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On September 10, the CFPB, in conjunction with state regulators, announced the American Consumer Financial Innovation Network (ACFIN) to enhance coordination among federal and state regulators to facilitate financial innovation. ACFIN has three stated objectives in its charter: (i) “[e]stablish coordination between Members to benefit consumers by facilitating innovation that enhances competition, consumer access, or financial inclusion”; (ii) “[m]inimize unnecessary regulatory burdens and bolster regulatory certainty for innovative consumer financial products and services”; and (iii) “[k]eep pace with the evolution of technology in markets for consumer financial products and services in order to help ensure those markets are free from fraud, discrimination, and deceptive practices.” The initial state members of ACFIN are Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee, and Utah, but the Bureau notes that all state regulators, including financial regulatory agencies, have been invited to join.
On September 10, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Housing Finance Reform: Next Steps” to discuss the federal government’s plans for reforming and strengthening the mortgage market. As previously covered by InfoBytes, the Department of Treasury and HUD released complementary proposals on September 5 discussing plans to end the conservatorships of Fannie Mae and Freddie Mac (GSEs) and reform the housing finance system. The Committee heard from Treasury Secretary Steven Mnuchin, HUD Secretary Ben Carson, and FHFA Director Mark Calabria. Committee Chairman Mike Crapo (R-ID) opened the hearing by stating a preference for comprehensive legislation to end the conservatorship of the GSEs but stressed that the agencies should “begin moving forward with incremental steps that move the system in the right direction.” Democratic members of the Committee stated their oppositions to the proposals, with Senator Sherrod Brown (D-Ohio) arguing that the Treasury’s plan “will make mortgages more expensive and harder to get,” make it more difficult for small lenders to compete, and roll back tools designed to help underserved families.
Treasury Secretary Mnuchin defended his agency’s proposal, and noted that while he prefers that Congress take the lead on ending the GSE conservatorships and plans to work with Congress on a bipartisan basis to enact comprehensive housing finance reform legislation, he also sees the need to concurrently develop administrative actions to protect taxpayers and foster competition. Among other things, Mnuchin discussed steps to remove the net worth sweep, which requires the GSEs to send nearly all their profits to the Treasury, arguing that ending the sweep will allow the GSEs to retain their earnings and build up capital.
FHFA Director Calabria emphasized that plans released by the Treasury and HUD are “broadly consistent” with his top priorities, which include developing capital standards for the GSEs to match their risk profiles that would “begin the process to end the [GSE] conservatorships,” as well as reforms to reduce the risks in the GSEs’ portfolios. All three witnesses agreed with Crapo’s assessment that the GSEs in their current form “are systemically important companies [and] that they continue to be too big to fail.” Calabria further emphasized that while he believes only Congress can reach a comprehensive solution, he believes the agencies can also make significant steps.
HUD Secretary Carson commented that a central principle of HUD’s housing finance plan is to improve coordination between HUD and FHFA to allow qualified borrowers access to responsible and affordable credit options, with HUD, the Department of Veterans Affairs, and the Department of Agriculture acting as the sole sources of low-down-payment financing for borrowers outside of the conventional mortgage market. Carson further noted that reform will “reduce the Federal Government’s outsized role in housing finance.”
CFPB files deceptive and abusive allegations against foreclosure relief services company and principals
On September 6, the CFPB announced a complaint filed in the U.S. District Court for the Central District of California against a foreclosure relief services company, along with the company’s president/CEO (defendants), for allegedly engaging in deceptive and abusive acts and practices in connection with the marketing and sale of purported financial-advisory and mortgage-assistance-relief services to consumers. According to the complaint, since 2014 the defendants allegedly violated the Consumer Financial Protection Act (CFPA) and Regulation O by making deceptive and unsubstantiated representations about the efficacy and material aspects of its mortgage assistance relief services, as well as making misleading or false claims about the experience and qualifications of its employees. Additionally, the Bureau alleged the defendants’ representations about their services constituted abusive acts and practices because, among other things, consumers “generally did not understand and were not in a position to evaluate the accuracy of [the defendants’] marketing representations or the quality of the mortgage-assistance-relief services that [the defendants] sold.” Moreover, the Bureau claimed the defendants further violated Regulation O by charging consumers advance fees before rendering services.
