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Federal Reserve Extends Comment Period on Proposed Rules for Oversight of Largest Banks and Systemically Important Nonbanks

On March 2, the Federal Reserve Board extended from March 31, 2012 to April 30, 2012 the comment period on its proposed rules related to supervision and regulation of (i) all U.S. bank holding companies with assets of $50 billion or more, and (ii) nonbank financial firms designated as systemically important by the Financial Stability Oversight Council.

Nonbank Supervision Federal Reserve

CFPB Proposes Rule to Define "Larger Participants" in the Consumer Debt Collection And Consumer Reporting Markets

On February 16, the CFPB released a proposed rule to define “larger participants” in the markets for consumer debt collection and consumer reporting, thereby beginning the process by which the CFPB will determine which such entities are subject to its supervision. In short, the proposal uses annual receipts as the metric for determining larger participants. Under the Dodd-Frank Act, the CFPB has authority to supervise, regardless of size, nonbanks that provide to consumers (i) origination, brokerage, or servicing of residential mortgage loans secured by real estate, and related mortgage loan modification or foreclosure relief services; (ii) private education loans; and (iii) payday loans. The CFPB also has the power to supervise “larger participants” in any other market for consumer financial products or services, and the Act grants the CFPB authority to define “larger participants.” In this first effort to define larger participants in specific markets, the CFPB proposes to supervise debt collectors with more than $10 million in annual receipts from debt collection activities, which would cover approximately 175 debt collection firms that collectively account for 63 percent of annual receipts from the debt collection market. Consumer reporting agencies with more than $7 million in annual receipts from consumer reporting activities also would be covered, capturing approximately seven percent of consumer reporting agencies, or about 30 firms, which the CFPB estimates account for approximately 94 percent of the annual receipts from consumer reporting. Stakeholders and the public can submit comments on the proposal through April 17, 2012. The CFPB plans to issue larger participant proposed rules for other markets. Final rules for all markets must be published by July 21, 2012.

CFPB Dodd-Frank Nonbank Supervision

Special Alert: Report on NMLS Annual User Conference and Training

The Nationwide Mortgage Licensing System and Registry (NMLS) held its fourth annual NMLS User Conference and Training (the Conference) in Scottsdale, Arizona from February 6-9, 2012. The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, top law firms, and education providers to learn about the latest developments in mortgage supervision and to discuss pressing issues confronting the industry. This special report includes a summary of key topics addressed at the meeting as well as announcements regarding important state licensing initiatives, including:  (i) enhancements to the NMLS system to expand its use for licensing of non-mortgage financial services companies, (ii) issuance of SAFE Act examination guidelines, and (iii) the announcement of efforts to develop a uniform mortgage loan originator state test.

The first day of the Conference included the bi-annual NMLS Ombudsman Meeting, which provided an opportunity for NMLS users to raise issues concerning the NMLS, state and/or federal regulation. NMLS Ombudsman Deborah Bortner, Director of the Non-Depository Division of the Washington Department of Financial Institutions, presided over the meeting, in which specific questions submitted by industry representatives were addressed. Several of the submitted questions focused on "leveling the playing field" between depositories and non-depositories by suggesting various means to allow a more efficient flow of mortgage loan originators (MLOs) from a federally-registered MLO status to a state-licensed MLO status. Suggestions included "transitional licensing", which would allow a federally registered MLO that moves to a state-licensed entity to continue operating for a period of 120 days, during which the individual would complete education, testing and other requirements in order to secure licenses within the transitional approval. Another suggestion was to allow federally registered MLOs to complete state education, examination, and other approval requirements prior to moving from a federal registrant to a state licensee. During a later panel, the Consumer Financial Protection Bureau (CFPB) indicated that there are no immediate plans to amend the requirements applicable to federal registrants.

Full details regarding the specific issues submitted for comment, as well as accompanying exhibits, are available on the NMLS website.  A recording of the Ombudsman Meeting should be posted to the NMLS Resource Center in the near future.

