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Texas Supreme Court Clarifies HELOC Fee Cap Decision
On January 31, the Texas Supreme Court released a January 24 supplemental opinion clarifying a June 2013 opinion in which it invalidated state regulations that (i) defined “interest” with regard to home equity loans to exclude lender-retained fees, and (ii) would have allowed borrowers to mail consent to a lender to have a lien placed on the homestead and to attend the equity loan closing through an agent. Finance Commission of Texas v. Norwood, No. 10-0121, 2014 WL 349790 (Tex. Jan. 24, 2013). The Texas Bankers Association sought clarification as to whether interest paid at closing falls outside the definition of interest, noting (i) that interest can be paid at closing for part of a payment period, calculated per diem, until the regular payment date, and (ii) that a borrower may pay discount points at closing to lower the interest rate for the term of the loan. In its supplemental opinion, the court held that per diem interest is still interest, even if prepaid, and that legitimate or “bona fide” discount points to lower the loan interest rate are, in effect, a substitute for interest. The court further explained that true discount points are not fees “necessary to originate, evaluate, maintain, record, insure, or service,” but are an option available to the borrower and thus are not subject to the three percent cap. The court also reaffirmed its holding requiring borrowers to be present at closing. It rejected the bankers’ argument that requiring a power of attorney, like other closing documents, to be executed “at the office of the lender, an attorney at law, or a title company” can be a hardship on certain borrowers for whom such locations are not readily accessible, explaining that such hardships are a public policy issue that should be addressed by the framers and ratifiers of the state Constitution.
CFPB Announces First Steps In HMDA Rulemaking Process, Launches Additional HMDA Data Tools
On February 7, the CFPB announced the first public phase of its rulemaking to expand the scope of HMDA data reporting, as required by the Dodd-Frank Act. The CFPB is asking small businesses to provide feedback on its initial proposal to collect new mortgage origination data from financial institutions and potential changes to the data collection and reporting process.
Proposed Data Requirements
Section 1094 of the Dodd-Frank Act transferred responsibility for HMDA and its implementing regulation to the CFPB and directed the CFPB to conduct a rulemaking to expand the collection of mortgage origination data to include, among other things: (i) the length of the loan; (ii) total points and fees; (iii) the length of any teaser or introductory interest rates; (iv) the applicant or borrower’s age and credit score; and (v) the channel through which the application was made. The Dodd-Frank Act granted the CFPB discretion to collect additional information as it sees fit.
As detailed in its outline for small businesses, in addition to the statutorily required fields, the CFPB also is considering requiring financial institutions to report more underwriting and pricing information, such as the interest rate, the total origination charges, and the total discount points of the loan, which the CFPB believes will help regulators investigate “true trouble spots” in the mortgage market. The Bureau also states that it is considering new requirements that would “more accurately capture access to credit in the mortgage market.” Specifically, the CFPB is considering requiring institutions to (i) provide an explanation of rejected loan applications; (ii) explain whether the institution considers a loan to be a Qualified Mortgage; and (iii) report the borrower’s debt-to-income ratio. The CFPB states that debt-to-income data would allow the Bureau to determine whether financial institutions are making loans that are unsuitable for borrowers.
Potential Reporting Changes
In addition to the planned expansion in the types of data to be collected, the CFPB is seeking small business feedback on how financial institutions report HMDA data. The CFPB is considering streamlining the collection process to mitigate the burden on lenders, including by possibly aligning the HMDA data requirements with “well-established data standards already in use by a significant portion of the mortgage market.” The CFPB also is proposing to standardize the reporting threshold. It explains that currently, all banks, savings associations, and credit unions that meet certain conditions must submit annual reports if they make even a single loan, while nonbank mortgage lenders typically only report if they make 100 loans and meet other conditions. The Bureau is considering requiring all banks and nonbanks that meet certain conditions to report HMDA data if they make 25 or more loans in a year. Finally, the CFPB states it is seeking to improve data entry, including by potentially streamlining the data submission and editing processes for lenders by creating an interface that will allow lenders to connect their software to a CFPB intake system. The CFPB is consulting with other federal agencies on potential data entry streamlining options.
Enhanced Access To Existing HMDA Data
The CFPB also re-launched and expanded the capabilities of its new HMDA data tool, which it originally announced in September 2013. The tool now includes additional features, which allow users to (i) filter records by, among other things, geography (state, metropolitan area, county, and census tract), borrower characteristics, loan characteristics, and property type; (ii) create summary tables (e.g. to compare refinances, home purchases, and home improvement loans over a given time period); (iii) download data and summary tables to allow researchers and software developers to incorporate the CFPB-provided HMDA data into other applications and visualizations; and (iv) save and share results, including through social media platforms.
Next Steps
This initial framework for enhancing HMDA data collection and reporting was released as part of the small business review process required when a potential CFPB rule could have a significant economic impact on a substantial number of small entities. In such cases, including with this HMDA proposal, the CFPB must convene a panel of representatives from the Bureau, the Chief Counsel for Advocacy of the Small Business Administration, and OMB’s Office of Information and Regulatory Affairs (the Review Panel) to meet with small business representatives. The CFPB released a fact sheet explaining the process, and a list of issues the Review Panel will discuss with small businesses. Within 60 days of convening the Review Panel, it must issue a report on the feedback received from small business, which then must be considered as the CFPB prepares a proposed rule. The small business review process is the first public step in a lengthy rulemaking process. Along the way, financial institutions of all sizes will have opportunities to weigh-in on the proposal, which could evolve over the coming months.
CFPB Reports Results Of Student Loan Payment Allocation Practices Inquiry
On February 3, the CFPB’s student loan ombudsman, Rohit Chopra, released a summary of student loan servicers’ responses to questions the CFPB posed last November about the application of borrower payments. In that November request, the CFPB asked a group of unidentified servicers to provide information about (i) the allocation of lump sum payments by the Department of Defense and other third parties on behalf of servicemembers or others seeking to direct lump-sum payments to specific loans; (ii) the percentage of borrower payments made through online bill pay systems and direct debit, and servicer practices related to borrower instructions provided with such payments; (iii) servicers’ ability to accommodate standing instructions for future excess payments; and (iv) the methods by which servicers communicate with borrowers about directing prepayments.
The CFPB’s summary of the responses explains that the request was sent to “a number of private student loan servicers” and that the respondents “represented many different forms” including “third-parties servicing notes held by banks or in a securitized pool, large depository institutions servicing loans in-house, and small depository institutions.” However, a chart included in the summary reports the results of only six respondents.
The report presents a short list of “key findings”:
- Many servicers responded that they cannot honor specific payment allocation instructions communicated through online, third-party bill pay services.
- Many servicer online payment platforms allow borrowers to direct payments to a specific loan, but others do not. Some that do not provide a workaround, requiring the borrower to contact their servicer following a payment and request a reallocation.
- Many servicers indicated that they are making other changes to improve communications to borrowers about payment processing policies.
- Many servicers have limited ability to accept payment instructions in advance of a payment made by a third party (e.g. payments made by the Department of the Defense on behalf of servicemembers receiving loan repayment assistance).
- Some servicers have recently changed their payment allocation policies and now allocate payments from borrowers in excess of the scheduled payment amount or statement balance due to balances with the highest interest rate.
In addition, in response to servicer inquiries regarding an appropriate standard allocation policy when borrowers have both fixed and variable rate loans, the Ombudsman states, based on the CFPB’s preliminary analysis, that applying excess funds toward the loan with the highest current interest rate will save the borrower interest in the short run and over the life of the loan.
SEC Chairman Sets 2014 Agenda, Promises Vigorous Enforcement
On January 27, SEC Chairman Mary Jo White outlined in remarks to the 41st Annual Securities Regulation Institute her agency’s 2014 agenda, promising “incredibly active enforcement” across “the entire industry spectrum.” Within that enforcement push, the Commission will pay particular attention to financial fraud, including by working to complete its major investigations stemming from the financial crisis while ramping up investigations by its new Financial Reporting and Accounting Task Force. As part of the broader enforcement agenda, the SEC will continue its new stance on seeking admissions from alleged wrongdoers, a policy change that Ms. White first announced publicly last June. Chairman White cited public and media pressure as part of the reason for the change, and explained that “admissions can achieve a greater measure of public accountability.” Outside of the agency’s enforcement plans, Chairman White highlighted numerous other SEC initiatives, including finalizing new disclosure requirements for asset-backed securities. The Commission also will continue to implement the National Examination Program’s new trading data analytics tool—just one example of the “transformative changes at the SEC in 2014” necessary to keep up with evolving market technology.
SDNY U.S. Attorney Details BSA/AML Enforcement Plans
On January 27, during a speech to certified AML compliance specialists, the U.S. Attorney for the Southern District of New York, Preet Bharara, stressed BSA/AML enforcement as a top priority for his office. Mr. Bharara focused on three issues: (i) the importance of holding institutions accountable for misconduct; (ii) the need for law enforcement to stay ahead of rapidly changing markets and technologies; and (iii) organizational changes within his office to bring the needed resources to bear. With regard to enforcement against institutions, the U.S. Attorney rebutted arguments that prosecutors should focus on individuals and described the full spectrum of tools available to hold institutions accountable—ranging from pursuing criminal prosecutions to seeking monetary fines and restitution through civil actions. He stressed the need to employ the full range of tools against institutions, especially in the AML context where many of the anti-money laundering laws and BSA provisions are specifically directed at institutions. The U.S. Attorney also announced that his office’s Criminal Division’s Asset Forfeiture Unit will be renamed the Money Laundering and Asset Forfeiture Unit to reflect his office’s commitment to dedicate more physical and human resources to addressing money laundering crimes and BSA violations.
CFPB Joins With DOD, VA, And Others To Launch Servicemember Education Complaint System
On January 30 the CFPB, the Department of Defense (DOD), the Department of Veterans Affairs (VA), the FTC, and other federal agencies announced the launch of a new online system designed to collect information from veterans, current servicemembers, and their families regarding negative experiences at education institutions and training programs administering the Post-9/11 GI Bill, DOD Military Tuition Assistance, and other military-related education benefit programs. The new system is modeled after the CFPB’s complaint system and is intended to help the government identify and address unfair, deceptive, and misleading practices. The complaint system, which is comprised of the DOD’s Postsecondary Education Complaint System and to the VA GI Bill Feedback System, was developed in accordance with the April 2012 Executive Order 13607, Establishing Principles of Excellence for Educational Institutions Serving Service Members, Veterans, Spouses, and Other Family Members. That order required, among other things, the Secretaries of Defense and Veterans Affairs to “create a centralized complaint system for students receiving Federal military and veterans educational benefits to register complaints that can be tracked and responded to by the Departments of Defense, Veterans Affairs, Justice, and Education, the CFPB” and other relevant agencies.
FinCEN Releases Additional Guidance Related To Virtual Currency Mining, Software, And Investment Activity
On January 30, FinCEN issued two rulings related to virtual currency mining and virtual currency software development and investment activity. The guidance clarifies FinCEN’s previous convertible virtual currency guidance. In FIN-2014-R001, FinCEN explains that miners of Bitcoins, whether individuals or corporations, who are engaging in mining solely for the miner’s own personal purpose are “users” of virtual currency and not MSBs under FinCEN’s previous guidance. FinCEN found this to be the case even if the miner from time to time must convert the mined Bitcoins into real currency or another convertible virtual currency so long as the conversion is solely for the miner’s own purposes and not as a business service performed for the benefit of another. In FIN-2014-R002, FinCEN states that a company that develops its own software to purchase virtual currency for its own account and to resell the virtual currency at the company’s own discretion and based on the company’s own investment decisions also is not an MSB under FinCEN’s prior guidance.
Federal Government Seeks Higher Penalties In GSE Fraud Case
On January 29, the DOJ filed a supplemental brief in support of its claim for civil penalties following a jury verdict it obtained last October in the first case alleging violations of FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. U.S. v. Countrywide Fin. Corp., No. 12-CV-1422 (S.D.N.Y. Jan. 28, 2014). In October, following a four week trial, a jury found a bank liable under FIRREA based on a program operated by a lender that the bank had acquired. The government originally sought damages of $864 million based on alleged losses incurred by Fannie Mae and Freddie Mac. After the judge requested supplemental briefing from the parties focused on the alleged gain rather than loss, the government submitted a brief arguing that the gain was $2.1 billion, and requesting that the court impose a penalty in that amount. The government asserts that the penalty should be calculated using gross gain, rather than net gain, to accomplish “FIRREA’s central purpose of punishment and deterrence.”
GAO Issues Report On SCRA Mortgage Protections
On January 28, the GAO issued a report on SCRA mortgage protections required by the 2012 legislation that extended those protections. Using data from three large mortgage servicers and a large credit union, the GAO examined changes in the financial well-being of servicemembers who received foreclosure-prevention and mortgage-related interest rate protections under SCRA, including the extent to which they became delinquent and the impact of protection periods. The report states that the number of servicemembers with mortgages eligible for SCRA mortgage protections is unknown because servicers have not collected this information in a comprehensive manner. For those identified as SCRA-eligible at the two servicers, delinquency rates ranged from 16 to 20 percent and from four to eight percent for other military borrowers. Delinquencies at the credit union were under one percent. GAO concluded that some servicemembers appeared to have benefitted from the SCRA interest rate cap of six percent, but that many eligible borrowers had not taken advantage of the protection. GAO also determined that the data were insufficient to assess the impact of SCRA protections after servicemembers left active duty, although it believes one institution’s limited data indicated that military borrowers had a higher risk of delinquency in the first year after leaving active duty. GAO also reviewed documentation on DOD’s partnerships and relevant education efforts related to SCRA mortgage protections and found relevant information to be limited because DOD has not undertaken any formal evaluations of the partnerships' effectiveness. Given its finding that many servicemembers did not appear to be taking advantage of the SCRA interest rate cap, GAO concluded that DOD’s SCRA education efforts could be improved and that an assessment of the effectiveness of these efforts is still warranted.
OCC Names Deputy Comptroller For Large Bank Supervision
On January 29, the OCC announced that Molly Scherf will serve as Deputy Comptroller for Large Bank Supervision with responsibility for overseeing the Large Bank lead experts, shared national credit, data analytics, and systems teams. Her new role will involve working with policy, midsize, and community bank supervision, and legal departments within the OCC as well as with domestic and international regulatory peers. Ms. Scherf joined the OCC in 1990 and brings 23 years of bank supervision experience across institutions ranging from $50 million to $2 trillion in assets. She most recently served as Large Bank Lead Expert for Governance and Enterprise Risk Management and previously served as a megabank Team Lead at Wells Fargo.