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HUD Announces Changes to Distressed Asset Stabilization Program
On June 30, HUD announced a series of changes to its Distressed Asset Stabilization Program (DASP). Last year, HUD updated DASP to (i) extend the time period preventing foreclosure after the note is sold from six months to one year; (ii) require servicers to evaluate borrowers for the Home Affordable Modification Program (HAMP) or a substantially similar modification; and (iii) implement non-profit only sales. In accordance with the most recent changes to DASP, “[c]ertain families with distressed mortgages insured by the [FHA] may soon be eligible for a reduction of their outstanding loan amounts should their mortgages be sold through DASP.” In addition, HUD’s fact sheet for the recent changes announces that DASP will, among other things: (i) limit interest rate increases to no more than one percent per year after a five-year period where the rate is fixed, thereby implementing payment shock protection and ensuring consistency with HAMP; (ii) prohibit purchasers from “walking away” from vacant properties; (iii) revise the 120-day delinquency notice to advise borrowers that their loan may be sold; (iv) set a goal to sell 10 percent of assets to non-profits and local governments; (v) release performance and outcome data on a pool level (instead of a sale level); (vi) release demographic data on sales; (vii) strengthen requirements for investors to obtain Neighborhood Stabilization Outcome (NSO) credit when selling to non-profits; and (viii) target loans for DASP sales based on non-profit and local government interest.
FDIC Conducts Survey on Banks' Small Business Lending Practices
On June 28, the FDIC announced that it is conducting a survey to collect information on banks’ small business lending practices. Selected at random, approximately 2,000 FDIC-insured banks will participate in the web-based small dollar lending survey. Intended to provide insight into various aspects of small business lending, the survey will collect data related to: (i) the general characteristics of banks’ small business borrowers; (ii) the types of credit offered to small businesses; (iii) commercial lending and its relative importance for different-sized banks and business models; (iv) geographical location, collecting data for banks in urban and rural communities; and (v) market areas for small business lending and perceived competition. In addition, the survey contains questions related to consumer transaction accounts, responding to a Congressional mandate to “learn more about bank efforts to bring unbanked individuals into the conventional finance system.” Institutions selected to participate in the survey received a letter from the FDIC in late June with directions on how to proceed. The U.S. Census Bureau is administering the survey on behalf of the FDIC. It is unclear how this survey relates to the CFPB’s forthcoming rulemaking on small business lending.
FSOC Rescinds Nonbank Financial Company's "Too-Big-to-Fail" Designation
On June 29, the Financial Stability Oversight Counsel (FSOC) announced that it rescinded its July 2013 “systemically important” designation of a Connecticut-based financial company. FSOC’s July 2013 designation subjected the company to supervision by the Federal Reserve and enhanced prudential standards. According to FSOC, the company posed a threat to U.S. financial stability due to its standing as one of the largest – ranked by assets – financial services companies in the U.S. At the time of its designation, the company also acted as a significant source of credit to the U.S. economy by providing financing to more than 243,000 commercial customers, 201,000 small businesses through retail programs, and 57 million consumers in the U.S. On June 28, FSOC unanimously voted to rescind its designation, stating that the company had “fundamentally changed its business” by, among other things: (i) decreasing its total assets by more than 50 percent; (ii) moving away from short-term funding; (iii) reducing connections with large financial institutions; (iv) no longer owning any U.S. depository institutions; and (v) no longer providing financing to U.S. consumers or small businesses in the U.S. FSOC also noted that, “[t]hrough a series of divestitures, a transformation of its funding model, and a corporate reorganization, the company has become a much less significant participant in financial markets and the economy.” Treasury Secretary Lew commented that the FSOC’s decision demonstrates a two-way designation process: “The Council follows the facts: When it identifies a company that could threaten financial stability, it acts; when those risks change, the Council also acts.”
Comptroller Curry Lends Perspective on Responsible Innovation
Recently, OCC Comptroller Curry delivered remarks regarding the agency's March 2016 white paper titled “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective.” In his opening remarks at the OCC’s June 23 forum on this topic, Curry noted a “need for heightened risk management to keep pace with the rapid changes in technology, products, services, and processes.” While recognizing that innovation remains an integral part of the banking system and has the ability to strengthen the financial services industry, Curry also emphasized its potential harm to consumers, banks, and the federal banking system at large. In order to limit the risks – such as cyber threats, phishing schemes, fraud, and identity theft – that innovation may pose to the banking industry, the OCC is developing a comprehensive framework to “improve [its] ability to identify and understand trends and innovations in the financial services industry, as well as the evolving needs of consumers of financial services.” According to the March 2016 paper, the OCC has formulated the following eight guiding principles to ensure that its framework supports responsible innovation consistent with safety and soundness, protection of consumer rights, and compliance with appropriate laws and regulations: (i) support responsible innovation; (ii) foster an internal culture receptive to responsible innovation; (iii) leverage agency experience and expertise; (iv) encourage responsible innovation that provides fair access to financial services and fair treatment of consumers; (v) further safe and sound operations through effective risk management; (vi) encourage banks of all sizes to integrate responsible innovation into their strategic planning; (vii) promote ongoing dialogue through formal outreach; and (viii) collaborate with other regulators. According to Curry’s remarks, the OCC’s forum helped “crystalize [] ideas for implementing a framework for innovation in the most effective way.”
