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California DBO Seeks Information Regarding Marketplace Lending Industry
On December 11, the California Department of Business Oversight (DBO) announced an inquiry into the marketplace lending industry, requesting that 14 lenders complete an online survey to provide five-year trend data on their loan and investor funding programs. In addition, the survey requests that participating firms provide information on their business models and online platforms. Marketplace lenders market themselves as a faster, more accessible source of financing for consumers and small businesses. Due March 9, 2016, the survey responses are intended to assist the DBO assess the state’s licensing and regulatory regime of the industry by: (i) assessing the industry’s size in California and the number of consumers and businesses it affects; and (ii) understanding the various loan and investor funding programs used by marketplace lenders. In four years, the national online lending market reportedly grew from $1 billion in loans to $12 billion; analysts anticipate that by 2020, the total volume will be $122 billion.
OFAC Authorizes Certain Transactions and Activities to Liquidate Honduras-Based Bank, Replaces Previously Issued General License
On December 8, OFAC announced that it issued a revised General License replacing a previously issued license to a Honduras-based bank, which OFAC designated as a Specially Designated Narcotics Trafficker. The General License authorizes certain transactions and activities to assist with the liquidation and winding down of the bank. The revised General License permits liquidation-related transactions and activities that are otherwise prohibited by the Foreign Narcotics Kingpin Sanctions Regulations through 12:01 a.m. on June 12, 2016, with the following exceptions: (i) the unblocking of any blocked property pursuant the Foreign Narcotics Kingpin Sanctions Regulations; or (ii) transactions or dealings that are limited by Executive Order or are with another individual or entity on OFAC’s List of Specially Designated Nationals or Blocked Persons. U.S. persons involved in the bank’s liquidation process must file a report with OFAC’s Licensing Division to include the parties involved, and the type, scope, and dates of the activities conducted.
Year in Review: Auto Finance and the CFPB in 2015
The auto finance industry gained a new regulator in 2015 with the publication of the CFPB’s larger participant rule, which, for the first time, allows the Bureau to supervise larger non-bank auto finance companies. In this new compliance environment, larger participants would be prudent to examine past bulletins and consent orders executed by the CFPB to proactively prepare for examinations and enforcements in the coming year.Regulation by Bulletins and Consent Orders
CPFB Bulletin 2013-02, which set forth the CFPB’s initial views regarding the risk under the Equal Credit Opportunity Act associated with “allowing” dealers the discretion to “mark up” the rates of customers’ retail installment sale contracts, provided a basis for two 2015 consent orders. Broadly speaking, the Bulletin noted two possible ways auto finance creditors could mitigate their risk – eliminating dealer discretion or monitoring for disparities in dealer discretion and then providing customer remediation for such disparities.
Since 2013 there have been three public CFPB consent orders regarding dealer pricing discretion. The first order, executed with a large bank holding company and its subsidiary bank in 2013, required the respondents to pay remediation for past transactions within the order’s scope, pay a $18 million civil money penalty, and establish a program to monitor and remediate disparities going forward. This contrasts with the two public consent orders that were issued afterwards. Those subsequent orders, entered into with a captive finance company and a large regional bank in the summer and fall of 2015, respectively, provided the respondents with the option of reducing the range of acceptable “markup” (i.e., the difference between the rate of the installment contract and the institution’s buy rate) to 125 basis points for contracts with a term of 60 months or less and 100 basis points for contracts with a term of more than 60 months. If a respondent selected this option, then monitoring for compliance with these markup limits is required, but monitoring and remediating disparities in dealer markup is not required. Both orders also included other options involving reduced dealer discretion, but did not include an option to monitor and remediate disparities without any change in the permitted dealer discretion.
Larger Participant Rule for Auto Finance
The CFPB’s larger participant rule for auto finance, which became effective on August 31, 2015, extended the CFPB’s supervisory authority to nonbank auto finance companies that have at least “10,000 annual originations.”
- “Originations” in this case includes credit for the purpose of purchasing an automobile, leases of automobiles, refinancings of such transactions, and purchases of such transactions.
- The rule excludes title lending and securitization transactions.
