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Ginnie Mae seeks feedback on plan to stress test non-bank issuers
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.
OCC outlines fraud risk management principles
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.
Ginnie Mae VA loan eligibility requirements amended
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.
Agencies complete living will evaluations, extend next filing deadline
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.
Special Alert: CFPB issues Advance Notice of Proposed Rulemaking to end GSE patch
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.
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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.CFPB seeks comments on “QM patch” ahead of expiration
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.
OCC updates risk governance and audit booklets
On July 25, the OCC announced the issuance of a fully revised “Corporate and Risk Governance” booklet for the Comptroller’s Handbook, as well as limited updates to the “Internal and External Audits” booklet for examiners completing core assessments affected by audit functions. Among other things, the revised “Corporate and Risk Governance” booklet is intended to provide examiners with a summary of corporate and risk governance, related risks, the board’s role and responsibilities in corporate and risk governance, strategic planning, and examination procedures. The revised booklet identifies the following as the primary risk categories associated with corporate and risk governance: (i) strategic; (ii) reputation; (iii) compliance; and (iv) operational. Updates to both booklets incorporate references to relevant OCC issuances and auditing standards published since the booklets were last issued, reflect the integration of federal savings associations into certain regulations, and make clarifying edits regarding supervisory guidance, sound risk management practices, legal language, and the roles of the bank’s board and management.
HUD suspends downpayment assistance mortgagee letter following injunction
On July 23, HUD issued Mortgagee Letter 2019-10, announcing the official suspension of the effective date of the agency’s April guidance (Mortgagee Letter 2019-06), which changed the downpayment assistance (DPA) guidelines. The suspension comes just a week after the U.S. District Court for the District of Utah granted an American Indian band and its mortgage company (collectively, “plaintiffs”) a preliminary injunction halting the enforcement of the April changes, and ordering that HUD “shall not deny insurance nor cause insurance to be denied based on non-compliance with Mortgagee Letter 19-06 and shall provide public notice that the effective date of Mortgagee Letter 19-06 is suspended until after a final determination on the merits of the case.” Buckley is co-counsel in the pending litigation.
The suspended guidance, Mortgagee Letter 2019-06 (Mortgagee Letter), issued on April 18, imposed new documentation requirements purportedly aimed at confirming that Governmental Entities operate their DPA programs within the scope of their governmental capacity when providing any portion of a borrower’s Minimum Required Investment (MRI). The letter updated Handbook 4000.1 to specify that when any portion of a borrower’s MRI comes from a Governmental Entity, a mortgagee must obtain the following documentation: (i) proof that the Governmental Entity has authority to operate in the jurisdiction where the property is located; (ii) a legal opinion from the Governmental Entity’s attorneys, signed and dated within two years of closing, establishing the Governmental Entity’s authority to operate in the jurisdiction where the property is located, which in the case of a federally recognized Indian Tribe means the entity is operating on tribal land in which the property is located, or offering DPA to enrolled members of the tribe; and (iii) evidence that the Governmental Entity is providing DPA and is doing so in its governmental capacity. The Mortgagee Letter went on to require documentation indicating that the provision of DPA is not contingent upon the future transfer of the insured mortgage to a specific entity.
The plaintiffs filed suit against HUD on April 22 arguing that the Mortgagee Letter was unlawful and discriminatory, and unfairly targeted American Indian tribes by “requiring them, for the first time, to confine their DPA programs to the geographic boundaries of their reservations and to enrolled members of the tribes, literally driving them out of the national marketplace and back onto the reservation.” Additionally, the complaint argued that HUD failed to execute these changes in accordance with the protections of the Administrative Procedures Act (APA) by providing a notice and comment period—purporting the Mortgagee Letter to be an “informal ‘guidance’ document that merely ‘clarifies’ existing law.” The decision to grant the preliminary injunction was announced by the court at the conclusion of a July 16 hearing. In the written order released the following week, the court concluded that the plaintiffs were likely to succeed on claims that the agency violated the APA because the Mortgagee Letter was actually a legislative rule with the force and effect of the law, not merely an interpretive rule. Moreover, the court rejected HUD’s argument that the Mortgagee Letter merely reiterates jurisdictional limitations that were already present, and stated the plaintiffs sufficiently demonstrated irreparable harm caused by the new jurisdictional limitations in the Mortgagee Letter.
OCC releases asset dissipation underwriting guidance
On July 23, the OCC issued Bulletin 2019-36 reminding banks to follow safety and soundness standards and guidelines when using asset dissipation underwriting (ADU)—also known as “asset depletion underwriting or asset amortization underwriting”—to originate mortgage loans. Specifically, the OCC states banks should develop and implement policies and processes for ADU in a manner consistent with existing regulatory real estate and mortgage lending standards and guidelines. Banks should also align ADU activities with their overall business plans and strategies, including “working with consumers who have a capacity to repay a mortgage loan even though they do not meet traditional income-based underwriting repayment standards.” The OCC additionally expects bank management to “develop and maintain risk governance processes that are commensurate with the credit risk of ADU, particularly if the offering constitutes a deviation from the bank’s existing mortgage lending business activities.” With regard to Fannie Mae and Freddie Mac loans, the OCC states that lenders may use ADU to underwrite mortgage loans based on certain assets, including employment-related retirement assets, for applicants who are near retirement.
Federal banking agencies and FinCEN issue statement on risk-focused BSA/AML examinations
On July 22, the Federal Reserve Board, FDIC, NCUA, and the OCC along with the Financial Crimes Enforcement Network (FinCEN), released a joint statement to improve transparency of their risk-focused approach to Bank Secrecy Act/anti-money laundering (BSA/AML) supervision. The statement outlines common practices for assessing a bank’s risk profile, including (i) leveraging available information, including internal BSA/AML risk assessments, independent audits, and results from previous examinations; (ii) contacting banks between examinations or before finalizing the scope of an examination; and (iii) considering the bank’s ability to identify, measure, monitor, and control risks. Examiners will use the information from the risk assessments to scope and plan the examination, as well as to evaluate the adequacy of the bank’s BSA/AML compliance program. The statement notes that the extent of examination activities needed to evaluate a bank’s BSA/AML compliance program, “generally depends on a bank’s risk profile and the quality of its risk management processes.”