UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal Year Ended
December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission file number 0-6835
IRWIN FINANCIAL
CORPORATION
(Exact name of Corporation as
Specified in its Charter)
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Indiana
(State or Other Jurisdiction of
Incorporation or Organization)
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35-1286807
(I.R.S. Employer
Identification No.)
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500 Washington Street Columbus, Indiana
(Address of Principal Executive
Offices)
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47201
(Zip Code)
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(812) 376-1909
(Corporations Telephone
Number, Including Area Code)
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www.irwinfinancial.com
(Web
Site)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of Class:
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Common Stock*
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Title of Class:
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8.70% Cumulative Trust Preferred Securities issued by IFC
Capital Trust VI and the guarantee with respect thereto.
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of
1934. Yes
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No
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Indicate by check mark whether the Corporation: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Corporation was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Corporations knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting
company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, computed by
reference to the closing price for the registrants common
stock on the New York Stock Exchange on June 30, 2007, was
approximately $276,290,152.
As of March 7, 2008, there were outstanding 29,600,284
common shares of the Corporation.
* Includes associated rights.
Documents
Incorporated by Reference
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Selected Portions of the Following Documents
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Part of Form 10-K Into Which Incorporated
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Definitive Proxy Statement for Annual Meeting
Shareholders to be held May 30, 2008
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Part III
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Exhibit Index on Pages 119 through 122
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FORM 10-K
TABLE OF CONTENTS
1
About
Forward-looking Statements
This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We
intend such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. We are
including this statement for purposes of invoking these safe
harbor provisions.
Forward-looking statements are based on managements
expectations, estimates, projections, and assumptions. These
statements involve inherent risks and uncertainties that are
difficult to predict and are not guarantees of future
performance. In addition, our past results of operations do not
necessarily indicate our future results. Words that convey our
beliefs, views, expectations, assumptions, estimates, forecasts,
outlook and projections or similar language, or that indicate
events we believe could, would, should, may or will occur (or
might not occur) or are likely (or unlikely) to occur, and
similar expressions, are intended to identify forward-looking
statements. These may include, among other things, statements
and assumptions about:
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our projected revenues, earnings or earnings per share, as well
as managements short-term and long-term performance goals;
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projected trends or potential changes in asset quality
(particularly with regard to loans or other exposures including
loan repurchase risk, in sectors in which we deal in real estate
or residential mortgage lending), loan delinquencies,
charge-offs, reserves, asset valuations, capital ratios or
financial performance measures;
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our plans and strategies, including the expected results or
costs and impact of implementing or changing such plans and
strategies;
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potential litigation developments and the anticipated impact of
potential outcomes of pending legal matters;
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predictions about conditions in housing markets, industries
associated with housing, the mortgage markets or mortgage
industry;
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the anticipated effects on results of operations or financial
condition from recent developments or events; and
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any other projections or expressions that are not historical
facts.
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We qualify any forward-looking statements entirely by these
cautionary factors.
Actual future results may differ materially from what is
projected due to a variety of factors, including, but not
limited to:
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potential deterioration or effects of general economic
conditions, particularly in sectors relating to real estate
and/or
mortgage lending or small business-based manufacturing and
services;
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potential effects related to the Corporations decision to
suspend the payment of dividends on its common, preferred and
trust preferred securities.
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potential changes in direction, volatility and relative movement
(basis risk) of interest rates, which may affect consumer and
commercial demand for our products and the management and
success of our interest rate risk management strategies;
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competition from other financial service providers for
experienced managers as well as for customers;
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staffing fluctuations in response to product demand or the
implementation of corporate strategies that affect our work
force and potential associated charges;
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the relative profitability of our lending and deposit operations;
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the valuation and management of our portfolios, including the
use of external and internal modeling assumptions we embed in
the valuation of those portfolios and short-term swings in the
valuation of such portfolios;
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borrowers refinancing opportunities, which may affect the
prepayment assumptions used in our valuation estimates and which
may affect loan demand;
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unanticipated deterioration in the credit quality or
collectibility of our loan and lease assets, including
deterioration resulting from the effects of natural disasters;
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difficulties in accurately estimating the future repurchase risk
of residential mortgage loans due to alleged violations of
representations and warrants we made when selling the loans to
the secondary market;
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unanticipated deterioration or changes in estimates of the
carrying value of our other assets, including securities;
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difficulties in delivering products to the secondary market as
planned;
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difficulties in expanding our businesses and obtaining or
retaining deposit or other funding sources as needed;
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changes in the value of our lines of business, subsidiaries, or
companies in which we invest;
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changes in variable compensation plans related to the
performance and valuation of lines of business where we tie
compensation systems to line-of-business performance;
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unanticipated outcomes in litigation;
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legislative or regulatory changes, including changes in laws,
rules or regulations that affect tax, consumer or commercial
lending, corporate governance and disclosure requirements, and
other laws, rules or regulations affecting the rights and
responsibilities of our Corporation, bank or thrift;
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regulatory actions that impact our Corporation, bank or thrift,
including the memorandum of understanding entered into as of
March 1, 2007 between Irwin Union Bank and Trust and the
Federal Reserve Bank of Chicago;
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changes in the interpretation of regulatory capital or other
rules;
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the availability of resources to address changes in laws, rules
or regulations or to respond to regulatory actions;
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changes in applicable accounting policies or principles or their
application to our business or final audit adjustments,
including additional guidance and interpretation on accounting
issues and details of the implementation of new accounting
methods;
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the final disposition of our remaining assets and obligations of
our discontinued mortgage banking segment; or
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governmental changes in monetary or fiscal policies.
