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Agencies finalize 2024 HPML smaller loan exemption threshold
On November 13, the CFPB, OCC, and the Fed published final amendments to the official interpretations for regulations implementing Section 129H of TILA, which establishes special appraisal requirements for “higher-risk mortgages,” otherwise termed as “higher-priced mortgage loans” (HPMLs). The final rule increases TILA’s loan exemption threshold for the special appraisal requirements for HPMLs. Each year, the threshold must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The exemption threshold will increase from $31,000 to $32,400 effective January 1, 2024.
DOE moves to empower student loan oversight for better borrower support
On November 9, the DOE announced it is outlining a framework for how it will increase borrower support and ensure student loan servicers are accountable for errors. Richard Cordray, Federal Student Aid (FSA) Chief Operating Officer, noted, “The landscape of loan servicing has substantially changed since the Department began collaboration with multiple servicers in 2009. FSA is dedicated to evolving servicing contracts to meet borrower requirements. As we approach the Direct Loan program’s unprecedented return to repayment, our upcoming transition to new contracts in 2024 will bring updated servicer obligations and increased avenues to ensure borrowers receive adequate support.”
The DOE has implemented various strategies to bolster oversight and monitoring of servicers:
- Direct Servicer Monitoring: FSA staff actively evaluate the quality of customer service provided by loan servicers, which involves scoring interactions between servicers’ representatives and borrowers, reviewing calls and chats, and conducting secret shopper calls to assess the accuracy of servicers’ responses to borrower inquiries.
- Partnership with Federal and State Regulators: The DOE collaborates with agencies like the CFPB and state attorneys general responsible for enforcing consumer financial laws. Updates in the interpretation of federal preemption provide clear guidance for the ability of states to enforce state consumer protection laws and allow for coordination between the DOE and state partners.
- Utilizing Borrower Complaints: The DOE leverages complaints filed through the FSA’s Office of the Ombudsman, which collaborates with the oversight team to discern if complaints signal wider servicer issues. The DOE also monitors social media and news stories to identify broader patterns of complaints, which allow the DOE to discern isolated instances from systemic errors affecting multiple borrowers. These listening tools serve as mechanisms for borrowers to report issues impacting their repayment directly.
The DOE and the Biden administration wield several measures to ensure servicers meet their obligations and maintain standards. The announcement highlighted that the DOE could withhold payments from servicers failing to serve borrowers adequately, as exemplified by the recent $7.2 million withheld from a Missouri servicer for delayed billing statements to 2.5 million borrowers. The DOE also has the authority to suspend or re-allocate borrowers to other servicers, which impacts the financial compensation of underperforming servicers. In addition, Contractor Performance Reports assess servicer performance and influence future contract awards, while Corrective Action Plans demand remedies for servicing errors to ensure borrower satisfaction and prevent reoccurrence. The DOE also safeguards borrowers from servicer errors by instructing servicers to grant affected borrowers a temporary administrative forbearance during error resolution. Additionally, the DOE directs servicers to count these periods as qualifying for loan forgiveness and adjusts accrued interest to zero when errors might impede borrowers’ progress toward forgiveness.
Finally, the DOE mentioned it is gearing up to transition to the USDS, a new loan servicing system, by spring 2024. This shift aims to enhance accountability, transparency, and performance evaluation for over 37 million federally managed student loan borrowers with a focus on rewarding good performance and ensuring servicers meet higher standards. By incentivizing servicers to maintain borrowers’ repayment status and improving tracking mechanisms, the DOE will prioritize borrower success and aim for a smoother repayment experience.
2nd Circuit: Reverse and remand a buy-now-pay-later suit
On November 3, the U.S. Court of Appeals for the Second Circuit reversed and remanded a district court’s decision to deny a buy now pay later servicer’s (defendant) motion to compel arbitration in a class action. The plaintiffs alleged the defendant violated the Connecticut Unfair Trade Practices Act, among other things, after the defendant’s charges incurred overdraft fees on the plaintiff’s checking account. The defendant argued that the consumer agreed, on multiple occasions, to the mandatory arbitration provisions in the servicer’s terms and conditions when she used its services. The district court concluded that the plaintiff did not have “reasonably conspicuous notice of and unambiguously manifest assent to [defendant’s] terms” and therefore plaintiff was not bound by the mandatory arbitration provisions in the defendant’s terms.
The 2nd Circuit panel of three judges identified “several factors” in its finding that the plaintiff had reasonably conspicuous notice, including that defendant’s interface was “uncluttered” adding that “[a] reasonable internet user, therefore, could not avoid noticing the hyperlink to [defendant’s] terms when the user selects ‘confirm and continue’ on the [application].” Further, the court found that the plaintiff “unambiguously manifested her assent” to the defendant’s terms and conditions.
