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Financial Services Law Insights and Observations

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  • Mortgage lender settles FCA allegations

    Federal Issues

    On February 13, the U.S. Attorney for the Eastern District of California announced a $3.67 million joint settlement with HUD and the Fair Housing Administration (FHA) to resolve allegations that a mortgage lender violated the False Claims Act by falsely certifying compliance with FHA mortgage insurance requirements. According to the settlement agreement, between 2007 and 2009, the mortgage lender, a participant in HUD’s Direct Endorsement Lender program, allegedly knowingly submitted false claims to the FHA loan insurance program by failing to ensure the loans qualified for FHA insurance when they were originated. The announcement notes that the settlement relates solely to allegations, and that there has been no determination of actual liability by the mortgage lender, which did not admit to liability in the settlement.

    Federal Issues HUD FHA False Claims Act / FIRREA DOJ Mortgages Mortgage Insurance

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  • CFPB releases semi-annual report to Congress

    Federal Issues

    On February 12, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2018, through September 30, 2018. The report, which is required by the Dodd-Frank Act, addresses issues including problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau when acting Director Mick Mulvaney was still in office. The report is the first to be released under Kathy Kraninger, who was confirmed as Director in December 2018. In her opening letter, Kraninger emphasized that during her tenure the Bureau will “vigorously and even-handedly enforce the law,” and will make sure the financial marketplace “is innovating in ways that enhance consumer choice.” Among other things, the report focuses on credit invisibility and mortgage shopping as two significant problems faced by consumers, noting that credit invisibility among adults tends to be concentrated in rural and highly urban areas and, based on recent studies, more than 75 percent of borrowers report applying for a mortgage with only one lender.

    The report also includes an analysis of the efforts of the Bureau to fulfill its fair lending mission. The report highlights the most frequently cited violations of Regulation B (ECOA) and Regulation C (HMDA) in fair lending exams during the reporting period and emphasizes that during the reporting period the Bureau did not initiate or complete any fair lending public enforcement actions or refer any matters to the DOJ with regard to discrimination.

    Federal Issues CFPB Supervision Enforcement Fair Lending Mortgages Regulation B Regulation C ECOA HMDA Dodd-Frank

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  • Banking agencies issue final rule on private flood insurance

    Federal Issues

    On February 12, the Federal Reserve Board, Farm Credit Administration, FDIC, National Credit Union Administration, and the OCC issued a joint final rule amending regulations governing loans secured by properties in special flood hazard areas to implement the provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 concerning private flood insurance. As previously covered by InfoBytes, the provisions, among other things, require regulated lending institutions to accept policies that meet the statutory definition of “private flood insurance,” and clarify that lending institutions may choose to accept private policies that do not meet the statutory criteria for “private flood insurance,” provided the policies meet certain criteria and the lending institutions document that the policies offer “sufficient protection for a designated loan, consistent with general safety and soundness principles.” The final rule takes effect July 1.

    (See also FDIC FIL-8-2019, NCUA press release, and OCC press release.)

    Federal Issues Federal Reserve OCC FDIC NCUA Farm Credit Administration Flood Insurance National Flood Insurance Act Flood Disaster Protection Act National Flood Insurance Program

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  • Fannie and Freddie issue selling policy changes

    Federal Issues

    On February 6, Fannie Mae and Freddie Mac each issued selling policy updates through SEL-2019-01 and Bulletin 2019-4, respectively. According to Fannie Mae’s Selling Guide announcement, the Guide has been updated to include (i) a change from the Quality Assurance System to the Loan Quality Connect platform for post-purchase reviews; (ii) changes to reflect the retirement of the Cost of Funds Index in January 2020; and (iii) a clarification that completion escrow accounts, which are required for construction that is not complete when the related mortgage is delivered to Fannie Mae, must be custodial accounts that satisfy the criteria in the Fannie Mae Servicing Guide.

    Freddie Mac’s Bulletin included selling updates regarding, among other things, (i) changes to the Condominium Project requirements; (ii) updates to commission income treatment based on tax law changes; and (iii) updates to the Certificate of Incumbency forms for sellers and servicers.

