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Financial Services Law Insights and Observations


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  • Federal Regulators Finalize Bank Stress Test Rules

    Consumer Finance

    On October 9, the OCC and the FDIC each finalized a rule to implement the company-run stress test requirements of the Dodd-Frank Act. The stress tests are exercises designed to gauge the losses that covered institutions might experience under hypothetical scenarios established by the regulators. The OCC and FDIC rules apply to covered institutions with average total consolidated assets greater than $10 billion. Covered institutions with assets over $50 billion are subject to the stress test requirements immediately. They will be required to submit results in January 2013 of stress tests based on data as of September 30, 2012 and scenarios that the FDIC and the OCC plan to publish next month. Implementation of the stress test requirements for institutions with assets of $10 billion to $50 billion will not begin until October 2013. Also on October 9, the Federal Reserve Board (FRB) finalized two stress test-related rules. The first rule establishes the stress test requirements for bank holding companies, state member banks, and savings and loan companies with more than $10 billion in total consolidated assets. As with the OCC and FDIC rules, the FRB rule delays implementation of stress test requirements for covered institutions with $50 billion or less in assets until the fall of 2013. Additionally, the results of that first test will not have to be publicly disclosed. The second FRB rule establishes the company-run stress test requirements for bank holding companies with $50 billion or more in total consolidated assets, and nonbank financial companies designated as systemically important by the Financial Stability Oversight Council. These institutions are required to conduct two internal stress tests each year, in addition to a stress test performed by the FRB. Like the OCC and the FDIC, the FRB expects to release its stress test scenarios in November.

    FDIC Nonbank Supervision Federal Reserve OCC Bank Compliance FSOC

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  • Special Alert: CFPB Announces First Determination Of A Petition to Modify Or Set Aside A Civil Investigative Demand


    On September 20, the Consumer Financial Protection Bureau issued its first Decision and Order on a petition to modify or set aside a civil investigative demand (CID).  The petition challenged a CID issued to a non-bank mortgage servicer (the Company) seeking responses to 21 interrogatories and 33 document requests.  CFPB Director Richard Cordray denied the petition in its entirety and ordered the Company to comply with the CID within 21 days.  In addition to ruling on the substantive issues relevant to the petition, the Decision and Order demonstrates the importance of including detailed and specific objections in any petition to modify or set aside a CID and the crucial role of the meet-and-confer sessions.

    The CID, served on May 22, was issued in connection with the Bureau’s investigation regarding whether ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders violates section 8 of the Real Estate Settlement Procedures Act (RESPA).  In the petition filed on June 12, the Company argued among other things that the CID (i) did not state the nature of the conduct under the investigation; (ii) was overly broad, unduly burdensome, and irrelevant; and (iii) requested materials going back more than 11 years when RESPA’s statute of limitations was 3 years and the CFPB’s enforcement power cannot be predicated on acts prior to July 21, 2010.

    In denying the petition, the Bureau began by explaining that CIDs play a “crucial role” in the Bureau’s ability to carry out its duty to enforce consumer financial laws.  It stated that the purpose of CIDs are to “close the [information] gap” between the Bureau and the subject company and/or individual in order for the Bureau to determine whether the investigation is worth pursuing, and if so, to what extent.

    The CFPB then set forth the standard it will use to consider and resolve petitions to modify or set aside CIDs, adopting the deferential standard of review relied upon by Circuit Courts of Appeals in proceedings to enforce administrative subpoenas.  That standard provides that a CID will be enforced if it satisfies the following requirements:  (i) the investigation is for a lawfully authorized purpose; (ii) the information requested is relevant to the investigation; and (iii) procedural requirements are followed.  If the Bureau establishes these factors, the CID will be enforced unless the petitioner demonstrates the CID imposes an “undue burden” or constitutes an abuse of process.

    With respect to the Company’s first issue, that the CID failed to state the nature of the conduct at issue, the Company argued that the CID’s description of the purpose of the investigation was so broad as to encompass every aspect of mortgage lending, and thus did not satisfy the notice requirement established by the Dodd-Frank Act.  The Bureau rejected this contention and found that “notice was provided from the outset and repeatedly thereafter” beginning as early as January 3 and through to May 22 in the CID’s “Notification of Purpose.”  In support of this finding, the CFPB cited cases standing for the proposition that the subject matter of investigations can be provided generally.

