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Financial Services Law Insights and Observations

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  • Bank and Philadelphia reach $10 million settlement in redlining suit

    State Issues

    On December 16, a national bank and the city of Philadelphia agreed to a $10 million settlement in a fair lending suit filed against a national bank in 2017 in the U.S. District Court for the Eastern District of Pennsylvania. The settlement resolves claims against the bank alleging violations of the Fair Housing Act, as previously covered in InfoBytes. Specifically, the city alleged that the bank engaged in discriminatory mortgage lending practices by placing minority borrowers in loans with less favorable terms than loans to similar non-minority borrowers. According to the complaint, these allegedly discriminatory loans increased foreclosure rates and resulted in falling property values, particularly in minority and low-income neighborhoods in Philadelphia. The empty properties and lower property values in turn reduced tax revenues and increased costs to the city to pay for municipal services including police, fire fighting, housing programs, and also maintenance for the growing number of empty properties. The court had previously denied the bank’s motion to dismiss, (prior InfoBytes coverage here), which argued, among other things, that the city had failed to show that the bank’s alleged lending practices were the proximate cause of the city’s harm.

    State Issues Courts Fair Housing Act Mortgage Origination Settlement Redlining Fair Lending

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  • Michigan approves temporary authority to act as a licensed mortgage loan originator

    On December 4, the Michigan governor signed HB 5084, which, among other things, includes provisions granting temporary authority for certain mortgage loan originators (MLOs) to originate loans in the state without a state license. Specifically, HB 5084 provides that, in order to be eligible for temporary authority to operate, the individual must be employed by an entity that is licensed or registered under applicable state laws and meets the following additional criteria: has no previous MLO application denials or MLO license suspensions or revocations in any state; has not been subject to, or served with, a cease and desist order in any state; has not been convicted of, or pled guilty or no contest to, a disqualifying crime; has submitted the required application and fee and meets the applicable surety bond requirement; was registered in the NMLS as a loan originator during the one-year period immediately preceding the date on which the applicant submitted the required information; and has not been subject to a prohibition order pertaining to any of the financial licensing acts. Individuals who were licensed as mortgage loan originators in another state the individual is eligible for temporary authority to act as a mortgage loan originator if the individual meets the criteria above and was licensed in another state during the 30 days immediately prior to submitting the required application information in Michigan. 

    Beginning November 24, HB 5084 permits qualifying MLO applicants to have temporary authority to act as a mortgage loan originator while their applications are pending for licensure for up to 120 days, or upon the withdrawal, denial, notice of intent to deny, or approval of the licensing application, whichever is sooner.

    Licensing State Legislation State Issues Mortgage Origination

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  • Wisconsin to provide temporary authority for MLOs

    On November 26, the Wisconsin governor signed SB 457, which, among other things, includes provisions granting temporary authority for certain mortgage loan originators (MLOs) to originate loans in the state while their license applications are pending. Specifically, SB 457 provides that in order to be eligible for temporary authority to operate, the individual must have been a registered MLO prior to becoming employed by a mortgage banker or mortgage broker, and must meet the following additional criteria: (i) no previous MLO application denials; (ii) no MLO license suspensions or revocations in any governmental jurisdiction; (iii) has not been “subject to, or served with, a cease and desist order in any governmental jurisdiction or by the director or the [CFPB]”; (iv) has not been convicted of a disqualifying crime; and (v) must be registered with the NMLS as a loan originator for a one-year period immediately preceding the date on which the applicant furnished the required information. For individuals who were licensed MLOs in another state, and are now employed by a mortgage banker or mortgage broker in Wisconsin, the individual is eligible for temporary authority to operate if the individual met criteria (i) through (iv) listed above and was licensed in another state during the 30 days prior to submitting the required application information in Wisconsin. Beginning November 28, SB 457 permits qualifying MLO applicants to engage in mortgage transactions while their applications are pending for licensure for up to 120 days, or upon the withdrawal, denial, or approval of the licensing application, whichever is sooner.

    Licensing State Legislation State Issues Mortgage Origination

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  • FSOC issues final guidance on nonbank designations; highlights key risks in annual report

    Agency Rule-Making & Guidance

    On December 4, the Financial Stability Oversight Council (FSOC) issued final interpretive guidance to revise and update 2012 guidance concerning nonbank financial company designations. According to Treasury Secretary Steven T. Mnuchin, the guidance “enhances [FSOC’s] ability to identify, assess, and respond to potential risks to U.S. financial stability. . . by promoting careful analysis and creating a more streamlined process.” Among other things, the guidance (i) implements an activities-based approach for identifying, assessing, and addressing potential risks and threats to financial stability in the U.S., allowing FSOC to work with federal and state financial regulators to implement appropriate actions when a potential risk is identified; (ii) enhances the analytic framework for potential nonbank financial company designations, which includes a cost-benefit analysis and a review of the likelihood of a company’s material financial distress determined by its vulnerability to a range of factors; and (iii) enhances the efficiency and effectiveness of the nonbank financial company designation process by condensing the process into two stages and increasing “engagement with and transparency to” companies under review, as well as their regulators, through the creation of pre- and post-designation off ramps.

