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Financial Regulators Propose Framework for Assessing Diversity At Financial Firms
On October 23, the CFPB, the OCC, the FDIC, the Federal Reserve Board, the NCUA, and the SEC proposed joint standards for assessing the diversity policies and practices of regulated institutions. Section 342 of the Dodd-Frank Act required the Office of Minority and Women Inclusion (OMWI) at each agency to develop the standards. The Act specifically prohibits the standards from imposing requirements on or otherwise affecting the lending policies and practices of any regulated entity, or requiring any specific action based on the findings of an assessment, and the agencies state that the assessments will not occur within the standard examination or supervision process. The standards, which the agencies believe are designed to promote “transparency and awareness,” cover four general areas: (i) organizational commitment to diversity and inclusion, (ii) workforce profile and employment practices, (iii) procurement and business practices to promote supplier diversity, and (iv) practices to promote transparency of organizational diversity and inclusion. The agencies state that the standards account for variables including asset size, number of employees, governance structure, income, number of members or customers, contract volume, location, and community characteristics, and the agencies recognize the standards may need to change and improve over time. The proposed standards are subject to a public comment period, which will run for 60 days once they are published in the Federal Register.
Special Alert: Agencies Issue Joint Statement On Fair Lending Compliance And The CFPB's ATR/QM Rule
On October 22, the CFPB, the OCC, the FDIC, the Federal Reserve Board, and the NCUA (collectively, the Agencies) issued a joint statement (Interagency Statement) in response to inquiries from creditors concerning their liability under the disparate impact doctrine of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B by originating only “qualified mortgages.” Qualified mortgages are defined under the CFPB’s January 2013 Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule). The DOJ and HUD did not participate in the Interagency Statement.
The Interagency Statement describes some general principles that will guide the Agencies’ supervisory and enforcement activities with respect to entities within their jurisdiction as the ATR/QM Rule takes effect in January 2014. The Interagency Statement does not state that a creditor’s choice to limit its offerings to qualified mortgage loans or qualified mortgage “safe harbor” loans would comply with ECOA; rather, the Agencies state that they “do not anticipate that a creditor’s decision to offer only qualified mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.” Furthermore, the Interagency Statement will not necessarily preclude civil actions.
The Agencies acknowledge that although there are several ways to satisfy the ATR/QM Rule, some creditors may be inclined to originate all or predominantly qualified mortgages, particularly when the ATR/QM Rule first becomes effective. In selecting business models and product offerings, the Agencies “expect that creditors would consider and balance demonstrable factors that may include credit risk, secondary market opportunities, capital requirements, and liability risk.” The Agencies further understand that creditors may have a “legitimate business need” to fine-tune their product offerings over the next few years in response to the impact of the ATR/QM Rule, just as they have in response to other significant regulatory changes that have occurred in the past.
The Agencies advise creditors to continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring their policies and practices and implementing effective compliance management systems. Nonetheless, the Agencies state that individual cases will be evaluated on their own merits.
The Agencies state that they “believe that the same principles…apply in supervising institutions for compliance with the Fair Housing Act.” However, because neither DOJ nor HUD participated in issuing the Interagency Statement, it remains to be seen how those agencies would view this issue.
It is noteworthy that the standard articulated in the Interagency Statement (“legitimate business needs”) differs from HUD’s disparate impact rule relating to the Fair Housing Act. In its rule, HUD codified a three-step burden-shifting approach to determine liability under a disparate impact claim. Once a practice has been shown by the plaintiff to have a disparate impact on a protected class, the rule states that the defendant would have the burden of showing that the challenged practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent…or defendant…A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.” (Emphasis added.)
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030
NCUA Updates Examination Report
This week, the NCUA issued Letter No. 13-FCU-09 to advise federally insured credit unions of changes to its examination report. The NCUA made the changes to “streamline the examination report, better clarify the priority exam action items to be resolved, reduce redundancy, and ensure consistency.” In an effort to help credit union officials clearly differentiate between major and minor problems in order to prioritize corrective actions, and to enhance consistency in the examination process, the Document of Resolution (DOR) and Examiner’s Findings will now be stand-alone documents. For any material problems identified in an examination, the examiner’s concern and documented support for that concern will be included in the DOR, along with corrective action plans. The letter also provides a table that details, document-by-document, other changes to the examination report. Full implementation will begin with examinations starting on or after January 1, 2014.
NCUA Files Additional RMBS Actions
On September 23, the NCUA announced that it filed separate lawsuits against nine financial institutions on behalf of five insolvent credit unions for alleged violations of federal and state securities laws in the sale of $2.4 billion in mortgage-backed securities. The complaints, which the NCUA filed in the U.S. District Court for the District of Kansas, claim that the securitizer made numerous misrepresentations and omissions in the offering documents regarding adherence to the originators’ underwriting guidelines, which concealed the true risk associated with the securities and routinely overvalued them. The NCUA claims that when the allegedly risky securities lost value, the credit unions were forced into conservatorship and liquidated as a result of the losses sustained. The NCUA has filed numerous similar suits, and it has previously settled similar claims for more than $335 million with four financial institutions.