    Federal Issues Fannie Mae Freddie Mac Selling Guide Mortgages

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  • University settles whistleblower FCA claims

    Federal Issues

    On February 11, the DOJ announced a $2.5 million settlement with a South Carolina university to resolve allegations that the university violated the False Claims Act (FCA) by submitting false claims to the U.S. Department of Education. According to the announcement, between 2014 and 2016, the university hired a company, which was partially owned by the university, to recruit students to the university and paid the company based on the number of students who enrolled in university programs, in violation of the prohibition on paying incentive compensation in Title IV of the Higher Education Act. The co-owner of the company originally brought a qui tam lawsuit against the university and will receive $375,000 from the settlement.

    Federal Issues DOJ Whistleblower Department of Education False Claims Act / FIRREA Incentive Compensation Settlement

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  • OCC praises CFPB’s payday rule proposal

    Federal Issues

    On February 11, the OCC released a statement from Comptroller of the Currency Joseph Otting supporting the CFPB’s proposed rule rescinding certain requirements relating to underwriting standards for short-term small-dollar loans. (Covered by InfoBytes here.) Calling the proposal “important and courageous,” Otting praised the Bureau, noting that it was “[t]he shrinking supply and steady demand” that “drove up prices and promoted much less favorable terms.” He continued to state that a framework of rules that allows responsible lenders to compete in the market will make the market “work better for everyone.”

    As previously covered by InfoBytes, in May 2018, the OCC released a Bulletin encouraging banks to meet the credit needs of consumers by offering short-term, small-dollar installment loans subject to the OCC’s core lending principles.

    Federal Issues Consumer Finance CFPB OCC Installment Loans Payday Rule Underwriting

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  • DOJ settles with mortgage company for alleged SCRA violations

    Federal Issues

    On February 7, the DOJ announced a $750,000 settlement with a New Jersey-based mortgage company resolving allegations that the company violated the Servicemembers Civil Relief Act (SCRA) by foreclosing on homes owned by servicemembers without first obtaining the required court orders. The complaint, which was filed on the same day as the settlement, alleges that between 2010 and 2012 the company foreclosed on six homes of SCRA-protected servicemembers. Under the SCRA, lenders must obtain a court order before foreclosing on a servicemember’s home during, or within one year after, active military service, provided that the mortgage originated before the servicemember’s period of military service. The settlement requires the company to, among other things, (i) pay $125,000 to each affected servicemember; (ii) provide staff training to prevent unlawful foreclosures in the future; and (iii) notify the DOJ of future SCRA complaints.

    Federal Issues DOJ Foreclosure Mortgages Servicemembers Settlement SCRA

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  • CFPB announces settlement with payday lending operation

    Federal Issues

    On February 6, the CFPB announced a settlement with an Indiana-based payday retail lender and affiliates (companies) in seven states to resolve alleged violations of the Consumer Financial Protection Act (CFPA), Truth in Lending Act (TILA), and Gramm-Leach-Bliley Act (GLBA) privacy protections. The CFPB alleges that the companies engaged in unfair acts or practices, failed to properly disclose annual percentage rates, and failed to provide consumers with required initial privacy notices.

    Specifically, the Bureau alleges that the companies violated CFPA’s UDAAP provisions by, among other things, (i) failing to implement processes to prevent unauthorized charges, including those resulting from unauthorized draws on borrowers’ bank accounts; (ii) requiring loan applicants to provide contact information for their employers, supervisors, and four personal references, and then repeatedly calling employers to seek payments when borrowers became delinquent; (iii) disclosing the borrower’s financial information during those calls and, in certain instances, asking the third party to make payments on the loan; (iv) misusing personal references for marketing purposes; and (v) advertising check-cashing and telephone reconnection services they were no longer providing.

    The Bureau also asserts that the companies violated the GLBA by only providing initial privacy notices when consumers opened their first loan. GLBA requires financial services firms to provide borrowers a privacy policy each time a new customer relationship is established, which in this instance the CFPB claims, occurred each time a borrower paid off an outstanding loan and subsequently took out a new loan. Finally, the Bureau alleges that because the payday loans extended by the companies constitute as closed-end credit under TILA and Regulation Z, the companies were required to disclose a payday loan database fee charged to Kentucky customers in the APR but failed to do so. This resulted in, among other things, inaccurate APR disclosures in advertisements.

    While the companies have not admitted to the allegations, they have agreed to pay a $100,000 civil money penalty and are prohibited from continuing the illegal behavior.

    Federal Issues CFPB Enforcement Settlement Payday Lending CFPA Gramm-Leach-Bliley Regulation P Privacy Notices TILA Regulation Z APR UDAAP

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  • Senator Crapo unveils plan for housing finance reform

    Federal Issues

    On February 1, Chairman of the Senate Banking, Housing, and Urban Affairs Committee, Mike Crapo (R-ID) released an outline for a sweeping legislative overhaul of the U.S. housing finance system. Most notably, the plan would end the Fannie Mae and Freddie Mac (GSEs) conservatorships, making the GSEs private guarantors while also allowing other nonbank private guarantors to enter the market. Highlights of the proposal include:

    • Guarantors. The GSEs would be private companies, competing against other nonbanks for mortgages, subject to a percentage cap. The multifamily arms of the GSEs would be sold and operated as independent guarantors. Consistent with current GSE policy, the eligible mortgages would, among other things, be subject to loan limits set by FHFA and would be required to have an LTV of no more than 80 percent unless the borrower obtains private mortgage insurance.
    • Regulation of Guarantors. FHFA, structured as a bi-partisan board of directors, would charter, regulate, and supervise all private guarantors, including the former GSEs. FHFA would be required to create prudential standards that include (i) leverage requirements; (ii) if appropriate, risk-based capital requirements; (iii) liquidity requirements; (iv) overall risk management requirements; (v) resolution plan requirements; (vi) concentration limits; and (vii) stress tests. Guarantors would be allowed to fail.
    • Ginnie Mae. Ginnie Mae would operate the mortgage securitization platform and a mortgage insurance fund. Additionally, Ginnie Mae would provide a catastrophic government guarantee to cover tail-end risk, backed by the full-faith and credit of the U.S.
    • Transition. In addition to a cap on the percent of all outstanding eligible mortgages, the legislation would require guarantors to be fully capitalized within an unspecified number of years after enactment.
    • Affordable housing. Current housing goals and duty-to-serve requirements would be eliminated and replaced with a “Market Access Fund,” which is intended to address the homeownership and rental needs of underserved and low-income communities.

    As previously covered by InfoBytes, on January 29, Chairman Crapo released the Senate Banking Committee’s agenda, which also prioritizes housing finance reform.

    Federal Issues Senate Banking Committee Housing Finance Reform Fannie Mae Freddie Mac Ginnie Mae Mortgages GSE FHFA Securitization

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  • Fannie Mae announces updates to multifamily small mortgage loan, hybrid ARM loan, and property inspection protocol

    Federal Issues

    On February 1, Fannie Mae issued Lender Memo 19-02 to provide updated guidance for multifamily lenders. The following adjustments have been made to the Multifamily Selling and Servicing Guide and are effective February 4:

    • The maximum small mortgage loan amount eligible for underwriting is increased to $6 million and will apply to all markets.
    • The maximum Hybrid ARM Loan amount has also been increased to $6 million.
    • Property Inspection Protocols and Financial Analysis of Property Operations associated with small mortgage loans have been updated to align asset management requirements with the increases described above. Fannie Mae noted that quarterly financial reporting will not be required—nor will a waiver be needed—for a mortgage loan secured by a cooperative property or a small mortgage loan provided it is not on Fannie Mae’s watchlist or does not have a rating of 4 or 5 on its most recent property inspection.

    Federal Issues Fannie Mae Mortgages Underwriting

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