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We undertake no obligation to update publicly any of these
statements in light of future events, except as required in
subsequent reports we file with the Securities and Exchange
Commission (SEC).
3
PART I
General
We are a bank holding company headquartered in Columbus, Indiana
with $155 million of net revenues from continuing
operations in 2007 and $6.2 billion in assets at
December 31, 2007. We focus primarily on the extension of
credit to small businesses and consumers as well as providing
the ongoing servicing of those customer accounts. Through our
direct and indirect subsidiaries, we currently operate three
major lines of business: commercial banking, commercial finance,
and home equity lending. In 2006, we sold the majority of our
conforming conventional first mortgage banking business.
We conduct our commercial and consumer lending businesses
through various operating subsidiaries. Our banking subsidiary,
Irwin Union Bank and Trust Company, was organized in 1871.
We formed the holding company in 1972. Our direct and indirect
major subsidiaries include Irwin Union Bank and
Trust Company, a commercial bank, which together with Irwin
Union Bank, F.S.B., a federal savings bank, conducts our
commercial banking activities; Irwin Commercial Finance
Corporation, a commercial finance subsidiary; and Irwin Home
Equity Corporation, a consumer home equity lending company. In
2006, we discontinued the majority of operations at Irwin
Mortgage Corporation, our mortgage banking company and formerly
one of our major subsidiaries.
Our strategy is to position the Corporation as an interrelated
group of specialized financial services companies serving niche
markets of small businesses and consumers while optimizing the
productivity of our capital. We seek to create competitive
advantage within the banking industry by serving small
businesses and consumers with lending, leasing, deposit,
advisory services and specialized mortgage products. Our
strategic objective is to create value through well-controlled,
profitable growth by attracting, retaining and developing
exceptional management teams at our lines of business and parent
company who focus on (i) meeting customer needs rather than
simply offering banking products or services, (ii) being
cost-efficient in our delivery, and (iii) having strong
risk management systems. We believe we must continually balance
these three factors in order to deliver long-term value to all
of our stakeholders. Our lines of business operate as direct and
indirect subsidiaries of Irwin Union Bank and Trust (and, in the
case of commercial banking, with Irwin Union Bank, F.S.B.). This
structure allows us to offer insured deposits and results in
regulatory oversight of our business.
Our Internet address is
http://www.irwinfinancial.com.
We make available free of charge through our Internet website
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports as soon as reasonably
practicable after we electronically file the material with the
Securities and Exchange Commission (SEC). Unless otherwise
indicated, our Internet website and the information contained or
incorporated in it are not intended to be incorporated into this
Annual Report on
Form 10-K.
Major
Lines of Business
Commercial
Banking
Our commercial banking line of business provides credit, cash
management and personal banking products primarily to small
businesses and business owners. We offer commercial banking
services through our banking subsidiaries, Irwin Union Bank and
Trust Company, an Indiana state-chartered commercial bank,
and Irwin Union Bank, F.S.B., a federal savings bank. The
commercial banking line of business offers a full line of
consumer, mortgage and commercial loans, as well as personal and
commercial checking accounts, savings and time deposit accounts,
personal and business loans, credit card services, money
transfer services, financial counseling, property, casualty,
life and health insurance agency services, trust services,
securities brokerage and safe deposit facilities. This line of
business operates through two charters, each headquartered in
Columbus, Indiana:
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Irwin Union Bank and Trust Company
organized in 1871, is a full service Indiana
state-chartered commercial bank with offices currently located
throughout nine counties in central and southern Indiana, as
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well as in Grandville (near Grand Rapids), Kalamazoo, Lansing
and Traverse City, Michigan; Carson City and Las Vegas, Nevada;
and Salt Lake City, Utah.
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Irwin Union Bank, F.S.B.
is a full-service
federal savings bank that began operations in December 2000.
Currently we have offices located in Mesa and Phoenix, Arizona;
Costa Mesa and Sacramento, California; Louisville, Kentucky;
Clayton (near St. Louis), Missouri; Reno, Nevada;
Albuquerque, New Mexico; and Milwaukee, Wisconsin. We opened
offices in Ohio and Florida in 2007.
