MidFirst Bank
June 28, 2004
Mr. Steven F. Hanft
Clearance Officer
Legal Division
Room MB-3046
Federal Deposit Insurance Corporation
550 17th Street NW
Washington DC 20429
Reference number: Consolidated Reports of Condition and Income, 3064-0052
Dear Mr. Hanft,
MidFirst Bank, OTS Docket 14191, appreciates the opportunity to respond
to the Joint Notice and Request for Comment regarding the Proposed Agency
Information Collection Activities published in the April 29, 2004, Federal
Register. As explained in the paragraphs that follow, MidFirst Bank has
significant concerns with the Schedule PD reporting rules as proposed
for delinquent FHA and VA loans (herein referred to as GNMA loans). Specifically,
MidFirst believes that the reporting changes fail to accomplish the intended
goals, and could cause those who review the TFR to misjudge the credit
risk associated with the assets of the reporting thrifts.
Risk of Misperception
Presumably, a primary objective of the proposal is to more clearly convey
the credit profile of reporting institutions. However, the proposed methodology,
which would combine government- backed and non-government backed loans,
does not achieve this goal and could have severe consequences. It is
our opinion that combining loans which are wholly insured or partially
guaranteed by the U.S. Government with loans that do not have government
backing produces a total that is not truly meaningful to readers of the
reports and serves to artificially inflate the perceived credit risk
of an institution. The risk-based capital calculation confirms the difference
between the risk profiles of GNMA and conventional loans. GNMA loans
retain the lowest possible loan risk weighting of 20% whether The risk-based
capital calculation confirms the difference in risk profiles between
GNMA and conventional loans. GNMA loans retain the lowest possible loan
risk weighting of 20% whether they are current or delinquent, whereas
the risk weighting for qualifying conventional loans doubles from 50%
to 100% when they become delinquent. By producing a combined total of
government-backed and non-government-backed non-performing loans, the
proposed reporting format could confuse some readers by implying that
all such loans are similar.
Proponents of the
change would point to the separate reporting line that captures the
subset of past
due loans that have government backing.
However, it seems reasonable to assume that many readers, including the
press, will focus on “headline” numbers such as the total
amount of past due loans without giving consideration to the offsetting
amount of government-backed loans. This significantly increases the risk
that customers, rating agencies, analysts, the press and business partners
could incorrectly perceive a negative or adverse financial condition.
The consequences will be particularly problematic for institutions
reporting delinquent GNMA loans on schedule PD for the first time,
as a significant increase in delinquent loan volume could be reported.
Suddenly including these loans as delinquent in a public forum could
unnecessarily alarm readers of this information. Such negative reactions
could be difficult to overcome.
The potential cost
associated with the proposed change could be significant. Adverse reporting
in
the press could have a significant impact on depositor
confidence and result in a loss of deposits for institutions with large
GNMA portfolios. Rating agencies may downgrade affected thrifts’ ratings.
Institutional lenders may be discouraged from providing funding sources
to
affected thrifts. The possible results of these occurrences could be
liquidity concerns and increased funding costs. Any one of these events
would necessitate additional marketing and public relations expenditures
to explain the issue and mitigate the damage caused by the proposed reporting
change.
Reporting Inconsistency
A stated objective of the proposed reporting change is to ensure consistency
in reporting for delinquent GNMA loans. However, the proposed reporting
change does not accomplish this goal. Within the published discussion
of the proposed reporting changes, the Agencies acknowledge the need
for an exception in TFR and Call report instructions prior to the implementation
of FAS 140. The need for this exception was due to the potential inconsistency
in treatment for serviced loans in foreclosure status which were bought
out of GNMA pools by institutions in order to avoid the continuation
of monthly advances on those loans and those loans in foreclosure status
which remained in the GNMA pool. The agencies go on to say this exception
is no longer necessary as a result of the FAS 140 requirement for delinquent
GNMA loans to be rebooked as assets as soon as the repurchase option
becomes unconditional. The justification for removing the exception seems
to be founded on the premise that all delinquent GNMA loans are required
to be rebooked. This is not the case.
The FAS 140 requirement for rebooking delinquent loans only applies
to assets actually transferred by an institution into GNMA pools upon
issuance of the pool. Rebooking assets that become unconditionally eligible
for repurchase by the issuer/transferor is essentially a reversal of
the sale recognition at the time the pools were issued. Servicers that
purchase GNMA servicing from the original GNMA pool issuer/transferor
are not required to rebook delinquent GNMA loans because there was no
sale to reverse as a result of the repurchase. Because the rebooking
of delinquent loans pursuant to FAS 140 does not apply to all GNMA servicers,
extinguishing the exception in the TFR and Call report instructions will
not eliminate inconsistency in the reporting of delinquent GNMA loans
MidFirst appreciates
the Agencies’ objective
to achieve consistency in reporting. However, by not recognizing the
distinction between transferor
loan servicers and non-transferor loan servicers consistent with SFAS
140, the proposed rule would actually result in less consistent reporting.
