InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
European Union Reaches Agreement Regarding New Data Protection Law
On June 15, the 28 governments of the European Union agreed to a draft Data Protection Regulation that would establish tighter privacy provisions for users of online services – including those provided by U.S. tech companies – in a majority of European countries. The draft Regulation advances a single set of data protection rules for the EU, which include data breach notification obligations, within 24 hours if feasible, a strengthened “right to be forgotten,” and additional enforcement power for Europe’s data protection authorities, including penalties of up to €1 million or up to 2% of global annual turnover of a company. While EU Commissioners say the proposed law would cut costs for businesses, critics argue that its provision requiring data processors to delete individuals’ personal data upon request would inevitably increase costs for European-based internet companies. For the past three and a half years, the EU has tried to reach an agreement to merge the countries’ rules on personal data protection into one set of regulations. If this most recent proposal passes the next phase of European Parliament negotiations, the law will have a 2016 effective date, with a two year transitional period for companies and data protection authorities to adapt to the new regulations.
SEC Requests Public Feedback On Exchange-Traded Products
On June 12, the SEC issued a press release announcing that it is seeking public comment on how it should regulate exchange-traded products (ETPs), on how broker-dealers sell the securities, especially to retail investors, and on investors’ understanding of the nature and use of ETPs. In particular, the securities regulator is requesting public feedback on arbitrage mechanisms and market pricing for ETPs, legal exemptions, and other regulations related to the listing standards and trading of ETPs. Comments will be received for 60 days following publication in the Federal Register.
OCC Announces Improved Online Access to Corporate Application Information and Comments
On June 12, the OCC announced an improvement to the public’s ability to access information online concerning business combination corporate applications submitted by national banks and federal savings associations. The enhanced online access, which is now accessible via the agency’s homepage and licensing page, allows the public to submit and view comments on business combination applications on a single page. In addition, the single page provides links to a public copy of the corporate application, supplemental material filed by the applicant, and a location for individuals to view and submit comments.
Federal Reserve Releases 2015 Annual Performance Plan
Recently, the Federal Reserve submitted to Congress its 2015 Annual Performance Plan, which sets forth the Board’s planned projects, initiatives, and activities for the upcoming year. The Plan, which complements the Federal Reserve’s Strategic Framework 2012-15, outlines planned activities in the following six areas aimed at assisting the Board in meeting its strategic framework’s long-term objectives: (i) supervision, regulation, and monitoring risks to financial stability; (ii) data governance; (iii) facilities infrastructure; (iv) human capital; (v) management process; and (vi) cost reduction and budgetary growth. Among its initiatives, the Board aims to continue building an interdisciplinary infrastructure for supervision, regulation, and monitoring of risks to financial stability. In addition, the Board’s staff plans to develop “analytical tools” that enhance the Board’s understanding of evolving market structures and practices, including changes in risk-management practices and incentives for financial institutions to appropriately manage risk exposures. With respect to the supervision of individual institutions, the report highlights the Board’s intent to develop supervisory approaches for community and regional banks, as well as for savings and loan holding companies, that “identify and support taking action against early warning indicators of outlier risk.”
Illinois AG Madigan Announces $1 Million Settlement Regarding Company's Management of Foreclosed Properties
On June 3, Illinois AG Madigan announced a $1 million settlement with an Ohio-based company that mortgage lenders hire to manage properties throughout the foreclosure process and ensure that the properties retain their value. The settlement resolves a 2013 lawsuit by Madigan that alleged that the company wrongly deemed homes vacant, and instructed its contractors to shut off utilities, change the properties’ locks and illegally remove residents’ personal belongings even though they actively remained in their homes. Under the settlement, the company agreed to overhaul its business practices by using objective standards to ensure that homes are vacant, such as: (i) requiring its inspectors to support their inspections with photographs and an affidavit; (ii) posting notice to the occupant that the property has been deemed vacant; (iii) not misrepresenting the occupants’ rights to stay in their home, even if they are behind on their mortgage payments and in foreclosure; (iv) increasing its oversight and quality control of its subcontractors; (v) providing consumers with access to a 24-hour hotline for submitting complaints; and (vi) unless the company obtains a court order, not removing any personal property prior to foreclosure.
In addition to the $1 million agreement, which will be paid in restitution to consumers who filed complaints with respect to the company’s business practices, the company agreed to adhere to ongoing monitoring by Madigan’s office to ensure compliance with the settlement.