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We discuss this line of business further in the Commercial
Banking section of Managements Discussion and
Analysis of Financial Condition and Results of Operation
(MD&A) of this report.
Commercial
Finance
Established in 1999, our commercial finance line of business
originates small-ticket equipment leases throughout the
U.S. and Canada and provides equipment and leasehold
improvement financing for franchisees (mainly in the quick
service restaurant sector) in the United States. The majority of
our leases are full payout (no residual), small-ticket assets
secured by commercial equipment. We finance a variety of
commercial and office equipment types while limiting the
industry and geographic concentrations in our lease and loan
portfolios. Loans to franchisees often include the financing of
real estate as well as equipment. In 2006, this segment expanded
its product line to include professional practice financing and
information technology leasing to middle and upper middle market
companies throughout the United States and Canada.
We discuss this line of business further in the Commercial
Finance section of the MD&A of this report.
Home
Equity Lending
We established this line of business when we formed Irwin Home
Equity Corporation as our subsidiary in 1994, headquartered in
San Ramon, California. Irwin Home Equity became a
subsidiary of Irwin Union Bank and Trust in 2001. The Board of
Irwin Union Bank and Trust recently approved the merger of Irwin
Home Equity into the Bank. This will not affect our operations,
but may result in more favorable tax treatment for the
Corporation. In conjunction with Irwin Union Bank and Trust,
Irwin Home Equity originates, purchases, securitizes and
services first mortgages and home equity loans and lines of
credit nationwide. Our target customers are principally
creditworthy, homeowners with limited equity in their homes as
well as lenders/third parties that can benefit from specialized
servicing. We market our first mortgage and home equity offering
principally through mortgage brokers and correspondent lenders
and also direct to consumers.
We discuss this line of business further in the Home
Equity Lending section of the MD&A of this report.
Discontinuance
of Mortgage Banking
We discontinued our mortgage banking line of business with the
sale of the majority of the assets of Irwin Mortgage
Corporation. We sold the production and most of the headquarters
operations of this segment in September 2006. We sold the bulk
of our portfolio of mortgage servicing rights to multiple
buyers, transferring these assets in early January 2007. We sold
our servicing platform in January 2007. Prior to the sales,
Irwin Mortgage, a subsidiary of Irwin Union Bank and
Trust Company, had engaged in the origination, purchase,
sale and servicing of conventional and government agency-backed
residential mortgage loans. Irwin Mortgage also engaged in the
mortgage reinsurance business through its subsidiary, Irwin
Reinsurance Corporation, a Vermont Corporation, which we have
retained. Irwin Mortgage no longer originates loans but
continues to manage and service loans that were not included in
the transfer of assets and to manage residual liabilities and
responsibilities from prior activities. This segment is
accounted for as discontinued operations.
Customer
Base
No single part of our lending business is dependent upon a
single borrower or upon a very few borrowers nor would the loss
of any one loan customer automatically have a materially adverse
effect upon our business.
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We have a number of funding sources which are important to our
operations, some of which are customers of our institutions
(e.g., depositors) and for some of which we are customers (e.g.,
lenders). For example, we are a member (and customer) of the
Federal Home Loan Bank of Indianapolis, we have a significant
Canadian dollar funding facility with a single bank domiciled in
Canada, and we have a significant deposit relationship with one
of our commercial banking branches. In those instances where we
have significant single relationships, on the funding side of
the balance sheet, we examine each relationship more intensively
than others and have developed contingency plans for the loss of
these significant customer relationships. The loss of any one of
these significant relationships would require changes to our
funding program.
Competition
We compete nationally in the U.S. in each business, except
for commercial banking where our market focus is in selected
markets in the Midwest and Western states. In our commercial
finance line of business, certain of our equipment leasing
products are also offered throughout Canada. We compete against
commercial banks, savings banks, credit unions and savings and
loan associations, and with a number of non-bank companies
including mortgage banks and brokers, insurance companies,
securities firms, other finance companies, and real estate
investment trusts.
Some of our competitors are not subject to the same degree of
regulation as that imposed on bank holding companies, state
banking organizations and federal saving banks. In addition,
many larger banking organizations, mortgage companies, mortgage
banks, insurance companies and securities firms have
significantly greater resources than we do. As a result, some of
our competitors have advantages over us in name recognition,
cost of funds, operating costs, and market penetration.
Employees
and Labor Relations
At January 31, 2008 we and our subsidiaries had a total of
1,256 employees, including full-time and part-time
employees. We continue a commitment of equal employment
opportunity for all job applicants and staff members, and
management regards its relations with its employees as
satisfactory.
Financial
Information About Geographic Areas
We conduct part of our commercial finance line of business in
Canadian markets. Net revenues for the last three years in this
line of business attributable to Canadian customers were
$18 million in 2007, $17 million in 2006, and
$12 million in 2005. The remainder of our revenues comes
from customers and operations in the United States.