- “Automobile” includes any self-propelled vehicle primarily used for personal, family, or household purposes for onroad transportation except for motor homes, RVs, golf carts, and motor scooters.
Now that the rule is in effect, CFPB examinations of non-bank auto finance companies are expected to follow. In light of this new rule, companies should examine other areas where the CFPB has been active in connection with other consumer financial products, in the event the Bureau extends such initiatives into auto finance. Those areas include:
- Fair lending
- Credit reporting
- Debt collection
- Treatment of servicemembers
- Ancillary products
- Vendor management
CFPB Announces Complaint and Proposed Consent Order Against Massachusetts Debt Collection Firm
On December 7, the CFPB announced the filing of a complaint and a proposed consent order against a Massachusetts-based debt collection firm for alleged violations of the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), and the Dodd-Frank Act. In 2012, the firm’s subsidiary purchased a debt portfolio from a telephone service provider containing over three million defaulted, and predominantly outdated, cellphone accounts. The firm and its subsidiary entered into a collection services agreement, with the firm agreeing to remit money collected from consumers, less fees and expenses, to its subsidiary. According to the CFPB, the firm, having prior experience in the collection of telecommunications debt, knew that the portfolio likely contained defects, including inaccurate and incomplete dispute histories and unverified documentation. Still, even after customers disputed certain debt, the firm continued to report the debt to credit reporting companies and to collect on time-barred, disputed, fraudulent, and settled or paid debts. The CFPB further alleges that the firm reported faulty information to the credit reporting companies by initially reporting that the entire debt portfolio was disputed, and then removing and subsequently reinserting the dispute flags on the entire portfolio. The firm’s purportedly deceptive practices resulted in the collection of about $743,000 on more than 2,000 disputed accounts, where the debt was not verified.
Under the proposed consent order, the firm would be required to: (i) refund to customers the payments that it received for disputed debt that was not verified; (ii) cease collecting and reporting on unverified, disputed debt, and request the removal by the credit reporting companies of such reported information from customer files; (iii) for five years, review original account-level documents to verify a debt before collecting on it; (iv) for five years, refrain from reselling its purchased debt to other debt collectors; and (v) pay a penalty of $1.85 million.
Florida Court Rules in Favor of Mortgagee in HOA Lien Priority Dispute
On December 2, a Florida court of appeals issued a decision reinforcing and clarifying the state’s lien priority law. U.S. Bank Nat’l Ass’n v. Grant, No. 4D14-979 (Fla. Dist. Ct. App., Dec. 2). At issue in the case was whether a homeowner’s association (HOA) lien on real property took priority over a mortgagee’s lien on the same property, where the mortgage was recorded prior to the association’s delinquency lien against the homeowners, but after the recording of the Declaration of Covenants and Restrictions for the HOA. The court held that the HOA lien did not take priority over the mortgage lien because, under Florida common law applicable to liens filed prior to July 1, 2007, the HOA lien could only relate back to the filing of the earlier declaration if the declaration “contain[s] specific language indicating that the lien relates back to the date of the filing of the declaration or that it otherwise takes priority over intervening mortgages.” In this case, the declaration did not contain the required language to put parties on notice of ongoing, automatic liens until the payment of periodic HOA fees. Therefore, the HOA lien did not relate back to the filing of the declaration to give the HOA lien priority over the mortgagee’s lien.
FAST Act to Provide Regulatory Relief to Community Banks
On December 4, President Obama signed into law H.R. 22, the “Fixing America’s Surface Transportation Act” (FAST Act). Although a transportation bill on its surface, the bill also contains various provisions that are intended to provide regulatory relief to community banks and improve the efficiency of state financial regulation. Significant provisions in the bill include: (i) establishing a process that allows parties, including banks and other stakeholders, to petition the CFPB for “rural” or “underserved” designations in certain areas for the purposes of the CFPB’s ability-to-repay rule; (ii) expanding the CFPB’s ability to exempt creditors serving rural or underserved areas from escrow requirements; (iii) granting greater flexibility to the CFPB in regards to treating a balloon loan as a qualified mortgage, if a community bank or creditor operating in a rural or underserved area extended the loan; (iv) increasing the threshold for 18-month exam cycles for well-capitalized banks from $500 million to $1 billion; and (v) authorizing the Nationwide Mortgage Licensing System – which state regulators use to license various nonbank financial services industries, such as money transmitters, payday lenders, and debt collectors – to process background checks for non-mortgage license applicants.
