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SEC Examinations To Target Never-Before Examined Investment Advisers
On February 20, the SEC’s Office of Compliance Inspections and Examinations (OCIE) launched a previously-announced initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years. OCIE plans to conduct examinations of a “significant percentage” of advisers that have not been examined since they registered with the SEC. The examinations will focus on compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets. The SEC plans to host regional meetings for investment advisers to learn more about the examination process.
Federal Reserve Board Finalizes Enhanced Prudential Standards For Large Bank Holding Companies, Foreign Banks
On February 18, the Federal Reserve Board issued a final rule that incorporates elements of two previously proposed rules related to U.S. bank holding companies with assets of $50 billion or more and foreign banking organization with assets of $50 billion or more. For covered domestic bank holding companies, the final rule (i) incorporates as an enhanced prudential standard previously-issued capital planning and stress testing requirements; and (ii) imposes enhanced risk-management, including liquidity risk-management standards. The rule further imposes a 15-1 debt-to-equity limit for companies that pose a grave threat to U.S. financial stability, as determined by the FSOC. For covered foreign banking organizations, the rule (i) implements enhanced risk-based and leverage capital requirements, liquidity requirements, risk-management requirements, stress testing requirements, and the debt-to-equity limit for FSOC-designated companies; and (ii) requires foreign banking organizations with U.S. non-branch assets of $50 billion or more to form a U.S. intermediate holding company (IHC) and imposes the same enhanced requirements on the IHC. The rule also establishes enterprise-wide risk-committee requirements for publicly traded domestic bank holding companies with total consolidated assets of $10 billion or more and for publicly traded foreign banking organizations with total consolidated assets of $10 billion or more, and implements stress-testing requirements for foreign banking organizations and foreign savings and loan holding companies with total consolidated assets of more than $10 billion. The final rule does not apply to non-bank financial firms designated as systemically important by the FSOC. The rule takes effect on June 1, 2014, but covered U.S. bank holding companies have until January 1, 2015 to comply. Foreign banking organizations must submit an implementation plan by January 1, 2015, but have until July 1, 2016 to comply. The final rule generally defers application of the leverage ratio to IHCs until 2018.
SEC Announces Cybersecurity Roundtable
On February 14, the SEC announced that it will host a roundtable on March 26, 2014, to discuss cybersecurity challenges for market participants and public companies. The roundtable will be held at the SEC’s Washington, D.C. headquarters and will be open to the public and webcast live on the SEC’s website.
FinCEN Outlines BSA Expectations Regarding Marijuana-Related Businesses
On February 14, FinCEN issued guidance to clarify BSA expectations for financial institutions seeking to provide services to marijuana-related businesses in states that have legalized certain marijuana-related activity. The guidance was issued in coordination with the DOJ, which provided updated guidance to all U.S. Attorneys. The FinCEN guidance reiterates the general principle that the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on its particular business objectives, an evaluation of the risks associated with offering a particular product or service, its ability to conduct thorough customer due diligence, and its capacity to manage those risks effectively. The guidance details the necessary elements of a customer due diligence program, including consideration of whether a marijuana-related business implicates one of the priorities in the DOJ memorandum or violates state law. FinCEN notes that the obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity and restates the SAR triggers. The guidance identifies the types of SARs applicable to marijuana-related businesses and describes the conditions under which each type should be filed.
OCC Issues Guidance Regarding Secured Consumer Debt Discharged In Bankruptcy
On February 14, the OCC issued Bulletin 2014-02, which clarifies supervisory expectations for national banks and federal savings associations regarding secured consumer debt discharged in Chapter 7 bankruptcy proceedings. The guidance describes (i) the analysis necessary to “clearly demonstrate and document that repayment is likely to occur,” which would preclude any charge-off as required by the Uniform Retail Credit Classification and Account Management Policy; and (ii) when a bank may consider post-discharge payment performance as evidence of collectability and when this performance demonstrates both capacity and willingness to repay the full amounts due. The OCC states that the repayment analysis should document (i) the existence of orderly repayment terms for structured collection of the debt without the existence of undue payment shock or the need to refinance the balloon amount; (ii) a history of payment performance that demonstrates the borrower’s ongoing commitment to satisfy the debt; and (iii) the consideration of post-discharge capacity to make future required payments. The guidance provides standards for post-discharge repayment capacity. Further, the guidance allows a bank to consider post-discharge payment performance as evidence of collectability, and states that the analysis can be conducted at a pool or individual level provided the bank considers whether (i) monthly payment includes both principal and interest that fully amortizes the remaining debt; (ii) sustained performance demonstrates ongoing capacity and willingness to repay post-discharge; and (iii) collateral levels indicate the bank is likely to recover the full amount due even if payments cease.