Supervision
and Regulation
General
We and our subsidiaries are each extensively regulated under
state and federal law. The following is a summary of certain
statutes and regulations that apply to us and to our
subsidiaries. These summaries are not complete, and you should
refer to the statutes and regulations for more information.
Also, these statutes and regulations may change in the future,
and we cannot predict what effect these changes, if made, will
have on our operations.
We are regulated at both the holding company and subsidiary
level and are subject to both state and federal examination on
matters relating to safety and soundness, including
risk management, asset quality and capital adequacy, as well as
a broad range of other regulatory concerns including: insider
and intercompany transactions, the adequacy of the reserve for
loan losses, regulatory reporting, adequacy of systems of
internal controls and limitations on permissible activities.
In addition, we are required to maintain a variety of processes
and programs to address other regulatory requirements,
including: community reinvestment provisions; protection of
customer information; identification of suspicious activities,
including possible money laundering; proper identification of
customers when performing transactions; maintenance of
information and site security; and other bank compliance
provisions. In a number of instances board
and/or
management oversight is required as well as employee training on
specific regulations.
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Regulatory agencies have a broad range of sanctions and
enforcement powers if an institution fails to meet regulatory
requirements, including civil money penalties, formal
agreements, and cease and desist orders.
Bank
Holding Company Regulation
We are registered as a bank holding company with the Board of
Governors of the Federal Reserve System under the Bank Holding
Company Act of 1956, as amended, and the related regulations,
referred to as the BHC Act. We are subject to regulation,
supervision and examination by the Federal Reserve, and as part
of this process, we must file reports and additional information
with the Federal Reserve.
Minimum
Capital Requirements
The Federal Reserve imposes risk-based capital requirements on
us as a bank holding company. Under these requirements, capital
is classified into two categories:
Tier 1 capital, or core capital, consists of
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common stockholders equity;
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qualifying noncumulative perpetual preferred stock;
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qualifying cumulative perpetual preferred stock, and subject to
some limitations, our Trust Preferred securities; and
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minority interests in the common equity accounts of consolidated
subsidiaries;
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Accumulated net gains (losses) on cash flow hedges and increase
(decrease) recorded in accumulated other comprehensive income
(AOCI) for defined benefit postretirement plans under
FAS 158
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goodwill;
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credit-enhancing interest-only strips (certain amounts
only); and
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specified intangible assets.
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Tier 2 capital, or supplementary capital, consists of
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allowance for loan and lease losses;
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perpetual preferred stock and related surplus;
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hybrid capital instruments including, to the extent not included
in Tier 1 Capital, Trust Preferred securities;
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unrealized holding gains on equity securities;
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perpetual debt and mandatory convertible debt securities;
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term subordinated debt, including related surplus; and
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intermediate-term preferred stock, including related securities.
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The Federal Reserves capital adequacy guidelines require
bank holding companies to maintain a minimum ratio of qualifying
total capital to risk-weighted assets of 8 percent, at
least 4 percent of which must be in the form of Tier 1
capital. Risk-weighted assets include assets and credit
equivalent amounts of off-balance sheet items of bank holding
companies that are assigned to one of several risk categories,
based on the obligor or the nature of the collateral. The
Federal Reserve has established a minimum Tier 1
leverage ratio, which is the ratio of Tier 1
capital to total assets (less goodwill and other specified
intangible assets), of 3 percent for strong bank holding
companies (those rated a composite 1 under the
Federal Reserves rating system). For all other bank
holding companies, the minimum Tier 1 leverage ratio is
4 percent. The Federal Reserve considers the Tier 1
leverage ratio in evaluating proposals for expansion or new
activities.
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As of December 31, 2007, we had regulatory capital in
excess of all the Federal Reserves minimum levels. Our
ratio of total capital to risk weighted assets at
December 31, 2007 was 12.6% and our Tier 1 leverage
ratio was 10.2%.
Expansion
Under the BHC Act, we must obtain prior Federal Reserve approval
for certain activities, such as the acquisition of more than 5%
of the voting shares of any company, including a bank or bank
holding company. The BHC Act permits a bank holding company to
engage in activities that the Federal Reserve has determined to
be so closely related to banking or managing or controlling
banks as to be a proper incident to those banking activities,
such as operating a mortgage bank or a savings association,
conducting leasing and venture capital investment activities,
performing trust company functions, or acting as an investment
or financial advisor. See the section on Interstate
Banking and Branching below.
Dividends
The Federal Reserve has policies on the payment of cash
dividends by bank holding companies. The Federal Reserve
believes that a bank holding company experiencing earnings
weaknesses should not pay cash dividends (1) exceeding its
net income or (2) which only could be funded in ways that
would weaken a bank holding companys financial health,
such as by borrowing. Also, the Federal Reserve possesses
enforcement powers over bank holding companies and their
non-bank subsidiaries to prevent or remedy unsafe or unsound
practices or violations of applicable statutes and regulations.
