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OCC calls for modernization of financial regulatory perimeter as fintechs/crypto firms increase
On November 16, acting Comptroller of the Currency Michael J. Hsu told attendees at the Federal Reserve Bank of Philadelphia’s Fifth Annual Fintech Conference that the federal banking agencies are “approaching crypto activities very carefully and with a high degree of caution” and “expect banks to do the same.” Hsu pointed out what while changes to the financial regulatory perimeter generally occur as a response to crises and failures, regulatory agencies need to take proactive modernization measures given the astounding growth and expansion of fintechs and cryptocurrencies. Hsu highlighted several important questions that agencies must consider, including whether fintech and crypto firms will start to function like banks and whether bringing them into the bank regulatory perimeter would be the proper solution. He also stated that regulatory agencies must consider whether the risks faced by banks and fintech/crypto firms are the same and, subsequently, whether agencies need to modernize or maintain their status quo. Hsu focused on two specific areas of concern: (i) synthetic banking, or fintechs, operating outside the bank regulatory perimeter but that offer a range of services, including extending various forms of credit and offering interest on cash held in accounts (emphasizing the importance of fintech-bank partnerships); and (ii) the fragmented supervision of universal crypto firms, where Hsu asserted that gaps in supervision are driven by the fact that crypto firms are not subject to comprehensive consolidated supervision.
Hsu announced that the agencies will soon issue a statement conveying results from a recent interagency “crypto sprint,” and that the OCC will also provide clarity on its recently concluded review of crypto-related interpretive letters. Hsu explained that “safety and soundness is paramount” when banks engage in crypto activities and that the agencies’ clarifications “should not be interpreted as a green light or a solid red light, but rather as reflective of a disciplined, deliberative, and diligent approach to a novel and risky area.”
Fed announces written agreement against China-based bank and NY branch
On November 16, the Federal Reserve Board announced an enforcement action against a Chinese state-owned bank’s New York branch for alleged credit risk management deficiencies. The written agreement requires the bank and its branch to jointly submit a written plan to strengthen senior management oversight of risk management and internal controls, including a sustainable governance and risk management framework. Among other things, the plan must ensure that the branch’s risk management, internal audit function, and credit risk functions maintain appropriate stature and independence, and that potential credit risks are timely escalated. Additionally, risk management roles and responsibilities must be “clearly defined” in the plan, and the bank must ensure that “data management procedures are incorporated into an effective data governance framework.” After the Fed approves the plans, the bank and branch will have 30 days following the end of each quarter to submit “written progress reports detailing the form and manner of all actions taken to secure compliance” with the provisions of the written agreement.
CFPB seeks input on HMDA
On November 16, the CFPB issued a notice and request for comments regarding the rules for implementing the Home Mortgage Disclosure Act (HMDA). The Request for Information (RFI) solicits public comments on its plans to assess the effectiveness of the HMDA Rule, focusing on, among other things: (i) institutional and transactional coverage; (ii) data points; (iii) benefits of the new data and disclosure requirements; and (iv) operational and compliance costs. According to the CFPB, the RFI follows a 2021 HMDA report, which found that mortgage lenders deny credit and charge higher interest rates to Black and Hispanic applicants more often than white applicants, and a July 2021 report that analyzed 2020 HMDA loan data and examined the differences in mortgage characteristics across Asian American and Pacific Islander subgroups. (Covered previously by InfoBytes here and here.) Additionally, the RFI notes that the Bureau expects to issue a report on the findings of its assessment of the HMDA Rule by January 1, 2023. The Bureau also notes that it “plans to review recent changes to the rule and evaluate their effectiveness,” and that the assessment “will strengthen the CFPB’s ability to maintain a fair, competitive, and non-discriminatory mortgage market.” The deadline for submitting comments on the RFI is 60 days after the notice is published in the Federal Register.
Democratic senators ask CFPB to reconsider the credit reporting process
On November 10, seven democratic senators sent a letter to CFPB Director Rohit Chopra requesting that the Bureau reform the credit reporting industry by improving credit reporting accuracy and updating the process on dispute resolutions, among other things. The senators recommended that the Bureau examine persistent errors in credit reporting “and how CRAs [(credit reporting agencies)] consistently fail to resolve these errors, especially by failing to devote sufficient personnel and resources for dispute resolution—a shortcoming the CFPB could use its supervisory authority to remedy.” Among other things, the senators requested that the Bureau (i) establish an ombudsperson position to facilitate the dispute resolution process; (ii) require nationwide CRAs to match an individual’s full Social Security number; (iii) consider requiring nationwide CRAs to perform accuracy audits on information furnishers periodically; and (iv) “codify provisions of the nationwide CRAs’ settlement with state attorneys general that delayed reporting of medical debt for six months and removed debts paid by insurance.” The senators noted that their requests were not exhaustive, and asked for immediate action to be taken to protect consumers and establish “much-needed accountability into the credit reporting system.”
