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Fannie and Freddie issue selling policy changes
On February 6, Fannie Mae and Freddie Mac each issued selling policy updates through SEL-2019-01 and Bulletin 2019-4, respectively. According to Fannie Mae’s Selling Guide announcement, the Guide has been updated to include (i) a change from the Quality Assurance System to the Loan Quality Connect platform for post-purchase reviews; (ii) changes to reflect the retirement of the Cost of Funds Index in January 2020; and (iii) a clarification that completion escrow accounts, which are required for construction that is not complete when the related mortgage is delivered to Fannie Mae, must be custodial accounts that satisfy the criteria in the Fannie Mae Servicing Guide.
Freddie Mac’s Bulletin included selling updates regarding, among other things, (i) changes to the Condominium Project requirements; (ii) updates to commission income treatment based on tax law changes; and (iii) updates to the Certificate of Incumbency forms for sellers and servicers.
University settles whistleblower FCA claims
On February 11, the DOJ announced a $2.5 million settlement with a South Carolina university to resolve allegations that the university violated the False Claims Act (FCA) by submitting false claims to the U.S. Department of Education. According to the announcement, between 2014 and 2016, the university hired a company, which was partially owned by the university, to recruit students to the university and paid the company based on the number of students who enrolled in university programs, in violation of the prohibition on paying incentive compensation in Title IV of the Higher Education Act. The co-owner of the company originally brought a qui tam lawsuit against the university and will receive $375,000 from the settlement.
OCC praises CFPB’s payday rule proposal
On February 11, the OCC released a statement from Comptroller of the Currency Joseph Otting supporting the CFPB’s proposed rule rescinding certain requirements relating to underwriting standards for short-term small-dollar loans. (Covered by InfoBytes here.) Calling the proposal “important and courageous,” Otting praised the Bureau, noting that it was “[t]he shrinking supply and steady demand” that “drove up prices and promoted much less favorable terms.” He continued to state that a framework of rules that allows responsible lenders to compete in the market will make the market “work better for everyone.”
As previously covered by InfoBytes, in May 2018, the OCC released a Bulletin encouraging banks to meet the credit needs of consumers by offering short-term, small-dollar installment loans subject to the OCC’s core lending principles.
DOJ settles with mortgage company for alleged SCRA violations
On February 7, the DOJ announced a $750,000 settlement with a New Jersey-based mortgage company resolving allegations that the company violated the Servicemembers Civil Relief Act (SCRA) by foreclosing on homes owned by servicemembers without first obtaining the required court orders. The complaint, which was filed on the same day as the settlement, alleges that between 2010 and 2012 the company foreclosed on six homes of SCRA-protected servicemembers. Under the SCRA, lenders must obtain a court order before foreclosing on a servicemember’s home during, or within one year after, active military service, provided that the mortgage originated before the servicemember’s period of military service. The settlement requires the company to, among other things, (i) pay $125,000 to each affected servicemember; (ii) provide staff training to prevent unlawful foreclosures in the future; and (iii) notify the DOJ of future SCRA complaints.
CFPB announces settlement with payday lending operation
On February 6, the CFPB announced a settlement with an Indiana-based payday retail lender and affiliates (companies) in seven states to resolve alleged violations of the Consumer Financial Protection Act (CFPA), Truth in Lending Act (TILA), and Gramm-Leach-Bliley Act (GLBA) privacy protections. The CFPB alleges that the companies engaged in unfair acts or practices, failed to properly disclose annual percentage rates, and failed to provide consumers with required initial privacy notices.
Specifically, the Bureau alleges that the companies violated CFPA’s UDAAP provisions by, among other things, (i) failing to implement processes to prevent unauthorized charges, including those resulting from unauthorized draws on borrowers’ bank accounts; (ii) requiring loan applicants to provide contact information for their employers, supervisors, and four personal references, and then repeatedly calling employers to seek payments when borrowers became delinquent; (iii) disclosing the borrower’s financial information during those calls and, in certain instances, asking the third party to make payments on the loan; (iv) misusing personal references for marketing purposes; and (v) advertising check-cashing and telephone reconnection services they were no longer providing.
The Bureau also asserts that the companies violated the GLBA by only providing initial privacy notices when consumers opened their first loan. GLBA requires financial services firms to provide borrowers a privacy policy each time a new customer relationship is established, which in this instance the CFPB claims, occurred each time a borrower paid off an outstanding loan and subsequently took out a new loan. Finally, the Bureau alleges that because the payday loans extended by the companies constitute as closed-end credit under TILA and Regulation Z, the companies were required to disclose a payday loan database fee charged to Kentucky customers in the APR but failed to do so. This resulted in, among other things, inaccurate APR disclosures in advertisements.
While the companies have not admitted to the allegations, they have agreed to pay a $100,000 civil money penalty and are prohibited from continuing the illegal behavior.
Senator Crapo unveils plan for housing finance reform
On February 1, Chairman of the Senate Banking, Housing, and Urban Affairs Committee, Mike Crapo (R-ID) released an outline for a sweeping legislative overhaul of the U.S. housing finance system. Most notably, the plan would end the Fannie Mae and Freddie Mac (GSEs) conservatorships, making the GSEs private guarantors while also allowing other nonbank private guarantors to enter the market. Highlights of the proposal include:
- Guarantors. The GSEs would be private companies, competing against other nonbanks for mortgages, subject to a percentage cap. The multifamily arms of the GSEs would be sold and operated as independent guarantors. Consistent with current GSE policy, the eligible mortgages would, among other things, be subject to loan limits set by FHFA and would be required to have an LTV of no more than 80 percent unless the borrower obtains private mortgage insurance.