Among these powers is the ability to prohibit or limit the
payment of dividends by banks (including dividends to bank
holding companies) and bank holding companies. See discussion of
Dividend Limitations below.
The Federal Reserve expects us to act as a source of financial
strength to our banking subsidiaries and to commit resources to
support them. In implementing this policy, the Federal Reserve
could require us to provide financial support when we otherwise
would not consider ourselves able to do so.
In addition to the restrictions on fundamental corporate actions
such as acquisitions and dividends imposed by the Federal
Reserve, Indiana law also places limitations on our authority
with respect to such activities.
In consideration of the Corporations recent losses, on
February 28, 2008, the Board of Directors elected to defer
dividend payments on the Corporations trust preferred
securities and elected to discontinue payment of dividends on
its non-cumulative perpetual preferred and common stock. Mindful
of regulatory policy and the current economic environment, the
Board took these steps to maintain the capital strength of the
Corporation at a time of elevated uncertainty in the economy.
The Board believes the elevated uncertainty in the current
environment demands a greater bias to capital retention on a
precautionary basis than distribution of cash from retained
earnings for maintenance of historic dividends. The Board will
reassess its dividend policy regularly. The ability to pay
future dividends is subject to the regulatory restrictions
referenced above and in the discussion in the section on
Dividend Limitations
below.
Bank
and Thrift Regulation
Indiana law subjects Irwin Union Bank and Trust and its
subsidiaries to supervision and examination by the Indiana
Department of Financial Institutions. Irwin Union Bank and Trust
is a member of the Federal Reserve System and, along with its
subsidiaries, is also subject to regulation, examination and
supervision by the Federal Reserve. Each of the principal
subsidiaries of Irwin Union Bank and Trust are routinely subject
to examination.
Irwin Union Bank, F.S.B., a direct subsidiary of the bank
holding company, is a federally chartered savings bank.
Accordingly, it is subject to regulation, examination and
supervision by the Office of Thrift Supervision (OTS).
The deposits of Irwin Union Bank and Trust and Irwin Union Bank,
F.S.B. are insured by the Deposit Insurance Fund of the Federal
Deposit Insurance Corporation (FDIC) to the maximum extent
permitted by law, which is currently $100,000 per depositor for
all accounts in the same title and capacity, other than
individual retirements accounts, certain eligible deferred
compensation plans, and so-called Keogh plans or HR 10 plans,
which currently
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are insured up to a maximum of $250,000 per participant in the
aggregate, such maximums in each case to be adjusted for
inflation beginning in 2010. As a result, Irwin Union Bank and
Trust and Irwin Union Bank, F.S.B. are subject to FDIC
supervision and regulation.
Irwin Union Bank and Trust and Irwin Union Bank, F.S.B. must
file reports with the Federal Reserve and the OTS, respectively,
and with the FDIC concerning their activities and financial
condition. Also, before establishing branches or entering into
certain transactions such as mergers with, or acquisitions of,
other financial institutions, Irwin Union Bank and Trust must
obtain regulatory approvals from the Indiana Department of
Financial Institutions and the Federal Reserve, and Irwin Union
Bank, F.S.B. must obtain approval from the OTS.
Capital
Requirements
The Federal Reserve imposes requirements on state member banks
such as Irwin Union Bank and Trust regarding the maintenance of
adequate capital substantially identical to the capital
regulations applicable to bank holding companies described in
the section on
Bank Holding Company
Regulation Minimum Capital Requirements.
While retaining the authority to set capital ratios for
individual banks, these regulations prescribe minimum total
risk-based capital, Tier 1 risk-based capital and leverage
(Tier 1 capital divided by average total assets) ratios.
The Federal Reserve requires banks to hold capital commensurate
with the level and nature of all of the risks, including the
volume and severity of problem loans, to which they are exposed.
As with the regulations applicable to bank holding companies,
the Federal Reserve requires all state member banks to meet a
minimum ratio of qualifying total capital to weighted risk
assets of 8 percent, of which at least 4 percent
should be in the form of Tier 1 capital.
The minimum ratio of Tier 1 capital to total assets, or the
leverage ratio, for banking institutions rated composite
1 under the uniform rating system of banks and not
experiencing or anticipating significant growth is
3 percent. For all other institutions, the minimum ratio of
Tier 1 capital to total assets is 4 percent. Banking
institutions with supervisory, financial, operational, or
managerial weaknesses are expected to maintain capital ratios
well above the minimum levels, as are institutions with high or
inordinate levels of risk. Banks experiencing or anticipating
significant growth are also expected to maintain capital,
including tangible capital positions, well above the minimum
levels. A majority of such institutions generally have operated
at capital levels ranging from 1 to 2 percent above the
stated minimums. Higher capital ratios could be required if
warranted by the particular circumstances or risk profiles of
individual banks. The standards set forth above specify minimum
supervisory ratios based primarily on broad credit risk
considerations. Banks, including ours, are generally expected to
operate with capital positions above the minimum ratios.
