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CSBS Names Charles Cooper Chairman of Board of Directors; Calls for Regulatory Collaboration
On May 24, the Conference of State Bank Supervisors (CSBS) announced several new officers, including Charles G. Cooper, Commissioner of the Texas Department of Banking, who will serve as the chairman of the CSBS Board of Directors. In his new role, Cooper delivered remarks at the State-Federal Supervisors Forum on May 26, addressing the following current issues facing the banking industry: (i) community banking; (ii) cybersecurity; and (iii) financial services provided by non-depository institutions, commenting on the expansion of the Nationwide Multistate Licensing System & Registry to include check cashers, debt collectors, and money service businesses. Cooper emphasized the significance of community banks, stating, “[t]heir role in providing credit and banking services is just as important as that of the largest financial intuitions.” Observing the decline in the number of community banks, Cooper called on Congress to implement “right-size regulation through legislation,” and stressed that regulators “need to continue to right-size [their] regulatory and supervisory processes.” Regarding cybersecurity, Cooper mentioned the CSBS Executive Leadership on Cyber Security (ELOC) program, which is intended to “bring [the] cyber issue out of the backroom and into the Board room.” Finally, Cooper concluded by calling on state and federal regulators, including the newer CFPB and FinCEN agencies, to “commit to working better together.”
CFPB's Latest Monthly Complaint Snapshot Highlights Issues Related to Credit Reporting
On May 24, the CFPB released its latest consumer complaint report. This month’s report highlights complaints related to credit reporting, noting that such complaints made up approximately 143,700 of the 882,800 total complaints that the CFPB has handled as of May 1. The report found, among other things, that: (i) credit reporting remains among the top three products complained about by consumers, with more than 4,500 complaints submitted in April alone; (ii) the three largest U.S. credit reporting companies are also the top three companies offering credit reporting services, accounting for 95% of the credit reporting complaints submitted between December 2015 and February 2016; and (iii) during that same time period, consumers also submitted more than 2,000 complaints involving specialty consumer reporting companies that provide reports in particular areas, including background and employment screening, checking account screening, rental screening, and insurance screening. According to the report, the most common types of credit reporting complaints have included the following: (i) inaccurate information appearing on credit reports, particularly information related to debt collection items and information resulting from identity theft; (ii) difficulty in correcting inaccuracies, including long delays, negative customer service experiences, and failed attempts to have inaccuracies removed; and (iii) the inability to access credit reports online due to overly burdensome identity authentication questions.
CFPB Takes Action Against Former Loan Officer for "Fee-Shifting" Practices, Alleges RESPA Violations
On May 26, the CFPB announced a consent order against a former mortgage loan originator of a San Francisco-based bank for allegedly violating Section 8(a) of the Real Estate Settlement Procedures Act (RESPA). The CFPB alleges that, from at least November 2013 through February 2015, the loan officer and an escrow company in California “engaged in a scheme in which they manipulated escrow fees, at [the loan officer’s] direction, by shifting them among loans in order to structure no-cost mortgage transactions.” The CFPB further contends that the loan officer referred settlement-services business for federally related mortgages to the escrow company in exchange for allowing him to dictate the escrow fees. According to the CFPB, the arrangement between the loan officer and the escrow company constituted providing a “thing of value” – prohibited under RESPA – because it allowed the officer to consistently deliver “no closing cost” loans to his clients, which “ultimately increased the number of loans he was able to close and, as a result, the commissions he earned.” The CFPB’s consent order imposes an $85,000 civil penalty and prohibits the loan officer from participating in the mortgage industry for one year.
Federal Register Publishes CFPB Arbitration Proposal; Comment Period Closes August 22
On May 24, the CFPB’s proposed rule on arbitration agreements was published in the Federal Register. As previously covered in InfoBytes, the CFPB’s proposal seeks to ban covered providers of most financial consumer products and services from including mandatory pre-dispute arbitration clauses in consumer agreements. Comments on the proposal are due by Monday, August 22, 2016.