100 Days Until the MLA: Compliance Challenges and Open Questions Before the New MLA's Rule Implementation
With only 100 days until the new Military Lending Act (MLA) rule takes effect on October 3, 2016, many financial institutions have begun enacting procedures to ensure they are compliant with the new regulation by the effective date. With the implementation of this new rule, financial institutions continue to work towards full compliance with the requirements imposed by the Department of Defense (DoD), but there are growing pains. As this deadline draws near, there are several important compliance concerns that financial institutions must keep in mind and a number of issues where the industry is concerned about unclear language.What types of credit are covered by the new MLA rule?
The 2007 MLA rule was limited to three specific types of products: payday loans, vehicle title loans, and refund anticipation loans. However, under the new rule, the MLA will cover a far broader range of products. The DoD sought to match the definition of credit under the Truth in Lending Act’s (TILA) implementing regulation—Regulation Z—so the new MLA rule will cover any credit that is (i) primarily for personal, family, or household purposes, and (ii) either subject to a finance charge under Regulation Z or payable by written agreement in more than four installments.
However, the new MLA rule excludes four specific types of transactions:
- Residential mortgages, which are defined as credit transactions secured by an interest in a dwelling. This includes purchase money home mortgages, as well as construction mortgages, refinance mortgages, home equity loans, home equity lines of credit, and reverse mortgages.
- Motor vehicle purchase loans that are secured by the vehicle being purchased. Importantly, motor vehicle refinance loans are not excluded, and therefore are covered by the new MLA rule.
- Personal property purchase loans that are secured by the personal property that is being purchased. As with motor vehicle refinance loans, any refinance or other non-purchase loan secured by personal property is not exempt from MLA compliance.
- Any transaction exempt from TILA (other than pursuant to a state exemption under 12 CFR § 1026.29) or otherwise not subject to disclosure requirements under Regulation Z (such as business-purpose loans).
How do I determine if a customer is a covered borrower under the MLA? What is the MLA safe harbor?
The MLA only applies to “covered borrowers,” a term that includes individuals who are servicemembers or the dependents of servicemembers at the time a qualifying loan was originated. Under the new MLA rule, there are four different safe harbors that a creditor may use to determine if a customer is a covered borrower:
- Online MLA Database (Individual Record Request): This is a free resource provided by the Department of Defense Manpower Data Center (DMDC) that requires the lender to manually enter a customer’s last name and date of birth/Social Security number to obtain a single result from a website. It provides a results certificate in seconds if the database is operational.
- Online MLA Database (Batch Record Request): This is a free resource provided by the DMDC that permits a creditor to upload a spreadsheet with identifying information for up to 250,000 individuals, and the system provides results within 24 hours if the database is operational.
- DMDC Direct Connection: This is a free resource provided by the DMDC that will permit certain large creditors to access the DMDC through a direct data link and obtain results instantaneously. The DMDC is still working to set this up and there will only be a handful of connections available to the largest creditors.
- Consumer Reporting Agency: Under the MLA rule, a code in a consumer report received from a consumer reporting agency can also provide safe harbor protection. Although there are many benefits to this approach, there will be a cost associated with it, and it is unclear if it will be available prior to the October 3, 2016 implementation deadline.
As long as a creditor retains the results of the safe harbor search, these results are “legally conclusive,” even if the customer was in fact on military service at the time of origination or account opening.
What is the Military APR (MAPR)?
The new MLA rule, like its 2007 predecessor, applies a MAPR cap of 36 percent to any debt that is covered by the MLA. The MAPR includes both the finance charges that are included under the Regulation Z APR calculation, as well as credit insurance premiums, debt suspension fees, ancillary product fees, and certain application and participation fees, among other costs and fees.
The MAPR need not be disclosed. However, in many instances, creditors need to refine their existing systems—or create a new system—to calculate the MAPR on a billing period-by-billing period basis to ensure that the MAPR never exceeds 36 percent in any billing cycle for as long as the customer remains a covered borrower.
What other protections are provided by the new MLA rule?