At December 31, 2007, Irwin Union Bank and Trust had a
total risk-based capital ratio of 12.5%, compared to our
internal Policy minimum of 12%. Irwin Union Bank and Trust had a
Tier 1 capital ratio of 10.7%, and a leverage ratio of
10.6%.
The risk-based capital guidelines also provide that an
institutions exposure to declines in the economic value of
the institutions capital due to changes in interest rates
must be considered as a factor by the agencies in evaluating the
capital adequacy of a bank or savings association. This
assessment of interest rate risk management is incorporated into
the banks overall risk management rating and used to
determine managements effectiveness.
Insurance
of Deposit Accounts
As FDIC-insured institutions, Irwin Union Bank and Trust and
Irwin Union Bank, F.S.B. are required to pay deposit insurance
premiums based on the risk they pose to the Deposit Insurance
Fund. As a result of the Federal Deposit Insurance Reform Act of
2005, the FDIC adopted a revised risk-based assessment system to
determine assessment rates to be paid by member institutions
such as Irwin Union Bank and Trust and Irwin Union Bank, F.S.B.
Under this revised assessment system, risk is defined and
measured using an institutions supervisory ratings with
certain other risk measures, including certain financial ratios.
The annual rates for 2007 for institutions in risk category I
range from 5 to 7 basis points; the rate for institutions
in risk category II is 10 basis points; and the rate
for institutions in risk category III is 28 basis
points. These rates may be offset by a one-time assessment
credit held by an institution, based on the assessment base of
that institution as of December 31, 1996, and in the future
by
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dividends that may be declared by the FDIC if the deposit
reserve ratio increases above a certain amount. The FDIC may
raise or lower these assessment rates based on various factors
to achieve a reserve ratio, which the FDIC currently has set at
1.25 percent of insured deposits.
In addition to deposit insurance fund assessments, the FDIC
assesses all insured deposits a special assessment to fund the
repayment of debt obligations of the Financing Corporation
(FICO). FICO is a government-sponsored entity that was formed to
borrow the money necessary to carry out the closing and ultimate
disposition of failed thrift institutions by the Resolution
Trust Corporation. At December 31, 2007, the
annualized rate established by the FDIC for the FICO assessment
was 1.14 basis points (0.00014%) per $100 of insured
deposits.
Dividend
Limitations
Under Indiana law, certain dividends require notice to, or
approval by, the Indiana Department of Financial Institutions,
and Irwin Union Bank and Trust may not pay dividends in an
amount greater than its net profits then available, after
deducting losses and bad debts.
In addition, as a state member bank, Irwin Union Bank and Trust
may not, without the approval of the Federal Reserve, declare a
dividend if the total of all dividends declared in a calendar
year, including the proposed dividend, exceeds the total of its
net income for that year, combined with its retained net income
of the preceding two years, less any required transfers to the
surplus account. As a result of our losses in 2007, the bank
cannot declare a dividend to us without regulatory approval
until such time that current year earnings plus earnings from
the last two years exceeds dividends during the same periods. We
sought and were granted such approval for a $15 million
dividend in the second quarter of 2007. Our ability to pay
dividends on our Trust Preferred, non-cumulative perpetual
preferred, and common stock is dependent on our ability to
dividend from Irwin Union Bank and Trust, for which prior
approval would be necessary.
In consideration of the Corporations recent losses, on
February 28, 2008, the Board of Directors elected to defer
dividend payments on the Corporations trust preferred
securities and elected to discontinue payment of dividends on
its non-cumulative perpetual preferred and common stock. See the
discussion above on
Dividends
in the section
on
Bank Holding Company Regulation
.
In most cases, savings and loan associations, such as Irwin
Union Bank, F.S.B., are required either to apply to or to
provide notice to the OTS regarding the payment of dividends.
The savings association must seek approval if it does not
qualify for expedited treatment under OTS regulations, or if the
total amount of all capital distributions for the applicable
calendar year exceeds net income for that year to date plus
retained net income for the preceding two years, or the savings
association would not be adequately capitalized following the
dividend, or the proposed dividend would violate a prohibition
in any statute, regulation or agreement with the OTS. In other
circumstances, a simple notice is sufficient.
Our ability and the ability of Irwin Union Bank and Trust and
Irwin Union Bank, F.S.B. to pay dividends also may be affected
by the various capital requirements and the prompt corrective
action standards described below under Other Safety and
Soundness Regulations. Our rights and the rights of our
shareholders and our creditors to participate in any
distribution of the assets or earnings of our subsidiaries also
is subject to the prior claims of creditors of our subsidiaries
including the depositors of a bank subsidiary.
