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Financial Services Law Insights and Observations


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  • CSBS releases regulatory prudential standards for nonbank mortgage servicers

    State Issues

    On July 26, the Conference of State Bank Supervisors (CSBS) released model state regulatory prudential standards for nonbank mortgage servicers. The prudential standards provide states with “a consistent framework that ensures covered nonbank servicers maintain the financial capacity to serve consumers and investors with heightened transparency, accountability and risk management standards.” According to CSBS, in the past 10 years, the nonbank mortgage servicer market has grown from 6 percent to 60 percent of the government agency mortgage market, representing at least 45 percent of the servicing market overall, with “[n]onbank mortgage servicers currently administer[ing] roughly three-quarters of the servicing for loans in Ginnie Mae mortgage backed-securities” (encompassing loans to veterans, first-time homebuyers, and low-to-moderate income borrowers). In response to concerns raised by state regulators about the lack of state standards to address servicers’ capital and liquidity levels, as well as inadequate corporate governance and board oversight identified by state and federal examiners, state regulators approved the prudential standards, which focus on two main areas: financial condition and corporate governance. The prudential standards—which “align with existing federal minimum eligibility requirements, wherever practical, to minimize regulatory burden for servicers”—cover both agency and non-agency servicing, and apply to servicers that service at least 2,000 loans and operate in at least two states. Exempt are small servicers that do not meet the minimum requirements, reverse mortgage loan servicers, not-for-profit mortgage servicers, and housing agencies. State agency commissioners are also given the authority to “increase requirements for high-risk servicers or even suspend the requirements in times of economic, societal or environmental volatility.” The prudential standards are part of CSBS’s eight Networked Supervision 2021 priorities, which are intended to advance its “strategy to streamline nonbank licensing and supervision and generate new data for risk analysis through expanded use of technology platforms.”

    State Issues CSBS State Regulators Nonbank Mortgages Mortgage Servicing

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  • Colorado enacts Colorado Nonbank Mortgage Servicers Act

    State Issues

    On July 12, Colorado enacted HB 1282, which creates the Colorado Nonbank Mortgage Servicers Act under Article 21 and provides additional consumer protections through the regulation of mortgage servicers. Under the act, a mortgage servicer does not include, among others: supervised financial organizations; certain regulated mortgage loan originators; a federal agency or department; a collection agency whose debt collection business involves collecting on defaulted mortgage loans; agencies, instrumentalities, or political subdivisions of the state; supervised lenders that do not service residential mortgages; servicers that service fewer than 5,000 residential mortgage loans annually; nonprofit organizations; government agencies; originators or servicers using a subservicer that does not act under their direction; and persons servicing loans held for sale. The act stipulates that on or after January 31, 2022, a person may not act as a mortgage servicer without providing notice to the administrator and paying the required fees within 30 days after it begins servicing in the state, and on or before January 31 annually thereafter. The act also outlines provisions related to renewal requirements, record retention, and compliance with federal laws and regulations. Under specified administrator powers and duties, the administrator is allowed to bring an enforcement action against a mortgage servicer, seek restitution and civil money penalties, and request an injunction. While the act provides a four-year statute of limitations, an additional one-year extension may be granted if it is proven that a mortgage servicer engaged in calculated conduct to delay commencement of the action. The act, however, does not create a private right of action or “affect[] any remedy that a borrower may have pursuant to law other than this Article 21.”

    State Issues State Legislation Mortgages Mortgage Servicing Nonbank

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  • FDIC Chairman discusses innovation in banking