In addition to the 36 percent MAPR limit, the MLA rule also places several other limits on the terms of an extension of credit to a covered borrower. Under the MLA, a creditor may not:
- Roll over, renew, repay, refinance or consolidate any consumer credit extended to the covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower
- Require the borrower to waive his or her right to legal recourse under any state or federal law
- Require the borrower to submit to arbitration or impose onerous legal notice requirements in the event of a dispute
- Demand unreasonable notice from the borrower as a condition for a legal action
- Use a check or other method to access a consumer’s financial account, with certain exceptions
- Use a vehicle title as a security for an obligation, with certain exceptions
- Require the consumer to establish an allotment to repay the debt
- Prohibit the consumer from prepaying the credit or impose a prepayment penalty
What disclosures must be provided under the new MLA rule?
The MLA rule requires three different written disclosures to the consumer before or at the time the borrower becomes obligated on the account: (1) a statement regarding the MAPR (which is not a disclosure of the numeric MAPR and may be satisfied using a model statement provided in the rule itself); (2) any disclosures required by Regulation Z; and (3) a clear description of the payment obligation of the borrower (which may be a payment schedule for closed-end credit or an account opening disclosure for open-end credit).
In addition, the MAPR statement and the description of the payment obligation must also be offered to the consumer orally before or at the time the borrower becomes obligated on the account. A creditor can satisfy this requirement by either providing the information to the customer in person, or by providing a toll-free telephone number that the consumer may call to obtain this information.
Are credit cards covered under the new MLA rule?
Yes, credit cards are covered under the new MLA rule. However, credit card issuers have an additional year to comply with the MLA rule’s requirements and need not have their compliance plans in place until October 3, 2017.
As we approach the October 3, 2016 implementation date, what are some areas of uncertainty under the MLA rule?
As it is currently written, there are several loan products and scenarios covered by the new rule where it is unclear how regulators and the courts will apply the MLA’s protections. Among the areas where there is some uncertainty under the MLA are the following:
- How can creditors ensure full compliance with the oral notice requirements under the MLA? Is it necessary to provide account-specific disclosures orally before the loan has been made and boarded onto the lender’s system?
- For creditors issuing credit based upon a telephone call from a consumer, how can they best comply with the requirement to provide written disclosures before the borrower becomes obligated?
- How can creditors best structure their account agreements so that they can use one account agreement for both MLA and non-MLA customers?
- If a creditor assigns an account to a third party, can the third party also enjoy the protections of the MLA covered borrower safe harbor?
- If the consumer reporting agencies have not reached an agreement with the DMDC to provide active duty information, how can financial institutions determine military status when issuing credit through instantaneous, automated (e.g. online or retail point-of-sale) channels?
SCOTUS Vacates First Circuit Ruling, Holds Scope of FCA Materiality Requirement is "Demanding"
On June 16, the United States Supreme Court issued an opinion vacating a First Circuit ruling on the grounds that the appellate court’s interpretation of the False Claims Act’s (FCA) materiality requirement to include any statutory, regulatory, or contractual violation is overly broad. Universal Health Servs., Inc. v. U.S. ex rel. Escobar, No. 15-7 (U.S. June 16, 2016). In a unanimous opinion delivered by Justice Clarence Thomas, the Court held that the implied false certification theory can be a basis for liability under the FCA when (i) the defendant submits a claim for payment to the government that makes specific representations about the goods or services provided; and (ii) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements make its representations misleading half-truths. However, the Court did not adopt the appellate court’s expansive interpretation of what constitutes a “false or fraudulent claim” under this theory, concluding:
A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment. Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance. Materiality, in addition, cannot be found where noncompliance is minor or insubstantial.
In Escobar, respondents filed a qui tam suit against a health services clinic, alleging that it violated Massachusetts Medicaid regulations, which were designated as express conditions of payment for the Medicaid program, by allowing unqualified staff to provide mental health counseling and knowingly misrepresenting compliance with the regulations when submitting reimbursement claims. According to respondents, a misrepresentation can be deemed material so long as the defendant “knows that the Government would be entitled to refuse payment were it aware of the violations.” The Supreme Court disagreed and held that, under 31 U.S.C. §3729(a)(1)(A), the FCA “does not adopt such an extraordinary expansive view of liability.” Rather, the Court reiterated that the materiality standard is demanding and the key determinant is whether the misrepresentation, i.e., the defendant’s failure to comply with particular statutory, regulatory or contractual requirements, is likely to influence the government’s payment decision. Because the First Circuit had not applied this standard, the Court remanded the case for the lower courts to reconsider whether the materiality threshold was met.
