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Financial Services Law Insights and Observations

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  • HUD proposes burden-shifting framework for Disparate Impact Regulation

    Agency Rule-Making & Guidance

    On July 31, national media outlets released HUD’s proposed rule amending the agency’s interpretation of the Fair Housing Act’s disparate impact standard (also known as the “2013 Disparate Impact Regulation”) to bring the rule “into closer alignment with the analysis and guidance” provided in the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a Buckley Special Alert) and to codify HUD’s position that its rule is not intended to infringe on the states’ regulation of insurance.

    The proposal codifies the burden shifting framework outlined in Inclusive Communities, adding five elements that a plaintiff must plead to support allegations that a specific, identifiable, policy or practice has a discriminatory effect. The five elements would require a plaintiff to adequately allege (i) the challenged policy or practice is “arbitrary, artificial, and unnecessary” to achieve a valid interest or legitimate objective; (ii) a “robust causal link” between the challenged policy or practice and a disparate impact on members of a protected class; (iii) the challenged policy or practice has an adverse effect on members of a protected class; (iv) the disparity caused by the policy or practice is significant (the disparity must be material); and (v) the complaining party’s alleged injury is directly caused by the challenged policy or practice. HUD emphasizes that plaintiffs alleging a single event, “will likely not meet the standard” of the proposal unless “the plaintiff can establish that the one-time decision is in fact a policy or practice.”

    The proposed rule also provides methods for defendants to rebut a disparate impact claim, including (i) showing its discretion is materially limited by a third party, such as through a controlling law or binding court order; and (ii) showing the algorithmic model relied on does not use inputs that are substitutes for protected characteristics and is predictive of risk or other valid objective, was created or maintained by a recognized third party, or that a neutral third party has analyzed the model and determined it is a demonstrably and statistically sound algorithm.

    The proposal, which has yet to be released by HUD, is reportedly under review by Congress and is set to be published in the Federal Register afterward. Comments will be due 60 days after publication.

    Agency Rule-Making & Guidance HUD Fair Housing Act Disparate Impact Fair Lending

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  • CFPB reopens comment period for certain aspects of HMDA rulemaking

    Agency Rule-Making & Guidance

    On July 31, the CFPB announced that it is reopening the comment period for certain aspects of its May Notice of Proposed Rulemaking (covered by InfoBytes here), which would permanently raise coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under the HMDA rules. The comment period originally closed on June 12, but to allow for the submission of comments that reflect the national loan level dataset for 2018 (which will be released “later this summer”), the Bureau is reopening the comment period for certain aspects of the May proposal. Specifically, the Bureau is reopening comments on (i) the proposed changes to the permanent coverage threshold for closed-end mortgage loans, which would permanently raise the reporting threshold from 25 loans in each of the two preceding calendar years to either 50 or 100 closed-end loans in each of the preceding two calendar years; (ii) the proposed changes to the permanent coverage threshold for open-end lines of credit, which would extend the temporary threshold of 500 loans for calendar years 2018 and 2019 to January 1, 2022, and then permanently lower the threshold to 200 open-end lines of credit after that date; and (iii) the appropriate effective date for any change to the closed-end coverage threshold. Comments are due by October 15.

    Agency Rule-Making & Guidance CFPB HMDA Mortgages

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  • CFPB adjusts annual dollar amount thresholds under TILA regulations

    Agency Rule-Making & Guidance

    On August 1, the CFPB published in the Federal Register the final rule amending Regulation Z, which implements the Truth in Lending Act (TILA), including as amended by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s ability-to-repay and qualified mortgage (ATR/QM) provisions. The CFPB is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index in effect on June 1, 2019. The following thresholds will be effective on January 1, 2020:

    • For open-end consumer credit plans under TILA, the threshold for disclosing an interest charge will remain unchanged at $1.00;
    • For open-end consumer credit plans under the CARD Act amendments, the adjusted dollar amount for the safe harbor for a first violation penalty fee will increase from $28 to $29, and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will increase from $39 to $40;
    • For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $21,980, and the adjusted points and fees dollar trigger for high-cost mortgages will be $1,099; and
    • The maximum thresholds for total points and fees for qualified mortgages under the ATR/QM rule will be: (i) 3 percent of the total loan amount for loans greater than or equal to $109,898; (ii) $3,297 for loan amounts greater than or equal to $65,939 but less than $109,898; (iii) 5 percent of the total loan amount for loans greater than or equal to $21,980 but less than $65,939; (iv) $1,099 for loan amounts greater than or equal to $13,737 but less than $21,980; and (v) 8 percent of the total loan amount for loan amounts less than $13,737.