CFPB, Federal Banking Agencies, and NCUA Issue Interagency Guidance Regarding Deposit Reconciliation Practices
On May 18, the CFPB, the Federal Reserve, the OCC, the FDIC, and the NCUA issued interagency guidance on supervisory expectations regarding customer account deposit reconciliation practices. According to the guidance, banks create a “credit discrepancy” if they credit a customer a different amount than the total of the items the customer tried to deposit into an account. In further explaining what constitutes a credit discrepancy, the guidance states, “the customer may deposit $110 to an account, but may indicate on the deposit slip that only $100 has been tendered. In this case, the financial institution may credit $100 to the customer’s account as indicated on the deposit slip without reconciling the $10 discrepancy.” According to the guidance, some financial institutions fail to correct the inconsistencies between the dollar value of items deposited to the customer’s account and the amount actually credited to that same account. This is a potential violation of (i) the Expedited Funds Availability Act’s, as implemented by Regulation CC, requirement to make deposited funds available for withdrawal within prescribed time limits; (ii) the FTC Act’s ban of unfair or deceptive acts or practices; and (iii) the Dodd-Frank Act’s prohibition of unfair, deceptive, or abusive acts or practices. In addition to reminding financial institutions of their obligations to comply with the aforementioned applicable laws, the guidance stresses that financial institutions are expected to “adopt deposit reconciliation policies and practices that are designed to avoid or reconcile discrepancies, or designed to resolve discrepancies such that customers are not disadvantaged.”
HUD Determines Down Payment Assistance Programs Eligible for FHA Insurance
This week, FHA Principal Deputy Assistant Secretary for Housing and Head of FHA, Edward Golding, issued a letter informing stakeholders that “HUD has determined that housing finance agency down payment assistance programs are legal and consistent with the National Housing Act.” We note that the letter was not a Mortgagee Letter nor was it published in the Federal Register and may be considered informal guidance.
In the letter, Golding advised that:
- Government entities may provide borrowers with funds for down payments on FHA loans; and
- Loans that include down payment assistance (DPA) provided by state and local housing finance agencies (HFA) continue to be eligible for FHA insurance.
Golding’s letter emphasized the benefits of DPA programs, commenting that such programs facilitate access to homeownership for low- and moderate-income families. Still, Golding noted that FHA will continue to monitor and mitigate any potential risk associated with DPA programs: “[w]e will work diligently to reduce the impact of these risks on our portfolio. We know it is possible to accomplish this as the research shows carefully designed programs perform better.”
Golding’s letter purports to resolve a matter of dispute regarding DPA between FHA and the HUD Office of Inspector General (OIG). Last year, HUD OIG audited an Arizona-based mortgage lender and issued a report concluding that the lender originated FHA loans that included gift DPA that did not comply with FHA rules and regulations. Specifically, the audit found that, among other things:
- The lender inappropriately allowed premium pricing to be used as a source for the borrowers’ down payments, which were not true gifts and were indirectly repaid by the borrowers through a higher premium rate;
- The lender used programs that had a circular funding mechanism (i.e., the program was structured to generate revenues through the sale of mortgage-backed securities); and
- The lender did not perform due diligence to ensure DPA was eligible.
After the audit, Golding issued a letter to reaffirm FHA’s support of certain DPA programs. Golding’s letter also stated that “[t]he intent of [FHA] rules regarding down payment assistance is clear and allows HFAs the discretion necessary to fund these programs appropriately.” HUD’s General Counsel (GC), Helen Kanovsky, also issued a memorandum to Golding regarding DPA programs concluding that:
- Governmental entities are a permissible source of funds for down payments on FHA loans;
- FHA does not place limitations or prohibitions on how a government entity raises funds for its DPA program; and
- FHA rules on premium pricing are not violated if the borrower and the lender agree on interest rates in relation to DPA programs.
The memorandum also noted that it did not support OIG’s audit conclusions that FHA rules regarding premium pricing or gift DPA were violated. We note that, similar to Golding’s letter from this week, the letter and the memorandum were not issued as Mortgagee Letters and were not published in the Federal Register.
Notwithstanding Golding’s letter after the audit and HUD GC’s memorandum, HUD OIG continues to audit lenders and issue reports on this issue.
The Obama Administration also responded to the DPA uncertainty earlier this year by releasing the FY 2017 Budget Proposal, which would amend the National Housing Act to clarify that “down payment assistance from state and local governments and their respective agencies and instrumentalities are not impermissible sources of down payment assistance.”
Despite Golding’s letter this week, a news website has reported that David Montoya, HUD’s Inspector General, “strongly disagree[s]” with HUD’s assessment of DPA programs. Specifically, it has been reported that Montoya issued the following statement: “we believe this specific aspect, where external lenders are originating FHA loans with ineligible down payment assistance gifts and secondary financing and agree to inflate the interest rate on the borrowers’ FHA loans, violates the law and harms borrowers.” A spokesperson noted that an OIG audit of a lender using funds derived from premium pricing to pay for gift DPA is still underway.
