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DFPI extends NMLS transition for CFL licensees to March 15, 2022
On December 16, the California Department of Financial Protection and Innovation (DFPI) extended the deadline for California Financing Law (CFL) licensees to transition their licenses to the Nationwide Multistate Licensing System & Registry (NMLS) from December 31 to March 15, 2022. All licensees not yet on NMLS must establish an account in NMLS and submit their information on or before the new March deadline. Licensees may access state-specific checklists on the NMLS transition here in addition to DFPI FAQs for additional guidance. Find continuing InfoBytes coverage on the CFL here.
OCC formally rescinds CRA rule
On December 14, the OCC issued a final rule rescinding its 2020 Community Reinvestment Act Rule (2020 Rule) and replacing it with a rule based largely on the prior rules adopted jointly by the federal banking agencies in 1995, as amended (1995 Rules). (See also OCC Bulletin 2021-16.) According to the OCC, the “action is intended to facilitate the ongoing interagency work to modernize the CRA regulatory framework and promote consistency for all insured depository institutions.” As previously covered by a Buckley Special Alert, the 2020 Rule was intended to modernize the regulatory framework implementing the CRA and provided for at least a 27-month transition period for compliance based on a bank’s size and business model, among other things.
In September, the OCC solicited comments on a proposal to rescind the 2020 Rule (NPRM) and issued a series of frequently asked questions discussing the rulemaking process and providing a general timeline on the transition from the 2020 Rule (covered by InfoBytes here and here). The FAQs addressed questions including concerns related to the transition period for tracking activities that qualify under the 2020 Rule but would not qualify should the 1995 Rules be reinstated. The OCC announced that after reviewing transition issue comments received on the NPRM, the final rule had been adopted largely without modification. The final rule carries a compliance date of January 1, 2022, for all national banks and federal and state savings associations, with the exception of the final rule’s public file and public notice provisions, which have a delayed compliance date of April 1, 2022. According to the OCC, transitioning back to the 1995 Rules should carry a limited burden as the June 2020 Rule had only been partially implemented.
The OCC further noted that “strategic plans approved under the June 2020 Rule may remain in effect” but that “these plans must comply with the provisions of the final rule, as applicable.” Also, since the final rule stipulates that a bank’s record of helping to meet the credit needs of its assessment area(s) will be taken into consideration, “provisions in strategic plans that include goals for activities outside a bank’s assessment area(s) will no longer be applicable, and the OCC will no longer evaluate these activities when assessing the bank’s performance.” Additionally, the OCC stated that the new rule is intended to limit the CRA burden on banks, bank communities, and examiners while ensuring that insured depository institutions can “meet the credit needs of their entire communities, including low- and moderate-income [] neighborhoods,” consistent with safe and sound operations.
CFPB publishes fall 2021 rulemaking agenda
On December 13, the Office of Information And Regulatory Affairs released the CFPB’s fall 2021 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters the Bureau plans to pursue during the period from November 2, 2021 to October 31, 2022. Additionally, the Bureau stated that the latest agenda reflects continued rulemakings intended to further its consumer financial protection mission and help advance the country’s economic recovery from the Covid-19 pandemic. Promoting racial and economic equity and supporting underserved and marginalized communities’ access to fair and affordable credit continue to be Bureau priorities.
Key rulemaking initiatives include:
- Small Business Rulemaking. This fall, the Bureau issued its long-awaited proposed rule (NPRM) for Section 1071 regulations, which would require a broad swath of lenders to collect data on loans they make to small businesses, including information about the loans themselves, the characteristics of the borrower, and demographic information regarding the borrower’s principal owners. (Covered by a Buckley Special Alert.) The NPRM comment period goes through January 6, 2022, after which point the Bureau will review comments as it moves to develop a final rule. Find continuing Section 1071 coverage here.
- Consumer Access to Financial Records. The Bureau noted that it is working on rulemaking to implement Section 1033 of Dodd-Frank in order to address the availability of electronic consumer financial account data. The Bureau is currently reviewing comments received in response to an Advance Notice of Proposed Rulemaking (ANPR) issued fall 2020 regarding consumer data access (covered by InfoBytes here). Additionally, the Bureau stated it is monitoring the market to consider potential next steps, “including whether a Small Business Review Panel is required pursuant to the Regulatory Flexibility Act.”
- Property Assessed Clean Energy (PACE) Financing. As previously covered by InfoBytes, the Bureau published an ANPR in March 2019 seeking feedback on the unique features of PACE financing and the general implications of regulating PACE financing under TILA (as required by Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amended TILA to mandate that the Bureau issue certain regulations relating to PACE financing). The Bureau noted that it continues “to engage with stakeholders and collect information for the rulemaking, including by pursuing quantitative data on the effect of PACE on consumers’ financial outcomes.”
- Automated Valuation Models (AVM). Interagency rulemaking is currently being pursued by the Bureau, Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to develop regulations for AVM quality control standards as required by Dodd-Frank amendments to FIRREA. The standards are designed to, among other things, “ensure a high level of confidence in the estimates produced by the valuation models, protect against the manipulation of data, seek to avoid conflicts of interest, require random sample testing and reviews,” and account for any other appropriate factors. An NPRM is anticipated for June 2022.
- Amendments to Regulation Z to Facilitate LIBOR Transition. As previously covered by InfoBytes, the Bureau issued a final rule on December 7 to facilitate the transition from LIBOR for consumer financial products, including “adjustable-rate mortgages, credit cards, student loans, reverse mortgages, [and] home equity lines of credit,” among others. The final rule amended Regulation Z, which implements TILA, to generally address LIBOR’s eventual cessation for most U.S. dollar settings in June 2023, and establish requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans. The final rule generally takes effect April 1, 2022.
- Reviewing Existing Regulations. The Bureau noted in its announcement that it decided to conduct an assessment of a rule implementing HMDA (most of which took effect January 2018), and referred to a notice and request for comments issued last month (covered by InfoBytes here), which solicited public comments on its plans to assess the effectiveness of the HMDA Rule. Additionally, the Bureau stated that it finished a review of Regulation Z rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009, and that “[a]fter considering the statutory review factors and public comments,” it “determined that the CARD Act rules should continue without change.”
Notably, there are 14 rulemaking activities that are listed as inactive on the fall 2021 agenda, including rulemakings on overdraft services, consumer reporting, student loan servicing, Regulation E modernization, abusive acts and practices, loan originator compensation, and TILA/RESPA mortgage disclosure integration.
CFPB finalizes LIBOR transition rule
On December 7, the CFPB issued a final rule facilitating the transition from LIBOR for consumer financial products. (Corrected rule published February 16, 2022.) The final rule amends Regulation Z, which implements TILA, to generally address LIBOR’s eventual cessation for most U.S. dollar settings in June 2023, and establishes requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans.
- Closed-end provision amendments provide examples of indices that meet certain Regulation Z standards, which may be used to replace LIBOR indices. To assist creditors in determining a comparable index for closed-end loans, the final rule identifies certain Secured Overnight Financing Rate (SOFR)-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (ARRC) for consumer products. The final rule also provides a non-exhaustive list of factors for creditors to use when determining whether a replacement index meets the Regulation Z “comparable” standard.
- Updated post-consummation disclosure sample forms for certain adjustable-rate mortgage loan products replace LIBOR references with a SOFR index.
- Amendments related to open-end loans add LIBOR-specific provisions, which allow creditors for home equity lines of credit (HELOCs) and credit card issuers to transition existing accounts using a LIBOR index to a replacement index on or after April 1, 2022, provided certain conditions are met. Creditors and card issuers are provided a non-exhaustive list of factors to consider when determining whether a replacement index meets Regulation Z’s “historical fluctuations are substantially similar” standard. In addition to identifying certain ARRC recommended SOFR-based spread-adjusted indices for consumer products, the final rule also lists the Prime rate as an example of an index that also meets this standard.
- The final rule also addresses change-in-terms notice provisions for HELOCs and credit card accounts related to the disclosure of margin reductions once LIBOR ends. Additionally, the final rule discusses how the requirement for reevaluating rate increases on credit card accounts applies to the transition from using LIBOR indices to a replacement index.
The final rule takes effect April 1, 2022, with the exception of certain provisions related to an amendment to appendix H which is effective October 1, 2023. Additionally, while the mandatory compliance date for change-in-terms notice requirement revisions is October 1, 2022, the mandatory compliance date for all other final rule provisions is April 1, 2022. Furthermore, the Bureau “is reserving judgment about whether to include references to a 1-year USD LIBOR index and its replacement index in various comments; the Bureau will consider whether to finalize comments proposed on that issue in a supplemental final rule once it obtains additional information.”
CFPB Director Rohit Chopra warned that “[n]o new financial contracts may reference LIBOR as the relevant index after the end of 2021,” and that beginning June 2023, “LIBOR can no longer be used for existing financial contracts.” Chopra further emphasized that creditors and servicers must continue to prepare for LIBOR’s cessation and should take clear and orderly steps to reduce risk and mitigate compliance, legal, financial, and operational risks.
OCC seeks information on climate risk in banking and finance
On December 3, the OCC announced it is soliciting academic-focused papers and policy-focused research on climate risk in banking and finance for presentation to the OCC on June 6-7, 2022. The meeting will provide a platform for interested academic, regulatory, and other experts to meet and share research on the interactions of climate change and the financial system. The information gathered “will inform the OCC’s approach to developing climate-related financial risk management guidance for regulated institutions.” Areas of interest include: (i) physical risks directly arising from climate change; (ii) transition risks from climate policies, technological innovation, consumer sentiment, or investor sentiment; and (iii) differential community impact, among others.
ARRC recommends SOFR fallbacks for one-week, two-month LIBOR contracts
On December 3, the Alternative Reference Rates Committee (ARRC) under the New York and Alabama LIBOR Relevant Recommending Body, released a statement recommending forms of the Secured Overnight Financing Rate (SOFR) and associated spread adjustments to replace references to 1-week and 2-month USD LIBOR in certain contracts affected by New York and Alabama state LIBOR legislation. The statement comes “with just one month until no new LIBOR and the cessation of these two USD LIBOR tenors,” noting that these recommendations are “important for the legacy contracts that rely on those tenors.” Under the states’ LIBOR legislation, ARRC serves as the “Relevant Recommending Body,” while SOFR is the recommended rate and alternative to USD LIBOR.
As previously covered by InfoBytes, ARRC announced its recommendation of CME Group’s forward-looking SOFR term rates, following the completion of key changes in trading conventions on July 26 under the SOFR First initiative. According to the recently released statement, ARRC recommends applying SOFR only to the narrow set of LIBOR-based contracts that are affected by the states’ LIBOR legislation, which are generally contracts with no fallbacks or fallbacks that reference LIBOR. For contracts with fallbacks that give a party discretion to decide on a replacement rate, the state laws also provide a safe harbor if that party chooses the SOFR-based rate and conforming changes recommended by ARRC. ARRC also published a set of frequently asked questions regarding the application of New York state law.
Fed provides guidance on LIBOR transition
On November 19, the Federal Reserve Board announced answers to “Supervision FAQs on the Transition away from LIBOR.” The Fed’s announcement follows an October 2021 joint statement by the CFPB, Fed, FDIC, NCUA, and OCC, in conjunction with the state bank and state credit union regulators, regarding the transition away from LIBOR. (Covered by InfoBytes here.) Among other things, the FAQs included statements regarding what qualifies as a “new contract” under the previously issued guidance, specifically regarding: (i) modifications to adjustable-rate mortgages; (ii) loans that “automatically renew” after December 31, 2021; and (iii) physical settlement of a contract that existed before December 31, 2021. The FAQs also discussed: (i) Board-supervised institutions engaging in secondary trading of LIBOR-linked cash instruments that were issued before December 31, 2021; (ii) the need for fallback language in contracts entered into prior to 2022; and (iii) the approach by examiners in assessing firms’ LIBOR transition plans.
DFPI reminds CFL licensees of December 31 transition deadline
Recently, the California Department of Financial Protection and Innovation (DFPI) reminded companies licensed under the California Financing Law that they must transition onto the Nationwide Multistate Licensing System & Registry (NMLS) by December 31. Licensees not currently on the NMLS must establish an account in the system and transfer information to DFPI through NMLS on or before the deadline. Applicants and transitioning licensees are required to submit IRS and Secretary of State documentation identifying the employer identification number and the state where the company is registered as a business. DFPI further stated that the time for “DFPI to process the licensee’s NMLS transition does not [affect] the licensure status of the licensee, and may occur after the licensee’s December 31, 2021 deadline to submit the licensee’s information to the DFPI through NMLS.”
Fed cites need to increase oversight of nonbank mortgage companies
On November 8, Federal Reserve Board Governor, Michelle W. Bowman, spoke at the “Women in Housing and Finance Public Policy Luncheon” regarding U.S. housing and the mortgage market. Bowman observed that home prices have increased in the past year and a half, stating that “[i]n September, about 90 percent of American cities had experienced rising home prices over the past three months, and the home price increases were substantial in most of these cities,” which “raise[s] the concern that housing is overvalued and that home prices may decline.” She discussed several factors leading to the demand for housing as including (i) low interest rates; (ii) accumulated savings; and (iii) increased income growth. Additionally, she pointed out that mortgage refinancing has surged due to the decrease in long-term interest rates, and that nonbank servicers utilized the proceeds from the “refinacings to fund the advances associated with forbearance.” However, Bowman added that higher home prices and rising rents contributed to inflationary pressures in the economy. Bowman stated that the “multifamily rental market is at historic levels of tightness, with over 95 percent occupancy in major markets,” and she anticipates that these housing supply issues are unlikely to reverse materially in the short term, suggesting that there will be higher levels of inflation caused by housing. With respect to forbearance, Bowman said, “1.2 million borrowers were still in forbearance, down from a peak of 4.7 million in June 2020” on mortgage payments. Bowman stated that, “[f]orbearance, foreclosure moratorium, and fiscal support have kept distressed borrowers in their homes.” Bowman warned that transitioning borrowers from mortgage forbearance to modification may be a “heavy lift” for some servicers. Bowman disclosed that the Fed will be monitoring what happens as borrowers reach the end of the forbearance on mortgage payments and estimates that 850,000 of those in forbearance will reach the end of their forbearance period in January 2022, and “the temporary limitations on foreclosures put in place by the Consumer Financial Protection Bureau will expire at the end of the year.” Bowman recommended that state and federal regulators collaborate to collect data, identify risks, and strengthen oversight of nonbank mortgage companies.
OCC to focus supervisory efforts on non-SOFR rates after LIBOR ends
On October 26, acting Comptroller of the Currency Michael J. Hsu warned banks not to be complacent when transitioning away from LIBOR. Hsu reiterated that federal regulators will not allow new contracts that use LIBOR as a reference rate after December 31. Hsu stressed that banks must look outside of activities that directly involve LIBOR exposure, such as lending, derivatives activities, and market-making capacities, to screen for LIBOR exposure in other contexts, such as LIBOR-based loan participation interests or as part of an instrument for a bank’s investment or liquidity portfolio paying LIBOR-based income or otherwise reflecting LIBOR exposures. As previously covered by InfoBytes, the CFPB, Federal Reserve Board, FDIC, NCUA, and OCC recently released a joint statement providing supervisory considerations for institutions when choosing an alternative reference rate. Hsu addressed the use of these alternative reference rates and reminded banks that they are expected to be able to demonstrate that their replacement rate is robust and appropriately tailored to their risk profile. He further commented that because the Secured Overnight Financing Rate (SOFR) “provides a robust rate suitable for use in most products, with underlying transaction volumes that are unmatched by other alternatives,” the OCC will initially focus its supervisory efforts on non-SOFR rates.