In addition, the Bureau entered a proposed stipulated final judgment and order against the company’s principal auditor for providing “substantial assistance in furtherance of [the defendants’] unlawful conduct” in violation of the CFPA and Regulation O. The proposed judgment imposes a $493,403.04 civil penalty, of which all but $5,000 is suspended due to the auditor’s limited ability to pay. The auditor is also permanently banned from providing mortgage assistance relief services or consumer financial products and services.
On September 6, the FTC voted 5-0 to approve a final settlement under which a software provider agreed to better protect the data it collects, resolving allegations that the company failed to implement reasonable data security measures and exposed personal consumer information obtained from its auto dealer clients in violation of the FTC Act and the Standards for Safeguarding Customer Information Rule, issued pursuant to the Gramm-Leach-Bliley Act.
As previously covered by InfoBytes, in its complaint, the FTC alleged the company’s failure to, among other things, (i) implement an organization information security policy; (ii) implement reasonable guidance or training for employees; (iii) use readily available security measures to monitor systems; and (iv) impose reasonable data access controls, which resulted in a hacker gaining unauthorized access to the company’s database containing the personal information of approximately 12.5 million consumers. The approved settlement requires the company to, among other things, implement and maintain a comprehensive information security program designed to protect the personal information it collects, including implementing specific safeguards related to the FTC’s allegations. Additionally, the settlement requires the company to obtain third-party assessments of its information security program every two years and have a senior manager certify compliance with the order every year.
On September 5, the Federal Reserve Board announced an enforcement action against a Nebraska-based bank for allegedly violating the National Flood Insurance Act (NFIA) and Regulation H, which implements the NFIA. The consent order assesses a $37,000 penalty against the bank for an alleged pattern or practice of violations of Regulation H, but does not specify the number or the precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,000 per violation.
On September 5, the U.S. Treasury Department and HUD released complementary proposals in response to a presidential memorandum issued last March (previously covered by InfoBytes here) directing the departments to develop plans to end the conservatorships of Fannie Mae and Freddie Mac (GSEs) and reform the housing finance system.
According to a press release released by the Treasury Department, the Treasury Housing Reform Plan outlines several broad goals and legislative and administrative reforms intended to protect taxpayers and assist homebuyers. Included in the Reform Plan are measures to privatize the GSEs, with the Treasury Department emphasizing that FHFA “should begin the process of ending” the conservatorships. “Central to this objective will be ensuring that the GSEs and their successors are appropriately capitalized to remain viable as going concerns after a severe economic downturn and also to ensure that shareholders and unsecured creditors, rather than taxpayers, bear losses.” Other notable agency and limited congressional action highlights include:
- Congress should authorize an explicit, paid-for guarantee by Ginnie Mae on qualified mortgage-backed securities for single-family and multifamily loans.
- Private sector participation should increase in the mortgage market to compete with the GSEs, and ensure a level playing field for lenders of all sizes.
- Congress should replace GSEs’ statutory affordable housing goals with a “more efficient, transparent, and accountable mechanism” to support underserved borrowers and expand HUD’s affordable housing activities.
- GSEs under FHFA’s capital rule should be required to maintain “capital sufficient to remain viable as a going concern after a severe economic downturn,” the cap on the GSEs’ investments in mortgage-related assets should be further reduced, and GSEs’ retained mortgage portfolios should be restricted to “solely supporting [the] business of securitizing mortgage-backed securities.”
- Mortgages eligible for GSE guarantees should have to comply with strict underwriting requirements.
- The Qualified Mortgage rule should be simplified and the so-called QM patch that allows GSEs to avoid certain regulations should be eliminated (see previous InfoBytes coverage on the CFPB’s advance notice of proposed rulemaking to allow the QM patch to expire here).
- Access to 30-year fix-rate mortgages for qualified homebuyers should be preserved.
