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Senate Confirms Richard Cordray as CFPB Director
This evening, the U.S. Senate voted 66 to 34 to confirm Richard Cordray as CFPB Director, for a five year term. As is well known, Mr. Corday had been serving in that position as a recess appointee and his recess appointment was set to expire at the end of this year. Moreover, his recess appointment has been the subject of a litigation challenge, and the issue of the validity of recess appointments such as his may have been resolved by the U.S. Supreme Court in the next term. The Senate vote on Mr. Cordray’s nomination came after several days of Senate debate over the Senate’s confirmation process and filibuster rules that resulted in a path forward on up or down votes on several presidential nominations. It ended a two-year stalemate between Republicans and Democrats over the Mr. Cordray’s nomination, based on a fundamental disagreement regarding the structure and oversight of the CFPB. For example, Republican members of both the Senate and the House have called for the CFPB’s director-led structure to be replaced by a commission, and for the CFPB’s budget to be subject to the annual congressional appropriations process.
There may be movement on one potential change to oversight of the CFPB. Concurrent with the agreement to vote on Mr. Cordray’s nomination, Senator Portman (R-OH) announced a bill that would establish an office of inspector general for the CFPB. Currently the Bureau shares an inspector general with the Federal Reserve Board. Also, following the confirmation vote, the Chairman of the House Financial Services Committee immediately dropped his objection to Mr. Cordray testifying before that committee and stated that the committee will call him to testify on the CFPB’s annual report as soon as practicable.
The confirmation of Mr. Cordray, and the expected confirmation of new presidential nominees to the National Labor Relations Board, may impact the Supreme Court’s pending review of presidential recess appointment power, a case we have written about on several other occasions, including most recently when the Supreme Court agreed to hear the case.
Other nominations of interest remain pending. For example, the President has nominated Representative Mel Watt (D-NC) to serve as FHFA Director. The Senate Banking Committee was set to vote on that nomination this morning, but postponed the vote until Thursday.
Eighth Circuit Holds Borrowers Must File Suit Within TILA Three-Year Rescission Period
On July 12, the U.S. Court of Appeals for the Eighth Circuit held that a borrower seeking rescission under TILA must file suit within three years, and that merely providing the lender notice is insufficient to preserve the borrower’s right of rescission. Keiran v. Home Capital, Inc., No. 11-3878 (8th Cir. Jul. 12, 2013). As the Tenth Circuit did last year, the Eighth Circuit reasoned that the text of the statute, as explicated by the Supreme Court in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), establishes that filing suit is required. Also like the Tenth Circuit, the court expressly rejected the CFPB’s argument that the lender, rather than the obligor, should be required to file suit to prevent rescission. To adopt the CFPB’s position, the court explained, “would create a situation wherein rescission is complete, in effect, simply upon notice from the borrower, whether or not the borrower had a valid basis for such a remedy. Under this scenario, the bank’s security interest would be unilaterally impaired, casting a cloud on the property’s title, an approach envisioned and rejected by Beach.” The holding is the latest in a series of circuit court decisions on this issue, with the majority of circuits now holding in favor of the lender and rejecting the position that notice extends the three-year TILA rescission right. BuckleySandler LLP filed an amicus brief in Keiran on behalf of the American Bankers Association, Consumer Bankers Association, and Consumer Mortgage Coalition.
House Chairman Outlines Housing Reform Bill
On July 11, House Financial Services Committee Chairman Jeb Hensarling (R-TX) outlined legislation set to be unveiled next week that is designed to reform the housing finance market. The centerpiece of the comprehensive bill is a plan to end the government’s conservatorship of Fannie Mae and Freddie Mac over a five year period, move those entities into receivership, and liquidate them. The bill would aim to replace the government-backed mortgage finance companies with a secondary market funded only by private capital, supported by a non-government, not-for-profit mortgage market utility regulated by the FHFA. The legislation also will include numerous provisions designed to “break down barriers to private investment capital,” including by delaying implementation of Basel III capital rules for community financial institutions and incorporating portions of a bipartisan proposal to change the calculation of loan points and fees in determining qualified mortgage eligibility. Finally, the bill would separate the FHA from HUD, limit the FHA’s mission to only serving first-time homebuyers and borrowers below 115% of area median income (AMI) nationwide or 150% of AMI in high-cost areas, lower the minimum and maximum FHA loan limits, and increase FHA down payment requirements, among other changes to the FHA program.
Governor Duke Announces Resignation from Federal Reserve Board
On July 11, the Federal Reserve Board announced that Governor Elizabeth Duke submitted her resignation effective August 31, 2013. She was appointed to the Board in August 2008 to fill a term that expired January 31, 2012. During her time on the Federal Reserve Board, Ms. Duke, a former community banker, focused on housing issues and financial regulation, including with regard to the impact of such regulation on community banks. For example, last year she cautioned regulators about the potential impact of the various mortgage and capital rules on small institutions. Ms. Duke, who also previously led the American Bankers Association, did not indicate her future plans.
