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FINRA Report Reviews Broker-Dealer Industry Conflicts Of Interest
On October 14, FINRA released a report on conflicts of interest in the broker-dealer industry, stating that the report is intended to identify potential problem areas and highlight effective conflicts management practices that may go beyond current regulatory requirements. The report identifies the components of an effective conflicts management framework, which include, for example (i) identifying and managing conflicts on an ongoing basis through an enterprise-level approach that is scaled to the size and complexity of a firm's business, (ii) establishing new product review processes that provide independent perspectives and identify potential conflicts raised by new products, (iii) minimizing conflicts in compensation structures between customer and broker or firm interests where possible, and (iv) including "best-interest-of-the-customer" standards in codes of conduct that apply to brokers' personalized recommendations to retail customers.
National Mortgage Settlement Monitor Announces Interim Credit
On October 16, Joseph A. Smith, Jr., the National Mortgage Settlement Monitor, announced that his office filed with the U.S. District Court for the District of Columbia reports on credited consumer relief and refinancing provided through December 31, 2012 by four of the five servicers subject to the National Mortgage Servicing Settlement. A summary report and fact sheet released by the Monitor provide additional detail about the relief certification procedures and a breakdown of each servicer’s relief activities.
D.C. Federal Court Dismisses Lawyer, Service Provider Challenge to CFPB Probe
On October 17, the U.S. District Court for the District of Columbia granted the CFPB’s motion to dismiss an attorney and service provider’s lawsuit challenging the authority of the CFPB. The court declined to exercise jurisdiction in the case and did not reach the merits of the service provider’s constitutional challenge. The court agreed with the CFPB’s argument that the service provider could obtain complete relief on its constitutional claim in an enforcement action currently pending in the Central District of California, and thus, injunctive and declaratory relief in the D.C. District Court was inappropriate. The court also held that the attorney, who is not a party to the Central District of California action, lacked standing to raise her claim, because she had failed to demonstrate a substantial probability of being forced to produce privileged information to the Bureau.
CFPB Student Loan Report Recommends Servicing Policy Changes
On October 16, the CFPB Student Loan Ombudsman issued a second annual report on student loans. The report analyzes and discusses approximately 3,800 complaints submitted by consumers to the CFPB from October 1, 2012 through September 30, 2013. According to the report, the most common complaints related to borrowers attempting to adjust the repayment terms of their loans in times of hardship, problems with debt collection practices, problems covering a range of payment processing issues, and general customer service issues. The report did caution that given its reliance on complaints and other non-scientific collection of data, it is not based on a representative sample and should not be used to draw conclusions as to the prevalence of problems in the student loan marketplace.
The majority of the report seeks to again draw parallels between problems previously seen in the mortgage servicing marketplace to those the CFPB sees in the student loan market. The CFPB also adds that some perceived problems in student loan servicing mirror those previously observed with regard to credit card servicing. The CFPB cites consumer complaints that servicers (i) fail to explain their payment application policies and processes, (ii) do not apply payments to highest interest loans first, (iii) apply underpayments to maximize late fees, (iv) fail to timely apply on-time payments, (v) do not provide electronic access to payment histories for payments made by phone or mail, (vi) lose payments, and (vii) are unable to provide accurate payoff information. In addition, the CFPB reports that consumers complained about numerous problems that arose following a transfer of the loan from one servicer to another. The CFPB also highlights its concern about insufficient refinancing and modification activity, but notes a recent statement from prudential regulators that the CFPB expects may help address those issues. The CFPB further discusses concerns about the servicing of loans for military servicemembers, but notes that some servicers have moved to address these alleged problems.
Stressing the interests of investors in addition to policymakers, and drawing from requirements in the CFPB’s new mortgage servicing rules and the 2009 Credit CARD Act, the Ombudsman recommends that student loan servicers take certain steps to address these and other servicing concerns:
- Provide notices prior to and following a change in servicer and ensure timely transfer of all documents and information;
- Introduce greater consistency in the handling of payoff requests, providing borrowers with a timely payoff statement in writing, and honoring the estimate for sufficient time;
- Improve error resolution procedures;
- Designate a single point of contact or team for each borrower;
- Improve and expand record management and retention policies;
- Initiate follow up communications after a missed payment;
- Improve payment posting to ensure timely application of payments;
- Reconsider fee-based model for expedited payments; and
- Deliver statements 21 days prior to payment date.