Interstate
Banking and Branching
Under federal law, banks are permitted, if they are adequately
or well-capitalized, in compliance with Community Reinvestment
Act requirements and in compliance with state law requirements
(such as age-of-bank limits and deposit caps), to merge with one
another across state lines and to create a main bank with
branches in separate states. After establishing branches in a
state through an interstate merger transaction, a bank may
establish and acquire additional branches at any location in the
state where any bank involved in the interstate merger could
have established or acquired branches under applicable federal
and state law.
As a federally chartered savings bank, Irwin Union Bank, F.S.B.
has greater flexibility in pursuing interstate branching than an
Indiana state bank. Subject to certain exceptions, a federal
savings association generally may
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establish or operate a branch in any state outside the state of
its home office if the association meets certain statutory
requirements.
Community
Reinvestment
Under the Community Reinvestment Act (CRA), banking and thrift
institutions have a continuing and affirmative obligation,
consistent with their safe and sound operation, to help meet the
credit needs of their entire communities, including low- and
moderate-income neighborhoods. Institutions are rated on their
performance in meeting the needs of their communities.
Performance is tested in three areas: (a) lending, which
evaluates the institutions record of making loans in its
assessment areas; (b) investment, which evaluates the
institutions record of investing in community development
projects, affordable housing and programs benefiting low or
moderate income individuals and business; and (c) service,
which evaluates the institutions delivery of services
through its branches, ATMs and other activities. The CRA
requires each federal banking agency, in connection with its
examination of a financial institution, to assess and assign one
of four ratings to the institutions record of meeting the
credit needs of its community and to take this record into
account in evaluating certain applications by the institution,
including applications for charters, branches and other deposit
facilities, relocations, mergers, consolidations, acquisitions
of assets or assumptions of liabilities, and savings and loan
holding company acquisitions. Irwin Union Bank and Trust
received a satisfactory rating, and Irwin Union
Bank, F.S.B. received an outstanding rating, on
their most recent CRA performance evaluations.
Other
Safety and Soundness Regulations
Under current law, the federal banking agencies possess broad
powers to take prompt corrective action in
connection with depository institutions that do not meet minimum
capital requirements. The law establishes five capital
categories for insured depository institutions for this purpose:
well-capitalized, adequately
capitalized, undercapitalized,
significantly undercapitalized and critically
undercapitalized. To be considered
well-capitalized under these standards, an
institution must maintain a total risk-based capital ratio of
10% or greater; a Tier 1 risk-based capital ratio of 6% or
greater; a leverage capital ratio of 5% or greater; and not be
subject to any order or written directive to meet and maintain a
specific capital level for any capital measure. An
adequately capitalized institution must have a
Tier 1 capital ratio of at least 4%, a total capital ratio
of at least 8% and a leverage ratio of at least 4%. Federal
savings banks must meet three minimum capital standards: an 8%
risk-based capital ratio, a 4% leverage ratio (or 3% for those
assigned a composite rating of 1), and a 1.5% tangible capital
ratio. Federal law also requires the bank regulatory agencies to
implement systems for prompt corrective action for
institutions that fail to meet minimum capital requirements
within the five capital categories, with progressively more
severe restrictions on operations, management and capital
distributions according to the category in which an institution
is placed. Failure to meet capital requirements can also cause
an institution to be directed to raise additional capital.
Federal law also mandates that the agencies adopt safety and
soundness standards relating generally to operations and
management, asset quality and executive compensation, and
authorizes administrative action against an institution that
fails to meet such standards.
Brokered
Deposits
Brokered deposits include funds obtained, directly or
indirectly, by or through a deposit broker for deposit into one
or more deposit accounts. Well-capitalized institutions are not
subject to limitations on brokered deposits, while an adequately
capitalized institution is able to accept, renew or rollover
brokered deposits only with a waiver from the FDIC and subject
to certain restrictions on the yield paid on such deposits.
Undercapitalized institutions are not permitted to accept
brokered deposits. Due to its capital ratios, Irwin Union Bank
and Trust and Irwin Union Bank, F.S.B. are permitted to, and do,
accept brokered deposits.
Anti-Money
Laundering Laws
Irwin Union Bank and Trust and Irwin Union Bank, F.S.B. are
subject to the Bank Secrecy Act and its implementing regulations
and other anti-money laundering laws and regulations, including
the USA PATRIOT Act of 2001. Among other things, these laws and
regulations require Irwin Union Bank and Trust and Irwin Union
Bank F.S.B to take steps to prevent the use of each institution
for facilitating the flow of illegal or illicit money, to report
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large currency transactions and to file suspicious activity
reports. Each bank also is required to develop and implement a
comprehensive anti-money laundering compliance program. Banks
also must have in place appropriate know your
customer policies and procedures. Violations of these
requirements can result in substantial civil and criminal
sanctions. In addition, provisions of the USA PATRIOT Act
require the federal financial institution regulatory agencies to
consider the effectiveness of a financial institutions
anti-money laundering activities when reviewing bank mergers and
bank holding company acquisitions.