Georgia District Court Rules SEC's Use of Administrative Law Judges In Insider Trading Case "Likely Unconstitutional"
On June 8, in Hill v. Securities And Exchange Commission, Civ. Action No. 1:15-CV-1801-LMM, a Georgia federal judge ruled that the Securities and Exchange Commission’s use of an in-house Administrative Law Judge (“ALJ”) to preside over an insider-trading case was “likely unconstitutional.” In Hill, after a nearly two-year investigation, the Securities and Exchange Commission (“SEC”) served Charles Hill, a self-employed real estate developer who was not registered with the SEC, with an Order Instituting Cease-And-Desist Proceedings under Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), alleging liability for insider trading in violation of Section 14(e) of the Exchange Act and Rule 14e-3. The SEC alleged that Hill, using inside information he received, purchased and then sold a large quantity of Radiant Systems, Inc. stock, profiting approximately $744,000. In addition to the cease-and-desist order, the SEC sought a civil penalty and disgorgement from Mr. Hill. The SEC sought to collect the civil penalty through an administrative hearing using an in-house ALJ. Mr. Hill filed this action to challenge the SEC’s decision to use an administrative proceeding, and asked the Court to (i) declare the proceeding unconstitutional; and (ii) enjoin the proceeding from occurring until the Court issues its ruling. The Court granted, in part, and denied, in part, his request. After rejecting the SEC’s argument that the Court lacked subject matter jurisdiction over Mr. Hill’s constitutional claims, the Court rejected Mr. Hill’s arguments that the Dodd-Frank Act, which delegates to the SEC the power to choose between an administrative forum and a federal district court to adjudicate violations of the Exchange Act, constituted an unconstitutional delegation of legislative power, and that the SEC’s decision to prosecute claims against him administratively violated his Seventh Amendment right to a jury trial. However, the Court determined that the SEC’s manner of appointment of administrative judges likely violated the Appointments Clause, because those judges are “inferior officers” that the President or an agency head must appoint. Because the ALJ in this case had not been so appointed, the Court found that Mr. Hill had a likelihood of success on his claims, and entered a preliminary injunction enjoining the SEC administrative proceeding. The Court, however, noted that its decision “may seem unduly technical” because the SEC could easily cure the issue by having the SEC Commissioners appoint the ALJ, or by presiding over the matter themselves.
New York Court of Appeals Rules Possession of Note, Rather than Mortgage, Conveys Standing to Commence Foreclosure Action
On June 11, the New York Court of Appeals held that a loan servicer who holds the note has standing to commence a mortgage foreclosure action against a borrower even if the servicer cannot show that it also holds the mortgage. See Aurora Loan Servs., LLC v. Taylor, 2015 NY Slip Op 04872 (Jun. 11, 2015). The court reasoned that the servicer did not need to show possession of the mortgage because “the note, and not the mortgage, is the dispositive instrument that conveys standing to foreclose under New York law.” In Aurora, the defendant borrowers had executed an adjustable rate note and a mortgage in 2006. The mortgage designated Mortgage Electronic Recording Systems, Inc. (“MERS”) as nominee, but the note was not transferred to MERS with the mortgage. After the borrowers defaulted, the servicer took possession of the note and filed for foreclosure against the borrowers. In reaching its decision, the court disregarded borrowers’ argument that the involvement of MERS somehow impacted the servicer’s standing to foreclose.
Net 1 Announces Closure of SEC FCPA Investigation
On June 8, Net 1 UEPS Technologies, Inc., a South Africa-based mobile payments company incorporated in Florida, announced that the SEC had closed a FCPA investigation arising out of a contract with the South African Social Security Agency. The SEC and the DOJ opened parallel investigations in November 2012, and the DOJ investigation remains ongoing. Net 1 has asserted that the investigation was instigated by one of the losing bidders on the contract.
Eletrobras Hires U.S. Law Firm to Conduct FCPA Investigation
On June 10, Eletrobras, Brazil’s state-run power company, announced that it had hired Hogan Lovells to investigate potential violations of the FCPA and other anti-corruption laws and corporate policies. The focus of the investigation will be “projects in which Eletrobras Companies take part in a corporate form or as minority shareholder, through special purpose entities.” According to an earlier Eletrobras filing, the investigation was triggered by testimony taken in conjunction with the Brazilian government’s ongoing investigation of corruption allegations against Petrobras, dubbed “Operation Car Wash.” That testimony alleged that the CEO of an Eletrobras subsidiary received illicit payments from a consortium of companies bidding for the Angra 3 power plant project.