CFPB releases FAQs on HMDA requirements
On November 10, the CFPB updated its FAQs on the Home Mortgage Disclosure Act (HMDA) reporting requirements to clarify institutional and transactional coverage. The updated FAQs, among other things, highlighted that the final rule, issued in April 2020, established the closed-end mortgage loan threshold to be 100 in each of the two preceding calendar years, effective July 2020, and the open-end line of credit threshold at 200 in each of the two preceding calendar years, effective January 1, 2022, upon the expiration of the temporary threshold of 500 open-end lines of credit. (Covered by InfoBytes here). Additionally, the FAQs presented circumstance-based questions and answers applying the threshold rules to scenarios with varying originations of closed-end mortgage loans and open-end lines of credit and addressed voluntary reporting.
On November 12, the CFPB sent a reminder to institutions that the threshold for reporting HMDA data for open-end lines of credit will adjust to 200 open-end lines of credit in each of the two preceding calendar years effective January 1, 2022. According to the reminder, starting January 1, 2022, an institution that meets the new threshold and all other Regulation C institutional coverage criteria, must collect, record, and report data about its open-end lines of credit.
CFPB sues pawn lenders for MLA violations
On November 12, the CFPB filed a complaint against a Texas-based pawn lender and its wholly owned subsidiary (together, “lenders”) for allegedly violating the Military Lending Act (MLA) by charging active-duty servicemembers and their dependents more than the allowable 36 percent annual percentage rate on pawn loans. According to the Bureau, between June 2017 and May 2021, the two lenders together allegedly made more than 3,600 pawn loans carrying APRs that “frequently exceeded” 200 percent to more than 1,000 covered borrowers. The Bureau further claimed that the lenders failed to make all loan disclosures required by the MLA and forced borrowers to waive their ability to sue. The identified 3,600 pawn loans only represent a limited period for which the Bureau has transactional data, the complaint stated, adding that the pawn stores located in Arizona, Nevada, Utah, and Washington that originated these loans only comprise roughly 10 percent of the Texas lender’s nationwide pawn-loan transactions. As such, that Bureau alleged that the lenders—together with their other wholly owned subsidiaries—made additional pawn loans in violation of the MLA from stores in these and other states. The Bureau seeks injunctive relief, consumer restitution, disgorgement, civil money penalties, and other relief, including a court order enjoining the lenders from collecting on the allegedly illegal loans and from selling or assigning such debts.
As previously covered by InfoBytes, the Bureau issued a prior consent order against an affiliated lender in 2013, which required the payment of $14 million in consumer redress and a $5 million civil money penalty. The affiliated lender was also ordered to cease its MLA violations. In its current action, the Bureau noted that because the Texas lender (who was not identified in the 2013 action) is a successor to the prior affiliated lender, it is therefore subject to the 2013 order. Accordingly, the Bureau alleged that the Texas lender’s violations of the MLA also violated the 2013 order.
FTC releases draft strategic plan for FY 2022 - 2026
On November 12, the FTC released a preliminary draft of the Strategic Plan for Fiscal Years 2022 to 2026 for public review and comment. Recognizing that protecting the public from unfair or deceptive acts or practices in the marketplace is a key FTC strategic goal, the draft Strategic Plan outlines several objectives guiding the Commission’s work in this area including (i) identifying, investigating, and taking enforcement action to deter these types of harm; (ii) providing consumers and businesses with guidance and tools to prevent harm; (iii) engaging in domestic and international collaboration efforts to enhance consumer protections, including those related to telemarketing, internet fraud, and privacy violations; and (iv) advancing measures to support underserved and marginalized communities. Recognizing that consumers cannot always identify whether unfair or deceptive practices have occurred, the FTC reports it will continue to identify consumer protection violations and collaborate with law enforcement partners to identify trends and targets and enforce consumer protection laws. These efforts will include safeguarding consumer privacy and litigating cases involving privacy risks.