The remaining days of the Conference covered various federal and state regulatory rule implementation, updates for industry, and a look ahead at new initiatives and changes to the NMLS. Specifically, various sessions covered the following issues:

• The CFPB’s supervision of the mortgage industry and the direction that the CFPB is taking with respect to depository and non-depository financial services, including a discussion with CFPB staff regarding issues of interpretation and implementation of state licensing, NMLS and the rules implementing the SAFE Act. Of particular interest, the CFPB indicated that it has started planning its first set of exams of non-depository financial institutions and that the CFPB will select institutions for examination based on size, volume, type of product or service offered, extent of state oversight, patterns of complaints, and other factors.
• Industry views on the regulation of and the future of the mortgage industry.
• Updates regarding the Mortgage Call Report, including a review of preliminary data, how it is used by regulators, and a review of additional changes and updates to assist with the compliance process.
• Review of the NMLS federal registration process and a discussion on how to improve the process.
• NMLS testing and education discussion, with a focus on understanding the desire from industry for increasing the available continuing education topics in order to provide a better learning experience for MLOs.
• NMLS federal examination and third party compliance management, including a discussion of best practices that institutions can consider to efficiently and effectively implement policies and procedures to ensure third parties are properly licensed and/or registered.
• Credit and criminal background checks for MLOs, control persons, and branch managers, which included discussions of expanding the criminal background check process from MLOs to also include branch managers and control persons.
• Potential modifications to the NMLS to accommodate state pre-notification filings for changes in control, changes in branch manager, or other changes in corporate structure or operations that require prior notice.
• Federal and state rules implementation, including ability to repay, loan officer compensation and TILA/RESPA disclosure conflicts.
• Discussion of important FHA rule changes for 2011 and upcoming changes in 2012.
• Surety bonds necessary to comply with state and federal law, including underwriting considerations, risk mitigation, and claim resolution.

In addition to the above general sessions, the Conference covered several major changes and new initiatives announced by the Conference of State Bank Supervisors (CSBS), including:

• System Enhancements and Expansion of NMLS to Cover Additional Financial Services Companies. The CSBS announced plansto expand the use of the NMLS to include nonbank, non-mortgage financial service providers, including consumer lenders, money services businesses, and debt collectors. Following this expansion, these other nonbank firms will be obligated to alter their compliance programs in order to apply for, amend, and renew state licenses using the NMLS. Entities that previously obtained and maintained relevant licenses via hard-copy applications and filings will be required to transition onto the NMLS, a process which could prove difficult as licensee's struggle to learn the new system and which may allow the state agency an opportunity to vet anew its licensees. While the electronic application and related processes will be centralized and uniform, entities that use the NMLS to obtain and maintain their licenses still will be subject to various unique state-specific requirements, which must be dealt with outside of the NMLS. For many participants in the mortgage industry, the mandated use of the NMLS has brought with it heightened compliance costs and increased reporting requirements, particularly as states increased disclosure and other application requirements to become more consistent with other states.  Non-mortgage state licensed financial institutions should be mindful of this experience and be prepared to review their licensing compliance procedures and resources following transition to the NMLS.  At a minimum, licensees should carefully monitor developments regarding licensing requirements during and after the transition to the NMLS.Through expansion of the system state bank regulators expect to see improved efficiency, and regulated entities can expect enhanced supervision and increased public access to license, registration, and supervisory information. The expansion is scheduled to begin in April when at least 12 states will begin transitioning their exiting licensing and registration systems to the NMLS.Further, the April expansion and update will include other changes and enhancements in an effort to improve the system overall:

• New Workflow – the changes and enhancements to the system require a new "license management workflow" (i.e., online navigation and information contained in the uniform plans) to support the new Business Activities section. The new workflow will (1) introduce a new navigational landing page in the Company (MU1), (2) combine the selection of licenses and entry of transition numbers into one step, and (3) introduce new navigation items onto the License/Registrations page.
• Amended Forms – the uniform mortgage forms (i.e., MU1 and MU3) will be amended to "Company Filing" and "Branch Filing", respectively, in anticipation of the expansion of the system to cover non-mortgage related industries.
• Business Activities – expands this section of the Form MU1 to allow users to identify a broader range of business activities conducted by the user (e.g., loan modifications, seller of money orders) based on definitions developed by the states.
• Approvals and Designations – introduces new approval and designation types, and allows users to add approval or identification numbers.
• Disclosure Explanation – in addition to updated company, branch and individual disclosure questions, a new disclosure explanation feature will allow users to add explanations to each disclosure question that has a “yes” answer in conjunction with submitting a filing.
• Document Upload – users will be able to upload specific materials into the NMLS to be shared by state regulators, thereby eliminating the need to send certain materials via hard copy outside the system. The type of materials that may be uploaded may include business plans, certificates of good standing, fidelity bonds, errors and omissions insurance, and other materials generally provided in the application and renewal process.
• Criminal Background Check for a Control/Qualifying Individual – all state licensed individuals will be required to complete a criminal background check via the NMLS.

Copies of the updated forms and "Business Activities Description" are available on the NMLS under News & Events.