Spotlight on Vendor Management: Mortgage Industry Continues To Bear Brunt of CFPB Regulatory Burdens
Mortgage industry players have had to adapt quickly in recent years to the evolving regulatory environment, and the latest scramble for mortgage lenders includes the various downstream effects of pending rule changes set to take effect on August 1, 2015, related to disclosures required under the implementing regulations of the Truth-in-Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). A critical factor to successful implementation of this historic set of rule changes, known as the TILA-RESPA Integrated Disclosure (“TRID”) rule, is coordinating with various vendors to address new timing and information requirements for Loan Estimates and Closing Disclosures, which are creating project management nightmares for mortgage professionals growing weary of the regulatory onslaught of revised regulations and enforcement actions.“Despite the relative speed with which many companies have adapted to various rule changes since the CFPB came online, there seems to be a new rule change waiting in the wings at almost every turn,” observed Elizabeth McGinn, Partner in the D.C. office of BuckleySandler. “To make matters worse, managing service providers through the changes has undoubtedly tested the strength of deep industry relationships that have been in place for decades.”
Synchronizing TRID-related changes with third party mainstays throughout the origination and closing processes has required extensive planning with mortgage brokers, software vendors, title companies, and closing agents, all of whom play a significant role in ensuring that Loan Estimates and Closing Disclosures (and any revisions thereto) are delivered to borrowers in an accurate and timely fashion. Importantly, as the CFPB has made clear repeatedly in stating its vendor management expectations, the mortgage lender will bear primary responsibility for any failure to comply with the new TRID rules, regardless of whether such failures are the result of vendor missteps.
“There is a lot of concern that vendors and various critical third parties will not be up to the task,” notes Moorari Shah, Counsel in BuckleySandler’s Los Angeles office. “As a result, we are seeing a number of companies revising service provider contracts in an effort to have better visibility and control over the end-to-end process of loan origination.”
While many will sweat through the summer months in hopes of a flawless transition, TRID represents just the latest vendor management test for an industry that has already perspired through plenty. McGinn and Shah also recommend that legal and compliance personnel take note of recent guidance and enforcement actions which raise vendor management issues specific to the mortgage industry, including oversight of (i) mortgage servicers, (ii) mortgage advertising companies, and (iii) relationships between loan officers and title companies.
Mortgage Servicers
Amongst the most difficult adjustments companies have had to make has been increased oversight of mortgage servicers, which continues to consume considerable compliance resources and expense. Regulators are focused in particular with ensuring that servicers (i) have instituted policies and procedures consistent with new regulations and guidance, and (ii) comply with collections and credit reporting requirements:
- Under the revisions to Regulation X that took effect in January 2014, the CFPB may now cite an institution for failure to maintain policies and procedures reasonably designed to, among other things, facilitate (i) ready access to accurate and current documents and information reflecting actions taken by service providers, and (ii) periodic reviews of service providers. See 12 C.F.R. § 1024.38(b)(3). The Bureau explained at the time it proposed § 1024.38(b)(3), that the new regulation was designed to address evaluations of mortgage servicer practices that had found that some major servicers ‘‘did not properly structure, carefully conduct, or prudently manage their third-party vendor relationships,” citing deficiencies in monitoring foreclosure law firms and default management service providers as key examples. Going forward, the CFPB expects that servicers seeking to demonstrate that their policies and procedures are reasonably designed to achieve these objectives will demonstrate that, in fact, the servicer has been able to use its information to oversee its service providers effectively.
- The compliance burdens on servicers are also evident in the latest CFPB guidance on mortgage servicing transfers. Bulletin 2014-01, Compliance Bulletin and Policy Guidance: Mortgage Servicing Transfers, was issued August 19, 2014, and outlines a number of CFPB expectations of servicers in connection with the transfer of mortgage servicing rights, including potentially preparing and submitting informational plans to the Bureau describing how the servicers will be managing the related risks to consumers. In this regard, a primary focus of Bulletin 2014-01 is signaling that the CFPB is committed to enforcing the new servicing transfer rules under RESPA, which, requires servicers to, among other things, maintain policies and procedures that are reasonably designed to achieve the objectives of facilitating the transfer of information during mortgage servicing transfers and of properly evaluating loss mitigation applications.