NCUA Files LIBOR Action
On September 23, the NCUA announced a lawsuit against 13 international banks alleging violations of federal and state antitrust laws by artificially manipulating the London Interbank Offered Rate (LIBOR) system. The NCUA filed the complaint in the U.S. District Court for the District of Kansas on behalf of five failed credit unions. The NCUA claims the institutions individually and collectively gave false interest rate information through the LIBOR rate-setting process to benefit their own LIBOR-related investments, to reduce their borrowing costs, to deceive the marketplace as to the true state of their creditworthiness and to deprive investors of interest rate payments. According to the NCUA, the now defunct credit unions held tens of billions of dollars in investments and other assets that paid interest streams tied to LIBOR, and that the alleged conspiracy to artificially depress LIBOR caused the failed credit unions to receive less in interest income than they otherwise were entitled to receive.
Two Federal Courts Hold Government MBS Claims Were Untimely
On April 9, the U.S. District Court for the Central District of California dismissed claims brought by the FDIC as receiver for a failed bank against a financial institution related to 10 MBS certificates sold to the bank, holding that the FDIC’s claims were time-barred. Fed. Deposit Ins. Corp. v. Countrywide Secs. Corp., No. 12-6911, slip op. (C.D. Cal. Apr. 9, 2013). The court found that “a reasonably diligent plaintiff had enough information about false statements in the Offering Documents of [the firm’s] securities to file a well-pled complaint before” the statute of limitations expired on August 14, 2008. The court noted that deviations from stated underwriting guidelines and inflated appraisals had come to light prior to the expiration of the statute of limitations through “multiple lawsuits” and “numerous media sources.” The court found that it was irrelevant that the FDIC was named receiver for the bank because “[t]he FDIC [did] not have the power to revive expired claims.” Similarly, on April 8, the U.S. District Court for the District of Kansas granted, in part, a motion to dismiss federal and state claims brought by the NCUA on behalf of three failed credit unions against a financial institution related to certain MBS certificates sold to the credit unions, holding that certain NCUA claims were time-barred. Nat’l Credit Union Admin. Bd. v. Credit Suisse Secs. (USA) LLC, No. 12 Civ. 2648, 2013 WL 1411769 (D. Kan. Apr. 8, 2013). The court found that the applicable federal and state law statutes of limitations required claims to be filed within one or two years of discovery of the alleged misstatement or omission, and within three or five years of sale or violation, respectively. The judge dismissed the federal and state claims for 12 of the MBS certificates as untimely, but preserved federal claims as to eight certificates, determining that the statutes of limitations were tolled on those claims. In addition, the court found that (i) venue was proper because defendant engaged in activity that would constitute the transaction of business in the district for purposes of the applicable venue statute and (ii) plaintiff set forth plausible claims for relief.
NCUA Announces Pre-Litigation MBS Settlement
On April 2, the NCUA announced that a financial institution agreed to settle allegations related to mortgage-backed securities issued to certain corporate credit unions. The NCUA has alleged on behalf of failed corporate credit unions that certain MBS issuers made numerous misrepresentations and omissions in MBS offering documents regarding adherence to the originators’ underwriting guidelines, which supposedly concealed the true risk associated with the securities and routinely overvalued them. When the allegedly risky securities lost value, the NCUA claims, the credit unions were forced into conservatorship and liquidated as a result of the losses sustained. In this settlement, the institution did not admit fault but agreed to pay $165 million to avoid threatened litigation. The settlement adds to the $170.75 million the NCUA already has obtained from four other institutions, and the agency continues to pursue additional institutions in 10 pending lawsuits.
Federal Regulators Clarify Effective Dates for Flood Insurance Amendments
On March 29, the Federal Reserve Board, the FDIC, the OCC, the NCUA, and the Farm Credit Administration issued an interagency statement to clarify the effective dates for changes to the Flood Disaster Protection Act enacted last year in the Biggert-Water Flood Insurance Reform Act (the Act). The statement informs financial institutions that the force-placed aspects of the Act became effective upon enactment, which was July, 6, 2012, while provisions related to private flood insurance and escrow of flood insurance payments do not take effect until the agencies issue regulations. The statement reiterates the OCC’s prior statement that the new flood insurance penalty provisions in the Act took effect immediately and apply to violations that occurred on or after July 6, 2012.
NCUA Issues Fair Lending Guide, Plans Fair Lending Webinar
On March 19, the NCUA released a letter to credit unions to introduce its new fair lending guide and announce other fair lending tools. The fair lending guide includes (i) an overview of fair lending law and regulations, (ii) credit union operational requirements, (iii) fair lending compliance policy considerations, and (iv) checklists for testing compliance with laws and regulations, or developing a fair lending policy for compliance. The letter also explains that the NCUA’s determinations about which credit unions will be examined for fair lending are based on (i) HMDA outliers, (ii) recent fair lending findings or violations identified in safety and soundness exams, (iii) general risk compliance ratings, and (iv) other factors such as volume, types, and complexity of products and services offered, types of communities served, and customer fair lending complaints. The NCUA also announced its plans to hold a fair lending webinar on April 4, 2013.
NCUA Names New Ombudsman, Elevates Position
On February 11, the NCUA announced that Joy Lee assumed the duties of Ombudsman, effective immediately. The NCUA also explained that it has elevated the position so the Ombudsman will now be supervised by the Executive Director's office and report directly to the Board. Prior to this position, Ms. Lee served as Senior Federal Financial Institutions Examination Council Advisor to the NCUA Chairman, and before that served in several senior staff positions at NCUA since joining the agency as an examiner in 1987.