots for 2014 are that there are more niche buyers with state-specific inquiries, significantly more capital on the sidelines looking for product, and stronger pricing versus what we have seen in the past,” said Roth.”


The report finished up with, “Pricing for performing second liens with life of loan clean pay histories is generally in the mid-60s to low 70s as a percentage of UPB. Additionally, there are a few buyers who have paid into the 80s for specific characteristics such as higher coupon, lower combined loan-to-value percentages, and overall larger pool sizes. Re-performing second liens trade in a wider range: from the low 20s to the 50s, depending on consistency of cash flows and other favorable pool characteristics. Secured, non-performing second lien loans trade between one percent and five percent of current UPB. The high end of the range would have loans that include attractive first lien statuses and CLTVs, low bankruptcy percentages, and favorable geography. Unsecured, non-performing seconds trade in the 10 to 50 basis point range. Higher bankruptcy percentages and out of statute loans are the reasons pricing continues to fall.”


Camilla Hall with Financial Times observed, “A looming repayment wave for a form of loan many Americans took out against their homes before the financial crisis is attracting the attention of regulators, who fear it will be accompanied by a rising tide of defaults. Borrowers must start repaying the principal on $167bn-worth of home equity lines of credit (Helocs) to large banks from Wells Fargo to JPMorgan between now and 2017 – half the total outstanding, according to the Office of the Comptroller of the Currency. The Federal Reserve stress tests, published last Thursday, showed that in a severe downturn, loan loss rates from Helocs and junior lien debt that was lent against people’s homes would rise to 9.6 per cent or $43.5bn, the second-highest loss rate after credit cards. Banks say many of the Helocs they offered in the lead-up to the financial crisis were structured as 10-year interest-only loans that could be drawn on in that timeframe but face a rise in payments in the 11th year when borrowers have to start paying back the principal. Because originations started to swell 10 years ago, when underwriting standards were looser, banks now face an aftershock of the pre-crisis lending boom, even though some banks, including Wells Fargo and JPMorgan, have moved away from interest-only home equity loans.”


Darrin Benhart, deputy comptroller for credit and market risk at the OCC, observed, “Helocs definitely represent a significant exposure at many of our institutions; it is an emerging risk that we’ve identified and we’ve asked our banks to proactively address this.” Banks have been scouring their Heloc portfolios and taking steps to prevent losses as the deadline approaches for many borrowers to start paying back their principal. “It’s certainly something that investors need to have on their radar,” says Jason Goldberg, analyst at Barclays Capital in New York.


Using a FICO credit score of 650, if that is the line drawn in the sand for “subprime”, which is arguable, about 15 per cent of Helocs entering the repayment period over the next five years are considered subprime, according to the OCC. Per Kelly Kockos, head of home equity at Wells Fargo, the biggest originator of such loans, “The bulk of the customers are choosing to enter their repayment period” rather than refinance.


The big banks had better hope things go well. Wells’ portfolio of home equity lines of credit totaled $76 billion at the end of 2013. Bank of America says its Heloc portfolio had an unpaid balance of $80 billion at the end of 2013, adding that more than 85 per cent of the loans will not enter their paydown period until 2015 or later. JPMorgan has $69 billion in its Heloc portfolio, including $20 billion that has already reset.


As we watch the basketball games, remember that it’s not just the winning teams getting all the publicity.  Quicken received a lot publicity for offering up a billion dollars for anyone who can pick the entire march madness bracket correctly. Of course no one won, as upsets have already crushed everyone’s bracket, but Quicken may be the big winner by capturing information on 15 million participants of the bracket buster challenge.  Garth Graham of STRATMOR Group had a good summary of his perceptions of the marketing value of the Quicken campaign:


As reported by the MBA: ” Independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $150 on each loan they originated in the fourth quarter of 2013, down from $743 per loan in the third quarter, the MBA reports in its latest Mortgage Bankers Performance Report. The “net cost to originate” was $5,171 per loan in the fourth quarter, up from $4,573 in the third quarter. The level of profit is at its lowest point since the MBA started counting in 2008. There is relief in sight! Quatrro Mortgage Solutions, an outsource loan fulfillment provider, offers a way to offset these rising costs due to QM and ATR compliance cost increases. “We save our banking clients 40% on average on origination and closing costs” according to Paul Trimakas, Business Development Manager. To find out how, contact Paul at or visit


Thursday rates dropped again with the yield on the 10-yr. heading back to 2.67%. Traders reported the interest in buying U.S. fixed income securities to the heightened tensions related to Ukraine and Russia. Once again, we are seeing events overseas determining our rates, and once again, when tensions lessen in a peaceful way, we are exposed to rates moving higher. But on top of that supply of MBS is lower than the demand, which also helped push prices higher and rates lower. (Yesterday’s report from the NYFRB showed agency MBS purchases totaled $10.8 billion for the week ending March 26, or $2.16 billion per day on average. With another $5 billion in tapering starting in April, buying for that month is estimated to ease slightly to an average of $2 billion per day.)


For housing news, the National Association of Realtors released its monthly Pending Home Sales Index for February which was not only weaker than expected but it was its eighth consecutive decline and lowest level since October 2011. But as with any housing news, one must wonder if it is due to real estate slowing or a lack of properties available for sale.


Today we’ve had February’s Personal Income and Consumption (+.3% and +.3%, as expected). We’ll also have the final March read on Consumer Sentiment. For numeros, we had a 2.67% close Thursday on the 10-year T-note; in the early going it is at 2.69%, and agency MBS prices are worse a shade.

Last night I was in luck and was able to buy two boxes of Bud Light cheap.

I placed the boxes on the front seat and headed back home. I stopped at a service station where a drop-dead gorgeous blonde in a short skirt was filling up her car at the next pump.

She glanced at the two boxes of beer, bent over and leaned in my passenger window, and said in a sexy voice, “I’m a big believer in barter, handsome. Would you be interested in trading sex for beer?”

I thought for a few seconds and asked, “What kind of beer ‘ya got?”



Rob (Copyright 2014 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)

Rob Chrisman