FSOC approves analytic framework for financial stability risks and guidance on nonbank financial company determinations
On November 3, the Financial Stability Oversight Council (FSOC) announced that it unanimously voted to issue the final versions of a new analytic framework regarding financial stability risks, in addition to updated interpretive guidance on the council’s nonbank designation guidance. The analytic framework indicates vulnerable points that commonly contribute to financial stability risks, and it explains how FSOC may address the risks, including interagency coordination, recommendations to regulators, or the designation of certain entities. The nonbank designation guidance establishes how the council determines whether a given nonbank should be under the Fed’s supervision and prudential standards under Section 113 of Dodd-Frank. In April, FSOC released the proposed analytic framework and the proposed nonbank designation guidance (as covered by InfoBytes here) and opened a comment period on the proposals.
FSOC adopted key changes in consideration of public comments on the proposed framework, including (i) clarifications to the interpretation of “threat to financial stability”; (ii) more examples of quantitative metrics considered in its analysis; (iii) expanded discussion of transmission channels; and (iv) additional emphasis on FSOC’s engagement with state and federal financial regulatory agencies regarding risk. Comments directed at the interpretive guidance were addressed, and some changes are reflected in the framework. Both CFPB Director Rohit Chopra and OCC Acting Comptroller Michael J. Hsu issued statements supporting the issuance of the interpretive guidance and the framework. Chopra commented that FSOC’s actions to evaluate whether any “shadow bank” meets the statutory threshold for enhanced oversight are essential in preventing potential threats to financial stability. Hsu also noted the significance of leveraging Dodd-Frank's tools for “monitoring and mitigating risks to U.S. financial stability.”
The analytic framework will be effective upon publication in the Federal Register, and the nonbank designations guidance will be effective 60 days after publication in the Federal Register.
OCC releases commercial lending bulletin on venture loans
On November 1, the OCC issued a bulletin on “commercial loans to early-, expansion-, and late-stage companies,” which it referred to as “venture loans.” The OCC explained that although “venture lending supports new business formation and can improve access to capital for growth companies… new business ventures have a high probability of failure.” Accordingly, the bulletin, which “applies to all OCC-regulated banks, including community banks, that engage in or are considering engaging in venture lending,” provides guidance on the agency’s expectations for risk management and risk-rating of venture loans.
The bulletin expressly exempts “[f]ully monitored and controlled asset-based loans (ABL) to early-, expansion-, and late-stage companies,” from the guidance. In addition, the OCC does not categorize the following types of credit as venture loans:
- Loans to businesses that primarily rely on internal cash flow, rather than equity investments, for their growth;
- Loans made under government-backed lending support programs where federal, state, or local guarantees sufficiently reduce credit risk (e.g., SBA guarantees); and
- Loans made under special purpose credit programs (SPCP).
Agencies revise TCPA examination procedures
On November 2, the OCC published revisions to the interagency examination procedures for the Telephone Consumer Protection Act (TCPA), which are utilized by the FDIC, NCUA, and the OCC. The OCC also announced that it is rescinding the “‘Telephone Consumer Protection Act and Junk Fax Protection Act’ section of the ‘Other Consumer Protection Laws and Regulations’ booklet of the Comptroller’s Handbook” and explained that OCC examiners will rely on the new interagency procedures.
The revisions were made to reflect amendments to the TCPA that became effective on October 25, 2021. “The revised interagency examination procedures address:
- provisions governing how customers can revoke consent under the TCPA;
- special exemptions from the customer consent provisions of the TCPA for banks using automated communications to notify customers of potential account fraud; and
- safe harbors for callers that check a reassigned number database maintained by the Federal Communications Commission.”
The revised examination procedures booklet can be found here.
FHA proposes updates to HECM program
On November 1, the Federal Housing Administration (FHA) proposed updates to FHA’s Home Equity Conversion Mortgage Program that are intended to address a number of servicing issues where existing program requirements have conflicted with HUD’s policy objectives. FHA is requesting public feedback. Key changes include the following:
- Allowing mortgage servicers to contact borrowers by phone to verify occupancy for the program’s required annual occupancy certification;
- Allowing outstanding homeowner’s association dues to be included in the calculation of a repayment plan for borrowers who are behind on their HECM financial obligations;
- Expanding the ability of mortgage servicers to work with borrowers who are behind on their property tax or hazard insurance by an amount up to $5,000 without calling the mortgage due and payable;
- Allowing mortgage servicers to assign a HECM to HUD after the servicer has funded a cure for a borrower’s delinquent financial obligations so long as the borrower has made all property charge payments for one year and all other assignment eligibility criteria are met;
- Streamlining requirements for executing alternatives to foreclosure and updating existing incentive payments for successful completion of loss mitigation options; and
- Providing a new incentive payment to mortgage servicers for completing these alternatives.