    With respect to the Company’s assertion that the CID was an overly broad and unduly burdensome fishing expedition, the Bureau noted that the petition “offered little or no detail to make the kind of showing required to substantiate these claims.”  It explained that in order to meet its legal burden, the petitioner needed to show the specific nature and the magnitude of the hardship and state specifically how compliance will harm its business.  The Bureau further noted that it already had made substantial modifications to the CID through the meet-and-confer process, and the Bureau’s enforcement team had stated that it was willing to consider other potential limitations.

    Finally, with respect to the Company’s objection that the CID sought documents, items, and information exceeding the applicable limitations period, the CFPB maintained that the relevant issue was not whether the information itself was actionable but rather whether that information was relevant to conduct that was actionable.  It cited other authority which allowed discovery beyond the statute of limitations and noted the importance of collecting relevant information in order to accurately and completely investigate a matter.

    Petitioning a newly-founded government agency in unchartered territories always is a difficult exercise.  With the increasing number of CFPB investigations and enforcement actions, that exercise will become even more challenging.  In light of the Bureau’s first determination of a petition to modify or set aside a CID, potential CID recipients will be left to wonder:  how is the CFPB likely to respond to future petitions of this type?  Given its precedential value for potential petitioners, it is important to determine what, if anything, can be gleaned from the CFPB’s determination.

    First, the Bureau makes clear that it is incumbent on petitioners to be specific in their objections to a CID.  Petitioners must specifically describe the burdens that supplying requested information imposes on the company and how the information sought is irrelevant to the investigation.  In fact, the Bureau criticized the petition’s use of “general objections” and summarily dismissed the arguments associated with those objections.

    Second, given the deferential standard of review which will be applied to such petitions, the meet-and-confer sessions take on increased importance.  The meet-and-confer session is intended as an opportunity to narrow the scope of the requests and close the information gap between the CFPB and the subject of the investigation.  As a prerequisite to filing a petition, CID recipients are obligated to confer with the Bureau in a good-faith effort to resolve issues and concerns.   In fact, the CFPB’s Rules of Investigations provide that “[t]he Bureau will not consider petitions to set aside or modify civil investigative demands unless the recipient has meaningfully engaged in the meet and confer process described in this subsection and will consider only issues raised during the meet and confer process.”  12 C.F.R. part 1080.6(c)(3) (emphasis added).  While the CFPB did not decide whether the Company met this obligation, the Bureau did express its concern to future parties about the importance of approaching this obligation affirmatively and engaging in “a productive discussion that can resolve issues or concerns more effectively.”

    CFPB Nonbank Supervision Mortgage Servicing Mortgage Insurance Enforcement Investigations

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  • CSBS Proposes Uniform Reporting of Authorized Delegates for Money Service Businesses

    Consumer Finance

    On September 28, the Conference of State Bank Supervisors (CSBS) proposed a system for state-licensed money service businesses (MSBs) to report information concerning authorized delegates through NMLS. Licensed MSBs are permitted to contract with third-parties-authorized delegates-to perform the function of receiving and dispensing funds on behalf of the MSB. Most state regulators require that MSBs report information regarding their authorized delegates. NMLS currently is expanding to allow state agencies to manage filings by non-mortgage companies, including MSBs. To date, nine states have started to manage or have announced their intent to manage MSB licenses through NMLS. An NMLS working group has determined that the reporting of authorized delegate information is not supported by NMLS' existing platform. The instant proposal (i) identifies new NMLS functionality to facilitate reporting of authorized delegate information, (ii) outlines policies to implement such reporting, and (iii) describes the process by which an MSB would report such information through NMLS. The CSBS has requested comment from licensees and regulatory agencies by November 1, 2012.

    Nonbank Supervision NMLS Money Service / Money Transmitters

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  • CFPB Releases Examination Procedures for Consumer Reporting Agencies

    Consumer Finance

    On September 5, the CFPB released procedures to guide its staff in examining “larger participant” consumer reporting agencies (CRAs). In July, the CFPB adopted a rule that will allow it to supervise CRAs with more than $7 million in annual receipts from consumer reporting activities starting September 30, 2012. The procedures outline how examiners should assess a CRA’s compliance with federal requirements, primarily under the Fair Credit Reporting Act, relating to (i) using and providing accurate consumer information, (ii) handling consumer disputes, (iii) providing disclosures to consumers, and (iv) preventing fraud and identity theft. While the procedures focus on issues specific to consumer reporting, they include a module that directs examiners to consider whether a CRA offers any other consumer financial product or service that creates other risks to consumers, particularly with regard to Gramm-Leach-Bliley privacy requirements and potential unfair, deceptive, or abusive acts or practices (UDAAP violations).

