InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Democrats urge HUD to “immediately rescind” disparate impact proposal
On November 22, the Democratic members of the House Financial Services Committee sent a letter to Secretary of HUD Ben Carson, opposing the agency’s proposed rule amending its interpretation of the Fair Housing Act’s (FHA) disparate impact standard (also known as the “2013 Disparate Impact Regulation”). The letter argues that the proposed rule would “make it harder for everyday Americans who find themselves victims of housing discrimination to get justice.” As previously covered by InfoBytes, in August, HUD issued the proposed rule in order to bring the rule “into closer alignment with the analysis and guidance” provided in the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a Buckley Special Alert) and to codify HUD’s position that its rule is not intended to infringe on the states’ regulation of insurance. Specifically, the proposed rule codifies the burden-shifting framework outlined in Inclusive Communities, adding five elements that a plaintiff must plead to support allegations that a specific, identifiable policy or practice has a discriminatory effect. Moreover, the proposal provides methods for defendants to rebut a disparate impact claim.
The letter urges Secretary Carson to “immediately rescind” the proposed rule, calling the proposal a “huge departure from a standard and framework that has been expressly supported by HUD…[and] a deviation from decades of legal precedent, including a Supreme Court decision affirming the legitimacy of the disparate impact standard under the [FHA].” Moreover, the letter argues that “[i]n 2018, Black homeownership rates reached the lowest they had since before the [FHA] was passed,” and that HUD’s mission to build inclusive and sustainable communities will be “seriously compromised” with this proposed rule.
CFPB report compares large and small mortgage servicers
On November 21, the CFPB released a new Data Point report from the Office of Research titled, “Servicer Size in the Mortgage Market,” which examines the differences between large and small mortgage servicers in the mortgage market. The report considers mortgage servicers in three size categories, (i) “small servicers” that service 5,000 or fewer loans; (ii) “mid-sized servicers” that service between 5,000 and 30,000 loans; and (iii) “large servicers” that service more than 30,000 loans.” Key findings of the report include:
- Only five percent of loans at small servicers are insured by FHA or guaranteed by the VA, the Farm Service Agency, or the Rural Housing Service, whereas such loans account for about 25 percent of loans at mid-sized and large servicers.
- Less than one-third of conventional loans are serviced on behalf of Fannie Mae or Freddie Mac at small servicers, whereas at large servicers, over 75 percent of conventional loans are serviced for Fannie Mae or Freddie Mac.
- Small servicers service the majority of loans in a number of rural counties in the U.S., particularly in the Midwest.
- From 2012 to 2018, delinquency rates of loans at large and small servicers generally converged, as compared to mortgage crisis levels when delinquency rates for loans serviced by small services were much lower than at mid-sized and large servicers.
- In response to a survey, 74 percent of borrowers with mortgages at small servicers said having a branch or office nearby was important, compared to 44 percent of borrowers with mortgages at large servicers.
FDIC creates advisory committee for state regulators
On November 19, the FDIC announced a new advisory committee between the agency and state regulators to discuss issues related to the regulation and supervision of state-chartered financial institutions. The committee, titled the Advisory Committee of State Regulators (ACSR), will explore topics such as (i) safety and soundness; (ii) consumer protection issues; (iii) the creation of new banks; and (iv) financial system risks, including cyberattacks or money laundering. Members of the ACSR will be composed of state financial regulators, as well as other individuals “with expertise in the regulation of state-chartered financial institutions.”
House passes bill to let SEC go back 14 years on disgorgement
On November 18, the U.S. House passed the Investor Protection and Capital Markets Fairness Act (H.R. 4344) by a vote of 314-95. The bill, which was received in the Senate, would overturn the U.S. Supreme Court’s 2017 decision in Kokesh v. SEC, which limits the SEC’s disgorgement power and subjects the agency to the five-year statute of limitations applicable to penalties and fines. (Previously covered by InfoBytes here.) As discussed in a recent Buckley article, in Kokesh’s wake, H.R. 4344 would amend the Securities Exchange Act of 1934 by specifically authorizing the SEC to seek disgorgement and restitution, putting to rest the threshold question of whether the SEC has the authority to seek disgorgement. Notably, on November 1, the Court granted certiorari in Liu v. SEC to answer this very question. If signed into the law, H.R. 4344 would allow the SEC 14 years to pursue disgorgement in federal court under the statute of limitations.
FDIC quarterly looks at growth in nonbank lending
On November 14, the FDIC released its latest issue of the FDIC Quarterly, which analyzes the U.S. banking system and focuses on changes occurring since the 2008 financial crisis, particularly within nonbank lending growth. The three reports—published by the FDIC’s Division of Insurance and Research—“address the shift in some lending from banks to nonbanks; how corporate borrowing has moved between banks and capital markets; and the migration of some home mortgage origination and servicing from banks to nonbanks.”