Further, the Ombudsman recommends that congressional policymakers, in connection with reauthorization of the Higher Education Act next year, consider statutory amendments to implement these suggested student loan servicing practices.
The CFPB suggests these changes as it prepares its final student loan servicer larger participant rule, which is expected in the coming weeks. If finalized largely as proposed, the rule will allow the CFPB to supervise any nonbank student loan servicer whose volume exceeds one million accounts, which the CFPB expects will cover the seven largest servicers.
On the same day, the CFPB also issued a consumer advisory to help borrowers instruct their servicers on how to process their payments. The CFPB advises borrowers to provide instructions to servicers with each payment and provides a sample instruction letter. For example, one such instruction letter would be used by borrowers to direct application of overpayments toward the highest-interest rate loans.
Special Alert: CFPB ISSUES MORTGAGE SERVICING RULE AMENDMENTS AND GUIDANCE ADDRESSING CONFLICTS WITH BANKRUPTCY AND DEBT COLLECTION RULES
On October 15, the CFPB issued an interim final rule amending certain provisions of its mortgage servicing rules and making technical changes to other January 2013 mortgage rules (the Interim Amendments). As explained in our Special Alert, the amendments address issues raised by bankruptcy trustees and industry about the incompatibility of the servicing rules with protections afforded to consumers by bankruptcy law and the FDCPA. The CFPB also issued a bulletin providing guidance on other aspects of the servicing rules and an advisory opinion on the interaction between the rules and the FDCPA. In addition, on October 16, CFPB staff provided unofficial oral guidance on specific questions about the mortgage servicing rules in a webinar hosted by the Mortgage Bankers Association. BuckleySandler attorneys attended the webinar and can address any questions you may have.
Like the mortgage servicing rules, the Interim Amendments will take effect on January 10, 2014. The CFPB issued the Interim Amendments without advance notice and public comment because of the impending effective date. The public will have 30 days to provide comments after publication of the amendments in the Federal Register (which has not yet occurred). After the comment period, the CFPB may make adjustments to the Interim Amendments before adopting them in final form.
Questions regarding the matters discussed in this Special Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
CFPB Deputy Director Discusses Supervisory Framework
As reported last week, the CFPB has decided to stop sending enforcement attorneys to routine examinations of financial institutions effective November 1. In a recent interview, CFPB Deputy Director Steven Antonakes said that the decision followed an “assess[ment of] the effectiveness and efficiency of the operation” over the past two years. He clarified that the presence of enforcement attorneys was “absolutely not” intended to intimidate supervised institutions but rather reflected the CFPB’s ongoing efforts to ensure “strong communication” between supervision and enforcement teams throughout the examination process.
Going forward, Antonakes explained that enforcement attorneys will continue to have a “line of sight throughout the beginning, middle, and end of the exam process,” in addition to serving other important functions, like conducting independent investigations. He noted the recent action targeting a debt settlement payment processor as “just one example of an independent investigation [the] enforcement team conducted completely outside of the supervisory process”. Antonakes further explained that “charter or license type is becoming less relevant in determining how we will prioritize and schedule our examinations.” Rather, the CFPB has “begun to implement a prioritization framework” that allocates resources based on potential consumer risk, assessed through consideration of several qualitative and quantitative factors, including:
- the size of a product market;
- a regulated entity’s market share in that product market;
- the potential for consumer harm related to a particular product market; and
- field and market intelligence that encompasses a range of issues including, but not limited to, the quality of a regulated entity's management, the existence of other regulatory actions, default rates, and consumer complaints.
Antonakes also noted that, although the Bureau has “sacrificed some timeliness” in issuing examination reports to date in exchange for “strong quality control [] [that] ensure[s] consistency in [] findings across the country and across banks and non-banks,” the Bureau is “now positioned to ensure consistency while also improving timeliness.” Specifically, he stated that, while “[t]here will always be some variance,” he would like exam reports to be issued “within 90-120 days from the time the examiner leaves the institution.”
