Data Breach Responses

One morning Gail woke up with a start.  Her husband Doug asked what was the matter, she told him, "I just had a dream that you gave me a pearl necklace for Valentine's Day. What do you think it means?"

"You'll know tonight," Doug said.

That evening, Doug home with a small package and gave it to his wife. Delighted, Gail opened it - only to find a book entitled "The Meaning of Dreams".

 

Lenders should know that the FDIC indicates it expects banks to evaluate and manage cyber risk as it does any other business risk and to do so as an enterprise-wide initiative involving all employees. That certainly goes beyond telling employees not to leave loan files on their desk when they go home at night. And Ponemon research finds companies have the following among their data breach response plans: contact information for all members of the data breach response team (95%), required C-level approval of the data breach response plan (67%), procedures for communicating with employees when a data breach occurs (55%), procedures for communicating with state attorneys general and regulators (53%), procedures for communications with investors, procedures for communications with business partners and other third parties, contact information for all members of the data breach backup response team, procedures for determining and offering identity theft protection services, and review of a third party or business partner's incident response plan.

Neither snow nor rain nor heat nor gloom of night stays mergers and acquisitions from being announced in commercial banking. Just in the last week the industry learned of some big ones. In Ohio the Huntington National Bank ($71B) will acquire FirstMerit Bank ($25.5B) for about $3.4B in cash and stock or roughly 1.6x tangible book. Over in Michigan three-bank holding company Chemical Financial ($9.2B) will acquire Talmer Bank and Trust ($6.6B) for about $1.1B in cash and stock. Down in California Opus Bank ($6.6B) will acquire alternative asset custodian Pensco Trust for $104mm in cash and stock.

 In Illinois Pioneer State Bank ($69mm) will acquire Farmers State Bank of Sublette ($39mm). Northwest Bank ($9.0B, PA) said it will consolidate 24 offices into nearby locations and convert 2 full services offices into drive up only facilities this year as it works to trim costs and consolidate its physical network. In Nashville Pinnacle Bank ($8.7B) will acquire Avenue Bank ($1.1B) for $201.4mm in cash and stock. In Missouri F&M Bank and Trust Co ($119mm) will acquire American Loan and Savings Assn ($4.4mm), and in Colorado Citywide Banks ($1.3B) has made a strategic investment in residential mortgage company Englewood Mortgage Co as a passive stakeholder.

 Recently, United Kingdom's Treasury Committee Chairman Andrew Tyrie addressed his IT concerns with the country's banks. Bloomberg writes, "Banks need to spend more on modernizing computer systems and boards should take direct responsibility for technology oversight, rather than relying on consultants, Conservative Party lawmaker Tyrie said after investigating the breakdowns. The Bank of England should set up a group to monitor banks and report on IT issues to government, he said. These risks and problems are causing a considerable amount of distress and disruption to millions of people and thousands of businesses...IT risks need to be accorded the same status as credit, financial and conduct" meaning "more, and higher quality, investment is probably required."

 While I am yammering about banks, Wells Fargo has agreed to pay $1.2 billion to settle claims that it "engaged in reckless lending under a FHA program that left a government insurance fund to clean up the mess." The bank, which is the nation's largest mortgage lender, has been in talks with the government since 2012 over accusations that it improperly classified some F.H.A. loans as qualifying for federal insurance when they did not, and that it knew of the misclassification but failed to inform housing regulators about the deficiencies before filing insurance claims. Wells Fargo said in a securities filing on Wednesday that it had reached an agreement in principle with the Department of Justice and the United States attorney's offices for the Southern District of New York and the Northern District of California, as well as the Department of Housing and Urban Development. The claims were civil and focused on Wells Fargo's lending under the F.H.A. program from 2001 to 2010.

