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Lenders brace for more federal oversight

Local banks, credit unions and mortgage lenders could be
playing on a dramatically different field by the end of this year. Federal
lawmakers are scrambling to revise mortgage-lending rules and, more
ambitiously, reinvent the federal bureaucracy dealing with financial services.

Local banks, credit unions and mortgage lenders could be
playing on a dramatically different field by the end of this year. Federal
lawmakers are scrambling to revise mortgage-lending rules and, more
ambitiously, reinvent the federal bureaucracy dealing with financial services.

It’s a big “if,” local executives said.

But in an election year, lawmakers are preparing to take
action to address the flood of foreclosures among U.S. homeowners. Legislation
affecting mortgage lending already has moved through the Pennsylvania
Legislature.

The challenge will be writing laws that fix problems rather
than create new ones, local executives said.

“There’s a difference between coming up with a solution that
works and coming up with a solution that’s politically expedient,” said Jeff
Roof, president of Roof Advisory Group Inc., an investment firm in Harrisburg.

The most ambitious proposal, unveiled by the U.S. Treasury
in March, would merge federal agencies that oversee banks, give more power to
the Federal Reserve System and otherwise modernize financial regulation.

Modernization is needed, said Bill Schenck, Pennsylvania’s former
banking secretary and now president of Pittsburgh-based TriState Capital Bank.
But given the scope of the task, it probably will have to wait until a new
president takes office in 2009, he said.

“There’s not enough time to get it done now,” Schenck said.

The last major shakeup of financial regulation came during
the Great Depression, when Congress created the Federal Deposit Insurance Corp.
and the Securities and Exchange Commission.

“We don’t have a financial crisis in this country of that
magnitude,” Schenck said. “But we do have a realization on the part of many people
today that we have a far more complex financial system, and we do not have a
regulatory structure which has kept up with it.”

Local bankers said they expect action on issues that
directly impact mortgage lending but are less certain anything will happen in
the broader arena of regulatory change. Some of the Treasury’s proposals have
floated around for years, such as a merger of two federal agencies that monitor
banks: the Office of the Comptroller of the Currency and the Office of Thrift
Supervision.

“Everybody’s got their own fiefdom, and to think that
they’re all going to combine, it would be a shock to me,” said Alan Dakey,
president and chief executive officer of Mid Penn Bank in Millersburg. “It
could be an improvement. I’m not saying I oppose it. Is it realistic? I don’t
think so.”

Opposition to the Treasury’s proposals already is brewing.
State securities regulators, for example, fear the federal government will
usurp their power to combat fraud and other investment abuses.

“There’s some bad stuff getting through that the SEC does
not have the resources to look at,” said Michael J. Byrne, chief counsel of the
Pennsylvania Securities Commission.

Credit unions have taken issue with a proposal for a shared
regulator over their industry and banks.

Bankers worry any new rules for mortgage lending could
hinder companies that played little or no role in subprime lending, the main
source of problems faced by homeowners. Nonetheless, local executives believe
some action is necessary to fix what went wrong.

The most likely step is licensure of mortgage originators,
the people who sell loans directly to consumers. The state Banking Department
licenses companies that offer mortgages but not the individuals who work for
them.

“That’s really the bigger issue here in what has gotten us
into this mess … Unregulated folks were making the mortgages. They definitely
need to be licensed,” said Ken Shoemaker, president and chief executive officer
of Orrstown

Financial Services Inc. in Shippensburg.

This spring, state lawmakers passed a package of legislation
that includes a bill to license mortgage originators. But differences between
House and Senate versions must be ironed out before the legislation becomes
law, said Dan Egan, a Banking Department spokesman. He characterized the
differences as minor.

The licensing requirement exempts mortgage originators who
work at banks, Egan said.

Banks said they already are well-regulated and don’t need
the extra scrutiny over their employees. Mortgage brokers argue otherwise and
said national standards are needed to ensure that bank originators are covered.

“The only way that happens is some type of federal
oversight,” said George Hanzimanolis, president of Bankers First Mortgage Inc.
in Tannersville, Pa., and president of the National
Association of Mortgage Brokers, an industry trade group.

Legislation introduced in the U.S. Senate would create a
national licensing system for residential-mortgage originators.

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