    CFPB Nonbank Supervision Consumer Reporting

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  • Special Feature: Report on the AARMR 23rd Annual Regulatory Conference


    The American Association of Residential Mortgage Regulators (AARMR) held its 23rd Annual Regulatory Conference in Boston, Massachusetts from August 14-17, 2012.  AARMR is the trade association of state mortgage regulators that coordinates state-level regulation of the mortgage industry and, in partnership with the Conference of State Bank Supervisors (CSBS), created the National Mortgage Licensing System & Registry (NMLS).

    The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, legal professionals, and education providers to discuss the latest developments in mortgage supervision and pressing issues confronting the industry, most notably developments regarding: (i) the SAFE Act and entity level licensing through the NMLS and (ii) the examination, enforcement and rulemaking initiatives of the Consumer Financial Protection Bureau (CFPB).

    On August 14, recently appointed NMLS Ombudsman Timothy Siwy, Deputy Secretary for Non-Depository Institutions, Pennsylvania Department of Banking, presided over his first bi-annual NMLS Ombudsman Meeting, which allows NMLS users an opportunity to raise concerns and questions regarding the NMLS.  Specifically, the session addressed the following topics, among others:

    • Continued discussion of the states potentially issuing (1) “reciprocal licenses” for mortgage loan originators (MLOs) based on similar state education and testing standards, or (2) a 90- to 120-day “transitional license” for MLOs needing additional time to complete a state’s specific MLO requirements;
    • “Inactive licenses” for federally registered MLOs, which would allow MLOs not currently employed by a state-licensed entity to obtain and maintain an “Approved-Inactive” status in the NMLS if the MLO otherwise satisfies the state’s MLO licensing requirements;
    • The Uniform State Test for MLOs, which is expected to launch in Spring 2013;
    • Alleviating “home state” licensure for MLOs, which is where a state requires the MLO to secure a license not because the MLO makes loans to borrowers in the state or secured by property in the state, but rather because the MLOs office is located in the home state;
    • Issues facing exempt companies, such as insurance companies, that may be required to obtain entity level approval via NMLS because of certain non-lending activities performed by its employees, e.g., underwriting activities;
    • States compelling submission of information from depository institutions to authorize state exemptions via the NMLS when such depository institutions may otherwise be exempt from a state’s mortgage lending law;
    • The April 2012 NMLS amendments, including a request for uniformity among states regarding recently-implemented requirements to upload documentation to the NMLS; and
    • Suggestions on how to improve the user interface of the NMLS.

    Subsequent panel discussions provided more detailed information on several of these topics, and also examined related NMLS issues.

    Details regarding the specific issues submitted for comment, as well as accompanying exhibits and an audio recording, will be made available on the NMLS Ombudsman website.

    The Conference included several CFPB focused panels, which included presentations from high ranking CFPB officials.

    First, on August 15, Edwin Chow, Regional Director, CFPB, West Region, discussed the CFPB’s supervision process for both banks and non-bank lenders with a focus on the recently launched non-bank exams.  Mr. Chow stated that the general intention of a CFPB examination is to evaluate a company’s ability to manage its compliance.  An entity’s ability to manage its compliance is assessed through the CFPB’s examination approach, which at a macro level includes:

    • The CFPB initiating the first point of contact through a preliminary meeting by phone or in-person with the entity;
    • Prior to an examination, issuing a letter to the entity requesting information to facilitate fast and efficient review of the entity;
    • Throughout the process, coordinating with state regulators of the entity; and
    • Following the examination, performing an “exit interview” prior to any finalized action to discuss tentative findings and conclusions and to address how issues may be corrected.

    Regardless of the region in which the examination is being conducted, Mr. Chow indicated that the CFPB will strive for uniformity and consistency in its examination approach.