As a result, MidFirst believes the exception in the current TFR and Call
report instructions should continue.
Disincentive for Appropriate Economic Actions
If the exception was not extended, a non-transferor servicer would be
required to report delinquent GNMA loans that are purchased from the
pools as past due. Meanwhile, loans that are otherwise past due but are
not purchased from the pools would not be subject to Schedule PD reporting.
This would imply that delinquent loans purchased from the pools have
a greater credit risk than delinquent loans which are not purchased from
the pools. In reality, no additional credit risk is created when the
loans are purchased from the servicing pools. In fact, the opposite is
true. By purchasing a delinquent loan from a pool, the servicer is able
to mitigate its ultimate loss on the loan, as the servicer is no longer
required to advance interest to the investor.
Not extending the exception would create a significant disincentive
(if not preclusion) for a non-transferor servicer to exercise the appropriate
economic decision regarding delinquent GNMA loans being serviced. In
other words, the servicer would have to weigh the economic benefits of
purchasing the loans from the pools against giving a false impression
to the public, including its customers, about inflated credit risk. Adoption
of a reporting policy that creates a disincentive for institutions to
make prudent economic decisions is contrary to the concept of safety
and soundness.
Recommendations
In summary, MidFirst opposes implementation of the proposed rule change.
We believe this rule change will create a misconception related to the
credit risk of government insured assets, while not solving the problem
of reporting inconsistencies. Further, if enacted, we believe this rule
change is contrary to safety and soundness objectives because it creates
a disincentive for institutions to take appropriate actions to mitigate
credit risk by purchasing delinquent loans from GNMA pools.
MidFirst believes
there are alternative solutions for meeting the stated objectives of
the rule
change while not creating the disadvantages discussed
above. MidFirst’s recommendations are as follows:
1. MidFirst suggests that the most effective solution would be to require
that all defaulted GNMA loans (both in GNMA pools and out of GNMA pools)
be reported separately from other defaulted loan types, most preferably
in a memoranda format, regardless of whether the loans are required to
be rebooked by FAS 140. In this scenario, institutions would not report
GNMA loans on the existing lines of Schedule PD as is the proposed requirement,
but would footnote delinquent GNMA loans. MidFirst also suggests that
such memoranda reporting be suppressed from public disclosure. In this
manner, the Agencies would receive the GNMA loan data for regulatory
oversight purposes just as they do now through periodic monitoring of
the institutions, but the risks associated with public disclosure would
be prevented.
2. Should the Agencies
decide to move forward with the reporting as proposed, MidFirst strongly
recommends
that the current exception be
continued for non-transferors. Specifically, we recommend that delinquent
loans which are not required to be rebooked under FAS 140, while still
in GNMA pools, be excluded from reporting when purchased from GNMA pools
and booked to an institution’s balance sheet. Continuing this exception
would prevent loans from becoming reportable solely because an institution
appropriately purchases delinquent loans from GNMA pools to mitigate
its losses. In effect, this would prevent the servicer from being “punished” for
choosing the best economic result of mitigating servicing losses by buying
the delinquent loans from the servicing pools.
3. If recommendation
number 2, above, is not possible, at a minimum we would recommend that
the
disclosure of assets on schedule PD be segregated
by government insured and non-government insured, rather than combined
in any form of total as currently proposed. This would avoid the confusion
of combining different types of past due assets that have very different
levels of true credit risk and ultimately give a much clearer picture
of an institution’s financial condition than what is presently
proposed.
4. For those impacted by the proposed rule that would not be subject
to a reporting exception, MidFirst suggests granting the option of reporting
GNMA loans on PD on a prospective basis, such that only GNMA pools originated
after the effective date of the proposed reporting change would be subject
to the new rule. As management teams developed GNMA loan origination
strategies pursuant to safe and sound management oversight, various issues
would have been considered and weighed. In part because of the regulatory
guidance at the time, it was never contemplated that significant volumes
of loans securitized and sold would be reported to the public as past
due at some point after the sale. It would be extremely unfair to penalize
management and institutions for pursuing an activity that was well conceived
pursuant to existing regulatory guidance, especially given the risk exposure
stemming from the activity has not changed.
5. Finally, MidFirst suggests that the effective date of any such reporting
change be delayed for 12 months following the publication of the final
reporting requirements. In this manner, managers would be afforded adequate
time to modify strategies that are reportable under the proposed rule,
thereby minimizing the associated risks. Such a delay also affords management
adequate time to develop and implement strategies to explain the results
to the public.
MidFirst thanks you for the opportunity to respond and would be glad
to answer any questions you might have.
Sincerely,
Todd A. Dobson
Chief Financial Officer
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