UK Government to regulate cryptoassets more strictly under a new regulatory regime
On October 30, the HM Treasury of the UK Government released a report titled “Future Financial Services Regulatory Regime for Cryptoassets,” confirming its plans to regulate digital assets more strictly. The regulatory framework includes descriptions of requirements for the admission of digital assets to a trading venue, including disclosure documents. To make cryptocurrencies subject to the FCA’s rule-making powers, the HM Treasury expanded the definition of “specified instruments” to include digital currencies, but not its definition of “financial instrument.”
The UK Government created the report based on stakeholder feedback on an extensive survey on cryptoassets. The report summarizes responses to 51 survey questions and provides explanations regarding the UK government’s intentions to proceed with the framework. The report outlines how the UK can attract more crypto businesses while also protecting consumer interests. Topics include, among other things, (i) confirmation that the proposed regime does not intend to capture activities relating to cryptoassets which are specified investments that are already regulated; (ii) information regarding the future FCA authorization process for cryptoasset activities; (iii) the UK government’s support for the use of publicly available information to compile appropriate disclosure and admission documents; and (iv) acknowledgment of the potential need for a staggered implementation for cross-venue data sharing obligations. The report recognizes the rapidly evolving nature of the crypto sector and emphasizes that “the government continues to consider that developing a fully bespoke regime outside of the FSMA framework would risk creating an un-level playing field between cryptoasset firms and the traditional financial sector.”
Any legislative changes in response to this report on how the UK Government regulates cryptoassets will occur in 2024, “subject to Parliamentary time.”
Regulators release final principles for climate-related financial risk management
On October 25, the Fed, OCC, and FDIC issued final interagency guidance titled Principles for Climate-Related Financial Risk Management for Large Financial Institutions. The principles are intended to help the largest institutions supervised by the Federal banking agencies, i.e., those with over $100 billion in assets, manage climate-related risk.
These climate-related risks include both physical and transition risks. Physical risks include “hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, etc.,” while transition risks “refer to stresses to institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes… [towards] a lower carbon economy.”
These climate-related risks affect the values of assets of liabilities and damage property, leading to a loss of income, defaults, and liquidity risks. The agencies created these principles to direct board of directors and managers make sound business practices with making progress toward mitigating climate-related financial risks.
CFPB Director Rohit Chopra, a member of the FDIC Board of Directors, shared remarks on the final principles, noting that climate change poses a dual challenge to protect infrastructure and fortify the financial system. He also stressed the need for regulatory guidance to convey clear and practical rules. FDIC Chairman Gruenberg also shared a statement on the final principles, highlighting the FDIC’s focus on the financial aspects of climate change, clarifying its role in managing risks rather than setting climate policy and encouraging cooperation among federal banking agencies to ensure consistency in addressing climate-related financial risks.
FDIC issues NPR to revise Federal Deposit Insurance Act regulations on Section 19
On October 24, FDIC announced a proposed rule to implement the Fair Hiring in Banking Act (FHB Act). The proposed rule amends 2 C.F.R. part 303, subpart L, and part 308, subpart M. The Federal Deposit Insurance Act (FDI Act) prohibits a person from participating in the affairs of an FDIC-insured institution if he or she has been convicted of an offense involving dishonesty, breach of trust, or money laundering, or has entered a pretrial diversion or similar program in connection with a prosecution for such an offense, without the prior written consent of the FDIC, among other provisions. The proposed rule would incorporate several statutory changes to the FDI Act, such as:
- Excluding certain offenses from the scope of the FHB Act based on the amount of time that has passed since the offense occurred or since the individual was released from incarceration;
- Clarifying that the FHB Act does not apply to the following offenses, if one year or more has passed since the applicable conviction or program entry: using fake identification, shoplifting, trespassing, fare evasion, and driving with an expired license or tag;
- Excluding certain offenses from the definition of “criminal offenses involving dishonesty,” including “an offense involving the possession of controlled substances”;
- Excluding certain convictions from the scope of the FHB Act that have been expunged, sealed, or dismissed. While existing FDIC regulations already exclude most of those offenses, the proposed rule would modestly broaden the statutory language concerning such offenses to harmonize the FDIC’s current regulations concerning expunged and sealed records with the statutory language; and
- Prescribing standards for the FDIC’s review of applications submitted under the FHB Act.
The proposed rule also provides interpretive language that addresses, among other topics, when an offense “occurs” under the FHB Act, whether otherwise-covered offenses that occurred in foreign jurisdictions are covered by the FDI Act, and offenses that involve controlled substances.
Comments will be accepted for 60 days after publication in the Federal Register.