    Also, on August 16, Steven Antonakes, Associate Director for Supervision, Enforcement, and Fair Lending, CFPB, and David Bleicken, Acting Deputy Associate Director for Supervision, Enforcement, and Fair Lending, CFPB, provided an update on the CFPB’s Supervision, Enforcement, and Fair Lending division and provided an overview of the CFPB’s enforcement approach.  Specifically, the officials indicated that during examinations the CFPB will:

    • Focus on harm to consumers, as it weighs heavily into whether the CFPB takes a “punitive” or “instructive” approach in a particular examination, (e.g., the CFPB may consider on a case-by-case basis whether consumer reimbursements are appropriate when there was no actual harm to a particular consumer);
    • Continue its efforts to maintain any relevant attorney-client privilege for information disclosed by entities.  Following the issuance of its January bulletin and June 28 final rule, the CFPB has asserted that a party may submit information to the CFPB in the supervisory or regulatory process without waiving any applicable privileges;
    • Utilize a product-based, rather than institution-based, focus; and
    • Utilize real-time information sharing.

    While the CFPB touched on the process for making decisions about what constitutes an “abusive” practice under the CFPB’s unfair, deceptive, or abusive acts or practices (UDAAP) authority, the officials declined to comment regarding mortgage-specific practices that the CFPB would generally deem to be “abusive.”

    The CFPB expects to issue the first summary of its examination findings this fall.

    Finally, during a separate panel on August 16, Peter Carroll, Assistant Director of Mortgage Markets, CFPB provided an overview of the CFPB’s widely-reported rulemakings on the combined TILA/RESPA disclosure form, HOEPA, appraisals, ability to repay and qualified mortgages, mortgage servicing guidelines, and MLO compensation and qualification.  Mr. Carroll indicated that next year the CFPB plans to focus on HMDA reporting and reverse mortgages.

    In addition to the above, the Conference covered other various federal and state regulatory issues, including the following:

    • In the panel “Mortgage Fraud and Other Trends Affecting Housing Finance Federal Housing Finance Agency (FHFA) Office of Inspector General,” representatives of the FHFA-OIG provided an overview of its ongoing audits of mortgage fraud;
    • “Mortgage Loan Servicing: Aftermath of National Servicer Settlement/Updates & Lessons” provided an overview of the widely-reported mortgage servicing settlement announced earlier this year.  Notably, Joseph Smith, Monitor of the Office of Mortgage Settlement Oversight, provided several comments regarding the settlement and fair lending concerns.  Specifically, while some have expressed a concern regarding the application of principal reductions for protected classes, the Monitor noted that violations of state fair lending laws were specifically reserved in the settlement, and the Monitor takes the position that the consumer relief provisions do not authorize him to assess whether principal reductions are being equally applied with respect to protected classes;
    • In the panel “Multistate Mortgage Committee Overview of Examination Procedures: Risk Scoping to Post-Exam Enforcement,” the Multistate Mortgage Committee (MMC), which coordinates examination and supervision of mortgage lenders, servicers and brokers operating in more than one state, gave an overview of its activities that (i) emphasized a risk-based approach to examinations, and (ii) outlined an examinations process that strives for uniformity, modernization, and effectiveness;
    • “A Look at Foreclosure Prevention, Loan Modification Scams and the Role of the Regulators” provided an overview of loan modification and foreclosure-related concerns,  including issues affecting low-income borrowers and protected classes; and
    • “FinCEN, Updates on AML for Mortgage Lenders and Originators” provided an overview of anti-money laundering, specifically the recently-effective requirement for non-banking entities, including residential mortgage lenders and originators, to file suspicious activity reports.


    CFPB Mortgage Licensing Nonbank Supervision Mortgage Origination NMLS CSBS

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  • State Regulators Urge Passage of CFPB Privilege Legislation

    Consumer Finance

    On August 23, the American Association of Residential Mortgage Regulators, the Conference of State Bank Supervisors, and other state financial regulators sent a letter to Representatives Jim Renacci (R-OH) and Ed Perlmutter (D-CO) in support of H.R. 6125. The recently introduced legislation seeks to amend the Federal Deposit Insurance Act to ensure that information submitted by banks and nonbanks to the CFPB is treated as privileged and confidential information. The state regulators argue that the bill will allow state and federal regulators to share information to facilitate better collaboration and will support use of the Nationwide Mortgage Licensing System and Registry. The letter adds that other federal legislation to address the confidentiality of information submitted to the CFPB does not go far enough to support federal-state coordination.

