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On November 30, the Bureau issued a no action letter (NAL) to a Fintech covering its automated underwriting and pricing model that facilitates the origination of unsecured, closed-end loans made by third party lenders. The NAL states that the Bureau will not bring supervisory or enforcement actions against the lender concerning alleged discrimination on a prohibited basis from its use of the automated model for unsecured, closed-end loans under (i) Section 701(a) of ECOA and Sections 1002.4(a) and (b) of Regulation B; or (ii) its authority to prevent unfair, deceptive, or abusive acts or practices. According to the lender’s application, after applicants meet initial eligibly requirements, the automated model, which uses artificial intelligence techniques and alternative data, is designed “to assess the individual risk profile of [eligible] applicants…and is responsible for assigning the maximum amount an applicant can borrow and the appropriate interest rate based on that risk assessment.” If the model’s assigned interest rate “falls within the parameters of a lending partner’s loan program,” the applicant will be approved. The NAL expires after 36 months.
On October 1, 2020, the U.S. Department of Housing and Urban Development issued Mortgagee Letter 20-33, which extends interim procedures regarding site access issues related to Section 232 mortgage insurance applications during the Covid-19 pandemic (previously covered here and here). The guidance provides temporary modifications pertaining to third-party site inspections for Section 232 FHA-insured healthcare facilities effective through December 31, 2020. The letter also provides guidance on other aspects relating to Section 232 properties, including regarding lender underwriter site visits, appraisals, and inspections on new construction, among other things.
DOJ: Lender allegedly violated FIRREA, False Claims Act by forging certifications and using unqualified underwriters
On September 25, the DOJ filed a complaint against a lender alleging that it forged certifications and used unqualified underwriters to approve FHA-insured Home Equity Conversion Mortgages (HECMs) to increase its loan production in violation of the Financial Institutions Reform, Recovery and Enforcement Act and the False Claims Act. In addition, the DOJ claims that, because the lender allegedly did not employ enough direct endorsement underwriters to review each HECM loan endorsed for FHA mortgage insurance, it bypassed FHA’s underwriter requirements and (i) allowed “unqualified temporary contractors to underwrite, approve, and sign certifications for HECM loans”; (ii) “[f]orged signatures of qualified underwriters on certifications for other HECM loans” to create the appearance that they had been reviewed and approved by a qualified underwriter; (iii) pre-signed blank certifications representing that appraisals had been reviewed and approved; and (iv) used these forms and certifications to insure HECM loans that did not meet the underwriting requirements. The DOJ alleges that, accordingly, the FHA insured overvalued and underwater properties, which increased borrower expenses and raised the chances of default. The DOJ also asserts that the lender’s purported false claims for FHA mortgage insurance payments were material, as it led to the government making payments it would otherwise not have been required to make.
On July 28, the CFPB updated its HMDA FAQs to include new guidance covering the reporting of certain data points related to the credit decision. Specifically, the FAQs state that credit underwriting data such as credit score, debt-to-income ratio, and combined loan-to-value ratio must be reported if it was “relied on in making the credit decision—even if the data was not the dispositive factor.” Similarly, the FAQs emphasize that income and property value should also be reported if they were relied on in making the credit decision.
On July 29, Freddie Mac updated its Covid-19 frequently asked questions regarding mortgage origination, underwriting, and loan eligibility for sellers. The update addresses questions regarding, among other things, (i) obtaining 2019 tax returns; (ii) borrower creditworthiness; (iii) construction conversion and renovation mortgages; and (iv) appraisal reports. Previous InfoBytes coverage on FAQ updates is available here.
On July 16, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included among the actions is a June 23 consent order, which resolves OCC claims that a California-based bank violated a 2016 consent order concerning Bank Secrecy Act/anti-money laundering compliance program deficiencies. According to the OCC, the bank failed to timely comply with the 2016 consent order and is required to pay a $100,000 civil money penalty. The list also includes a July 25 civil money penalty order against a New York-based bank, which requires the payment of $43,000 for an alleged pattern or practice of violations of the Flood Disaster Protection Act and its implementing regulations.
Additionally, an Iowa-based bank and the OCC reached a formal agreement on June 16 for alleged unsafe or unsound practices related to, among other things, credit underwriting, credit administration, problem loan management, and real estate valuation practices. Among other conditions, the agreement requires the bank to (i) appoint a compliance committee to ensure adherence to the agreement’s provisions; (ii) establish a three-year strategic plan outlining goals and objectives related to the bank’s risk profile and liability structure; (iii) submit a commercial and retail credit underwriting and administration program to ensure the bank “analyzes credit and collateral information sufficient to identify, monitor, and report the [b]ank’s credit risk, properly account for loans, and assign accurate risk ratings in a timely manner”; (iv) implement programs providing for an annual review of loans, loan level stress testing, and problem loan management; (v) implement an exception tracking and reporting system; and (vi) establish an appraisal and evaluation program.