In addition, the act provides relief to all financial institutions meeting certain criteria from annual Gramm-Leach-Bliley privacy notice requirements. Pursuant the Gramm-Leach-Bliley Act (GLBA) and Regulation P, financial institutions were required to submit privacy notices, physically, or with consent electronically, to customers; in 2014, the CFPB amended Regulation P permitting institutions to post privacy notices online without customer consent, so long as certain criteria were met. The FAST Act’s statutory change in Section 75001 removes some of the criteria so that financial institutions do not have to send annual privacy notices so long as (i) their information sharing practices have not changed since its last notice; and (ii) they do not engage in information sharing that requires providing customers with an opt-out under the GLBA.
FinCEN Director Highlights the Significance of SAR Filings
On December 9, FinCEN Director Calvery highlighted at a joint FBIIC-FSSCC meeting the role of FinCEN in gathering and analyzing financial intelligence and the value of Suspicious Activity Reports (SARs) in curtailing malicious cyber activity. Calvery noted the importance of attribution information, such as IP addresses, timestamps, e-mail addresses, and the nature of the suspicious activity, when included in SAR filings, in helping FinCEN and law enforcement agencies deflect cyber-attacks, detect the source of such attacks, and identify members of money laundering networks. “For example, SARs filed by several different financial institutions played a vital role in furthering an investigation where a regional Florida bank had nearly $7 million fraudulently wired out of one of its accounts,” Calvery explained. Calvery emphasized the importance of including cyber-derived information (such as IP addresses and bitcoin wallet addresses) in SAR filings, noting that while less than two percent of filed SARs contain IP addresses, the information is “incredibly important to FinCEN analysts and law enforcement investigators working to combat cyber-crimes.”
DOJ Announces Racketeering Indictment Alleging Money Laundering Schemes
On December 10, the DOJ announced three unsealed indictments of a total of 20 defendants in connection with various money laundering schemes. Fifteen of the defendants were arrested and taken into custody, while the remaining individuals are still being sought by authorities.
The first indictment alleges that the former president and CEO of an Orange County, California bank and five other individuals, as members of a narcotics trafficking and international money laundering organization, violated the Racketeer Influenced and Corrupt Organizations Act (RICO) by participating in schemes to launder drug proceeds. According to the DOJ, the former bank official used his position, insider knowledge, and connections to “promote and facilitate money laundering transactions involving members and associates of the enterprise.” The DOJ alleges that the six defendants (i) arranged to convert purported drug proceeds, in the form of cash provided by an undercover informant, into cashier’s checks made out to a company the informant claimed to own; (ii) proposed to an informant that the informant and his boss purchase a controlling interest in the Orange County bank to more easily facilitate money laundering operations; and (iii) proposed to set up a foundation in Liechtenstein to be used, in part, to launder the informant’s drug sale proceeds. The DOJ also asserts that the bank official introduced the five other defendants to operatives of a drug cartel aspiring to launder millions of dollars monthly and discussed plans to purchase the bank with the drug cartel operatives. In addition to the RICO count, the indictment charges a total of 16 defendants with 27 additional counts, including conspiracy, money laundering, structuring transactions to avoid federal reporting requirements, and evidence tampering.
The two additional unsealed indictments charge a total of four defendants with conspiring to launder money they believed to be proceeds from narcotics trafficking.
The CFPB's Mortgage Originations Agenda in 2016
Now more than ever, financial services firms need to proactively focus on issues of concern identified by the CFPB and ensure that they are engaged in industry best practices that are clearly identified and carefully monitored. In the mortgage originations sphere, the new TRID/ KBYO rule, MSAs, LO compensation, UDAAP, and fair lending are all issues for companies to focus on in the coming year.TRID/KBYO
Compliance with the new TILA-RESPA Integrated Disclosure/Know Before You Owe (TRID/KBYO) rule will likely be an area of Bureau concern in 2016. The rule took effect on October 3, 2015 and does not include a “hold harmless” period for errors as lenders implement the new disclosure requirements, although letters from the OCC, FDIC, and CFPB have clarified that regulators will focus in the beginning on institutions’ implementation plans, training, and handling of early technical problems. It is likely that the CFPB will require remediation back to the rule’s compliance date when it identifies tangible consumer harm, but it is unlikely that the Bureau will bring enforcement actions initially based on technical issues where there is no tangible consumer harm.