U.S. House Passes SAFE Transitional Licensing Act to Give Greater Job Mobility to Mortgage Loan Originators
On May 23, the U.S. House of Representatives unanimously passed by voice vote H.R. 2121, the SAFE Transitional Licensing Act of 2015. Congressman Steve Stivers (R-OH) introduced H.R. 2121 in April 2015 with the purpose of “providing regulatory relief for loan originators in an effort to make a smooth employment transition between bank and non-bank entities.” As passed, H.R. 2121 would amend the SAFE Mortgage Licensing Act of 2008 to give eligible mortgage loan originators (MLOs) the ability to continue originating loans while awaiting a decision on their application for a state originator license. This temporary authority would apply when MLOs switch jobs (i) from a depository institution, where a state originator license is not required, to a state-licensed non-bank lender, where such a license is required; or (ii) from a state-licensed lender in one state to a state-licensed lender in another state, where a new state originator license is required. In both cases, this temporary authority would expire upon the grant, denial, or withdrawal of the license application, or, if an application is deemed incomplete, 120 days after the application was submitted.
FTC Chairwoman Ramirez Provides Testimony on Pending Consumer Protection Legislation
On May 24, FTC Chairwoman Edith Ramirez provided testimony before the U.S. House of Representatives on pending legislation pertaining to the agency’s jurisdiction to regulate certain marketplace areas affecting consumers. Consumer protection bills under consideration and discussed by Chairwoman Ramirez include, but are not limited to, (i) H.R. 5111, the Consumer Review Fairness Act, which, according to the FTC, “would help to prevent companies from silencing truthful consumer reviews or products and services”; (ii) H.R. 4526, the Stop Online Booking Scams Act, which would require online travel sites to provide disclosures regarding their affiliation with hotels; and (iii) H.R. 5104, the Better On-line Ticket Sales Act, which is intended to make sure that consumers (“not just scalpers with specialized software”) are able to purchase online tickets to certain events. Chairwoman Ramirez also provided insight regarding H.R. 5239, the Protecting Consumers in Commerce Act, which would remove the telecommunications common carrier exemption from the FTC Act. In support of H.R. 5239, Ramirez commented, “[r]emoving the exception from the FTC Act would enable the FTC to bring its extensive law enforcement experience to bear in protecting consumers of common carriage services against unfair and deceptive practices in the same way that it can protect against unfair and deceptive practices for other services.” Further expressing the FTC’s opposition to certain pending legislation, FTC Ramirez noted that H.R. 5109, the Clarifying Legality and Enforcement Action Reasoning Act, would require that the FTC submit to Congress an annual report regarding its consumer protection investigations, “describing both those that result in agency action as well as those that are closed.” Chairwoman Ramirez contends that submitting such a report would not only be time consuming and costly, but would risk harming the reputation of companies against whom the FTC did not take formal action.
U.S. House Members Seek Information Related to Financial Institution-Fintech Relationship
On May 24, twelve U.S. congressmen – eleven Republican – sent a letter to the Government Accountability Office (GAO) requesting information on how the U.S. financial system’s regulatory structure affects the relationship between financial firms and fintech companies. This request follows a separate April 18 letter from three Democratic senators requesting that the GAO complete a study on the fintech industry, and comes after a GAO report, which was published in February but publicly released in March, that assessed the U.S. financial system’s regulatory structure, including the impacts of fragmentation and overlap in financial regulation. The most recent letter requests that the GAO supplement its February report by providing information concerning: (i) how the GAO’s findings of fragmentation and overlap in financial regulation “slowed or otherwise harmed innovation, and restricted the ability of financial firms . . . from pursuing new technological ventures”; (ii) how collaboration between financial firms and fintech companies has “helped financial firms streamline processes and become more efficient in delivering products and services”; (iii) “what challenges . . . both financial institutions and fintech companies have with the existing regulatory structure”; and (iv) how federal regulators can “streamline” collaboration between financial firms and fintech ventures, and what best practices U.S. regulators can consider to foster a “culture of collaboration” – such as the “regulatory sandbox” offered by the U.K. Financial Conduct Authority’s Project Innovate.
FHA Proposes Revisions to Reverse Mortgage Program
On May 18, HUD announced that the FHA proposed a new rule that is intended to “strengthen” its Home Equity Conversion Mortgage (HECM) Program by reinforcing reforms that have taken place in the past two years, and by adding new consumer protections. New revisions to the HECM program outlined in the proposed rule include, but are not limited to, (i) ensuring that required HECM counseling occurs before a mortgage contract is signed; (ii) amending the definition of “property charges” to include utilities as a borrower responsibility; (iii) capping lifetime interest rate adjustments for adjustable interest rate products at 5%; (iv) requiring as a condition of eligibility for loan assignment that the HECM mortgage be in lien status prior to homeowners association and condo association liens; and (v) creating a “cash for keys” program to “incentivize parties with legal authority to dispose of a property that serves as the security for a HECM to complete a deed in lieu of foreclosure more quickly.” Comments on the proposal are due by Monday, July 18, 2016.