    Agency Rule-Making & Guidance CFPB TILA CARD Act Credit Cards HOEPA Qualified Mortgage Dodd-Frank

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  • Federal Reserve seeks comments on capital assessments and stress testing reporting

    Agency Rule-Making & Guidance

    On July 31, the Federal Reserve Board published two notices and requests for comments in the Federal Register seeking input on information collections that would affect reporting requirements for bank holding companies with total consolidated assets of $100 billion or more as well as U.S. intermediate holding companies with $50 billion or more in total consolidated assets that are subsidiaries of foreign banking organizations. The Fed uses the information in the Capital Assessments and Stress Testing Reports (FR Y-14A/Q/M) to help ensure that these firms implement “strong, firm-wide risk measurement and management processes [that support] their internal assessments of capital adequacy and that their capital resources are sufficient given their business focus, activities, and resulting risk exposures.” These reports are also used to support the Fed’s annual Comprehensive Capital Analysis and Review exercise.

    The first notice announces several proposed schedule changes, as well as the Fed’s intent to modify and clarify instructions for existing data items in the FR Y-14A/Q/M reports. These changes, the Fed notes, are designed to reduce reporting burdens, clarify reporting requirements, address inconsistencies between FR Y-14 reports and other regulatory reports, and account for revised rules and accounting principles. The Fed proposes to implement these revisions as of September 30.

    The second notice addresses, among other things, the revised accounting for credit losses under the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-13 and will implement the current expected credit loss accounting methodology across all of the FR Y-14 reports. According to the Fed, these revisions will “address the broadening of the scope of financial assets for which an allowance for credit losses assessment must be established and maintained, along with the elimination of the existing model for [purchased credit-impaired] assets.”

    Comments on both notices must be received by September 30.

    Agency Rule-Making & Guidance Federal Reserve Stress Test Of Interest to Non-US Persons

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  • Ginnie Mae seeks feedback on plan to stress test non-bank issuers

    Agency Rule-Making & Guidance

    On July 23, Ginnie Mae published a Request for Input (RFI) seeking feedback on its plan to monitor and support the sustainability of the Ginnie Mae mortgage-backed securities (MBS) market, by developing a stress test framework for its non-bank issuer base. The RFI notes that, after reviewing two approaches to the stress test framework, Ginnie Mae elected to adopt a framework that forecasts an issuer’s financial performance over the next eight quarters under a base and adverse scenario. The framework would provide the following outputs: (i) a balance sheet, income statement and cashflow statement; (ii) a “Projected Issuer Risk Grade” (Ginnie Mae’s proprietary risk rating method); (iii) projected issuer compliance with Ginnie Mae and Government Sponsored Enterprise net worth, liquidity and capitalization requirements; (iv) projected compliance with common warehouse covenants; and (v) projected risk of insolvency. The RFI provides significant details on the framework, including details regarding the various structural components that will form its basis. The RFI lists four specific topics that responders may provide input on and requests that responders expand on the topics as appropriate to address related questions or implications. Comments must be submitted by August 31.

    Agency Rule-Making & Guidance Ginnie Mae MBS Stress Test RFI

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  • OCC outlines fraud risk management principles

    Agency Rule-Making & Guidance

    On July 24, the OCC issued Bulletin 2019-37 to provide fraud risk management principles for all OCC-supervised institutions. The Bulletin supplements previously issued notices addressing corporate and risk governance, and focuses on fraud risk, operational risk, and the need for strong governance and sound risk management principles. According to the OCC, strong governance is vital to managing an institution’s exposure to fraud and must include a strong corporate culture that discourages imprudent risk-taking. However, the OCC noted that fraud risk management should be commensurate with the bank’s risk profile. The Bulletin highlights several preventative and detective controls, including (i) developing anti-fraud policies and procedures, such as ethics policies, codes of conduct, and identity theft programs; (ii) creating anti-fraud awareness campaigns; (iii) establishing fraud risk management training programs for employees and contractors and educating customers on preventative measures; (iv) implementing a system of controls intended to prevent employees and third parties from conducting fraudulent transactions, such as opening or closing of bank accounts; (v) conducting background investigations for new employees and periodic checks for existing employees and third parties; (vi) providing sound training and information security programs; and (vii) establishing processes for customer identification, customer due diligence, and beneficial ownership identification and verification. Additionally, the OCC stated that senior management should understand the institution’s exposure to fraud risk and associated losses.

    Agency Rule-Making & Guidance OCC Risk Management Fraud

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  • Ginnie Mae VA loan eligibility requirements amended

    Agency Rule-Making & Guidance

    On July 25, President Trump signed the “Protecting Affordable Mortgages for Veterans Act of 2019,” Public Law No. 116-33, which amends the National Housing Act to revise Ginnie Mae loan seasoning requirements for Department of Veterans Affairs (VA) housing loans. Section 306(g)(1) now requires that, in order to be eligible for Ginnie Mae securities, the date of the VA refinance loan must be the later of (i) “the date on which the borrower has made at least six consecutive monthly payments on the loan being refinanced; and” (ii) “the date that is 210 days after the first payment due date of the loan being refinanced.” The amendment is effective immediately.

    Agency Rule-Making & Guidance Federal Legislation Ginnie Mae Department of Veterans Affairs Mortgages Refinance

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  • Agencies complete living will evaluations, extend next filing deadline

    Federal Issues

    On July 26, the FDIC and the Federal Reserve Board announced several resolution plan actions, including completing their evaluations of the 2018 resolution plans for 82 foreign banks and 15 domestic banks. Additionally, the agencies extended the deadline for the next resolution plans (known as living wills) from those firms until July 1, 2021. The agencies note that the deadline extension is to help mitigate the uncertainty around the filing requirements during the pendency of the agencies’ April proposal, which considers three changes: (i) creating tiered planning requirements for living wills based on an institution’s size, complexity, and other factors; (ii) revising the frequency and required content of resolution plan submissions, including eliminating living will submission requirements for certain smaller and less complex institutions; and (iii) improving communication between the FDIC and banks on resolution planning. (Previously covered by InfoBytes here.)

    The agencies’ evaluations did not identify shortcomings or deficiencies in the 2018 resolution plans of the 82 foreign banks and are requesting additional information in the next resolution plans from seven firms.

    Federal Issues Agency Rule-Making & Guidance FDIC Federal Reserve Living Wills Of Interest to Non-US Persons

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  • Special Alert: CFPB issues Advance Notice of Proposed Rulemaking to end GSE patch

    Agency Rule-Making & Guidance

    On July 25, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPR) that is intended as a first step in an orderly expiration of the so-called GSE patch, which confers Qualified Mortgage status for loans purchased or guaranteed by Fannie Mae and Freddie Mac while those entities operate under FHFA conservatorship. The patch expires in January 2021, or when Fannie and Freddie exit their conservatorships, whichever comes first. The ANPR solicits feedback on amending Regulation Z and the Ability to Repay/Qualified Mortgage Rule (ATR/QM Rule) to minimize disruption from the patch’s expiration. Comments are due 45 days after the ANPR’s publication in the Federal Register, which has not occurred as of the publication of this Special Alert.

    The Bureau has previously solicited comments on the ATR/QM Rule, including the GSE Patch — first through a request for information relating to its adopted regulations in March 2018, and then in its ATR/QM Rule Assessment Report in January 2019. 

    * * *

    Click here to read the full special alert.

    If you have questions about the GSE Patch and potential changes to the Ability to Repay/Qualified Mortgage Rule, please visit our Consumer Financial Protection Bureau practice page or contact a Buckley attorney with whom you have worked in the past.

    Agency Rule-Making & Guidance CFPB Special Alerts Ability To Repay Qualified Mortgage Regulation Z Fannie Mae Freddie Mac

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  • CFPB seeks comments on “QM patch” ahead of expiration

    Agency Rule-Making & Guidance

    On July 25, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPR) seeking feedback on potential revisions to the Ability to Repay/Qualified Mortgage (ATR/QM) Rule related to the expiration in 2021 of the “GSE patch,” a temporary provision granting Qualified Mortgage status to mortgages that are eligible for purchase or guarantee by Fannie Mae and Freddie Mac, including loans with higher debt-to-income (DTI) ratios than are allowed under the general QM requirements. The GSE patch (also referred to as the “QM patch”) is set to expire no later than January 10, 2021, or when Fannie and Freddie exit their government conservatorship, whichever comes first, with the Bureau stating that it currently plans to allow the GSE patch to expire as scheduled or “after a short extension” to facilitate a smooth transition. As previously covered by InfoBytes, the Bureau issued an assessment report on the ATR/QM Rule, in which it reported, among other things, that the GSEs have persistently maintained a high share of the market.

    The ANPR requests comments on several potential amendments, including (i) whether the “qualified mortgage” definition should be revised in light of the upcoming expiration (currently, loans under the GSE patch generally qualify for safe harbor from legal liability under the ATR/QM Rule even if their DTI ratio exceeds 43 percent); (ii) whether the DTI ratio limit should remain at 43 percent or be increased or decreased, along with whether loans above the DTI ratio should be granted QM status if they have “certain compensating factors,” (iii) whether the QM definition should take into account possible alternatives to the DTI ratio for assessing a borrower’s ability-to-repay; and (iv) whether Appendix Q—which sets standards for calculating and verifying debt and income to determine the borrower’s DTI ratio—should be replaced, changed, or supplemented. Comments on the ANPR are due 45 days after publication in the Federal Register.

    A more detailed Buckley Special Alert to follow.

    Agency Rule-Making & Guidance CFPB Qualified Mortgage Ability To Repay Regulation Z GSE Fannie Mae Freddie Mac

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