Upon implementation of the new forms in April, existing NMLS users should be aware that in order to submit any new applications, address updates, addition of officers, or other general maintenance items, the company will be required to complete all new Company Filing fields, and the company's control persons and qualifying individuals must complete additional questions and information requests.

• SAFE Act Examination Guidelines. The Multi-State Mortgage Committee (MMC), a ten-state representative body created by CSBS and AARMR, issued SAFE Act Examination Guidelines (SEGs) for use by state non-depository mortgage regulators.  The SEGs are not required guidelines for state agencies, but utilization of SEGs is intended to allow state agencies to determine compliance with the SAFE Act and provides consistent and uniform guidelines for use by institution in-house compliance and audit departments conducting SAFE Act and state compliance reviews. The SEGs are presented in a question and answer format and are “modular,” such that state mortgage regulators may easily use part or all of the SEGs as they see fit.

• Uniform MLO State Test. The CSBS announced that efforts are underway to develop content for a uniform MLO state test. Currently, an MLO is required to take the state component of the SAFE Act mortgage loan originator test for each state in which he or she intends to be licensed. With the introduction of a uniform MLO state test, an MLO will meet the testing requirement for multiple states by passing a single test that includes content representative of all of the states.An ad hoc committee composed of state regulators has been charged with researching the feasibility of developing a uniform MLO state test.  In coordination with industry subject matter experts and test consultants, the committee has completed its initial feasibility studies and test development is now underway. Later this year, the committee plans to present a uniform test proposal to state regulators.

A message that pervaded the Conference was that with the completion of several multi-year NMLS initiatives responding to the requirements of the SAFE Act (e.g., the introduction of the NMLS Mortgage Call Report), NMLS is turning its attention to implementing changes to and expanding the NMLS.  While the changes are ultimately intended to streamline the NMLS process, current NMLS users should prepare for additional oversight and regulation, and licensees transitioning onto the system should prepare for heightened compliance costs and increased reporting requirements.

For more information about NMLS, visit the NMLS Resource Center, About NMLS.

CFPB Mortgage Licensing Nonbank Supervision Mortgage Origination

CFPB Holds Field Hearing on Payday Lending, Releases Payday Lending Exam Guide

On January 19, the CFPB held a field hearing in Birmingham, Alabama to discuss payday lending products. The hearing, which was the first such hearing held by the CFPB, included three panels featuring CFPB staff, consumer groups, and industry representatives. In conjunction with the event, the CFPB also released its “Short-Term, Small-Dollar Lending Procedures,” which is a field guide for use in examining bank and nonbank payday lenders. These procedures are structured to mirror payday lending activities ranging from initial advertising to collection practices. The CFPB will prioritize its supervision of payday lenders depending on the perceived risk to consumers, taking into account factors such as a lender’s volume of business and the extent of existing state oversight. In remarks at the event, Director Richard Cordray stated that there are some payday lenders and practices that deserve more urgent attention because they present immediate risk to consumers and are “clearly illegal.” The Director identified two examples of such practices, including (i) unauthorized debits on a consumer’s checking account that can occur when the consumer unknowingly “is dealing with several businesses hidden behind a payday loan,” any one of which could be a “fraudster” merely seeking the customer’s private financial information, and (ii) “aggressive debt collection tactics” including “posing as federal authorities, threatening borrowers with criminal prosecution, trying to garnish wages improperly, and harassing the borrower.”

CFPB Payday Lending Nonbank Supervision

CFPB Launches Nonbank Supervision Program

On January 5, the CFPB announced the launch of its nonbank supervision program. With a Director now in place, the Obama Administration believes that the CFPB can now exercise authority granted to it by the Dodd-Frank Act to supervise companies that offer or provide consumer financial products or services, but that do not have a bank, thrift, or credit union charter. (Republican senators have expressed disagreement; in their view, the Dodd-Frank Act grants that authority only when a CFPB Director has been confirmed by the Senate.) Nonbank supervision will proceed in two phases, with immediate focus on nonbank mortgage, payday lending, and private education companies, regardless of such a company's size. A second phase will expand supervision to large debt collection, consumer reporting, auto financing, and money-service businesses. The CFPB expects soon to propose a rule defining "larger participants" in those second-phase markets, a predicate to exercising its supervisory authority over such institutions. The CFPB also noted that it may supervise any nonbank whose conduct poses risks to consumers with regard to consumer financial products or services. Rules describing procedural guidelines for exercising that authority will be published in the future.

Nonbank Supervision