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SEC Approves Mortgage Risk Proposal at Pulte HomesSubmitted by: Subodh Mishra, Governance Institute

The Securities and Exchange Commission?s Division of Corporation Finance has denied a ?no action? request by Pulte Homes to exclude a proposal on mortgage lending risks. The decision bucks a trend by the commission of allowing companies to omit similar resolutions.

The proposal, filed by the International Brotherhood of Electrical Workers? Pension Benefit Fund, is among the first to pass muster at the SEC, which to date has allowed home builders and financial services companies to omit a variety of proposals seeking to address risks related to mortgage lending practices or exposure to mortgage-backed securities.

To date, RiskMetrics Group is tracking 22 shareholder proposals for 2008 annual meetings that seek to address risks related to subprime mortgage lending or exposure to nontraditional mortgage investments. Eighteen of those proposals have either been omitted at the SEC or withdrawn.

In a Feb. 27 letter to Pulte Homes? outside counsel, agency staff members rejected the company?s argument that the proposal could be omitted on ?ordinary business? grounds. SEC Rule 14a-8(i)(7) allows firms to exclude proposals dealing with management functions or those relating to ordinary business operations.

The IBEW proposal calls on the company to establish a committee of outside directors to develop and enforce policies to ensure nontraditional mortgage loans ?are consistent with prudent lending practices? and that the board report to shareholders within one year on policies and their enforcement. The proposal suggests that prudent lending practices include consideration of borrowers? ability to repay the loan, and that borrowers are fully aware of loan terms and associated risks. The union fund argues that the proposal would mitigate risk ?in light of the substantial risks that nontraditional mortgage products may create for lenders, borrowers, and the broader economy??

?In our judgment,? lawyers for the company wrote, the proposal is ?excludable because it focuses on solely on the [c]ompany?s mortgage lending operations, which are part of its ordinary business.?

A proposal by the LongView fund of the Amalgamated Bank calling for the creation of a compliance committee to review regulatory, litigation, and compliance risks tied to mortgage lending operations was omitted at the Ryland Group, KB Home, and Toll Brothers. Two firms?Lennar and MDC?will allow shareholders to vote on the measure, according to the proponent.

Because the LongView proposal is broadly similar to the IBEW?s and was also filed at Pulte, company officials argued for exclusion of the IBEW proposal under Rule 14a-8(i)(11), which allows for omission of a resolution that substantially duplicates a previously submitted proposal. SEC staff members said they were unable to concur with Pulte?s argument that the proposals were duplicative, though they did not detail why.

One potential explanation for why Pulte?s ?no action? petition was denied may lie in the language chosen by the proponent. IBEW?s suggestion that ?prudent? lending practices include consideration of borrowers? ability to repay the loan, and that they are fully aware of loan terms and associated risks, may have served to frame the resolution as a public policy issue, thus allowing for inclusion.

On Feb. 13, SEC officials denied a ?no action? request by Cash America to omit a ?predatory lending? proposal filed by Christian Brothers Investment Services and the Benedictine Sisters of Boerne, Texas. The proposal similarly called for the establishment of a committee of outside directors to amend current policies and create enforcement mechanisms to prevent employees and affiliates from engaging in ?predatory lending practices.? Cash America, which provides consumer cash advances, or ?payday loans,? argued the resolution was ?vague and misleading? and constituted ordinary business.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on March 07, 2008 (boomark / email).