 Wells is the last of the top 4 banks to settle: Citigroup, Bank of America and JPMorgan Chase all previously settled similar claims. The settlement means Wells Fargo has to reduce 2015 profit by $134 million to account for the extra legal expense. The industry continues to watch FHA volumes at institutions like Chase, Quicken Loans, and others as companies try to limit the exposure to such penalties under the Civil War's False Claims Act catch-all federal law meant to thwart fraud committed against the U.S. Government.

 In other government lending news Franklin American Mortgage Company has updated its guide to include Marijuana related business/employment as an ineligible source of income. This change is effective immediately.

 (FAMC also clarified that for USDA purchase transactions, secondary financing may be provided by a valid city, county, state or federal governmental agency, or a HUD-approved non-profit that is also considered an instrumentality of the government.)

 Flagstar posted numerous announcements recently, many dealing government-related loan programs. Some of the highlights include enhancements to its TRID system. Its Disclosure Management Module now displays advisories that are or have been applied to the loan for initial and/or redisclosed LE's by selecting Manage Advisories.  Users will be able to see the advisory, sent date, status and state change date. Regarding Flagstar's fair lending analysis, in the near future, it will include broker compensation in its regular fair lending analysis and share results with our customers as necessary to create transparency and work with them to remediate any identified disparities or issues.

 "Flag" also posted, in compliance with Fannie Mae's recent announcement, applications dated on or after February 4^th, the following transactions are not eligible for a Property Inspection Waiver regardless if offered on the DU Feedback: subject property is an REO property, the last transaction on the subject property was a foreclosure or the lender is required by law to obtain an appraisal (This does not apply for loans on which Flagstar Bank, FSB is the named lender). Regarding non-safe harbor QM's, although VA indicates it will guaranty loans that are not Safe Harbor QMs, Flagstar does not approve, fund or purchase VA loans that are not Safe Harbor QMs or do not meet all regulatory requirements. Obtaining VA's Prior Approval for an IRRRL does not provide Safe Harbor Protection to IRRRLs that do not meet all of the requirements above. VA Prior Approval requirements have not changed, and Prior Approval is required only for VA loans that are 30 days or more past due. 

 Not only does the industry have to monitor all these changes, but we have to keep an eye on the economy as well. Housing and jobs drives much of it, and according to a recent article published by Zillow construction jobs have recovered more slowly since the recession. The industry appears to be stuck in the middle row of growth, not fully at the comeback stage but also not at levels seen after the housing crash. In 2015, the number of construction jobs increased 5.8 percent YoY and just in December, more than 23,000 Americans found jobs building homes and apartments. Yet it will likely take the rest of the decade for construction jobs to be at pre-crash levels, as employment is still 20 percent below the 2008 levels. Housing starts have increased and permits data implies that more may come. With the high demand and growth in the construction market, employment within the field could soon rise.

 Things here in the U.S. and 'round the world are certainly increasing volatility in the bond market. Wednesday we had an early rally which moved yields on the 10-year T-Note down to 1.793% although agency MBS prices lagged. As ThomsonReuters put it, "Morning volumes were heavy and biased to better buying as prepay fears weighed on higher coupons despite the MBA release which showed the Refi Index remaining relatively steady..."

 But during the day oil prices "caught a bid" and moved higher, equities moved higher, and suddenly bond prices (including mortgage-backed securities) headed lower which moves rates higher. At the close, 10-year notes were 5 ticks lower yielding 1.88% and MBS prices were pretty much unchanged.

 Today's economic calendar began with January Challenger job cuts: 42% higher than last year mostly due to retail and energy reductions. We've also had weekly jobless claims (277k up 8k to 285k) and Q4 productivity and unit labor costs (-3% - not good for growth, and +4.5%). Later we have December's Factory Orders and the New York Fed's release its weekly MBS FedTrade operation totals covering the January 28 to February 3 week - yes, it keeps buying MBS to help keep rates low. In the early going the 10-year is at 1.87% with agency MBS prices, which determine rate sheets for borrowers, roughly unchanged from Wednesday's close.