- It should come as no surprise that one of the primary vendor management implications of the evolving regulatory requirements described above is that ongoing compliance will likely require significantly more dedication of financial and human resources for most mortgage servicers to comply. However, the cost of non-compliance can be substantially more devastating. Consider the troubles of one of the largest nonbank servicers that entered into a $2 billion settlement with the CFPB, authorities in 49 states, and the District of Columbia under a joint enforcement action in December 2013 over allegations related to charging customers unauthorized fees, misleading customers about alternatives to foreclosure, denying loan modifications for eligible homeowners, and sending robo-signed documents through the courts during the foreclosure process. Just one year later, in December 2014, the same servicer entered into a $150 million settlement with the New York Department of Financial Services in connection with allegations of mishandling foreclosures, abusing delinquent borrowers, and failing to maintain adequate systems for servicing hundreds of billions of dollars in mortgages. In each consent order, the failure to maintain reasonable policies and procedures and engage in appropriate vendor oversight was highlighted as a finding by the regulators.
- In addition to ensuring that mortgage servicers are implementing adequate policies and procedures with respect to vendor oversight, federal agencies have also been attentive to debt collection and credit reporting practices of mortgage servicers. A joint enforcement action by the FTC and CFPB in April of this year was critical of the servicer, in part, for allegedly (i) threatening arrest and imprisonment to consumers that were behind on payments and placing collection calls outside of the daily call window permitted under the Fair Debt Collections Practices Act (15 U.S.C. 1692 et seq.), and (ii) furnishing inaccurate credit information to consumer reporting agencies in violation of the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.) even after consumers indicated that they had reported the inaccuracies to the servicer. The servicer agreed to a $63 million settlement with the FTC and CFPB to resolve the matter.
Mortgage Advertising Companies
The CFPB has taken direct aim at deceptive mortgage advertisements in 2015, particularly those that imply an affiliation with programs offered by the U.S. government. At least a handful of enforcement actions have been announced by the Bureau during the first half of the year, including a simultaneous announcement in February against three private mortgage lenders that sent mailings simulating notices from the U.S. government despite the fact that none of the companies had any connection to a government agency. In bringing these actions, the CFPB made note of the customary practice of mortgage brokers and mortgage lenders to hire marketing companies to produce advertisements for mortgage credit products:
- In the two matters that resulted in consent orders (n.b., the third matter is still pending), the CFPB compelled the companies to (i) pay a civil monetary penalty for which they could not seek indemnification from any of the marketing companies that assisted with producing the advertisements, and (ii) carefully review henceforth any proposed marketing materials prepared by such marketing companies for compliance specifically with the Mortgage Acts and Practices Rule (Regulation N, 12 C.F.R. § 1014.3(n)), and the Dodd-Frank Act, which generally prohibits unfair, deceptive, or abusive acts or practices (12 U.S.C. §§ 5531(a), 5536(a)(1)(B)).
- In terms of vendor management, a key takeaway from these enforcement actions is that the CFPB expects mortgage lenders to take the same precautions with mortgage advertising companies as they are required to do with any other service provider that interacts with customers, inclusive of appropriate due diligence and oversight. Treating mortgage advertising companies as service providers has taken some in the industry by surprise as such companies have generally been viewed as marketing partners rather than service providers for mortgage brokers and lenders, and often receive a marketing fee for any advertisement that yields a new origination. Note also that the general expansion of third parties that qualify as “service providers” under Dodd-Frank is in keeping with various CFPB enforcement actions taken against ancillary and add-on product providers in the credit card and auto finance industries.
Relationships between loan officers and title companies
Another area of focus for the CFPB has been referrals made by loan officers to title companies in exchange for cash and marketing services:
- In April of this year, the CFPB joined forces with Maryland Attorney General to take action against several loan officers for their alleged participation in steering title insurance and closing services to a title company in exchange for the loan officers’ receipt of marketing services and cash from the title company. The consent orders, in addition to outlining RESPA violations which prohibit the giving of a “fee, kickback, or thing of value” in exchange for a referral of business related to a real estate settlement service (12 U.S.C. § 2607(a)), barred each of the loan officers from the mortgage industry for a period of years. The April announcements were follow-on enforcement actions to ones that the CFPB had announced in January against two large banks stemming from allegations that the banks’ loan officers had participated in similar schemes with the same (now defunct) title company.
- The potential for RESPA violations presents another compliance challenge for mortgage lenders to increase their oversight of not only third party title companies, but also the lender’s own loan officers that may be engaged, wittingly or unwittingly, in potentially illegal activity. In addition to enhanced RESPA training for loan officers and title companies, mortgage lenders may need to increase their monitoring and auditing activities of interactions between loan officers and title companies to further mitigate the risk of RESPA violations.
Note: This article previously appeared in the June 12, 2015, issue of Mortgage News Daily.