    Federal Issues

    On June 29, FDIC Chairman Jelena McWilliams spoke at the “Fintech: A Bridge to Economic Inclusion” conference on technology’s role in creating and facilitating a more inclusive financial system. McWilliams noted that while the proportion of U.S. households that were banked in 2019 was 94.6 percent, 7 million households still reported no banking relationship. Moreover, she noted that “the rates for Black and Hispanic households who do not have a checking or savings account at a bank remain substantially higher than the overall ‘unbanked’ rate.” McWilliams discussed the FDIC’s multi-pronged approach to tackle the issue of financial inclusion, which includes: (i) looking at financial innovations in the private sector; (ii) taking steps, including hosting tech sprints, to identify solutions; (iii) coordinating with Minority Depository Institutions and Community Development Financial Institutions; and (iv) conducting targeted public awareness campaigns on the importance of having a banking relationship. In explaining the initiatives, McWilliams pointed out that encouraging the use of alternative data that is not usually found in consumer credit files can “help firms evaluate the creditworthiness of consumers who might not otherwise have access to credit in the mainstream credit system.” She also discussed the use of artificial intelligence, updating brokered deposits rulemaking, and establishing a public/private standard-setting organization for due diligence of vendors and for the technologies they develop. According to McWilliams, “FDiTech is also leading tech sprints to identify data, tools, and technology to help community banks meet the needs of the unbanked, including how to measure impact.” (Covered by InfoBytes here.) McWilliams concluded her remarks by explaining that “[a]lthough the FDIC has limited ability to address directly the issue of unbanked Americans, there are things that [it] can do – and which [it is] doing – to foster innovation across all banks and to reduce the regulatory cost of and barriers to innovation.” 

    Federal Issues Fintech FDIC Bank Regulatory Nonbank

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  • Brainard provides update on central bank-issued digital currencies

    Federal Issues

    On May 24, Federal Reserve Governor Lael Brainard spoke at the Consensus by CoinDesk 2021 Conference about the Fed’s exploration of central bank digital currencies (CBDCs) and cross-border payments. Brainard noted that a CBDC may address concerns regarding the lack of federal deposit insurance and banking supervision for nonbank issuers of digital assets, and that “new forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks.” She highlighted that “introducing a safe and accessible central bank money to households and businesses in digital payments systems. . .would reduce counterparty risk and the associated consumer protection and financial stability risks.” Brainard noted that a Fed-backed digital currency could cause payment transactions to be cheaper, faster, and more efficient by improving processes for sending and receiving money internationally, encouraging private-sector competition in retail payments, and increasing financial inclusion.

    Brainard discussed how CBDCs could affect central banks’ ability to manage the economy, saying a digital dollar would need to be designed with safeguards to “protect against disintermediation of banks and to preserve monetary policy transmission more broadly.” She cautioned that the design should complement, not replace, existing currency and bank deposits and emphasized the need for regulators to work together “to ensure that banks are appropriately identifying, monitoring, and managing risks associated with digital assets.”

    As previously covered by InfoBytes, last week Chairman Jerome Powell stated that an important step in engaging the public about CBDCs involves “publishing [a] paper this summer to lay out the Fed’s current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context.”

    Federal Issues Federal Reserve Fintech Central Bank Digital Bank Regulatory Nonbank

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  • CSBS seeks comments on modernized NMLS

    On April 15, the Conference of State Bank Supervisors (CSBS) announced a request for public comments on proposed requirements for developing a new system to modernize and streamline the NMLS licensing application process and “[p]romote efficient operations and networked supervision among regulators.” Key components of the proposal include:

    • A three-part licensing framework that divides licensing requirements into three categories: core, business-specific, and license-specific, with the goal of providing a standard set of requirements for companies, individuals, and locations “regardless of the industry they are operating in or license types they hold.”
    • A listing and description of core requirements as applicable to companies and individual licensees.
    • An overview of the identity verification process all users will complete when creating a new user account in the modernized NMLS.

    CSBS emphasized that one of its Networked Supervision priorities is to establish a standardized licensing approach based on uniform requirements across all state nonbank financial regulatory agencies, and noted that the money services business industry will be the first industry to transition to the new system at some point in 2022. Comments on the proposal will be accepted through May 31.