CFPB Releases Special Edition Supervisory Highlights with Focus on Mortgage Servicing
On June 22, the CFPB released its eleventh issue of Supervisory Highlights specifically to address recent supervisory examination observations of the mortgage servicing industry. According to the report, mortgage servicers continue to face compliance challenges, particularly in the areas of loss mitigation and servicing transfers. The report attributes compliance weaknesses to outdated and deficient servicing technology, as well as the lack of proper training, testing, and auditing of technology-driven processes. Notable findings outlined in the report include the following: (i) multiple violations related to servicing rules that require loss mitigation acknowledgment notices, observing deficiencies with timeliness and content of acknowledgement notices; (ii) violations regarding servicer loss mitigation offer letters and other related communications, including unreasonable delay in sending letters; (iii) failure to state the correct reason(s) in letters to borrowers for denying a trial or permanent loan modification option; (iv) failure to implement effective servicing policies, procedures, and requirements; and (v) heightened risks to consumers when transferring loans during the loss mitigation process. Although the report focuses largely on mortgage servicers’ continued violations, it acknowledged that certain servicers have significantly improved over the past several years by, in part, “enhancing and monitoring their servicing platforms, staff training, coding accuracy, auditing, and allowing for great flexibility in operations.”
In addition to outlining Supervision’s examination observations of the mortgage servicing industry, the report also notes that the CFPB’s Supervision and Examination Manual was recently updated to reflect regulatory changes, technical corrections, and updated examination priorities in the mortgage servicing chapter.
CFPB Amends Annual Dollar Thresholds in TILA Regulations
On June 17, the CFPB announced that it adjusted dollar threshold amounts for provisions in Regulation Z, which implements TILA, under the CARD Act, HOEPA, and the Dodd-Frank Act. The CFPB is required to make adjustments based on the annual percentage change reflected in the Consumer Price Index effective June 1, 2016. For 2017, the minimum interest charge will remain $27 for the first late payment and the subsequent violation penalty safe harbor fee for 2016 was amended to $38 for the remainder of 2016 and all of 2017. The CFPB is increasing the combined points and fees trigger-threshold for compliance with HOEPA to $1,029, and the amount threshold for high-cost mortgages in 2017 will be $20,579. To satisfy the underwriting requirements under the ATR/QM rule, a covered transaction will not be considered a QM unless the combined points and fees do not exceed 3% of the total loan amount for a loan greater than or equal to $102,894; $3,087 for a loan amount greater than or equal to $61,737 but less than $102,894; 5% of the total loan amount for a loan greater than or equal to $20,579 but less than $61,737; $1,029 for a loan amount greater than or equal to $12,862 but less than $20,579; and 8% of the total loan amount for a loan amount less than $12,862. The final rule is effective January 1, 2017, except that the amendment to the subsequent violation penalty safe harbor fee amount of $38 for the remainder of 2016 takes effect upon Federal Register publication.
FSOC Publishes 2016 Annual Report, Highlights Marketplace Lending as Emerging Risk
On June 21, the Financial Stability Oversight Council (FSOC) released its 2016 annual report. The report reviews financial market and regulatory developments, identifies emerging risks, and offers recommendations to enhance the U.S. financial markets, promote market discipline, and maintain investor confidence. Among other things, the report focuses on threats and vulnerabilities related to cybersecuritry, marketplace lending, and distributed ledger systems/blockchain technology. Addressing the need for heightened cybersecurity, the report advises financial institutions to work together with government agencies to better understand risks associated with destructive malware attacks and to “improve cybersecurity, engage in information sharing efforts, and prepare to respond to, and recover from, a major incident.” Regarding marketplace lending, the report stresses that, as the industry continues to grow, “financial regulators will need to be attentive to signs of erosion in lending standards.” Finally, according to the report, distributed ledger systems pose operational vulnerabilities that “may not become apparent until they are deployed at scale,” and cautions that a “considerable degree of coordination among regulators may be required to effectively identify and address risks associated with distributed ledger systems.”
FTC Bans Debt Collector from Debt Collection Business
On June 16, the FTC announced that it obtained a court order against a debt collector and one of its officers for allegedly deceiving consumers with text messages, emails, and phone calls that falsely threatened arrest or lawsuits if they failed to make debt collection payments. In May 2015, the District Court for the Northern District of Georgia issued an ex parte Temporary Restraining Order that “froze a number of Defendants’ assets, provided the FTC with immediate access to Defendants’ business premises, and granted expedited discovery to determine the existence and location of assets and documents pertinent to the allegations of the Complaint.” The recently issued final order prohibits the defendants from, among other things: (i) engaging in debt collection activities; (ii) misrepresenting material facts regarding financial-related products or services; and (iii) disclosing, using, or benefiting from consumers’ personal information, and failing to properly destroy such information when appropriate. Finally, the final order imposes a $980,000 judgment to be used as equitable monetary relief, including, but not limited to, consumer redress.