Compliance
with Consumer Protection Laws
The lending activities of Irwin Union Bank and Trust and its
subsidiaries, Irwin Commercial Finance and Irwin Home Equity,
are regulated by the Federal Reserve. Federal Reserve
regulations and policies, such as restrictions on affiliate
transactions and real estate lending policies relating to asset
quality and prudent underwriting of loans, apply to our
residential lending activities. The Indiana Department of
Financial Institutions has comparable supervisory and
examination authority over Irwin Commercial Finance and Irwin
Home Equity due to their status as subsidiaries of Irwin Union
Bank and Trust.
Our subsidiaries also are subject to federal and state consumer
protection and fair lending statutes and regulations including
the Equal Credit Opportunity Act, the Fair Housing Act, the
Truth in Lending Act, the Truth in Savings Act, the Real Estate
Settlement Procedures Act and the Home Mortgage Disclosure Act.
In many instances, these acts contain specific requirements
regarding the content and timing of disclosures and the manner
in which we must process and execute transactions. Some of these
rules provide consumers with rights and remedies, including the
right to initiate private litigation. Specifically, these acts,
among other things:
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require lenders to disclose credit terms in meaningful and
consistent ways;
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prohibit discrimination against an applicant in any consumer or
business credit transaction;
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prohibit discrimination in housing-related lending activities;
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require certain lenders to collect and report applicant and
borrower data regarding loans for home purchases or improvement
projects;
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require lenders to provide borrowers with information regarding
the nature and cost of real estate settlements;
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prohibit certain lending practices and limit escrow account
amounts with respect to real estate transactions; and
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prescribe possible penalties for violations of the requirements
of consumer protection statutes and regulations.
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In addition, banking subsidiaries are subject to a number of
federal and state regulations that offer consumer protections to
depositors, including account terms and disclosures, funds
availability and electronic funds transfers.
As part of the home equity line of business in conjunction with
its subsidiary, Irwin Home Equity, Irwin Union Bank and Trust
originates home equity loans through its branch in Carson City,
Nevada. Irwin Union Bank and Trust uses interest rates and loan
terms in its home equity loans and lines of credit that are
authorized by Nevada law, but might not be authorized by the
laws of the states in which the borrowers are located. As a
state member bank insured by the FDIC, Irwin Union Bank and
Trust is authorized by Section 27 of the FDIA to charge
interest at rates allowed by the laws of the state where the
bank is located, including at a branch located in a state other
than the Banks home state, regardless of any inconsistent
state law, and to apply these rates to loans to borrowers in
other states. Irwin Union Bank and Trust relies on
Section 27 of the FDIA and the FDIC opinion in conducting
its home equity lending business described above. Any change in
Section 27 of the FDIA or in the FDICs interpretation
of this provision, or any successful challenge as to the
permissibility of these activities, could require that we change
the terms of some of our loans or the manner in which we conduct
our home equity line of business.
Irwin Union Bank and Trust entered into a memorandum of
understanding with the Federal Reserve Bank of Chicago as of
March 1, 2007 to enhance the consumer compliance function
and compliance oversight programs of the Bank and its
subsidiaries. Under the memorandum of understanding, which is
considered an informal
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agreement, Irwin Union Bank and Trust agreed, among other
things, to enhance the Bank-wide perspective on consumer
compliance oversight and the risk assessment process, undertake
an initial and ongoing review of lending policies and
procedures, improve the risk monitoring, issues tracking,
training and control programs of the Bank, and enhance the
resources devoted to this area. In addition, the Bank agreed to
and did provide quarterly written progress reports to the
Federal Reserve Bank of Chicago with respect to these matters
through the required period ending September 30, 2007. We
believe we have been responsive in developing and implementing
plans to address the issues raised by the Federal Reserve Bank
of Chicago. We are waiting for the Federal Reserve Bank of
Chicago to perform a validation of the actions we took to
address their concerns. However, if the Federal Reserve Bank of
Chicago concludes the actions we took are not sufficient, we
could experience additional regulatory action.
Proposed
Federal and State Laws and Regulations
Currently, there are a number of proposed and recently enacted
federal, state and local laws and regulations and guidance,
including changes to the Truth in Lending Act and accompanying
regulations, addressing mortgage lending, purchasing and
servicing practices. Many of these laws and regulations focus on
borrowers with blemished credit or nontraditional mortgage
products, while others take a broader approach. For example,
Congress is considering several bills to combat abuses in the
mortgage lending market and to provide substantial new
protections to mortgage consumers. While it is not possible to
predict which of these bills will pass, key provisions of the
bills under consideration would:
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establish a federal duty of care owed by mortgage originators to
mortgage applicants and borrowers;
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prohibit steering of borrowers into subprime loans if they
qualify for prime loans;
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establish minimum federal standards for licensing or
registration of mortgage originators, including brokers and bank
loan officers;
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