Freddie Mac Updates Selling, Servicing Policies
On February 14, Freddie Mac issued Bulletin 2014-02, which includes numerous selling and servicing policy changes. For example, the Bulletin states that, effective for mortgages with settlement dates on or after June 1, 2014, (i) sellers’ reserves must be based on the full monthly payment amount for the property, not only principal, interest, taxes, and insurance; (ii) sellers no longer have to provide borrowers an additional six months’ reserve when the borrower converts a two- to four-unit primary residence to an investment property; and (iii) Freddie Mac is removing the requirements that the appraisal must be dated no more than 60 days prior to the note date when used to document the value of a primary residence pending sale or being converted to a second home or an investment property for the purposes of establishing the minimum required reserves. Freddie Mac also is reducing the delivery fee rate to 75 basis points for Home Possible Mortgage purchase transactions with settlement dates on or after March 1, 2014. Also for sellers, the Bulletin (i) introduces a summary of changes made to Guide Exhibit 19, Postsettlement Delivery Fees; (ii) revises resubmission requirements for mortgages submitted to Loan Prospector after the note date or the effective date of Permanent Financing for Construction Conversion and Renovation Mortgages; (iii) updates the Guide to include Phase 2 ULDD data point requirements and clarifications on existing ULDD data points; and (iv) updates and consolidates property eligibility and appraisal requirements in Guide Chapter 44, Property and Appraisal Requirements. For sellers and servicers, the Bulletin announces updates to Guide Form 16SF, Annual Eligibility Certification Report, to enhance its usability and provide additional functionality. Finally, for servicers, the Bulletin revises requirements for reimbursement of condominium, homeowners’ association and Planned Unit Development assessments in states where a lien for such amounts can take priority over Freddie Mac’s lien.
New Mexico Supreme Court Analyzes State's Foreclosure Standing Requirements, Ability To Repay Standard
On February 13, the New Mexico Supreme Court held that a borrower’s ability to repay a home mortgage loan is one of the “borrower’s circumstances” that lenders and courts must consider in determining compliance with the New Mexico Home Loan Protection Act (HLPA). Bank of New York v. Romero, No. 33,224, 2014 WL 576151 (N.M. S. Ct. February 13, 2014). In this case, after two borrowers became delinquent on a cash-out refinance mortgage loan, a bank initiated a foreclosure action in state court. The trial court and appellate court rejected the borrowers’ arguments that the bank failed to establish that it was the holder of the note and that the loan violated the “anti-flipping provision” of the HLPA, which prohibits creditors from knowingly and intentionally making a refinance loan when the new loan does not have reasonable, tangible net benefit to the borrower considering all of the circumstances—i.e. “flipping” a home loan. The Supreme Court reviewed the state’s stringent standing requirements and held that possession of the note alone is insufficient to establish standing and that the bank failed to provide other evidence sufficient to demonstrate transfer of the note. Although its decision on standing mooted the issue of the alleged HLPA violation, the court decided to address the issue given some party may eventually establish standing to foreclose. The court, in what might be considered dicta, stated that although the “anti-flipping provision” of the HLPA did not specifically include ability to repay as a factor to be considered in assessing the “borrower’s circumstances,” it could find “no conceivable reason why the Legislature in 2003 would consciously exclude consideration of a borrower’s ability to repay the loan as a factor of the borrower’s circumstances.” As such, the court stated that the HLPA’s “reasonable, tangible net benefit” requirement must include as a factor “the ability of a homeowner to have a reasonable chance of repaying a mortgage loan,” and that here the lender failed to do so when it claimed to rely solely on the borrowers’ assertions about their income and failed to review tax returns or other documents to confirm those assertions. Finally, the court also stated that (i) the National Bank Act does not expressly preempt the HLPA; (ii) the bank failed to prove that conforming to the dictates of the HLPA prevents or significantly interferes with its operations; and (iii) the HLPA does not create a discriminatory effect. The Supreme Court reversed the lower courts’ decisions and remanded to the district court with instructions to vacate its foreclosure judgment and to dismiss the bank’s foreclosure action for lack of standing.
Mortgage Company Wins Mortgage Loan Officer Overtime Trial
Recently, a jury in the U.S. District Court for the Eastern District of Virginia found that a mortgage company proved that it properly classified an employee as an outside sales person under the Fair Labor Standards Act and therefore was not required to pay the employee overtime. Cougill v. Prospect Mortgage, LLC, No. 13-1433 (E.D.Va. Feb. 5, 2014). The suit is one of many that have been filed across the country involving claims by employees that they were misclassified and were not paid overtime or minimum wage. The verdict came on the same day the court ruled in favor of the mortgage company on summary judgment in a separate, but similar case. Hantz v. Prospect Mortgage, LLC, No. 13-1435, 2014 WL 463019 (E.D.Va. Feb. 5. 2014). In that case, the court held that the loan officer’s claims were time barred under the FLSA’s two-year statute of limitations because the officer failed to demonstrate the alleged misclassification would constitute a willful violation, which would have extended the time limit by a year. Although its holding on the statute of limitations issue was dispositive of the case, the court went on to address the plaintiff’s status as an outside sales person. The court reasoned that in determining FLSA classification, the inquiry is whether the employee performs tasks critical to the sales process away from the office on more than an occasional basis. The fact that the employee may also perform a significant amount of work inside the mortgage company’s office does not limit the exemption. In this case, the court noted that the loan officer’s outside meetings with realtors, time spent distributing flyers, attending open houses, and giving seminars demonstrated that the officer “customarily and regularly” engaged in outside sales activity sufficient to trigger the exemption, notwithstanding the officer’s testimony that he also worked considerable hours inside the office. The court also rejected the officer’s argument that the exemption should not apply because he did not make any sales at a borrower’s home or place of business, noting that where the actual sale occurs is irrelevant.
CFPB Deputy Director Promises Vigilant Supervision, Enforcement Of Mortgage Servicing Rules
On February 19, CFPB Deputy Director Steve Antonakes spoke at the Mortgage Bankers Association’s annual servicing conference and detailed the CFPB’s expectations for servicers as they implement the new servicing rules that took effect last month.
Mr. Antonakes’s remarks about the CFPB’s plans to supervise and enforce compliance with the new rules are the most assertive to date. Until now, the CFPB’s public position has been that “in the early months” after the rules took effect, the CFPB would not look for strict compliance, but rather would assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Mr. Antonakes clarified this position, stating that “[s]ervicers have had more than a year now to work on implementation” of “basic practices of customer service that should have been implemented long ago” and that “[a] good faith effort . . . does not mean servicers have the freedom to harm consumers.” He went on to state that “[m]ortgage servicing rule compliance is a significant priority for the Bureau. Accordingly, we will be vigilant about overseeing and enforcing these rules.”
Default Servicing and Foreclosures
Specifically, the CFPB expects that, “in these very early days,” servicers will (i) identify and correct “technical issues”; (ii) “conduct outreach to ensure that all consumers in default know their options”; and (iii) “assess loss mitigation applications with care, so that consumers who qualify under [a servicer’s] own standards get the loss mitigation that saves them – and the investor – from foreclosure.” Mr. Antonakes acknowledged that “foreclosures are an important part of the business, but they shouldn’t happen unless they’re necessary and they must be done according to relevant law. We expect the new rules to go a long way to reduce consumer harm for all consumers with mortgages, especially as these rules work in concert with the existing prohibition against unfair, deceptive, and abusive practices.”
Servicing Transfers
Mr. Antonakes specifically detailed expectations concerning mortgage servicing rights transfers. He stated that the CFPB expects servicers to “pay exceptionally close attention to servicing transfers and understand [that the CFPB] will as well. . . . Our rules mandate policies and procedures to transfer ‘all information and documents’ in order to ensure that the new servicer has accurate information about the consumer’s account. We’re going to hold you to that. Servicing transfers where the new servicers are not honoring existing permanent or trial loan modifications will not be tolerated. Struggling borrowers being told to pay incorrect higher amounts because of the failure to honor an in-process loan modification – and then being punished with foreclosure for their inability to pay the incorrect amounts – will not be tolerated. There will be no more shell games where the first servicer says the transfer ended all of its responsibility to consumers and the second servicer says it got a data dump missing critical documents.”
CFPB Consumer Advisory Board Meeting To Focus On Consumer Reporting
The CFPB announced this week that its next Consumer Advisory Board meeting will be held on February 27, in Washington, DC, and that the sole public session will focus on the “consumer experience in the credit reporting market.” Non-public sessions of the two-day event will cover, among other things, the HMDA rulemaking, the debt collection rulemaking, and the CFPB’s general approach to regulation.