In terms of staffing, Antonakes noted the Office of Enforcement currently has approximately 150 employees, including more than 100 attorneys. He said that the targeted staffing level for the supervision offices is about 600. The offices are currently 75-80% staffed, but the CFPB hopes to have them fully staffed by the end of the year.
Bank Holding Company Resolves Federal Mortgage Claims
On October 10, a bank holding company announced that it has agreed in principle, on behalf of itself and certain affiliates, to resolve mortgage-related allegations by the federal government. The company reached agreements in principle with HUD and the DOJ to settle (i) certain civil and administrative claims arising from FHA-insured mortgage loans originated over a six-and-a-half year period and (ii) certain alleged civil claims regarding the company’s mortgage servicing and origination practices as part of the National Mortgage Servicing Settlement. Pursuant to the agreements in principle, the company committed to $500 million of consumer relief, a $468 million cash payment, and the implementation of certain mortgage servicing standards. The company also reached an agreement in principle with the Federal Reserve Board to impose a $160 million civil monetary penalty, in conjunction with an April 2011 Consent Order.
Agencies Propose Flood Insurance Rule
On October 11, the FDIC, the OCC, the Federal Reserve Board, and other federal agencies (collectively the agencies) proposed a rule to implement changes to certain flood insurance regulations required by the Biggert-Waters Flood Insurance Reform Act of 2012. The proposal generally would, among other things, require premiums and fees for flood insurance to be escrowed for any loans secured by residential improved real estate or a mobile home. The proposal incorporates a statutory exception for any institution with total assets of less than $1 billion that, as of July 6, 2012, was not required by federal or state law to escrow taxes or insurance for the term of the loan and did not have a policy to require escrow of taxes and insurance. The agencies also propose requiring lenders to accept private flood insurance that meets the statutory definition to satisfy the mandatory purchase requirement, but seek comment on whether the final rule should include a provision that expressly permits lenders to accept a flood insurance policy issued by a private insurer that does not meet the definition of "private flood insurance.” The proposed rule also would amend lender-placement provisions to clarify that a lender or its servicer has the authority to charge a borrower for the cost of coverage commencing on the date on which the borrower's coverage lapsed or became insufficient. The proposal also stipulates the circumstances under which a lender or its servicer must terminate lender-placed insurance and refund payments to a borrower, and establishes documentary evidence a lender must accept to confirm that a borrower has obtained an appropriate amount of flood insurance coverage. Comments on the proposal are due by December 9, 2013.
FDIC Advises Banks On Managing Interest Rate Risk
On October 8, the FDIC issued Financial Institution Letter FIL-46-2013, which re-emphasizes the importance of prudent interest rate risk oversight and risk management processes to prepare for a period of rising interest rates. The FDIC states that interest rate risk management should be viewed as an ongoing process that requires effective measurement and monitoring, clear communication of modeling results, conformance with policy limits, and appropriate steps to mitigate risk. It believes that for a number of FDIC-supervised institutions, the potential exists for material securities depreciation relative to capital in a rising interest rate environment. FDIC examiners will continue to consider the amount of unrealized losses in the investment portfolio and the degree to which institutions are exposed to the risk of realizing losses from depreciated securities when qualitatively assessing capital adequacy and liquidity and assigning examination ratings.
FDIC Cautions Financial Institutions About D&O Insurance Coverage
On October 10, the FDIC released Financial Institution Letter FIL-47-2013 to caution financial institutions about an increase in exclusionary terms or provisions in director and officer (D&O) liability insurance policies purchased by financial institutions. The FDIC reports that insurers are increasingly adding exclusionary language to D&O policies that has the potential to limit coverage and leave officers and directors personally responsible for claims not covered by those policies. Such exclusions may adversely affect financial institutions’ ability to recruit and retain qualified directors and officers. The FDIC advises institutions to thoroughly review the risks associated with coverage exclusions contained in D&O policies. The letter also reminds institutions that FDIC regulations prohibit an insured depository institution or depository institution holding company from purchasing insurance that would be used to pay or reimburse an institution-affiliated party for the cost of any civil money penalties assessed in an administrative proceeding or civil action commenced by any federal banking agency.