    Licensing CSBS NMLS State Issues State Regulators Nonbank

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  • CSBS announces new nonbank cybersecurity exam tool

    On February 24, during the Nationwide Multistate Licensing System Annual Conference, the Conference of State Bank Supervisors (CSBS) released an updated cybersecurity examination tool designed for nonbank financial company supervision. The tool is intended for state regulators to use during examinations, and CSBS encourages companies to use it monitor cybersecurity health between examinations. The tool is the newest addition to state regulators’ ongoing efforts to help nonbank companies—including fintech and payment companies, money transmitters, and mortgage companies—protect, mitigate, and respond to cyber threats. While the current tool is “considered a baseline assessment for less complex and lower risk institutions,” CSBS notes that an additional tool is currently under development for release in Q2 2021 for more complex institutions.

    Licensing State Issues CSBS Nonbank Privacy/Cyber Risk & Data Security State Regulators Fintech

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  • FSOC annual report highlights Covid-19 impact on financial stability

    Federal Issues

    On December 3, the Financial Stability Oversight Council (FSOC) released its 2020 annual report. The report reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. The report also highlights the impact of Covid-19 on the economy and the financial system. The report notes that although “policy actions to minimize the effects of the pandemic have been effective at improving market conditions, risks to U.S. financial stability remain elevated compared to last year” and that “the global outlook for economic recovery is uncertain, depending on the severity and the duration of the ongoing pandemic.” Highlights include:

    • Nonbank mortgage origination and servicing. FSOC notes that disruptions in mortgage payments due to the pandemic have focused attention on the nonbank sector. In particular, FSOC states that due to a surge in refinancing due to low rates, nonbank servicers have an additional source of liquidity to help sustain operations. However, FSOC cautions that “an increase in forbearance and default rates . . . has the potential to impose significant strains on nonbank servicers.” FSOC recommends federal and state regulators coordinate and share data and information, identify and address potential risks, and strengthen oversight of nonbank companies originating and servicing residential mortgages.
    • Alternative Reference Rates. FSOC recommends that the Alternative Reference Rates Committee continue to work to facilitate an orderly transition to alternative reference rates following the anticipated cessation of LIBOR at the end of 2021, and encourages federal and state regulators to “determine whether further guidance or regulatory relief is required to encourage market participants to address legacy LIBOR portfolios.”
    • Cybersecurity. FSOC “recommends that federal and state agencies continue to monitor cybersecurity risks and conduct cybersecurity examinations of financial institutions and financial infrastructures to ensure, among other things, robust and comprehensive cybersecurity monitoring, especially in light of new risks posed by the pandemic.” FSOC also supports “efforts to increase the efficiency and effectiveness of cybersecurity examinations across the regulatory authorities.”
    • Large bank holding companies. FSOC recommends that financial regulators “continue to monitor and assess the impact of rules on financial institutions and financial markets—including, for example, on market liquidity and capital—and ensure that [bank holding companies] are appropriately monitored based on their size, risk, concentration of activities, and offerings of new products and services.”

    Additional topics also addressed include short-term wholesale funding markets, nonfinancial business borrowing, and commercial real estate asset valuations.

    Federal Issues FSOC Covid-19 Nonbank Privacy/Cyber Risk & Data Security LIBOR Bank Holding Companies Mortgage Origination

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  • Nonbank lender argues CFPB redlining action is flawed


    On October 23, a Chicago-based nonbank mortgage company moved to dismiss a CFPB redlining action on the grounds that the Bureau’s complaint “improperly seek[s]” to expand ECOA to “prospective applicants.” As previously covered by a Buckley Special Alert, in July, the Bureau filed a complaint against the mortgage company alleging the mortgage company engaged in redlining in violation of ECOA and the Consumer Financial Protection Act. The Bureau argued, among other things, that the company redlined African American neighborhoods in the Chicago area by discouraging their residents from applying for mortgage loans from the company and by discouraging nonresidents from applying for loans from the company for homes in these neighborhoods. To support its arguments, the Bureau cited to (i) a number of racially disparaging comments allegedly made by the owner and employees on the company’s broadcasts; (ii) the company’s comparatively low application volume from African American neighborhoods and applicants; (iii) its lack of specific marketing targeting the African American community in Chicago; (iv) and its failure to employ African American mortgage loan officers.

    In support of its motion to dismiss, the mortgage company argued that the Bureau’s complaint is “flawed” by seeking to expand the reach of ECOA to “prospective applicants” and regulate the company’s behavior before a credit transaction begins. In addition to expanding the application of ECOA, the company argued that the Bureau is attempting to impose—through Regulation B’s “discouragement” definition—(i) “affirmative requirements to target advertising to specific racial or ethnic groups”; (ii) “a demographic hiring quota”; and (iii) “a requirement to have business success with specific racial or ethnic groups.” Moreover, the company argued the Bureau’s interpretation of ECOA and Regulation B violates the company’s First Amendment rights by attempting to regulate “the content and viewpoint of protected speech . . . in a way that is unconstitutionally overbroad and vague.” Lastly, the company argued the Bureau similarly violated the Fifth Amendment’s due process clause by seeking to enforce Regulation B’s definition of “discouragement,” because it is unconstitutionally vague.

    Courts ECOA CFPB Enforcement Regulation B CFPA Redlining Fair Lending Mortgages Nonbank

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  • CSBS proposes prudential standards for state-licensed nonbank mortgage servicers

    State Issues

    On October 1, the Conference of State Bank Supervisors (CSBS) requested public comment on proposed regulatory prudential standards for nonbank mortgage servicers. According to CSBS, the proposal is being issued to address concerns about nonbank mortgage servicers, including the rapid market share growth, institution size, and financial stability and governance. The goals of the proposal are to (i) “[p]rovide better protection for borrowers, investors and other stakeholders in the occurrence of a stress event. . .[that] could result in harm”; (ii) “[e]nhance effective regulatory oversight and market discipline over these entities”; and (iii) “[i]mprove transparency, accountability, risk management and corporate governance standards.” Highlights of the proposal include:

    • Baseline Standards. CSBS notes that the baseline standards, which cover eight areas—capital, liquidity, risk management, data standards and integrity, data protection/cyber risk, corporate governance, servicing transfer requirements and change of control—will represent regulatory requirements for state-licensed nonbank mortgage servicers and will “leverage existing standards or generally accepted business practices” in order to minimize the regulatory burden.
    • Enhanced Standards. CSBS is proposing enhanced standards that would apply to servicers owning whole loans plus mortgage servicing rights (MSRs) totaling the lesser of $100 billion or representing at least a 2.5 percent total market share based on Mortgage Call Report quarterly data of licensed nonbank owned whole loans and MSRs (known as “Complex Servicers”). The enhanced standards would be applied to capital, liquidity, stress testing and living will/recovery and resolution planning. Additionally, the proposal notes that regulators may determine a nonbank mortgage servicer that does not meet the definition of Complex Servicer is still subject to the enhanced standards based on “a unique risk profile, growth, market importance, or financial condition of the institution.”

    Comments on the proposal are due by December 31.

    State Issues Licensing Nonbank Mortgage Servicing CSBS Agency Rule-Making & Guidance

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  • CDBO releases proposed commercial financing disclosure regulations

    State Issues

    On September 11, the California Department of Business Oversight (CDBO) initiated the formal rulemaking process with the Office of Administrative Law (OAL) for the proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). In September 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances (covered by InfoBytes here). In July 2019, California released the first draft of the proposed regulations (covered by InfoBytes here) to consider comments prior to initiating the formal rulemaking process with the OAL.

    The new proposed regulations, which have been modified since the July 2019 draft, provide general format and content requirements for each disclosure, as well as specific requirements for each type of covered transaction. Additionally, the proposed regulations provide information on calculating the annual percentage rate (APR), including additional details for calculating the APR for factoring transactions, as well as calculating the estimated APR for sales-based financing transactions, among other things. Additional details about the proposed regulations can be found in the CDBO’s initial statement of reasons. Comments on the proposed regulations will be accepted through October 28.

    State Issues Small Business Lending Fintech Disclosures APR Commercial Finance Nonbank CDBO Merchant Cash Advance

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