A recent amendment to the financial modernization bill regarding consumer privacy has put the government-sponsored enterprises at odds with consumer groups in the mortgage industry.

The amendment was sponsored by U.S. Rep. Spencer Bachus (R., Ala.), and later re-amended by U.S. Rep. Edward Markey (D., Mass.). It stated that those financial institutions having direct relationships with consumers could not sell or transfer database information to nonaffiliated third parties without first sending out an annual notice to its database members informing them of the company's privacy policy. The institutions also must give those customers a choice to opt out if the information was to be sold or transferred.

However, the secondary mortgage market was exempt from adhering to the requirements, as they do not deal directly with consumers. An industry source indicated that Fannie Mae pushed to get the transfer language removed, so as long as Fannie Mae did not sell the information, it would be covered by the exemption.

Many agree that neither GSE wants to get into the selling or transferring business. "It's clear to everyone that Freddie Mac does not sell information to third parties and we would not do that," said Douglas Robinson, spokesman for Freddie Mac. "We share information with people we do business with in the course of being a secondary mortgage market player."

"Because the whole purpose was to make sure that as long as we stayed in our core business, we would be exempt. If we left our core business, which we have no intention of doing, we would be covered by the bill," added David Jeffers, vice president for corporate relations at Fannie Mae.

Will GSEs Branch Out?

While those in the mortgage industry agree that Fannie Mae and Freddie Mac may not currently want to move into the selling or transferring business, it may be in their long-term business plan.

"They are very good about identifying items they need to change by regulation or legislation way in advance of when they really are executing the business strategy they intend to deploy," said an industry source knowledgeable about the consumer mortgage business. "So I think this is something that over time would be much more beneficial to [Fannie Mae and Freddie Mac] than it is right now. This was probably the first step in trying to get a series of exemptions from the consumer-protection status."

Other sources are led to believe that it was the wording over who would regulate the GSEs that prompted the change in the amendment. Another MBS source has said that Fannie Mae was unhappy that its consumer actions would be regulated by the Office of Federal Housing Oversight Enterprise, whereas all other consumer groups are monitored by the Federal Trade Commission. "They're much more appropriate as a consumer protection regulator," the source said.

However, the consumer watchdog group FMWatch got involved when it discovered that the Markey amendment had been put forth. "Fannie was trying to get the language taken out or have report language put in the final bill that would have nullified [the original amendment]," said Mike House, executive director for FMWatch. "Why did they need the special exemption beyond the secondary market exemption that was already included in the underlying bill?"

The report language that was ultimately placed in the bill by the Treasury Department, along with the House Republicans and Senate Democrats, stated that the exemption would not be in effect as long as the GSEs marketed to consumers. "It narrowed the intent of the Bachus-Markey amendment," said a source at a consumer advocacy group.

Freddie Mac's Robinson was quick to note that the GSE did not sponsor the additional exemption. "We didn't seek any exemption in that legislation, so we're fully in compliance with the way the law stands already," he said.

"There were some inconsistencies that had to be cleared up," said Jeffers. "One had to do with who the appropriate regulator was, and then there were a couple of others that were noncontroversial ambiguities about what was meant by how our core business was defined in respect to the bill. They were cleared up."

More Exemptions Ahead?

Sources indicate that this issue goes beyond the reaches of this amendment. Although the agencies currently have no intentions of expanding their lines of business, "their business strategy is to move the secondary market line to the retail level," said the consumer advocacy source. "Clearly their deal here is to set up the technology pipeline, build up the Fannie Mae brand name and use the same business strategy that Citigroup or many others have and market lots of product to their customer base, which is very sizeable." It is estimated that Fannie Mae has over 30 million entries in its database.

Because privacy is becoming a more talked-about issue, an exemption this time could lead to further exemptions, said the consumer advocacy source, and Fannie Mae and Freddie Mac's federal charter preempts all state laws, which may set precedent for future federal regulations regarding the GSEs.

Jeffers argues that Fannie's federal charter simply will not allow it to expand outside its core business, "because our core business is between us and our customers, which are lender servicers," he said. "So we have no contact with consumers, by law, by definition of what we do and how we do it."

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