Reduction of mortgage principal resulting from a potential major settlement between the country’s largest lenders, state attorneys general, and the Obama administration “certainly has some advantages,” but a lot depends on how it is structured, as well as the other alternatives under consideration, Federal Reserve Board Chairman Ben Bernanke said Jan. 25, 2012.

Speaking at a news conference (webcast) Bernanke said there are a variety of views about principal forgiveness within the Fed, and no official position exists. “It seems very likely that principal forgiveness could be helpful,” Bernanke said, but warned that there are some potential drawbacks.

One such drawback, according to Bernanke, is the fact that the amount of negative equity in the United States is about $700 billion, “which is enormous, and so there’s no conceivable program that is going to put everybody in the country above water.”

Bernanke said the issue then becomes, depending on the eventual size of the mortgage settlement, “what is the most cost-effective way to help as many people as possible. And I think that’s an ongoing debate.”

Earlier the Fed announced that economic conditions are likely to warrant “exceptionally low” levels for the federal funds rate, at least until late 2014. The Fed said it expects the pace of economic growth to be moderate over coming quarters, reflecting ongoing drags in the housing sector and continued tight credit conditions for many households and small businesses. Looking further ahead, the central banks expects economic activity to accelerate gradually in conjunction with strengthening consumer and business confidence, improving financial conditions, and the continuation of a “highly accommodative” monetary policy stance.

Officials from the CFPB, Department of Defense, and Federal Trade Commission and the New York Attorney General have announced the development of a database to combat consumer financial frauds directed at military members, veterans and their families. The Repeat Offenders Against Military (ROAM) Database will track completed enforcement actions against companies and individuals who repeatedly scam military personnel. “As a former Ohio Attorney General, I know how frustrating it is to expose a scam and then see it take root in another state. The ROAM database will help law enforcement crack down on frauds that cross state lines,” said CFPB Director Richard Cordray at a press conference. “ROAM is a huge step forward in our mission to improve consumer protection for the military community.”

Law enforcement officials across the country, including state Attorneys General, United States Attorneys, and Judge Advocates from all five branches of the armed forces, will be able to search the ROAM database for publicly available information about completed civil and criminal legal actions against perpetrators of financial scams against military personnel, veterans, and their families. The CFPB stated in a post on its blog that ROAM is the first central mechanism for officials to run a quick search for actions taken by various federal, state and local law enforcers against those who target the military.

Rep. Scott Garrett, R-N.J., Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, applauded passage of the Swap Execution Facility Clarification Act (H.R. 2586) by the House Agriculture Committee with wide bipartisan support. Introduced by Garrett in July 2011 and passed by the Financial Services Committee in November, the bill would require the Commodities Future Trading Commission and the Securities and Exchange Commission to finalize swap execution facilities rules that allow the swaps market to “evolve towards the best form of execution over time.”

Garrett stated that regulating the execution of swap transactions in the United States, as mandated by the Dodd-Frank Act, is the “most significant market structure undertaking since 1934.” According to Garrett, a failure to do this would “risk putting the U.S. at a competitive disadvantage with our foreign counterparts.”

As part of its “Know Before You Owe” initiative, the CFPB has released two new settlement disclosure prototypes (Butternut Bank and Hemlock Bank) that will be used in a third round of consumer testing. The prototypes were developed through feedback received in earlier testing rounds. In the latest round of testing, consumers will be asked to compare the two disclosure prototypes to the disclosure a mortgage applicant would receive at the time of applications, the CFPB stated in a post on its blog. To evaluate the prototypes, consumer testers are asked to consider the following questions: 

• Can you easily find key loan terms? 
• Are you able to identify changes to the loan terms or costs? 
• Do you know who to contact to discuss your loan or changes to your loan? 
• Do you have the information you would need to feel comfortable closing on the loan? 
• Are the disclosures easy for lenders and settlement agents to use and explain to consumers?

The prototypes use a format for closing costs that is similar to the format on the initial disclosure to enable the two forms to work well together. Consumers should be able to see if their final loan terms and costs are different from the numbers they were originally offered, the CFPB noted. The disclosures are expected to provide consumers a clear picture both of what they owe and whether it is what they expected to owe, before signing any legal documents. 

Acting Comptroller of the Currency John Walsh on Jan. 24, 2012, addressed members of the American Securitization Forum Annual Conference on issues related to Dodd-Frank Act rulemaking in the areas of securitization and derivatives. Walsh noted that the rulemaking goal of the agencies “must be to strike a balance that meets the objectives of Dodd-Frank, while enabling financial firms to continue conducting business in a manner that is safe, sound, and profitable; ensuring appropriate monitoring and management of risk; promoting healthy and liquid markets; and supporting a strong and growing economy.” He also remarked on the status of the Dodd-Frank rulemaking process, especially the “Volcker Rule” proposal. On that matter, Walsh said, “As the interagency group drafted the proposal, it became clear that this rule could have a significant impact on securitizations; so we wrote more than two dozen questions directly related to securitization, asking commenters to supply us with additional information.”

The Office of the Special Inspector General for the Troubled Asset Relief Program has released its evaluation of the process designed by the Office of the Special Master for TARP Executive Compensation (OSM) to set pay packages and OSM's decisions on compensation for the top 25 employees at the companies that received exceptional assistance under TARP. Under this evaluation, SIGTARP assessed the criteria used by OSM to evaluate and make determinations on each company's executive compensation and whether OSM consistently applied criteria to all seven companies.