    FSOC also released its 2019 annual report to Congress, which reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. Key highlights include:

    • Cybersecurity. FSOC states that “[g]reater reliance on technology, particularly across a broader array of interconnected platforms, increases the risk that a cybersecurity event will have severe consequences for financial institutions.” Among other things, FSOC recommends continued robust, comprehensive cybersecurity monitoring, and supports the development of public and private partnerships to “increase coordination of cybersecurity examinations across regulatory authorities.”
    • Nonbank Mortgage Origination and Servicing. The report adds the increasing share of mortgages held by nonbank mortgage companies to its list of concerns. FSOC notes that of the 25 largest originators and servicers, nonbanks originate roughly 51 percent of mortgages and service approximately 47 percent—a notable increase from 2009 where nonbanks only originated 10 percent of mortgages and serviced just 6 percent. FSOC states that risks in nonbank origination and servicing arise because most nonbanks have limited liquidity as compared to banks and rely more on short-term funding, among other things. FSOC recommends that federal and state regulators continue to coordinate efforts to collect data, identify risks, and strengthen oversight of nonbanks in this space.
    • Financial Innovation. The report discusses the benefits of new financial products and practices, but cautions that these may also create new risks and vulnerabilities. FSOC recommends that these products and services—particularly digital assets and distributed ledger technology—should be continually monitored and analyzed to understand their effects on consumers, regulated entities, and financial markets. 

    Agency Rule-Making & Guidance FSOC Nonbank Mortgages Mortgage Origination Mortgage Servicing Privacy/Cyber Risk & Data Security Fintech

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  • Georgia proposes temporary authority for MLOs

    On November 18, the Georgia Department of Banking and Finance issued a notice of proposed rulemaking, which would require several state specific requirements for mortgage loan originators (MLO) seeking to utilize temporary authority (Temporary Authority) in the state of Georgia pursuant to Section 106 of the Economic Growth, Regulatory Relief, and Consumer Protection Act—which is set to take effect November 24. Specifically, the proposed rule outlines the following additional requirements:

    • Disclosure requirements. Mortgage companies are required to provide additional written disclosures to consumers showing that the MLO is not licensed and may ultimately not be granted a license. This written disclosure shall be “made no later than the date the consumer signs an application or any disclosure, whichever event occurs first,” and must be maintained by the company. Additionally, the disclosure must state that the Department “may take administrative action against the [MLO] that may prevent such individual from acting as a [MLO]” before a loan is closed. The language in the rule must appear on the loan documentation in 10-point bold-face type.
    • Education requirements. Any MLO who qualifies to utilize Temporary Authority must submit proof to the Department that they have enrolled in a class to satisfy education requirements and have registered to take the national MLO test. Both notifications must be submitted within 30 days of the MLO’s application submission.
    • Advertising requirements. All advertisements must “clearly and conspicuously” indicate that MLOs operating under Temporary Authority are currently unlicensed and have pending applications with the Department. Moreover, the advertisement must state that the “Department may grant or deny the license application.”
    • Transaction journal requirements. Mortgage companies must maintain a journal of mortgage loan transactions that clearly identifies when any MLO utilizes Temporary Authority at any point in the application or loan process. The transaction journal should also notate the outcome of the MLO’s license application as either “approved, withdrawn, or denied.”
    • Signature requirements. Any MLO operating under temporary authority must indicate “TAO,” (temporary authority to operate) or use a substantially similar designation next to any signature on a loan document, including those that relate to the negotiation of terms or the offering of a loan.
    • Administrative fines. Mortgage companies who employ a person who does not satisfy the federal Temporary Authority requirements but engages in licensable MLO activities under Georgia law will be subject to a fine of $1,000 per occurrence and the mortgage companies’ license shall be subject to suspension or revocation.

    Comments on the proposed rule must be received by December 18.

    Visit here for additional guidance on MLO temporary authority from APPROVED.

    Licensing State Regulators Mortgage Origination MLO State Issues EGRRCPA

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  • CFPB seeks feedback on TRID

    Agency Rule-Making & Guidance

    On November 20, the CFPB issued a request for information (RFI) regarding the TILA-RESPA Integrated Disclosures Rule (TRID Rule) assessment, which is required by Section 1022(d) of the Dodd-Frank Act. Section 1022(d) requires the Bureau to conduct an assessment of each “significant rule or order” no later than five years after its effective date. The Bureau issued the TRID Rule in November 2013, and the rule took effect on October 3, 2015. In addition to comments received on this RFI, the Bureau notes that it is also considering the approximately 63 comments already received regarding the TRID Rule from the 2018 series of RFIs issued on the adopted regulations and new rulemakings, as well as the inherited regulations (covered by InfoBytes here and here).

