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Hsu urges banks to evaluate risk management exposures
On May 17, acting Comptroller of the Currency Michael J. Hsu stressed “[n]ow is the time for banks to take a fresh look at their exposures and take actions to adjust their risk positions—to ‘trim their sails,’ so to speak—ahead of potential uncertainty and volatility.” Hsu said banks should take action now to examine exposure and adjust risk profiles ahead of potential uncertainty and volatility in interest rates and loan performance. “Empowering risk managers and enforcing discipline in risk-taking will enable banks to better navigate the rate environment and will lower the chances of nasty surprises as quantitative tightening occurs,” Hsu stressed. Banks should also re-review their risk identification capabilities and assess the comprehensiveness of their counterparty credit risk management practices, paying close attention to areas where risk limits or other practices have been relaxed for “high-priority, high-growth clients, especially where increasing wallet share has been a goal.” He also cautioned banks against taking on too much risk associated with a single economic concentration, flagging commercial real estate and loans to non-depository financial institutions (including broker-dealers, asset managers, and investment funds) as specific areas where banks may suffer considerable losses when markets turn. Banks should also be careful not to relax underwriting standards, Hsu warned, pointing to some banks that have lowered their retail credit underwriting to obtain new customers and volume growth. “Actions today to defease high-impact tail risks can temper the need to go full ‘risk-off’ tomorrow, ensuring that the banking industry can remain a source of strength to the economy, as it has throughout the pandemic and recent market turbulence,” Hsu stated.
FHFA includes rental history in underwriting
On August 11, FHFA announced that Fannie Mae will consider rental payment history in its risk assessment processes to expand access to credit in a safe and sound manner. According to FHFA, the update to Fannie Mae’s systems will provide future borrowers the benefit of a positive rental payment history to be included in an underwriting decision.
Industry group sues to stop Washington’s emergency rule banning credit scoring in insurance underwriting
On April 8, the American Property Casualty Insurance Association (APCIA) filed a lawsuit in Washington Superior Court in an attempt to stop an emergency rule issued last month by the Washington Insurance Commissioner, which bans the use of credit-based insurance scores in the rating and underwriting of insurance for a three-year period. The rule specifically prohibits insurers from “us[ing] credit history to place insurance coverage with a particular affiliated insurer or insurer within an overall group of affiliated insurance companies” and applies to all new policies effective, and existing policies processed for renewal, on or after June 20, 2021.
According to a press release issued by the Commissioner, the emergency rule is intended to prevent discriminatory pricing in private auto, renters, and homeowners insurance in anticipation of the end of the CARES Act, which will expire 120 days after President Biden declares an end to the national emergency caused by the Covid-19 pandemic. Under the CARES Act, Congress required furnishers of information to credit bureaus to modify credit reporting practices if and when they grant an “accommodation”—that is, an agreement to defer payments, modify a loan, or grant other relief—to borrowers impacted by the Covid-19 pandemic, irrespective of asset type to ensure that borrowers who sought and obtained forbearance or other relief were not credit reported as becoming delinquent or further delinquent as a result of the forbearance or other relief (see Buckley Special Alert), which the Commissioner believes has disrupted the credit reporting process and reportedly caused credit bureaus to collect inaccurate credit histories for some consumers. The Commissioner further contends that because “the predicative ability of current credit scoring models cannot be assumed,” scoring models used by insurers to set rates for policyholders have been degraded and will have a disparate impact on consumers with lower incomes and communities of color. Sources report that APCIA’s lawsuit—which seeks declaratory and injunctive relief (and asks the court to declare the Commissioner’s rule invalid and to enjoin its enforcement)—claims the Commissioner’s rule will harm insured consumers in the state who pay less for auto, homeowners, and renters insurance because of the use of credit-based insurance scores to predict risk and set rates.
CFPB to address harm created from revocation of payday rule’s ability to repay standard
On March 23, CFPB acting Director Dave Uejio published a blog post highlighting the Bureau’s belief that harms in the small dollar lending market identified by its 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” still exist. As previously covered by InfoBytes, in 2020, the Bureau issued a final rule revoking certain underwriting provisions of the 2017 final rule, including (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. Uejio stressed that the Bureau intends to “use the authority provided by Congress to address these harms, including through vigorous market monitoring, supervision, enforcement, and, if appropriate, rulemaking.” Additionally, he noted that the Bureau “continues to believe that ability to repay is an important underwriting standard. To the extent small dollar lenders’ business models continue to rely on consumers’ inability to repay, those practices cause harm that must be addressed by the CFPB.”
CFPB issues automated underwriting NAL to Fintech
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.
HUD re-extends procedures to address Section 232 mortgage insurance issues
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.
CFPB updates HMDA FAQs
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.
Freddie Mac updates Covid-19 FAQs
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.
OCC releases recent enforcement actions
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.