SIGTARP found that the Special Master could not effectively rein in excessive compensation at the seven companies because he was under the constraint that his most important goal was to get the companies to repay TARP. Although he generally limited cash compensation and made some reductions in pay, the Special Master still approved total compensation packages in the millions.

In the report, SIGTARP recommends that the OSM: substantiate each exception to the $500,000 pay limit that is requested and whether the requests demonstrate or fail to demonstrate “good cause;” better document its use of market data in its calculations; and develop more robust policies, procedures, or guidelines to help ensure that its pay determination process and its decisions are evenhanded.

President Barack Obama said he will direct the Attorney General to establish a Financial Crimes Unit of investigators to work with U.S. attorneys in going after large-scale financial fraud. The president also announced he would expand investigations into the abusive lending practices and packaging of risky mortgages that created the housing crisis.

In his January 24, 2012 State of the Union speech, Obama noted that some financial firms violate major anti-fraud laws “because there’s no real penalty for being a repeat offender.” He urged lawmakers to pass legislation that makes the penalties for fraud count.

Obama also said a special unit of federal prosecutors and leading state attorneys general will hold accountable those who broke the law while engaging in illegal lending practices. The unit will also work to speed assistance to homeowners. “We’ve all paid the price for lenders who sold mortgages to people who couldn’t afford them, and buyers who knew they couldn’t afford them,” he said.

Meanwhile, Obama announced he will send Congress a plan that would allow responsible homeowners who are current on their payments to save $3,000 a year on their mortgage by refinancing at historically low interest rates. “No more red tape. No more runaround from the banks,” Obama said. He noted that some of the administration’s proposed bank fees could cover the cost of the refinancing plan, giving banks that were rescued by taxpayers “a chance to repay a deficit of trust.”

Consumer Financial Protection Bureau Director Richard Cordray told Congress that his recess appointment earlier this month was “valid,” and that he will now move forward with the rulemaking responsibilities assigned to the new agency.

Appearing January 24, 2012 before a House Oversight and Government Reform subcommittee, Cordray was asked by the full committee chairman Rep. Darrell Issa, R-Calif., if he had looked at ways in which, if his appointment was ultimately ruled to be invalid, the work that he is currently overseeing would remain intact. “In other words, do you have a plan B?” Issa asked.

“It’s a good question and it’s a bit of a dilemma,” responded Cordray. He added that as director he now has legal responsibilities to move forward on rulemaking. “Either we do or we don’t, and it seems to me that the right answer is that we do, we need to go ahead.”

Cordray assured Issa that he would give some thought to considering how much of the work done so far could sustain his departure, should that occur for any reason. Cordray stressed, however, that “it would be dereliction of duty…for me to say we’re not going to go forward and do the things the law of the land now tells us to do because I’m going to somehow act as though I was not appointed. I just think that’s not tenable.”

Meanwhile, Rep. Patrick McHenry, R-N.C., pressed Cordray on whether he would lay out the bureau’s regulatory framework agenda for the coming year. Cordray noted that the bureau’s agenda is currently “stuffed full of the requirements that Congress has imposed on us. And that’s our first obligation to carry that out.”

McHenry advised Cordray to consider the Securities and Exchange Commission’s practice in laying out its regulatory agenda, noting that the CFPB is “vested with enormous powers.” Cordray replied that the CFPB would be prepared to work with the committee to “see what we can do.”

The Consumer Financial Protection Bureau adopted a final rule that will increase protections for consumers who transfer money internationally. Under the new rule, which implements Section 1073 of the Dodd-Frank Act, remittance transfer providers will generally be required to disclose the exchange rate and all fees associated with a transfer so that consumers know exactly how much money will be received on the other end. The rule also requires remittance transfer providers to investigate disputes and remedy errors.

“People sending money to their loved ones in another country should not have to worry about hidden fees,” said CFPB Director Richard Cordray. “With these new protections, international money transfers will be more reliable. Consumers will know the costs ahead of time and be able to compare prices. Transfer providers will also be held accountable for errors that occur in the process.”

Senator Daniel K. Akaka, D-Hawaii, the author of Section 1073, noted that “simple disclosures will empower consumers with important information, including the amount of currency that the recipient will receive, the promised date of delivery, and the rights of the sender regarding the resolution of errors. This is the information that consumers need to know so they can properly compare the rates and fees deducted from their remittances. I thank the Bureau for its work to implement these needed consumer protection reforms and for its commitment to work with consumer groups, industry, and other regulators to follow up on the impact of these new regulations.”

The CFPB also issued a Notice of Proposed Rulemaking along with the final rule. The Notice seeks comment on whether to make a few additional adjustments to the final rule, including setting a threshold that would minimize the impact of the rule on community banks, credit unions and other companies that do not normally process these transactions. The agency will act on an expedited basis to make any further changes prior to the effective date of the final rule.

“[T]he Bureau will be giving payday lenders much more attention,” CFPB Director Richard Cordray told a Birmingham, Ala., field hearing. According to Cordray, the bureau's information is that about 19 million American families use payday loans, paying lenders more than $7 billion in fees each year. These borrowers tend to have fewer assets, less income and lower net worth than average, he said, and are disproportionately likely to be members of racial minorities. Cordray stressed that the CFPB still is gathering information on short-term lending and has not yet reached any conclusions on what regulations might be needed. The bureau is aware that payday loans can provide a necessary source of credit, but also is aware of illegal or abusive practices it intends to stop.