HUD’s Housing Finance Reform Plan, released in conjunction with Treasury’s proposal, addresses the role of FHA and Ginnie Mae, and outlines steps to reduce risk in the FHA portfolio. According to HUD’s press release, the proposal focuses on four objectives: refocusing FHA to its core mission, protecting American taxpayers, providing tools to FHA and Ginnie Mae to appropriately manage risk, and providing liquidity to the housing finance system. Among other objectives, HUD’s plan (i) stresses that FHA, which serves low- and moderate-income borrowers, “must ensure that borrowers are creditworthy and that they have access to loans that meet their financial needs without creating undue risk”; (ii) recommends that FHA and FHFA establish a “formalized collaborative approach” to streamline government-supported mortgage programs to ensure they are “not competing and do not crowd private capital out of the marketplace;” (iii) encourages continued efforts to reduce loan churning; (iv) encourages a continued partnership between FHA and DOJ “to provide more clarity on how the agencies will consult on the appropriate use of the [False Claims Act]” to provide regulatory certainty to lenders; (v) encourages FHA to develop servicing standards for home equity conversion mortgage programs to reduce operational and financial burdens; and (vi) recommends that FHA develop a mortgage origination risk tool that integrates an automated underwriting system.
On August 30, the FDIC announced its release of a list of administrative enforcement actions taken against banks and individuals in July. The list reflects that the FDIC issued fourteen orders and one notice of charges, which include “four stipulated consent orders; four terminations of consent orders; four Section 19 orders; one stipulated civil money penalty order; one stipulated removal and prohibition order; and one notice of charges and hearing.”
Among other actions, the FDIC assessed a civil money penalty (CMP) against a Louisiana-based bank for alleged violations of the Flood Disaster Protection Act, including, among other things, (i) failing to obtain flood insurance coverage on loans at the time of origination, increase, renewal, or extension; or (ii) failing to maintain flood insurance coverage for the term of a loan secured by property located or to be located in a special flood hazard area.
On August 30, the Department of Education issued final regulations revising protections for student borrowers that were significantly misled or defrauded by the higher education institution they attended. The final Institutional Accountability regulations—first proposed in July 2018 (previous InfoBytes coverage here)—establish standards for loan forgiveness applicable for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.” Loans disbursed prior to July 1, 2020 remain subject to defenses under prior regulations issued in 2016. Provisions under the new regulations include:
- Borrowers will be required to file their claims within three years of leaving an institution, and may assert defense to repayment claims regardless of whether a loan is in default or in collection proceedings.
- The 2016 final regulation’s preponderance of the evidence standard for all borrower defense to repayment claims will be maintained. The Department also rejected the presumption against full relief, stating that financial harm will be determined by the Department as “the amount of monetary loss that a borrower incurs as a consequence of misrepresentation. . . . [but will] not include damages for nonmonetary loss.”
- The pre-dispute arbitration and class action waiver ban contained within the 2016 final regulations will be eliminated. Institutions are permitted to choose their own internal dispute resolution process, including the use of mandatory pre-dispute arbitration agreements and class action waivers, provided the agreements are explained in plain language to enable students to make informed enrollment decisions.
- The “closed school loan discharge” eligibility time period is extended from 120 days to 180 days for students who have left an institution prior to its closure. However, borrowers must submit applications, as automatic closed-school discharges are not allowed under the new regulations. Borrowers asserting false certification discharge must also submit applications. Additionally, borrowers will be allowed to choose between accepting a teach-out opportunity offered by an institution or submitting a closed school loan discharge to the Department.
The Department notes that the regulations will take effect July 1, 2020. However, “regulations relating to financial responsibility will be available for immediate implementation.”
On September 4, the FTC and the New York Attorney General announced (see here and here) a combined $170 million proposed settlement with the world’s largest online search engine and its video-sharing site subsidiary concerning alleged violations of the Children’s Online Privacy Protection Act (COPPA). According to the complaint, the video-sharing site allegedly collected personal information in the form of “persistent identifiers” from viewers of child-directed channels without first obtaining verifiable parental consent. The persistent identifiers allegedly generated millions of dollars in revenue by delivering targeted ads to viewers. The FTC and New York AG allege, among other things, that the defendants knew the video-sharing site hosted numerous child-directed channels but told advertisers that the video-sharing site contains general audience content, even informing one advertising company that it did not have users younger than 13 on its platform and therefore channels on its platform did not need to comply with COPPA.