- Regulation of Guarantors. FHFA, structured as a bi-partisan board of directors, would charter, regulate, and supervise all private guarantors, including the former GSEs. FHFA would be required to create prudential standards that include (i) leverage requirements; (ii) if appropriate, risk-based capital requirements; (iii) liquidity requirements; (iv) overall risk management requirements; (v) resolution plan requirements; (vi) concentration limits; and (vii) stress tests. Guarantors would be allowed to fail.
- Ginnie Mae. Ginnie Mae would operate the mortgage securitization platform and a mortgage insurance fund. Additionally, Ginnie Mae would provide a catastrophic government guarantee to cover tail-end risk, backed by the full-faith and credit of the U.S.
- Transition. In addition to a cap on the percent of all outstanding eligible mortgages, the legislation would require guarantors to be fully capitalized within an unspecified number of years after enactment.
- Affordable housing. Current housing goals and duty-to-serve requirements would be eliminated and replaced with a “Market Access Fund,” which is intended to address the homeownership and rental needs of underserved and low-income communities.
As previously covered by InfoBytes, on January 29, Chairman Crapo released the Senate Banking Committee’s agenda, which also prioritizes housing finance reform.
Fannie Mae announces updates to multifamily small mortgage loan, hybrid ARM loan, and property inspection protocol
On February 1, Fannie Mae issued Lender Memo 19-02 to provide updated guidance for multifamily lenders. The following adjustments have been made to the Multifamily Selling and Servicing Guide and are effective February 4:
- The maximum small mortgage loan amount eligible for underwriting is increased to $6 million and will apply to all markets.
- The maximum Hybrid ARM Loan amount has also been increased to $6 million.
- Property Inspection Protocols and Financial Analysis of Property Operations associated with small mortgage loans have been updated to align asset management requirements with the increases described above. Fannie Mae noted that quarterly financial reporting will not be required—nor will a waiver be needed—for a mortgage loan secured by a cooperative property or a small mortgage loan provided it is not on Fannie Mae’s watchlist or does not have a rating of 4 or 5 on its most recent property inspection.
Federal Reserve Governor discusses CRA modernization feedback
On February 1, Federal Reserve Governor Lael Brainard spoke at the “Research Symposium on the Community Reinvestment Act” hosted by the Federal Reserve Bank of Philadelphia to discuss the need to update Community Reinvestment Act (CRA) regulations. Brainard summarized comment letters received in response to the OCC’s Advance Notice of Proposed Rulemaking (ANPR) published last August (previously covered by InfoBytes) seeking input on ways to transform or modernize the CRA regulatory framework, and discussed the following six key takeaways:
- There is broad support for the CRA among commenters—including academics, financial institutions, banking trade associations, community organizations, consumer groups, and citizens—who, among other things, applaud the volume of CRA loans and investments that support low-and-moderate income households and communities.
- There is general agreement among commenters for the need to modernize—but not completely overhaul—CRA assessment areas, while retaining its core focus.
- Commenters support different performance tests for different types of banks. According to Brainard, there is broad agreement that “CRA regulations cannot be one-size-fits-all” and should be tailored to banks of different sizes, as well as different business models.
- CRA modernization should keep the focus on underserved areas. Commenters discussed concerns about “CRA hotspots and credit deserts,” and the need for incentives to ensure CRA capital can reach underserved communities has been a common theme at regional roundtables.
- Commenters offered recommendations on how to increase the “consistency and predictability of CRA evaluations and ratings.”
- Roundtable discussions as well as commenters have emphasized the “historical context of the CRA as it relates to redlining practices,” and demonstrated strong support for the CRA to retain its underlying focus of reaching all underserved borrowers, including low-income communities and communities of color.
Computer financing operator cannot use bankruptcy to discharge $13.4 million judgment
On February 1, the FTC announced that the U.S. Bankruptcy Court for the Southern District of Florida ruled that the operator of a computer-financing scheme cannot use his bankruptcy to discharge a $13.4 million judgment entered in 2016 for violating a 2008 FTC order. The FTC alleged that the defendant and his affiliated companies collected more than $14 million from consumers based on promises that they would finance the purchase of new computers but failed to actually deliver the computers. The court determined that the contempt judgment issued in 2016 could not be discharged because it resulted from the defendant’s fraudulent conduct “based on both misrepresentation and concealment.” In a press release describing the ruling, the FTC stated that the defendant’s attempt to shield himself from complying with the order by filing for bankruptcy was an attempt to “avoid justice.”
CFPB files proposed consent order banning certain Canadian and Maltese payday lenders from U.S. consumer lending
On February 1, the CFPB and a group of payday lenders, including individuals and corporate officials based in Canada and Malta (collectively, “defendants”), filed a proposed consent order with the U.S. District Court for the Southern District of New York that would resolve allegations that the defendants violated the Consumer Financial Protection Act. According to the Bureau’s press release, the defendants allegedly (i) misrepresented to consumers an obligation to repay loan amounts that were voided because the loan violated state licensing or usury laws; (ii) misrepresented that loan agreements were not subject to federal or state laws; (iii) misrepresented that non-payment would result in lawsuits, arrests, imprisonment, or wage garnishment; and (iv) conditioned loan agreements upon irrevocable wage assignment clauses. Under the terms of the proposed order, the defendants would be, among other things, (i) permanently banned from consumer lending in the U.S.; (ii) permanently restrained from the collection or sale of existing U.S. consumer debts; and (iii) subject to certain reporting and recordkeeping requirements. The proposed order does not impose a fine on the defendants.