GSEs have also issued letters stating they will not perform TRID/KBYO compliance file reviews at the beginning of the implementation period. The GSEs further stated that it will not exercise its repurchase and other remedies unless (1) a required form is not used or (2) a practice would impair its enforcement of its rights against borrowers. In contrast, the FHA has stated that it expects lenders to comply with “all federal, state, and local laws, rules, and requirements applicable to the mortgage transaction as outlined in [the] FHA Handbook….”
MSAs and RESPA Enforcement
The CFPB set forth a strong position in October 2015 regarding Section 8 of RESPA, which generally prohibits kickbacks in connection with the referral of settlement services. Through enforcement actions, the CFPB has taken a broad interpretation of the term “thing of value,” finding that the opportunity to participate in a business—even if market rates are paid for services—can itself constitute a thing of value sufficient to create Section 8 liability for kickbacks.
This calls into question the legality of marketing services agreements (MSAs) generally. While the CFPB has stated that it does not view MSAs as per se illegal and has acknowledged that it does not have the authority to declare them per se illegal without a formal rulemaking process, it is possible that the Bureau may pursue further public enforcement actions regarding MSAs if it does not see institutions pulling back from using them. State examiners are also aware of the issue and may refer nonbank entities that they supervise to the CFPB if they see issues with MSA usage. Courts are getting the opportunity to weigh in on these RESPA issues, through the appeal to the D.C. Circuit of the PHH enforcement action and the 9th Circuit’s reversal of the district court’s refusal to certify the class in Edwards v. FAC.
LO Compensation Rule
The CFPB has been aggressive in applying the Federal Reserve Board’s LO Compensation rule, as amended by the CPFB. While the rule was passed to avoid steering of borrowers into certain products, the CFPB does not need to establish steering to prove a violation and instead tends to build cases based on technical non-compliance with the rule. In bringing cases under the rule, the CFPB often names individuals as well as companies. It should be noted that the CFPB views payments to LLCs controlled by producing branch managers based on mortgage profits as illegal compensation under the rule. In examinations, the CFPB typically looks for a written compensation plan and cites institutions that do not reflect their compensation practices in their plan, even if those practices are legal.
Examination Enforcement Trends and UDAAP
The CFPB has heighted its focus on vendor management, scrutinizing vendor products and services during examinations (including the marketing of these products and services as well as the value they add), and will bring enforcement actions or court cases where it finds issues. Biweekly payments are one area of heighted scrutiny, as the CFPB has been skeptical of the value added by this service. The Bureau has also focused on loss mitigation contracts that suggest that a borrower has waived rights in connection with receiving the modification.
Fair Lending
“What’s old is new again” in 2016 fair lending – issues such as pricing, discretion, and the charging or waiving of fees remain important. Regulators will remain focused on redlining and access to credit. The September 24, 2015 Hudson City Savings Bank enforcement action, requiring the bank to pay $27 million, focused on the role of brokers in redlining. The CFPB’s Office of Fair Lending and Equal Opportunity is a hybrid examination and enforcement division, which provides insight into the CFPB’s approach to fair lending. The CFPB also will look at nonbanks’ fair lending and bring enforcement actions against these institutions to the extent it finds problems.
FHA Loan Limits for Forward Mortgages to Increase in 2016
On December 9, FHA announced new maximum loan limits for forward mortgages for 2016 in 188 counties due to changes in housing prices. The new loan limits for forward mortgages are effective for case numbers assigned on or after January 1, 2016 through the end of the year. FHA noted that no areas saw a decrease in the maximum loan limits for forward mortgages and that, as detailed in Mortgagee Letter 2015-30, the national standard loan limits for low cost and high cost areas remain unchanged at $271,050 and $625,500, respectively.
