Ombudsman Report to the Industry
Message from Cottrell L. Webster, FDIC Ombudsman
I am pleased to present the latest in our series of online reports to
the financial services industry about issues and concerns raised to
the FDIC Office of the Ombudsman (OO). This report covers the period
July 1 through December 31, 2007.
OO outreach efforts focused on minority and de novo institutions
during this period. Representatives of minority depository institutions
continued to express concern that the markets they serve present challenges
in loan underwriting and BSA compliance. I have conveyed this concern
to FDIC examiners and management. Unique markets often require unique solutions,
and I continue to ask examiners to be open to bankers’ suggestions
in the supervisory area.
Although most bankers expressed overall satisfaction with the FDIC,
some bankers were troubled by a lack of communication during the
application and examination process. In the regulation area, bankers’ concerns
remained essentially the same as in our last report, but included a new
fear that Congress will overreact to the subprime mortgage crisis. This
report discusses the FDIC’s response to the subprime mortgage
crisis as well as updates on Suspicious Activity Reports.
In each of the OO’s last three reports, we introduced one of
our Regional Ombudsmen. Their assigned regions and contact information
are summarized below. I encourage readers to contact our Regional
on any matter that would benefit from a neutral, independent
and confidential ear.
||Atlanta and New York (plus the states of Arkansas, Louisiana, Mississippi,
||Kansas City and Dallas (excluding Arkansas, Louisiana, Mississippi
||San Francisco and Chicago
We welcome institutions’ suggestions
and concerns about the FDIC in its supervisory role. The OO summarizes
these comments for FDIC senior management’s review without attribution
to the institutions to eliminate the possibility of retaliation.
In addition to Regional Ombudsmen, OO specialists in Washington, D.C.,
to assist on any matter, regardless of your location. Please visit
our Ombudsman web site for more information
||Cottrell L. Webster
Office of the Ombudsman
What You Told Us:
During the second half of the year, 448 bankers contacted
the OO requesting assistance. In addition, OO staff spoke with 160 financial
industry representatives through outreach visits, telephone calls and industry-sponsored
Subprime Mortgage Crisis: Several bankers expressed concern about possible
government overreaction to the subprime mortgage crisis, including creating
additional laws and increasing the regulatory burden on FDIC-supervised banks.
While new regulation is possible, the FDIC has been working with other government
entities and the industry on market-based ways to refinance and restructure
performing subprime mortgages.
Last October, FDIC Chairman Bair proposed that the financial services industry
systematically address subprime adjustable-rate mortgage loans for owner-occupied
properties in which the borrowers are current on payments but unable to maintain
higher payments following reset. Three common misconceptions expressed to the
OO about Chairman Bair’s proposal and the FDIC’s responses are
Misconception: Restructuring is a bailout of subprime borrowers or investors.
This proposal is not a government bailout. Servicers voluntarily attempt to
restructure eligible loans in the interest of borrowers and investors. Such
efforts are consistent with existing contracts and servicer practices in mitigating
losses from delinquencies.
Misconception: Restructuring violates the contractual rights of investors.
Pooling and servicing agreements allow servicers to pursue streamlined restructuring
strategies in the interest of investors. Such strategies also are consistent
with generally accepted accounting practices and the Real Estate Mortgage Investment
Conduit (REMIC) tax requirements. Given the significant deterioration in mortgage
performance and housing market conditions, Chairman Bair’s proposal could
maximize the total net present value (NPV) of securitized subprime mortgages.
As long as servicers can demonstrate that their strategy is designed to maximize
the total NPV of the pool, it is difficult to argue that the Chairman’s
proposal violates contractual rights.
Misconception: Restructuring will create a windfall for subprime borrowers.
The starter rates for subprime loans were well above rates for prime fixed-rate
loans. In the first quarter of 2006, the average starter rate of subprime hybrid
mortgages was 8.28 percent. During that same period, the weighted-average rate
on subprime fixed-rate loans was 7.93 percent. Even after restructuring to
eliminate the upward rate adjustment, subprime borrowers would continue to
pay subprime rates well exceeding prime.
The Chairman’s subprime proposal, including industry and public misconceptions,
is discussed in detail in documents available through the following links.
Bank Secrecy Act/Anti-Money Laundering (BSA/AML): BSA/AML remains the
subject of comments and complaints. Bankers continue to express concern about
terms of burden and the high costs of training and implementation. Bankers
also complain of not receiving feedback about Suspicious Activity Report filings,
which gives the impression that the data are not used. Since the OO’s
last Report to the Industry, the FDIC published a relevant article in its Supervisory
Insights journal, which is linked and summarized below.
Connecting the Dots…The Importance of Timely and Effective Suspicious
Activity Reports “There is often a financial connection to crime, and
Suspicious Activity Reports (SARs) play a critical role in exposing the financial
links to illicit activities and fighting financial crimes. For the suspicious
activity reporting system to be effective, SARs must be complete, accurate,
and timely. This article highlights the importance of SARs, provides examples
of how various agencies use SARs, discusses common deficiencies in SAR filings,
and provides tips on what makes an effective SAR.”
If you have comments or suggestions about this semiannual report, please contact
FDIC Ombudsman Cottrell Webster at (703) 562-6040, or by e-mail at email@example.com.
To receive e-mail notifications of future OO semiannual reports as soon as
they are posted to the FDIC's Web site, follow the instructions at www.fdic.gov/about/subscriptions/index.html .