- Bank and Nonbank Lending Over the Past 70 Years notes that total lending in the U.S. has grown dramatically since the 1950s, with a shift in bank lending that reflects the growth of nonbank loan holders as nonbanks have gained market share in residential mortgage and corporate lending. The report states that in 2017, nonbanks represented 53 percent of mortgages originated by HMDA filers, and originated a significant volume of loans for sale to the GSEs. Mortgage servicing also saw a shift from banks to nonbanks, with nonbanks holding “42 percent of mortgage servicing rights held by the top 25 servicers in 2018.” The report also discusses shifts in lending for commercial real estate, agricultural loans, consumer credit, and auto loans, and notes that bank lending to nondepository financial institutions has grown from roughly $50 billion in 2010 to $442 billion in the second quarter of 2019.
- Leveraged Lending and Corporate Borrowing: Increased Reliance on Capital Markets, With Important Bank Links examines the shift in corporate borrowing from banks to nonbanks, with nonfinancial corporations “relying more on capital markets and less on bank loans as a funding source.” The report also, among other things, discusses resulting risks and notes that “[d]espite the concentration of corporate debt in nonbank credit markets, banks still face both direct and indirect exposure to corporate debt risks.”
- Trends in Mortgage Origination and Servicing: Nonbanks in the Post-Crisis Period examines changes to the mortgage market post 2007, including the migration outside of the banking system of a substantive share of mortgage origination and servicing. The report also discusses trends within the mortgage industry, key characteristics of nonbank originators and servicers, potential risks posed by nonbanks, as well as potential implications the migration to nonbanks may pose for banks and the financial system. Specifically, the report lists several factors contributing to the resurgence of nonbanks in mortgage origination and servicing, including (i) crisis-era legacy portfolio litigation at bank originators; (ii) more aggressive nonbank expansion (iii) nonbanks’ technological innovations and mortgage-focused business models; (iv) large banks’ sales of crisis-era legacy servicing portfolios due to servicing deficiencies and other difficulties; and (v) capital treatment changes to mortgage servicing assets applicable to banks. The report emphasizes, however, that “[c]hanging mortgage market dynamics and new risks and uncertainties warrant investigation of potential implications for systemic risk.”
FTC settles with technology service provider on data security issues
On November 12, the FTC announced a proposed settlement, which requires a technology service provider to implement a comprehensive data security program to resolve allegations of security failures, which allegedly allowed a hacker to access the sensitive personal information of about one million consumers. According to the complaint, the FTC asserts that the service provider and its former CEO violated the FTC Act by engaging in unreasonable data security practices, including failing to (i) have a systematic process for inventorying and deleting consumers’ sensitive personal information that was no longer necessary to store on its network; (ii) adequately assess the cybersecurity risk posed to consumers’ personal information stored on its network by performing adequate code review of its software and penetration testing; (iii) detect malicious file uploads by implementing protections such as adequate input validation; (iv) adequately limit the locations to which third parties could upload unknown files on its network and segment the network to ensure that one client’s distributors could not access another client’s data on the network; and (v) implement safeguards to detect abnormal activity and/or cybersecurity events. The FTC further alleges in its complaint that the provider could have addressed each of the failures described above “by implementing readily available and relatively low-cost security measures.”
The FTC alleges more particularly that, between May 2014 and March 2016, an unauthorized intruder accessed the service provider’s server over 20 times, and in March 2016, “accessed personal information of approximately one million consumers, including: full names; physical addresses; email addresses; telephone numbers; SSNs; distributor user IDs and passwords; and admin IDs and passwords.” Because the information obtained can be used to commit identity theft and fraud, the FTC alleged that the service provider’s failure to implement reasonable security measures violated the FTC’s prohibition against unfair practices.
The proposed settlement requires the service provider to, among other things, create certain records and obtain third-party assessments of its information security program every two years for the 20 years following the issuance of the related order that would result from the settlement.
VA encourages relief for Tropical Storm Imelda-affected borrowers
On November 8, the Department of Veterans Affairs (VA) issued Circular 26-19-29, encouraging mortgagees to provide relief for VA borrowers affected by Tropical Storm Imelda. Among other forms of assistance, the Circular encourages loan holders and servicers to (i) extend forbearances to borrowers in distress because of the disaster; (ii) establish a 90-day moratorium from the disaster declaration date on initiating new foreclosures on affected loans; (iii) waive late charges on affected loans; and (iv) suspend credit reporting related to affected loans. The Circular is effective until January 1, 2021. Mortgage servicers and veteran borrowers are also encouraged to review the VA’s Guidance on Natural Disasters.