On July 6, the Missouri governor signed SB 599, which, among other things, modifies the state’s mortgage broker licensing requirements. Specifically, the legislation (i) provides that a prelicensing education course that is completed by an applicant will not satisfy the state’s education requirement if the course precedes an application “by a certain period” as established by the Nationwide Multi-State Licensing System and Registry (NMLSR); (ii) requires persons with various financial relationships with a business applicant for a residential mortgage loan broker license to furnish fingerprints to the NMLSR for submission to the FBI and any other authorized government entity for a background check; and (iii) allows the Director of the Division of Finance to waive the requirement that residential mortgage loan brokers maintain at least one full-service office in the state of Missouri for persons “exclusively engaged in the business of loan processing or underwriting,” or providing mortgage loan servicing. The legislation is effective August 28.
On July 7, the CFPB released a blog post discussing the use of artificial intelligence (AI) and machine learning (ML), addressing the regulatory uncertainty that accompanies their use, and encouraging stakeholders to use the Bureau’s innovation programs to address these issues. The blog post notes that “AI has the potential to expand credit access by enabling lenders to evaluate the creditworthiness of some of the millions of consumers who are unscorable using traditional underwriting techniques,” but using AI may create or amplify risks, including unlawful discrimination, lack of transparency, privacy concerns, and inaccurate predictions.
The blog post discusses how using AI/ML models in credit underwriting may raise compliance concerns with ECOA and FCRA provisions that require creditors to issue adverse action notices detailing the main reasons for the denial, particularly because AI/ML decisions can be “based on complex interrelationships.” Recognizing this, the Bureau explains that there is flexibility in the current regulatory framework “that can be compatible with AI algorithms.” As an example, citing to the Official Interpretation to Regulation B, the blog post notes that “a creditor may disclose a reason for a denial even if the relationship of that disclosed factor to predicting creditworthiness may be unclear to the applicant,” which would allow for a creditor to use AI/ML models where the variables and key reasons are known, but the relationship between them is not intuitive. Additionally, neither ECOA nor Regulation B require the use of a specific list of reasons, allowing creditors flexibility when providing reasons that reflect alternative data sources.
In order to address the continued regulatory uncertainty, the blog post encourages stakeholders to use the Trial Disclosure, No-Action Letter, and Compliance Assistance Sandbox programs offered by the Bureau (covered by InfoBytes here) to take advantage of AI/ML’s potential benefits. The blog post mentions three specific areas in which the Bureau is particularly interested in exploring: (i) “the methodologies for determining the principal reasons for an adverse action”; (iii) “the accuracy of explainability methods, particularly as applied to deep learning and other complex ensemble models”; and (iii) the conveyance of principal reasons “in a manner that accurately reflects the factors used in the model and is understandable to consumers.”
On July 7, the CFPB issued the final rule revoking certain underwriting provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule). As previously covered by InfoBytes, the Bureau issued the proposed rule in February 2019 and the final rule implements the proposal without revision. Specifically, the final rule revokes, among other things (i) the provision that makes it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay the loans according to their terms; (ii) the prescribed mandatory underwriting requirements for making the ability-to-repay determination; (iii) the “principal step-down exemption” provision for certain covered short-term loans; and (iv) related definitions, reporting, and recordkeeping requirements. Additional details regarding the final rule can be found in the Bureau’s unofficial redline and executive summary.
While compliance with the payment provisions of the Payday Lending Rule is currently stayed by court order (see previous InfoBytes coverage here), the Bureau states that it “will seek to have them go into effect with a reasonable period for entities to come into compliance.” Additionally, the CFPB ratified the payment provisions of the Payday Lending Rule in light of the U.S. Supreme Court decision in Seila Law (covered by a Special Alert here) and issued a statement on the supervision and enforcement of certain aspects of the payment provisions with respect to certain large loans. According to the statement, the Bureau does not intend to take supervisory or enforcement action with regard to covered loans that exceed the Regulation Z coverage threshold (currently set at $58,300). The statement notes that the Bureau is monitoring and assessing the “effects of the [p]ayment [p]rovisions, including their scope, and [it] may determine whether further action is needed in light of what it learns.”
Moreover, the Bureau released FAQs pertaining to compliance with the payment provisions of the Payday Lending Rule. The FAQs discuss the details of the covered loans and “payment transfers”—defined as a “a debit or withdrawal of funds from a consumer’s account that the lender initiates for the purpose of collecting any amount due or purported to be due in connection with a covered loan”—under the rule.
On July 1, Fannie Mae and Freddie Mac updated its Covid-19 frequently asked questions regarding the underwriting and loan eligibility for sellers. Fannie Mae’s FAQs (previously discussed here) were updated to address questions regarding documentation and calculations related to self-employed income and variable income, including where borrowers experienced gaps of employment due to Covid-19. Freddie Mac’s origination, underwriting, and eligibility FAQs were updated to address questions regarding, among other things, pre-closing verifications, fluctuating employment earnings, self-employed income, determining income eligibility with additional analysis and documentation, documentation requirements, and Covid-19 business assistance, including proceeds from Paycheck Protection Program loans.
- Steven R. vonBerg to discuss "Non-QM market overview & the impact of QM 2.0" at the IMN Non-QM Virtual Conference
- Buckley Webcast: Looking ahead — Tighter scrutiny of deposit and payment practices
- Jeffrey P. Naimon to discuss "What have you bought non-QM post-Covid?" at the IMN Non-QM Virtual Conference
- Garylene D. Javier to moderate "Innovation in an evolving privacy landscape" at the American Bar Association Business Law Section Consumer Financial Services Committee Winter Meeting