Additional goals outlined within the draft Strategic Plan focus on marketplace competition, anticompetitive mergers, antitrust issues, resource management and workforce protections, and climate readiness. The draft Strategic Plan notes the importance of “cross-training staff on both consumer protection and competition issues” and of “grasping market realities” as “the economy becomes increasingly digitized.” According to the FTC, the “agency plans to be especially attentive to next-generation technologies, innovations, and nascent industries across sector.” Comments on the draft plan may be submitted through November 30.
Fannie updates Covid-19 payment deferral provisions
On November 17, Fannie Mae reissued LL-2021-07 to provide updated requirements for servicers when evaluating a borrower for a Covid-19 payment deferral offer. The updated lender letter was originally published in November 2020 and updated in February 2021 (covered by InfoBytes here). Specifically, the revisions update requirements related to performing an escrow analysis, and require single-family servicers to: (i) perform an escrow analysis when evaluating borrower for Covid-19 payment deferrals; (ii) “inform the borrower of the full monthly contractual payment based on repayment of any escrow shortage amount over a term of 60 months before the borrower can accept the COVID-19 payment deferral offer”; and (iii) “spread any escrow shortage repayment amount in equal monthly payments over a period of 60 months, unless the borrower decides to pay the escrow shortage amount in a lump sum up-front or over a shorter period (not less than 12 months) for a COVID-19 payment deferral or a Flex Modification for COVID-19 impacted borrowers.” Changes apply to a Fannie Mae Flex Modification and a Disaster Payment Deferral and will be incorporated into the Servicing Guide in February 2022. The provisions in the lender letter are effective until further notice. Fannie Mae encourages servicers to implement these policy changes immediately but no later than March 1, 2022.
Agencies end Covid mortgage servicing flexibility
On November 10, the OCC, Federal Reserve Board, CFPB, FDIC, NCUA, and state financial regulators issued a joint statement announcing the end to temporary supervisory and enforcement flexibility provided to mortgage servicers due to the Covid-19 pandemic by the agencies’ April 3, 2020 joint statement. As previously covered by InfoBytes, the April 2020 joint statement provided mortgage servicers greater flexibility to provide CARES Act forbearance of up to 180 days and other short-term options upon the request of borrowers with federally backed mortgages without having to adhere to otherwise applicable rules. The April 2020 joint statement also announced that agencies would not take supervisory or enforcement action against mortgage servicers for failing to meet certain timing requirements under the mortgage servicing rules provided that servicers made good faith efforts to provide required notices or disclosures and took related actions within a reasonable time period.
The agencies noted in their announcement that while the pandemic continues to affect consumers and mortgage servicers, servicers have had sufficient time to take measures to assist impacted consumers and develop more robust business continuity and remote work capabilities. Accordingly, the agencies “will apply their respective supervisory and enforcement authorities, when appropriate, to address any noncompliance or violations of the Regulation X mortgage servicing rules that occur after the date of this statement.” However, the agencies will take into consideration, when appropriate, “the specific impact of servicers’ challenges that arise due to the COVID-19 pandemic and take those issues in account when considering any supervisory and enforcement actions,” including factoring in the time it may take “to make operational adjustments in connection with this joint statement.”
The same day, the Bureau released a report titled Mortgage Servicing Efforts in Response to the Covid-19 Pandemic, summarizing efforts taken by the Bureau since the start of the pandemic to respond to the evolving needs of homeowners and CFPB-supervised entities. These responses include: (i) conducting prioritized assessments and targeted supervisory reviews; (ii) issuing reminders to servicers that being “unprepared is unacceptable”; (iii) implementing temporary procedural safeguards to allow borrowers time to explore options before foreclosure; (vi) analyzing consumer complaint data and conducting targeted reviews of high-risk complaints related to pandemic forbearances; (v) analyzing and releasing information relating to mortgage servicers’ pandemic responses; (vi) documenting research on the pandemic’s disproportionate impact on Black, Hispanic, and low-income communities; and (vii) partnering with other federal agencies to create online tools to provide information on CARES Act assistance and protections, as well as providing homeowner outreach materials. The Bureau noted it “will continue to monitor closely the performance of mortgage servicers to prevent avoidable foreclosures to the maximum extent possible and will not hesitate to take supervisory or enforcement action if warranted.”
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.