Enhancing Transparency in the Structured Finance Market Unprecedented growth and innovation in the structured finance market during the past 10 years have focused attention on the need for increased transparency in certain securitization products. This article reviews the information available about these products and concludes that concern about transparency is warranted. The author offers several recommendations for policymakers to consider that would improve the transparency of these products. The article concludes with a reminder about existing supervisory guidance regarding banks’ investments in rated securities.
Hybrid ARMs: Addressing the Risks, Managing the Fallout Lax underwriting standards and potentially deceptive marketing claims have heightened the risks that hybrid adjustable-rate mortgage (ARM) products pose to borrowers and lenders. The seriousness of the current situation in the mortgage market underscores the importance of compliance with sound and responsible lending practices. This article provides an overview of the risks and describes key aspects of the supervisory guidance applicable to these products.
A Primer on the Use of Interest Reserves The use of a loan-funded interest reserve in Acquisition, Development, and Construction (ADC) lending can be a viable underwriting practice, depending on the feasibility of the project, the creditworthiness of the borrower, and the collateral protection. However, in certain instances, the use of an interest reserve can mask signs of deteriorating credit quality. Recent observations by examiners have identified potential concerns in this regard. This article examines the risks associated with this underwriting practice, reviews regulatory guidance, and highlights the importance of evaluating the appropriateness of interest reserves when an ADC project falters or becomes troubled.
External Auditors’ Reports:
Internal Control Deficiencies Effective internal control underpins the safe and sound operation of a depository institution. This article summarizes the development of internal control standards, provides examples of internal control deficiencies, and explains how these deficiencies should be evaluated and communicated as part of external auditor reports. The author highlights examination considerations and looks at how professional auditing standards may change in the near term.
Supervisory Insights is published by the Division of Supervision and Consumer Protection of the Federal Deposit Insurance Corporation to promote sound principles and best practices for bank supervision.
Sheila C. Bair
Sandra L. Thompson
Director, Division of Supervision
and Consumer Protection
Journal Executive Board
George French, Deputy Director and Executive Editor
Christopher J. Spoth, Senior Deputy Director
John M. Lane, Deputy Director
Robert W. Mooney, Deputy Director
William A. Stark, Deputy Director
Thomas J. Dujenski, Regional Director
Doreen R. Eberley, Regional Director
Stanley R. Ivie, Regional Director
James D. LaPierre, Regional Director
Sylvia H. Plunkett, Regional Director
Mark S. Schmidt, Regional Director
Kim E. Lowry
Donna J. Bell Financial Writer
Todd G. Eich
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The views expressed in Supervisory Insights are
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Federal Deposit Insurance Corporation. In particular, articles should not be construed as definitive regulatory or supervisory guidance. Some of the information used in the preparation of this publication was obtained from publicly available sources that are considered reliable. However, the use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation.