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Representatives urge financial regulators to strengthen cyber infrastructures to avoid cyber attacks
On January 7, Representatives Emanuel Cleaver II (D-MO) and Gregory Meeks D-NY) sent a letter to nine federal financial regulators urging them to strengthen their financial infrastructures against possible cyber-attacks in the wake of recent threats against the U.S. from Iran and its allies following the killing of Iranian official Qasem Soleimani. The letter also requests that the regulators coordinate with law enforcement and regulated entities to increase information sharing surrounding cyber threats, and “communicate a strategy to further mitigate existing cyber vulnerabilities within [the U.S.] financial infrastructure by March.” The letter was sent to the Federal Reserve Board, Treasury Department, SEC, FDIC, CFPB, Federal Housing Finance Agency, Commodity Futures Trading Commission, National Credit Union Administration, and the OCC.
As previously covered by InfoBytes, NYDFS separately issued an Industry Letter on January 4 warning regulated entities about the “heightened risk” of cyber-attacks by hackers affiliated with the Iranian government. The letter provides recommendations for ensuring quick responses to any suspected cyber incidents, and reminds entities they must inform NYDFS “as promptly as possible but in no event later than 72 hours’ after a material cybersecurity event.”
On December 16, the FHFA released a notice of proposed rulemaking (NPRM) to amend the stress testing requirements for Federal Home Loan Banks (FHL Banks), consistent with changes made by Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). Specifically, the NPRM will (i) increase the minimum threshold for regulated entities to conduct stress tests from $10 billion to $250 billion in total consolidated assets; (ii) remove the requirements for FHL Banks subject to stress testing, as none of the banks meet the minimum threshold (notably, under the proposal, the Director will maintain the ability to require any regulated entity with assets below the minimum threshold to conduct stress tests at his or her discretion); and (iii) reduce the number of stress test scenarios from three to two by removing the “adverse” scenario. According to the FHFA, while the “adverse” scenario provides value in limited circumstances, “the ‘baseline’ and ‘severely adverse’ scenarios largely cover the full range of expected and stressful conditions.” As such, the FHFA believes removing the “adverse” scenario will reduce the supervisory burden for FHL Banks. The FHFA further proposes that the Enterprises (Fannie Mae and Freddie Mac)—who remain subject to stress testing under the NPRM—be required to conduct stress tests on an annual basis, as Section 401 changed the required frequency from “annual” to “periodic,” but did not define the term “periodic” in the Act.
Comments on the NPRM are due January 13, 2020.
On November 26, the FHFA announced that it will raise the maximum conforming loan limits for mortgages purchased in 2020 by Fannie Mae and Freddie Mac from $484,350 to $510,400. In high-cost areas, such as Los Angeles, New York, San Francisco, and Washington, D.C., the maximum loan limit will be $765,600. For a county-specific list of the maximum loan limits in the U.S., click here.
On November 4, the FHFA issued a Request for Input (RFI) on Fannie Mae’s and Freddie Mac’s (the GSEs) pooling practices as they relate to the formation of the “To-Be-Announced”-eligible Uniform Mortgage-Backed Securities (UMBS). The RFI follows the June launch of the UMBS—a common security through which GSE mortgage-backed securities will be issued (previously covered by InfoBytes here)—and seeks input to assist FHFA in determining whether further action or alignment is required to ensure reasonably consistent security cash flows and continued fungibility of the GSEs’ UMBS so they “remain a source of stable, affordable liquidity for the U.S. housing finance system.” In addition, FHFA requests input on whether having more aligned pooling practices could facilitate the issuance of UMBS by market participants beyond the GSEs, and seeks comments on other policies and practices that might affect UMBS compatibility. Comments are due December 19.
On October 16, 19 Democratic Senators wrote to FHFA Director, Mark Calabria, requesting the agency to reconsider its decision to remove the language preference question and housing counseling agency information from the redesigned Uniform Residential Loan Application (URLA), which was originally set to take effect on February 1, 2020. As previously covered by InfoBytes, in August, Fannie Mae and Freddie Mac (GSEs) announced, at the direction of the FHFA, that mandatory use of the redesigned URLA will no longer begin on February 1, 2020. Additionally, the GSE’s noted that FHFA is requiring the removal of the language preference question. The question, along with the home ownership education and housing counseling question, will now be a part of a separate voluntary consumer information form. In response, the Senators argue that the decision to remove the language preference question is arbitrary and could leave “loan servicers without basic communication information about their borrowers” as a voluntary information form may not be used or may not travel with the loan documents. The Senators assert that the language information is “vital” to policymakers and the planned revisions to the URLA were “an important step toward increasing language access throughout the mortgage market.” The letter requests that Director Calabria respond to their concerns by November 18.
On September 18, the FHFA issued Advisory Bulletin AB 2019-04, which provides guidance to Fannie Mae and Freddie Mac (GSEs) on fraud reporting requirements pursuant to 12 C.F.R. Part 1233 (FHFA Regulation). The Bulletin states that the GSEs are required to notify designees of the Director of the FHFA through the secure methods established by the FHFA within one calendar day from when the GSE discovers fraud or possible fraud that may have a “significant impact” on the GSE. The Bulletin defines “significant impact” as an event that “may create substantial financial or operational risk for the Enterprise, whether from a single event/incident or because it is systemic.” Moreover, the GSEs are required to submit a monthly fraud status report to the FHFA containing instances where they have (i) filed a suspicious activity report (SAR) with the Treasury Department or the Financial Crimes Enforcement Network; or (ii) discovered that the Enterprise purchased or sold a fraudulent loan or financial instrument, or suspects a possible fraud related to the purchase or sale of any loan or financial instrument, and the Enterprise has not filed a SAR. Additionally the GSEs are required to submit quarterly reports summarizing information concerning the GSE fraud risk management environments. The Bulletin is effective January 1, 2020.
On September 10, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Housing Finance Reform: Next Steps” to discuss the federal government’s plans for reforming and strengthening the mortgage market. As previously covered by InfoBytes, the Department of Treasury and HUD released complementary proposals on September 5 discussing plans to end the conservatorships of Fannie Mae and Freddie Mac (GSEs) and reform the housing finance system. The Committee heard from Treasury Secretary Steven Mnuchin, HUD Secretary Ben Carson, and FHFA Director Mark Calabria. Committee Chairman Mike Crapo (R-ID) opened the hearing by stating a preference for comprehensive legislation to end the conservatorship of the GSEs but stressed that the agencies should “begin moving forward with incremental steps that move the system in the right direction.” Democratic members of the Committee stated their oppositions to the proposals, with Senator Sherrod Brown (D-Ohio) arguing that the Treasury’s plan “will make mortgages more expensive and harder to get,” make it more difficult for small lenders to compete, and roll back tools designed to help underserved families.
Treasury Secretary Mnuchin defended his agency’s proposal, and noted that while he prefers that Congress take the lead on ending the GSE conservatorships and plans to work with Congress on a bipartisan basis to enact comprehensive housing finance reform legislation, he also sees the need to concurrently develop administrative actions to protect taxpayers and foster competition. Among other things, Mnuchin discussed steps to remove the net worth sweep, which requires the GSEs to send nearly all their profits to the Treasury, arguing that ending the sweep will allow the GSEs to retain their earnings and build up capital.
FHFA Director Calabria emphasized that plans released by the Treasury and HUD are “broadly consistent” with his top priorities, which include developing capital standards for the GSEs to match their risk profiles that would “begin the process to end the [GSE] conservatorships,” as well as reforms to reduce the risks in the GSEs’ portfolios. All three witnesses agreed with Crapo’s assessment that the GSEs in their current form “are systemically important companies [and] that they continue to be too big to fail.” Calabria further emphasized that while he believes only Congress can reach a comprehensive solution, he believes the agencies can also make significant steps.
HUD Secretary Carson commented that a central principle of HUD’s housing finance plan is to improve coordination between HUD and FHFA to allow qualified borrowers access to responsible and affordable credit options, with HUD, the Department of Veterans Affairs, and the Department of Agriculture acting as the sole sources of low-down-payment financing for borrowers outside of the conventional mortgage market. Carson further noted that reform will “reduce the Federal Government’s outsized role in housing finance.”
En banc 5th Circuit declares FHFA structure unconstitutional, allows net worth sweep claims to proceed
On September 6, the U.S. Court of Appeals for the 5th Circuit reaffirmed, in an en banc rehearing, that the Federal Housing Finance Agency (FHFA) structure violates constitutional separation of powers requirements and allowed “net worth sweep” claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders to proceed. As previously covered by InfoBytes, GSE shareholders brought an action against the U.S. Department of Treasury and FHFA arguing that (i) the FHFA acted outside its statutory authority when it adopted a dividend agreement that requires the GSEs to pay quarterly dividends equal to their entire net worth to the Treasury Department (known as “net worth sweep”); and (ii) the structure of the FHFA is unconstitutional because it violates separation of powers principles. The district court dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the separation of powers claim. On appeal, the 5th Circuit agreed with the lower court on the first claim, concluding that the net worth sweep payments were acceptable under the FHFA’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008 (HERA), which places restraints on judicial review. However, the appellate court reversed the lower court’s decision on the separation of powers claim, concluding that Congress went too far in insulating the FHFA’s single director from removal by the president for anything other than cause, ruling that the agency’s structure violates Article II of the Constitution.
After an en banc rehearing, the appellate court issued two separate majority opinions. Both opinions concluded that (i) the GSE shareholders plausibly alleged that the net worth sweep exceed the powers of the FHFA when acting as a conservator under HERA; and (ii) the FHFA’s structure—which provides the director with “for cause” removal protection—violates the Constitution’s separation of powers requirements. However, the opinions differed on the appropriate remedy, with nine judges concluding that the remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the “for cause” restriction is declared removed. We go no further.”
Various dissenting opinions were issued, including one signed by seven judges concluding that the FHFA acted within its statutory powers under HERA when it adopted the net worth sweep, stating “the FHFA’s ‘powers are many and mostly discretionary.’” In another dissenting opinion, four judges argued that the majority opinions wrongly concluded that the FHFA’s structure is unconstitutional, arguing that there are “only reasons for caution and skepticism, and none for action” in the constitutional claim. “Neither the Constitution’s text, nor the Supreme Court’s constructions thereof, nor the adversary process in this litigation has given us much ground on which to declare the FHFA’s design unconstitutional,” the judges argued.
Given the similarities of the FHFA’s single director structure with that of the CFPB, this case warrants close attention as it has the potential to create a vehicle for consideration by the Supreme Court of the constitutionality of single director agencies.
On September 5, the U.S. Treasury Department and HUD released complementary proposals in response to a presidential memorandum issued last March (previously covered by InfoBytes here) directing the departments to develop plans to end the conservatorships of Fannie Mae and Freddie Mac (GSEs) and reform the housing finance system.
According to a press release released by the Treasury Department, the Treasury Housing Reform Plan outlines several broad goals and legislative and administrative reforms intended to protect taxpayers and assist homebuyers. Included in the Reform Plan are measures to privatize the GSEs, with the Treasury Department emphasizing that FHFA “should begin the process of ending” the conservatorships. “Central to this objective will be ensuring that the GSEs and their successors are appropriately capitalized to remain viable as going concerns after a severe economic downturn and also to ensure that shareholders and unsecured creditors, rather than taxpayers, bear losses.” Other notable agency and limited congressional action highlights include:
- Congress should authorize an explicit, paid-for guarantee by Ginnie Mae on qualified mortgage-backed securities for single-family and multifamily loans.
- Private sector participation should increase in the mortgage market to compete with the GSEs, and ensure a level playing field for lenders of all sizes.
- Congress should replace GSEs’ statutory affordable housing goals with a “more efficient, transparent, and accountable mechanism” to support underserved borrowers and expand HUD’s affordable housing activities.
- GSEs under FHFA’s capital rule should be required to maintain “capital sufficient to remain viable as a going concern after a severe economic downturn,” the cap on the GSEs’ investments in mortgage-related assets should be further reduced, and GSEs’ retained mortgage portfolios should be restricted to “solely supporting [the] business of securitizing mortgage-backed securities.”
- Mortgages eligible for GSE guarantees should have to comply with strict underwriting requirements.
- The Qualified Mortgage rule should be simplified and the so-called QM patch that allows GSEs to avoid certain regulations should be eliminated (see previous InfoBytes coverage on the CFPB’s advance notice of proposed rulemaking to allow the QM patch to expire here).
- Access to 30-year fix-rate mortgages for qualified homebuyers should be preserved.
HUD’s Housing Finance Reform Plan, released in conjunction with Treasury’s proposal, addresses the role of FHA and Ginnie Mae, and outlines steps to reduce risk in the FHA portfolio. According to HUD’s press release, the proposal focuses on four objectives: refocusing FHA to its core mission, protecting American taxpayers, providing tools to FHA and Ginnie Mae to appropriately manage risk, and providing liquidity to the housing finance system. Among other objectives, HUD’s plan (i) stresses that FHA, which serves low- and moderate-income borrowers, “must ensure that borrowers are creditworthy and that they have access to loans that meet their financial needs without creating undue risk”; (ii) recommends that FHA and FHFA establish a “formalized collaborative approach” to streamline government-supported mortgage programs to ensure they are “not competing and do not crowd private capital out of the marketplace;” (iii) encourages continued efforts to reduce loan churning; (iv) encourages a continued partnership between FHA and DOJ “to provide more clarity on how the agencies will consult on the appropriate use of the [False Claims Act]” to provide regulatory certainty to lenders; (v) encourages FHA to develop servicing standards for home equity conversion mortgage programs to reduce operational and financial burdens; and (vi) recommends that FHA develop a mortgage origination risk tool that integrates an automated underwriting system.
On August 13, the FHFA announced its final rule on the validation and approval of third-party credit score model(s) that can be used by Fannie Mae and Freddie Mac (the GSEs), implementing Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule defines a four-phase process for a GSE to validate and approve credit score models: (i) solicitation of applications from credit score model developers; (ii) submission and review of applications; (iii) credit score assessment; and (iv) business assessment, which, among other things, evaluates the impact of using the credit score model on industry operations and mortgage market liquidity. Additionally, the final rule lays out timing and notices for GSE decisions under the process. After a GSE approves or disapproves of an application, within 45 days the FHFA must approve or disapprove of the GSE’s proposed determination. If any applications are approved, the credit score solicitation will be made publicly available. The rule will take effect 60 days after it is published in the Federal Register.
- Jonice Gray Tucker to discuss "Trends in regulatory enforcement" at the ABA Banking Law Committee Meeting
- Jonice Gray Tucker to discuss "Fair access to credit in today’s innovative environment" at the ABA Banking Law Committee Meeting
- Andrew W. Schilling to moderate "Expectations of in-house counsel from their law firm partners" at the ACI's 7th Annual Advanced Forum on False Claims and Qui Tam
- Buckley Webcast: Tips for navigating changes to the FHA recertification process
- Daniel P. Stipano to discuss "A 20/20 view on 2020’s legislative and regulatory outlook" at the ACAMS Anti-Financial Crime and Public Policy Conference
- Kathryn L. Ryan to discuss "Industry open forum session on NMLS usage" at the NMLS Annual Conference & Training
- Kathryn L. Ryan to discuss "Regulating innovative consumer lending products" at the NMLS Annual Conference & Training
- Daniel P. Stipano to moderate "Washington update" at the 17th Puerto Rican Symposium of Anti Money Laundering 2020 conference
- APPROVED Checkpoint Webcast: CFL overview
- Daniel P. Stipano to discuss "Pathway of the SARs: Tracking trajectories of suspicious activity reports from alerts to prosecution" at the ACAMS moneylaundering.com 25th Annual International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Which bud’s for you? A deep-dive into evolving marijuana laws" at the ACAMS moneylaundering.com 25th Annual International AML & Financial Crime Conference