Under COPPA, operators of websites and online services directed at children are prohibited from collecting personal information of children under the age of 13—including through the use of persistent identifiers for targeted advertising purposes—unless the company has explicit parental consent. Furthermore, third parties—such as advertising networks—must also comply with COPPA where they have actual knowledge that personal information is being collected directly from users of child-directed websites and online services.
While neither admitting nor denying the allegations, except as specifically stated within the settlement, the defendants will, among other things, (i) pay a $136 million penalty to the FTC and a $34 million penalty to New York; (ii) change their business practices to comply with COPPA; (iii) maintain a system for channel owners to designate their child-directed content on the video-sharing site; and (iv) disclose their data collection practices and obtain verifiable parental consent prior to collecting personal information from children. According to the FTC, the $136 million penalty is “by far the largest amount the FTC has ever obtained in a COPPA case since Congress enacted the law in 1998.”
On August 30, the Federal Financial Institutions Examinations Council released the 2018 Home Mortgage Disclosure Act (HMDA) data on mortgage lending transactions covering information submitted by financial institutions on or before August 7. The data will not remain static, but instead will be updated on an on-going basis to reflect late submissions and resubmissions. The data currently includes information on 12.9 million home loan applications, 7.7 million of which resulted in loan originations, and 2 million purchased loans. Observations on the data include: (i) the total number of originated loans decreased by roughly 12.6 percent; (ii) refinance originations decreased by 23.1 percent; (iii) the share of refinance loans to low- and moderate-income borrowers increased from 22.9 percent to 30 percent; and (iv) nondepository, independent mortgage companies accounted for 57.2 percent of first-lien owner-occupied home purchase loans (up from 56.1 percent in 2017).
On the same day, the CFPB also released two data point articles describing mortgage market activity based on data reported under HMDA. The first article presents a report providing a “first look” at mortgage application and origination trends within the 2018 HMDA data. The second article introduces a report introducing the “new and revised data points in the 2018 HMDA data” and discussing the Bureau’s initial observations on the mortgage market based upon those new or revised data points.
- Buckley Webcast: Government lending update
- Amanda R. Lawrence to discuss "Data privacy litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Brandy A. Hood to discuss "How to ace your TRID exam" at the Mortgage Bankers Association Regulatory Compliance Conference
- Katherine L. Halliday to discuss "UDAP, UDAAP & the Map rule compliance basics" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Jonice Gray Tucker to discuss "HMDA data is out, now what?" at the Mortgage Bankers Association Regulatory Compliance Conference
- Melissa Klimkiewicz to discuss "Navigating FHA rules and regs" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jeffrey P. Naimon to discuss "Washington regulatory overview" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Consenting views: Achieving positive outcomes from consent order recovery" at the ACAMS AML & Financial Crime Conference
- APPROVED Webcast: Preparing for 2020 license renewals
- Kathryn L. Ryan to discuss "The state’s role in fintech: Providing an industry framework for innovation" at Lend360
- Daniel P. Stipano to discuss "AML developments: The latest trends, challenges and opportunities" at the American Conference Institute Financial Crime Executive Roundtable
- Marshall T. Bell and Jeffrey P. Naimon to discuss "Truth in lending" at the American Bar Association National Institute on Consumer Financial Services Basics
- Amanda R. Lawrence and Michael A. Rome to discuss "California Consumer Privacy Act compliance" at the Capital Area Compliance Roundtable
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions" at the Institute of International Bankers Risk Management and Regulatory Examination/Compliance Seminar
- Daniel P. Stipano to discuss "Customer identification program/customer due diligence/enhanced due diligence" at a National Association of Federal Credit Unions webinar
- Jonice Gray Tucker to discuss "MCCA's blueprint for selling & buying - A pitch workshop for outside counsel" at the Minority Corporate Counsel Association Creating Pathways to Diversity Conference
- Kathryn L. Ryan and Moorari K. Shah to discuss "Today's regulatory environment - Are you in the know?" at the Equipment Leasing and Finance Association Annual Convention
- Kathryn L. Ryan and Tim Lange to discuss "Temporary authority to operate - Are you prepared? Hear what the states are doing" at the RegList Annual Workshop
- Jonice Gray Tucker to discuss "Fintech regulatory developments, crypto-assets, blockchain and digital banking, and consumer issues" at the Practising Law Institute Banking Law Institute
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference