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Fed cites need to increase oversight of nonbank mortgage companies
On November 8, Federal Reserve Board Governor, Michelle W. Bowman, spoke at the “Women in Housing and Finance Public Policy Luncheon” regarding U.S. housing and the mortgage market. Bowman observed that home prices have increased in the past year and a half, stating that “[i]n September, about 90 percent of American cities had experienced rising home prices over the past three months, and the home price increases were substantial in most of these cities,” which “raise[s] the concern that housing is overvalued and that home prices may decline.” She discussed several factors leading to the demand for housing as including (i) low interest rates; (ii) accumulated savings; and (iii) increased income growth. Additionally, she pointed out that mortgage refinancing has surged due to the decrease in long-term interest rates, and that nonbank servicers utilized the proceeds from the “refinacings to fund the advances associated with forbearance.” However, Bowman added that higher home prices and rising rents contributed to inflationary pressures in the economy. Bowman stated that the “multifamily rental market is at historic levels of tightness, with over 95 percent occupancy in major markets,” and she anticipates that these housing supply issues are unlikely to reverse materially in the short term, suggesting that there will be higher levels of inflation caused by housing. With respect to forbearance, Bowman said, “1.2 million borrowers were still in forbearance, down from a peak of 4.7 million in June 2020” on mortgage payments. Bowman stated that, “[f]orbearance, foreclosure moratorium, and fiscal support have kept distressed borrowers in their homes.” Bowman warned that transitioning borrowers from mortgage forbearance to modification may be a “heavy lift” for some servicers. Bowman disclosed that the Fed will be monitoring what happens as borrowers reach the end of the forbearance on mortgage payments and estimates that 850,000 of those in forbearance will reach the end of their forbearance period in January 2022, and “the temporary limitations on foreclosures put in place by the Consumer Financial Protection Bureau will expire at the end of the year.” Bowman recommended that state and federal regulators collaborate to collect data, identify risks, and strengthen oversight of nonbank mortgage companies.
DFPI issues fourth round of draft regulations for commercial financing disclosures
On November 5, the California Department of Financial Protection and Innovation (DFPI) issued a fourth draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 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. California released the first draft of the proposed regulations in July 2019, initiated the formal rulemaking process with the Office of Administrative Law in September 2020, and subsequently released second and third rounds of modifications in August and October of this year (covered by InfoBytes here, here, here, and here). The fourth modifications to the proposed regulations follow a consideration of public comments received on the various iterations of the proposed text. Among other things, the proposed modifications amend the term “average monthly cost” to mean the average total amount paid by the recipient (for periodic and irregular payments) over a contract’s term divided by the number of months specified in the contract. Providers may divide the number of days in the contract term by 30.4 to determine the number of months in the contract term. This calculation may also be used to determine the “estimated monthly cost.” Comments on the fourth modifications must be received by November 22.
FSB reports on nonbank resilience efforts
On November 1, the Financial Stability Board (FSB) released a report providing an update on its efforts to enhance the resilience of nonbank financial intermediation. According to FSB’s report, Enhancing the Resilience of Non-Bank Financial Intermediation, the non-bank financial intermediation (NBFI) sector has become more diverse and grown significantly to nearly half of global financial assets, compared to 42 percent in 2008. The report, among other things, provided an overview of the NBFI ecosystem and a framework for analyzing the availability of liquidity and the effective intermediation under stressed market conditions. The report noted that FSB’s “main focus of work to date” is intended “to assess and address vulnerabilities in specific areas that may have contributed to the build-up of liquidity imbalances and their amplification,” which includes, among other things: (i) enhancing money market fund resilience through policy work; (ii) assessing liquidity risk and its management in open-ended funds; (iii) examining the structure and drivers of liquidity during stress in government and corporate bond markets; (iv) examining “the frameworks and dynamics of margin calls in centrally cleared and non-centrally cleared derivatives and securities markets, and the liquidity management preparedness of market participants to meet margin calls”; and (v) assessing the fragilities in USD cross-border funding and their vulnerabilities in emerging market economies interactions. Based on these findings, the report noted that FSB’s future work will pursue a systemic approach to NBFI, which involves expanding the understanding of systemic risks in NBFI and ensuring that the current policy toolkit is adequate and effective from a system-wide perspective.
New York expands CRA requirements to non-depository mortgage lenders
On November 1, the New York governor signed S5246A, which expands the New York Community Reinvestment Act (New York CRA) to cover non-depository lenders. Under the act, nonbank mortgage providers’ lending and investment in low- and moderate-income communities will be subject to NYDFS review. The anti-redlining law—which previously only measured banks’ activities in low- to moderate-income communities—is intended to “ensure everyone has fair and equal access to lending options in their pursuit of purchasing a home, especially in communities of color which continue to be impacted by the effects of the pandemic and have historically faced many more hurdles when seeking a mortgage,” Governor Kathy Hochul stated. The act follows a report issued by NYDFS in February, which examined redlining in the Buffalo metropolitan area and concluded that there is a “distinct lack of lending by mortgage lenders, particularly non-depository lenders” to majority-minority populations and to minority homebuyers in general. (Covered by InfoBytes here.) At the time, the report made numerous recommendations, including a recommendation to amend the New York CRA to cover nonbank mortgage lenders and a request that the OCC and the CFPB investigate federally regulated institutions serving the Buffalo area for violations of fair lending laws. The act takes effect in a year.
FTC updates Safeguards Rule for financial institutions
On October 27, the FTC announced a final rule updating the Safeguards Rule to strengthen data security protections for consumer financial information following widespread data breaches and cyberattacks. The final rule follows a 2019 notice of proposed rulemaking (covered by InfoBytes here) and makes the following modifications to the existing rule:
- Adds specific criteria financial institutions must undertake when conducting a risk assessment and implementing an information security program, including provisions related to access controls, data inventory and classification, authentication, encryption, disposal procedures, and incident response, among others. The final rule also adds measures to ensure employee training and service provider oversight are effective.
- Requires financial institutions to designate a single qualified individual to oversee the information security program. Periodic reports must also be made to an institution’s board of directors or governing bodies.
- Provides an exemption from requirements related to written risk assessments, incident response plans, and annual reporting to the board of directors, for financial institutions that collect information on fewer than 5,000 consumers.
- Expands the definition of “financial institution” to include “entities engaged in activities that the Federal Reserve Board determines to be incidental to financial activities.” Included in the definition are “finders” (i.e. companies that bring together buyers and sellers of products or services that fall within the scope of the Safeguards Rule).
- Adds several definitions and related examples into the Safeguards Rule itself instead of incorporating them through a reference from a related FTC rule.
Provisions of the final rule under Section 314.5 are effective one year after the date of publication in the Federal Register. The remainder of the provisions are effective 30 days following publication.
Additionally, the FTC issued a supplemental notice of proposed rulemaking seeking comments on a proposal to further amend the Safeguards Rule to require financial institutions to report security events to the Commission where a determination has been made that consumer information has been misused, or is reasonably likely to be misused, in an event affecting at least 1,000 consumers. Comments are due 60 days after publication in the Federal Register.
The FTC also announced a final rule adopting largely technical changes to its authority under the Privacy of Consumer Financial Information Rule (Privacy Rule) under the Gramm-Leach-Bliley Act, which requires financial institutions to inform consumers about their information-sharing practices and allow consumers the ability to opt out of having their information shared with certain third parties. The Privacy Rule is amended to revise the rule’s scope, modify the definitions of “financial institution” and “federal functional regulator,” and update requirements pertaining to annual customer privacy notices. The FTC noted that these changes align the Privacy Rule with changes made under Dodd-Frank and the FAST Act.
OCC cites preemption decision in valid-when-made rule challenge
On August 24, the OCC filed a statement of recent decision in support of its motion for summary judgment in an action brought against the agency by several state attorneys general challenging the OCC’s final rule on “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” (known also as the valid-when-made rule). The final rule was designed to effectively reverse the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision and provide that “[i]nterest on a loan that is permissible under [12 U.S.C. § 85 for national bank or 12 U.S.C. § 1463(g)(1) for federal thrifts] shall not be affected by the sale, assignment, or other transfer of the loan.” (Covered by a Buckley Special Alert.) The states’ challenge argued that the rule “impermissibly preempts state law,” is “contrary to the plain language” of section 85 (and section 1463(g)(1)), and “contravenes the judgment of Congress,” which declined to extend preemption to non-banks. Moreover, the states contended that the OCC “failed to give meaningful consideration” to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.” (Covered by InfoBytes here.) Both parties sought summary judgment, with the OCC arguing that the final rule validly interprets the National Bank Act (NBA) and that not only does the final rule reasonably interpret the “gap” in section 85, it is consistent with section 85’s “purpose of facilitating national banks’ ability to operate their nationwide lending programs.” Moreover, the OCC asserted that 12 U.S.C. § 25b’s preemption standards do not apply to the final rule, because, among other things, the OCC “has not concluded that a state consumer financial law is being preempted.” (Covered by InfoBytes here.)
In its August 24 filing, the OCC brought to the court’s attention a recent order issued by the U.S. District Court for the Western District of Wisconsin. As previously covered by InfoBytes, the Wisconsin court reviewed claims under the FDCPA and the Wisconsin Consumer Act (WCA) against a debt-purchasing company and a law firm hired by the company to recover outstanding debt and purported late fees on the plaintiff’s account in a separate state-court action. Among other things, the court examined whether the state law’s notice and right-to-cure provisions were federally preempted by the NBA, as the original creditor’s rights and duties were assigned to the debt-purchasing company when the account was sold. The court ultimately concluded that the WCA provisions “are inapplicable to national banks by reason of federal preemption,” and, as such, the court found “that a debt collector assigned a debt from a national bank is likewise exempt from those requirements” and was not required to send the plaintiff a right-to-cure letter “as a precondition to accelerating his debt or filing suit against him.”
DFPI releases report on CRMLA
On August 2, the California Department of Financial Protection and Innovation released a report examining residential mortgage lending, rates, consumer complaints, foreclosures, and other data elements during 2020. The DFPI compiled data submitted by licensed non-bank mortgage lenders under the California Residential Mortgage Lending Act (CRMLA). According to the report, “nonbank residential mortgage loans doubled from 2019 to 2020 as more Californians refinanced or obtained new loans in response to lower interest rates despite the economic downturn that resulted from the COVID-19 pandemic.” The report also noted that there was an approximate 68 percent decrease in foreclosures in response to Covid-19 moratoriums meant to protect consumers and an almost 19 percent decline in complaints. Other key findings include that (i) the number of mortgage loans originated increased by 100.5 percent; (ii) the number of loans brokered increased by 52.7 percent; and (iii) the aggregate average amount of loans serviced by licensees each month increased by 12.4 percent compared to 2019.
CSBS releases regulatory prudential standards for nonbank mortgage servicers
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.”
Colorado enacts Colorado Nonbank Mortgage Servicers Act
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.”
FDIC Chairman discusses innovation in banking
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.”