    The RFI seeks public feedback on any information relevant to assessing the effectiveness of the TRID Rule, including (i) comments on the feasibility and effectiveness of the assessment plan; (ii) recommendations to improve the assessment plan; (iii) data and information about the benefits, costs, and effectiveness of the TRID Rule; and (iv) recommendations for modifying, expanding, or eliminating the TRID Rule.

    Comments must be received within 60 days of publication in the Federal Register.

    Agency Rule-Making & Guidance TRID RFI Mortgages Mortgage Origination Dodd-Frank TILA RESPA CFPB Disclosures

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  • FDIC quarterly looks at growth in nonbank lending

    Federal Issues

    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.”

    Federal Issues FDIC Nonbank Mortgage Origination Mortgage Servicing Mortgages Nonbank Lending

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  • CFPB issues FAQs on SAFE Act amendments

    Agency Rule-Making & Guidance

    On September 25, the CFPB published four FAQs pertaining to compliance with federal SAFE Act amendments created by the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), which take effect on November 24. According to the Bureau, the Act’s amendments “establish temporary authority, which provides a way for eligible loan originators who have applied for a new state loan originator license to act as a loan originator in the application state while the state considers the application.” Specifically, the FAQs address (i) residential mortgage loan originator categories and requirements; (ii) the temporary authority to act as a loan originator, as added by Section 106 of the Act; (iii) guidance concerning state transitional license availability under the SAFE Act; and (iv) the impact of the Act’s amendments on the permissibility of state transitional licensing under the SAFE Act and Regulation H.

    Agency Rule-Making & Guidance CFPB EGRRCPA Licensing SAFE Act Mortgage Origination

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  • Washington DFI proposes MLO and student loan servicer amendments

    State Issues

    On September 24, the Washington State Department of Financial Institutions (DFI) will hold a rulemaking hearing to discuss amendments concerning mortgage loan originators (MLOs) as well as provisions related to student loan servicers. The proposed amendments will amend rules impacting Washington’s Consumer Loan Act and the Mortgage Broker Practices Act, including those related to the regulation of student loan servicers under a final rule that went into effect January 1. (See previous InfoBytes coverage on DFI’s adoption of amendments concerning student loan servicers here.) According to DFI, the proposed amendments are currently scheduled to take effect November 24.

    Among other proposed changes impacting MLOs are additional disclosure requirements concerning interest rate locks. Under the proposed amendments, MLOs will be required to provide a new interest rate lock agreement to a borrower within three business days of a locked interest rate change. Valid reasons for a change in a locked interest rate include changes in loan value, credit score, or other factors that may directly affect pricing. The amendments will also permit MLOs to include a prepayment penalty or fee on an adjustable rate residential mortgage loan provided “the penalty or fee expires at least sixty days prior to the initial reset period.” Among other provisions, the amendments also stipulate that a loan processor may work on files from an unlicensed location provided the processor accesses the files directly from the licensed mortgage broker’s main computer system, does not conduct any of the activities of a licensed MLO, and the licensed MLO has in place safeguards to protect borrower information.

    The proposed amendments also contain several changes applicable to student loan servicers regulated under the Consumer Loan Act, including that: (i) licensees servicing student loans for borrowers in the state “may apply to the director to waive or adjust the annual assessment amount”; (ii) licensees are required to disclose to all service members their rights under state and federal service member laws and regulations connected to their student loans; and (iii) student loan servicers must review all student loan borrowers against the Department of Defense’s database to ensure borrower entitlements are applied appropriately, and maintain written policies and procedures for this practice. The proposed amendments also state that compliance with federal law is sufficient for complying with several Washington requirements applicable to student loan servicers, including borrower payment provisions.

    State Issues State Regulators Student Lending Student Loan Servicer Mortgage Origination

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  • Texas adopts licensing requirements for MLOs

    On August 16, the Finance Commission of Texas adopted provisions to amend various licensing requirements for residential mortgage loan originators (MLOs) regulated by the state’s Office of Consumer Credit Commissioner (OCCC), and implement licensing provisions in HB 1442, which took effect September 1. The amendments adopted by the Commission in August “maintain the current one-year term, the current December 31 expiration date, and the current reinstatement period from January 1 through the last day of February.” The Commission further clarified that these amendments apply to MLOs regulated by the OCCC, not just those applying for licensure. The amendments took effect September 5.

    Licensing State Issues Mortgage Origination Mortgage Licensing

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