    CFPB Examination Nonbank Supervision CSBS

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  • FinCEN Issues Reminder Regarding New AML Compliance Obligations for Non-Bank Residential Mortgage Lenders and Originators

    Financial Crimes

    On August 13, FinCEN reminded non-bank residential mortgage lenders and originators (RMLOs) that their obligation to comply with new anti-money laundering (AML) regulations started this week. In February, FinCEN finalized a rule to extend to RMLOs certain AML regulations already applicable to other types of financial institutions, requiring non-bank RMLOs to establish AML compliance programs and file suspicious activity reports (SARs). The rule took effect April 16, 2012, but non-bank RMLOs had until August 13, 2012 to comply. This week’s announcement, as well as an advisory issued by FinCEN on August 16, remind covered companies that all FinCEN reports must be filed electronically and provide other compliance guidance. For additional information and compliance tips, please check out BuckleySandler’s three-part Spotlight Series on these new requirements for non-bank RMLOs.

    Nonbank Supervision Anti-Money Laundering Bank Secrecy Act

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  • Bills Introduced on Regulation of Short Term, Small Dollar Lending

    Consumer Finance

    On July 18, Representatives Luetkemeyer (R-MO) and Baca (D-CA) introduced H.R. 6139, a bill that would create a national charter for qualified non-depository creditors, to be known as National Consumer Credit Corporations (NCCCs). The bill would task the OCC with assessing applications with a focus on the applicant institution’s ability to offer products that provide credit to underserved consumers, and developing a process for approving financial products to be offered by NCCCs.  The OCC would be able to establish an annual fee for a charter, but it would not be permitted to restrict the method by which an NCCC offers its products, or to establish usury limits. NCCCs would be subject to certain restrictions, including a prohibition on consumer loans with terms of 30 days or less. The House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing to consider H.R. 6139 on July 24, 2012.

    On July 24, Senators Merkley (D-OR), Udall (D-NM), and Durbin (D-IL) introduced a bill, first revealed by Senator Merkley in March 2012, and now formalized as S. 3426, the Stopping Abuse and Fraud in Electronic Lending Act. According to a press release, the bill seeks to  (i) ensure that a third party doesn’t gain control of a consumer’s account through remotely created checks, (ii) allow consumers to cancel a debit in connection with a small-dollar loan, (iii) require all lenders, including banks, to abide by a state’s rules for small-dollar, payday-like loans they offer customers in the state, (iv) ban lead generators and anonymously registered payday lending websites, and (v) give the CFPB authority to shut down payment processing for lenders that are violating state and other consumer lending laws through the Internet.

    CFPB Payday Lending Nonbank Supervision

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  • Congress Acts on Bills Regarding Protection of Information Submitted to CFPB and ATM Fee Disclosure Requirements


    On July 12, Representatives Renacci (R-OH) and Perlmutter (D-CO) introduced H.R. 6125, a bill that would amend the Federal Deposit Insurance Act to grant protections to documents and information submitted by banks and nonbanks to the CFPB and state bank and financial regulators. H.R. 4014, a similar bill, previously passed the House with broad bipartisan support. The House also recently passed by a wide margin H.R. 4367, a bill to eliminate the EFTA requirement that ATM providers attach a fee disclosure placard to their machines. On July 17, Senate Banking Committee Chairman Johnson (D-SD) introduced with the support of Ranking Member Shelby (R-AL) S. 3394, which combines versions of H.R. 4014 and H.R. 4367 for Senate consideration.

    CFPB Nonbank Supervision

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  • CFPB Releases Semiannual Regulatory Agenda

    Consumer Finance

    On July 16, the CFPB announced the release of its spring 2012 rulemaking agenda. The agenda lists the regulatory matters that the CFPB anticipates pursuing during the period June 1, 2012 through May 31, 2013. It also updates the CFPB’s first-ever such agenda, published as part of the fall 2011 Unified Agenda. For example, the updated agenda indicates that the CFPB expects to issue by January 2013, an Advance Notice of Proposed Rulemaking regarding the registration of certain nonbank entities, whereas the fall 2011 agenda anticipated a Notice of Proposed Rulemaking on this topic by March 2012. Similarly, the new rulemaking agenda updates the date by which the CFPB expects to take further action on developing regulations concerning the expanded HMDA data collection required by the Dodd-Frank Act from October 2012 to April 2013.

    CFPB Dodd-Frank Nonbank Supervision Bank Compliance

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