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FHFA requests information on its FHLBank Affordable Housing Program
On June 20, FHFA released its request for input (RFI) on the application process for the Federal Home Loan Banks’ (FHLBanks) Affordable Housing Program (AHP). FHFA invited input on all aspects of the AHP application process, with a deadline for submissions no later than August 19. The AHP housing program was designed to provide funding to purchase, construct, and rehabilitate housing for very low-, low-, and moderate-income households. Each FHLBank provides funding through either a competitive application program that funds both rental and homeownership projects or a homeownership set-aside program that supports owner-occupied housing for income-eligible households. The RFI focused on the competitive application programs and posed eight questions related to the AHP application process, including the use of consultants to apply for AHP funds, and opportunities for improvements to the application process.
Agencies finalize new standards for AVMs
On June 20, the CFPB, OCC, Fed, FDIC, NCUA and FHFA (the financial services regulators) issued a final rule implementing new provisions governing the use of automated valuation models (AVMs), which are commonly used by mortgage originators and secondary-market issuers to estimate a property’s value for loan underwriting and portfolio monitoring. The rule, which was proposed in June 2023 (covered by InfoBytes here), had mortgage servicers adopt policies and procedures ensuring that AVMs operate with certain quality control standards, designed to operate with a high level of confidence. These estimates should be produced to protect against data manipulation and avoid conflicts of interest. The rule included requirements to conduct random sampling testing and reviews, and to comply with nondiscrimination laws. The financial services regulators noted that despite comments that lending institutions have little control over how AVMs were created, the rule “will allow the implementation of the standards to evolve along with changes in AVM technology and minimize compliance costs.”
In announcing the final rule, FDIC Chairman Martin Gruenberg emphasized that the rule created an independent requirement “to ensure that AVMs used in connection with making credit decisions or covered securitization determinations adhere to quality control standards designed to comply with applicable nondiscrimination laws,” and that the “new requirement would further mitigate potential discrimination risk in lenders’ use of AVMs.” In its announcement, the OCC stated that the rule “supports Acting Comptroller of the Currency Michael J. Hsu’s priority to reduce inequality and elevate fairness in banking.”
The final rule will go into effect the first day of the calendar quarter 12 months after its publication in the Federal Register.
CFPB extends its small business lending rule and opens comment period
On June 25, the CFPB released its formal action to extend the compliance dates for its small business lending rule, section 1071 (covered by InfoBytes here). The extension of 290 days represented the time elapsed between the Texas court’s first issuance of a stay last year and the Supreme Court’s decision in CFPB v. CFSA last month. As previously covered by InfoBytes, the CFPB notified the public of these changes in May but has now issued its interim final rule with a request for public comment. The new rule will implement section 1071 by adding subpart B to Regulation B of the rule, and the CFPB estimated this rule will affect at most 1,900 banks, savings associations and credit unions with $10 billion or less in total assets.
Under the new rule, the following dates will go into effect:
- Tier 1 institutions (highest volume lenders): The new compliance date will be July 18, 2025, and the first filing deadline will be June 1, 2026.
- Tier 2 institutions (moderate volume lenders): The new compliance date will be January 16, 2026, and the first filing deadline will be June 1, 2027.
- Tier 3 institutions (lowest volume lenders): The new compliance date will be October 18, 2026, and the first filing deadline will be June 1, 2027.
The CFPB also included the previous rule’s 12-month grace period wherein the Bureau would not assess penalties for errors made in good faith in data reporting. To add clarity to these changes, the Bureau issued an unofficial redline of its final changes. The new rule will go into effect 30 days following its publication in the Federal Register.
FDIC approves final rule to adjust resolution plan requirements
On June 20, the FDIC adopted its final rule amending the resolution planning requirements for large banks. The amended rule will amend 12 C.F.R. Part 360 “Resolutions and Receivership Rules,” and, among other components, require a covered institution’s full resolution submission to include:
- Identified Strategy – resolving issues in the event of a failure.
- Failure Scenario – proof of assets in the event of a failure.
- Executive Summary – summarizing the identified strategy with descriptions and discussions.
- Organizational Structure – legal entities, core business lines, and branches.
- Methodology for Material Designation
- Separation from Parent – demonstrate the ability to operate separately from parent org.
- Overall Deposit Activities – including foreign deposits, sweep arrangements, etc.
- Critical Services – ensure continuity of the institution’s critical services in resolution.
- Key Personnel – identified by title, function, location, core business line, etc.
- Franchise Components – ensure that franchises are marketable in resolution.
Under the rule, depository institutions with more than $100 billion in total assets must submit a full resolution plan either biennially or triennially (most will file triennially, with the “largest and most systematic and interconnected” institutions required to file biennially). Depository institutions with at least $50 billion but less than $100 billion in total assets must submit more limited informational filings – which would not include an identified strategy for the institution’s resolution or proof of assets in the event of a failure – on a triennial basis. The FDIC noted that because such institutions will file less information, “the FDIC expects the engagement and capabilities testing [] will be a key component of its resolution planning for such firms and expects to conduct engagement and capabilities testing with most [of these institutions] in each cycle.” Failure to submit a full resolution submission, and address adequately a material weakness identified by the FDIC may lead to enforcement actions against non-compliant institutions. The rule will go into effect on October 1 and the FDIC will notify institutions of the date when their first full resolution submissions or interim supplements are due under the final rule (The FDIC will set a date for Group A Filers at least 270 days after the effective date, and the FDIC will set a date for Group B Filers at least a year after the effective date).
In an OCC news release, the Acting Comptroller of the Currency stated his support for the FDIC’s resolution plan rule, noting that when such plans are lacking, “consequences can include not just disorderly failure and the need for extraordinary government action, but also a broader loss of trust in banks and their regulators.” The Director of the CFPB, Rohit Chopra, also released a statement and noted that the sale of a failed bank to an even larger institution can result in substantial costs to the Deposit Insurance Fund. Chopra expressed support that rules requiring banks to demonstrate how they might be wound down would help the FDIC pursue alternative dissolution strategies for large banks, such as breaking up the bank into smaller components or reprivatizing it through an initial public offering.
OCC proposes revisions to its recovery planning guidelines
On June 24, the OCC proposed revisions to its recovery planning guidelines—plans for how to respond quickly and effectively to, and recover from, the financial effects of severe stress on large financial institutions. Considering the increase in withdrawals of uninsured deposits in March 2023, the OCC will expand the application of its guideline requirements to insured national banks, federal savings associations and federal branches with average total consolidated assets of $100 billion or more.
The proposed revisions also change “average total consolidated assets” as defined in the guidelines to clarify that the calculation would be based on the “total assets” line of the Call Report, not the “average total consolidated assets” line of the Call Report. The OCC said this may affect the quarter in which a bank becomes a covered bank.
The OCC further proposed to incorporate a yearly, risk-based testing standard of recovery plans to include stress scenarios that ensure “the plan’s triggers appropriately reflect the covered bank’s particular vulnerabilities and will, in practice, provide the covered bank with timely notice of a continuum of increasingly severe stress, ranging from warnings of the likely occurrence of severe stress to the actual existence of severe stress.” Testing should ensure that management and the board can confirm the bank's readiness to execute identified strategies under stress. The OCC will require that a covered bank’s recovery plan will consider appropriately both financial risk and non-financial risk (including operational and strategic risks), as well as be integrated into its risk governance functions.
Covered banks will have one year from the effective date of the amendments to comply with the new requirements. Comments must be received 30 days after publication in the Federal Register.
CFPB settles HMDA lawsuit with large mortgage lender for $3.95 million
On June 18, the CFPB filed a proposed stipulated final judgment and order in its lawsuit against a large mortgage lender for violating HMDA, Regulation C and the CFPA. The mortgage lender agreed to pay a civil money penalty of $3.95 million. As previously covered by InfoBytes, the CFPB filed its complaint against the Florida-based nonbank mortgage lender in October 2023 to obtain relief and penalties associated with the lender’s alleged repeated failure to comply with HMDA reporting requirements and the terms of a 2019 Consent Order. In addition to the monetary penalty, the proposed order will prohibit the mortgage lender from violating HMDA, and require the development of additional policies, and issued controls to prevent errors in recording consumer and loan data and HMDA data reporting. Under the proposal, the mortgage lender must also establish an HMDA Compliance Subcommittee that will include the CEO, COO, CRO, and CLO, and retain a third-party independent auditor to perform HMDA data transaction testing, perform a root cause analysis, and issue written reports for five years. Within 30 days of the date the order will be entered by the court, the mortgage lender must create a compliance plan outlining detailed steps, designed policies, board notifications, and specific timelines. In agreeing to the proposed stipulation, the mortgage lender neither admitted nor denied the allegations in the complaint.
FHFA approves Freddie Mac's second mortgage pilot
On June 20, FHFA conditionally approved a limited pilot program for Freddie Mac to begin purchasing certain single-family closed-end second mortgages. This decision came after implementing a new approval process for products from Freddie Mac and Fannie Mae, which became effective in April 2023. The pilot will determine if the new mortgage product “advances Freddie Mac's statutory purposes and benefits borrowers, particularly in rural and underserved communities.”
FHFA's approval will set specific limitations for the pilot, including (i) a $2.5 billion cap on purchases; (ii) a maximum duration of 18 months; (iii) a maximum loan amount of $78,277, (in alignment with the CFPB’s Qualified Mortgage criteria); (iv) a 24-month “seasoning period” for the first mortgage; and (v) a restriction to primary residences only. Following the pilot, the FHFA will evaluate its success and effectiveness. Any proposed expansion or conversion of the pilot into a regular program will require a new round of public comments and FHFA approval, based on the pilot's initial outcomes.
CFPB bans two companies for reverse mortgage servicing violations
On June 18, the CFPB issued an order against two reverse mortgage servicing companies (along with certain affiliates and subsidiaries), after determining that the companies misrepresented loan defaults and failed to respond appropriately to borrower communications to effectively service their reverse mortgages, leading to unnecessary costs and foreclosure fears for borrowers. Specifically, the CFPB alleged the companies failed to respond to borrower communications – including requests for information and payoff statements – in violation of RESPA. The companies also sent false repayment letters to older adult homeowners stating that their reverse mortgage loans were due and must be paid within 30 days due to a default, when no such trigger event had occurred. Further, the companies allegedly had inadequate resources and staffing to handle as many as 150,000 borrowers, leading to systematic regulatory failures.
Both companies were ordered to permanently cease reverse mortgage servicing activities and pay a civil money penalty (although for one company, the civil money penalty was $1 due to an inability to pay). The other company was ordered to pay over $11 million in consumer redress and $5 million in civil money penalties.
District Court says defendant violated TCPA written consent requirement
On June 6, the U.S. District Court for the District of Maryland held that the prerecorded telemarking calls placed by a health insurance provider and its affiliated marketing company required prior written consent from consumers. Plaintiffs brought a class action against defendants for their marketing practices related to dental savings plans, alleging defendants’ practices violated the Telephone Consumer Protection Act (TCPA). The defendants placed numerous, prerecorded “winback” calls to plaintiffs encouraging them to renew a dental plan expired previously. While the lead plaintiff provided verbal consent to receive text messages and prerecorded phone calls while enrolled in the plan, plaintiff alleged that the automated calls received after the plan ended were not authorized.
The court denied the defendants’ motion for summary judgment and granted the plaintiff’s motion for class certification. The court found that the “winback” calls qualified as telemarketing advertisements under 47 C.F.R. § 64.1200(f)(13) and, as such, were subject to the heightened requirement for “prior express written consent” under the TCPA. The court discussed the “complex tapestry” comprising the definition for prior express written consent, and concluded that such consent will be satisfied if it is in writing and the following three elements are met, at a minimum: “(1) an agreement; (2) a signature (that the signatory intended to function as a signature); and (3) “clear and conspicuous” disclosures about the content of the agreement and that the consumer need not sign the agreement.” Additionally, the court held that the “consumer disclosure” section of the E-SIGN Act applied in this case, further requiring written disclosures to obtain consumer consent under the TCPA.
The court also found that the class action waiver and arbitration clauses on the defendants’ website did not apply to members of the class because: (1) the class members signed up by phone; and (2) similar to the TCPA analysis, telemarketing phone calls to former customers after their plans ended and they were no longer customers did not fall under the "sites and services" governed by the terms of use.
Senate Committee reports on AI use by hedge fund traders
On June 14, the U.S. Senate Committee on Homeland Security and Governmental Affairs released a report on the use of artificial intelligence (AI) by hedge funds to inform trading decisions. The report suggested that the increased use and reliance upon AI in the financial services sector could lead to greater risks to financial investors and markets. On par with these findings included, for instance, an observation that hedge funds and regulators may use inconsistent or unclear terms to define AI systems that could make it difficult to understand what types of systems are in use and how existing and proposed regulations could apply. The report also suggested this may complicate efforts to audit and assess hedge funds’ review processes and human moderation efforts. The report also suggested that the use of AI for trading purposes could amplify traditional investment industry risks.
The Committee made several recommendations, including calling upon regulators to consider potential gaps in existing and proposed regulatory frameworks. The report concluded that Congress and regulators should seek to improve the public’s understanding of AI and establish guardrails to address risks related to the use of this technology in the financial services sector.