Find continuing InfoBytes coverage on disaster relief guidance here.
DOJ charges short-sale negotiators with fraud
On November 8, the DOJ announced that it charged the principals and co-founders (collectively, “defendants”) of a mortgage short sale assistance company with allegedly defrauding mortgage lenders and investors out of half a million in proceeds from short sale transactions. The DOJ also alleged the defendants’ actions defrauded Fannie Mae, Freddie Mac, and HUD. According to the announcement, from 2014 to 2017, the defendants negotiated with lenders for approval of short sales in lieu of foreclosure, and falsely claimed during settlement that the lenders had agreed to pay loss mitigation service fees from the proceeds of short sales. The defendants allegedly obtained around 3 percent of the short sale price from the settlement agent, which was separate from fees paid to real estate agents and closing attorneys, among others. In order to further deceive lenders, the defendants would then file fabricated documents to justify or conceal the additional fees being paid to the company. The defendants were charged with conspiracy to commit wire fraud, and one co-founder was also charged with aggravated identity theft.
FDIC, bank reach RESPA settlement
On November 6, the FDIC announced that a Washington-based bank agreed to settle allegations that it violated RESPA by paying fees to real estate brokers and homebuilders in exchange for mortgage business referrals. Section 8(a) of RESPA “prohibits giving or accepting a thing of value for the referral of settlement service involving a federally related mortgage loan.” According to the FDIC, the bank’s discontinued mortgage banking line allegedly entered into arrangements with real estate brokers and homebuilders to co-market services through online platforms. The FDIC also alleged that the bank’s mortgage banking business rented desk space in brokers’ and homebuilders’ offices, which resulted in the payment of fees by the bank for referrals of mortgage loan business. The FDIC further stated, “While co-marketing arrangements and desk rental agreements are permissible where the fees paid bear a reasonable relationship to the fair market value of marketing or rental costs, such arrangements and agreements violate RESPA when the amounts paid exceed fair market value and the excess is for referrals of mortgage business.” The bank, which has neither admitted nor denied the charges, has agreed to pay a $1.35 million civil money penalty under the terms of the settlement order, and has terminated all of its co-marketing and desk rental agreements.
CFPB holds small business lending symposium
On November 6, the CFPB held a symposium covering small business lending and Section 1071 of the Dodd-Frank Act, which amends ECOA to require financial institutions to compile, maintain, and submit to the Bureau certain information concerning credit applications by women-owned, minority-owned, and small businesses, and also directs the Bureau to promulgate regulations to implement these requirements. In her opening remarks, Director Kraninger, noted that the symposium was being convened to assist the Bureau with information gathering for upcoming rulemaking and emphasized that the Bureau is focused on a rulemaking that would not impede small business access to credit by imposing unnecessary costs on financial institutions. The symposium consisted of two panels, with the first covering policy issues related to small business lending, while the second discussed specific aspects of the requirements of Section 1071. Highlights of the panels include:
- Panel #1. During the policy discussion, panelists focused on non-traditional lenders, namely fintech firms, that have entered the small business lending market, with most noting that these online alternative lenders have filled a necessary lending gap left by traditional banks and depository institutions. While concerns around bad actors in the online lending space were discussed, most panelists agreed that online financing may provide an opportunity for women and minority-owned businesses to avoid potential biases in underwriting, with one panelist noting that his company does not collect gender or race information in its online application.
- Panel #2. Panelists focused their discussion on specific implementation concerns of Section 1071, including compliance costs, definitions of small business and financial institutions, data elements to be reported, and privacy concerns. Among other things, panelists noted that the definition of “small business” should be limited to businesses under $1 million in revenue, which is a figure included in other regulations such as ECOA and the CRA. Panelists disagreed on whether the Bureau should exercise its exemptive authority under Section 1071 for the definition of “financial institution.” While some panelists believe that the broad definition included in the Act is necessary to hold all the players in the market accountable, others argued that large financial institutions that receive an “outstanding” CRA rating should be excluded from the reporting requirements. As for data elements, most agreed that the Bureau should only require the statutorily mandated elements and not include any others in the rulemaking, while one panelist suggested that APR must be included in order to ensure that approval rates for minority-owned small businesses are the result of actual innovation and effective business models and not just the charging of high rates. Moreover, panelists reminded the Bureau to be cognizant of the small business lending reporting requirements of the CRA and HMDA and cautioned the Bureau to keep Section 1071 data requirements compatible.