Colorado AG Investigating Foreclosure Law Firm Fees
On July 11, the Denver Post reported that Colorado Attorney General (AG) John Suthers is investigating whether foreclosure law firms are inflating fees that are added to the cost of the foreclosure and mortgage balance, and subsequently are passed on to borrowers, lenders, and investors. The AG has not filed charges against any firms, but has moved to enforce subpoenas his office issued seeking information from numerous law firms about the foreclosure fees they charged. The investigation covers all costs claimed by the firms, including costs related to posting foreclosure notices on homeowners’ doors, which the AG claims substantially exceed the market rate.
Prudential Regulators Finalize Regulatory Capital Rule, Propose New Leverage Ratio for Large Banks
On July 9, the FDIC and the OCC approved a final rule to implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The same rule was approved on July 2 by the Federal Reserve Board. The final rule (i) increases the minimum common equity tier 1 capital requirement from 2% to 4.5% of risk-weighted assets; (ii) increases the minimum tier 1 capital requirement from 4% to 6% of risk-weighted assets; and (iii) adds a new capital conservation buffer of 2.5% of risk-weighted assets. The rule also establishes a minimum leverage ratio of 4% for all banking organizations. In response to concerns raised by smaller and community banking organizations, the regulators did not finalize more onerous capital requirements that would have substantially increased the risk-weightings for residential mortgages, as explained in more detail in our recent post. The final rule does not change the more stringent limits on the inclusion of mortgage servicing assets and deferred tax assets in regulatory capital calculations, but does extend the phase-in period for community banks. Internationally active banks must begin to implement the new capital rules in January 2014, while all other banking organizations will have until January 2015 to begin to phase in the new capital requirements. Also on July 9, the FDIC and the OCC approved a proposed rule that would require bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody to maintain a tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Failure to exceed the 5% ratio would subject covered companies to restrictions on discretionary bonus payments and capital distributions. The proposed rule also would require insured depository institutions of covered holding companies to meet a 6% supplementary leverage ratio to be considered “well capitalized” for prompt corrective action purposes. The proposal suggests a phase-in period for the rule with an effective date of January 1, 2018. Comments on the proposal are due 60 days after it is published in the Federal Register.
FTC Announces Largest Civil Penalty Ever Against Third-Party Debt Collector
On July 9, the FTC announced that a third-party debt collector and its subsidiaries agreed to pay a $3.2 million civil penalty to resolve allegations that the companies violated the FDCPA and FTC Act by (i) calling individuals multiple times per day, including early in the morning or late at night, (ii) calling even after being asked to stop, (iii) calling individuals’ workplaces despite knowing that the employers prohibited such calls, (iv) leaving phone messages for third parties, which disclosed the debtor’s name and the existence of the debt, and (v) continuing collection efforts without verifying a debt, even after individuals said they did not owe the debt. In addition to the monetary penalty, which the FTC described as the largest it has ever obtained against a third-party collector, the stipulated order requires, with regard to consumers who dispute the validity or the amount of a debt, that the companies close the account and end collection efforts, or suspend collection until they have conducted a reasonable investigation and verified that their information about the debt is accurate and complete. The order also restricts situations in which the defendants can leave voicemails that disclose the alleged debtor’s name and the fact that he or she may owe a debt, and requires the companies to halt or limit other alleged practices. The companies also must record at least 75% of all their debt collection calls beginning one year after the date of the order, and retain the recordings for 90 days after they are made.
CFPB Publishes Mortgage Rules Readiness Guide
On July 8, the CFPB published a guide intended to help financial institutions prepare to comply with the various mortgage-related rules the CFPB promulgated in January 2013, some of which it continues to revise. The guide briefly describes each of the rules and provides (i) a readiness questionnaire, (ii) frequently asked questions, and (iii) a list of other resources available to companies seeking to come into compliance with the new rules. The readiness questionnaire covers (i) implementation plans, (ii) policies and procedures, (iii) training, (iv) audit/quality control, (v) consumer complaints, and (vi) vendor management.
OCC Names Head of Large Bank Supervision
On July 10, the OCC named Martin Pfinsgraff as Senior Deputy Comptroller for Large Bank Supervision. Mr. Pfinsgraff has been filling that role on an acting basis since Michael Brosnan left the position to become Examiner-in-Charge of an OCC-supervised institution. Mr. Pfinsgraff previously served as Deputy Comptroller for Credit and Market Risk and prior to joining the OCC held senior positions with iJet International, Prudential Insurance Company, and Prudential Investment Corporation.
Fannie Mae, Freddie Mac Provide Additional Information Regarding QM Requirements
On July 2, Fannie Mae and Freddie Mac provided lenders additional information about eligibility criteria for mortgages with application dates on or after January 10, 2014. Recently, the FHFA directed Fannie Mae and Freddie Mac to limit future mortgage acquisitions to loans that meet the requirements for qualified mortgages under the CFPB’s ability-to-repay/qualified mortgage rule. The letters state that, effective January 10, 2014, mortgages will be eligible for sale to either entity only if they (i) are fully amortizing, (ii) have terms no longer than 30 years, and (iii) have points and fees of 3% or less of the total loan amount. In addition, both entities will continue to purchase mortgage loans that are exempt from the ability-to-repay rule. Fannie Mae and Freddie Mac anticipate updating policies regarding representations and warranties, as well as certain policies related to loan eligibility in August 2013, and plan to provide information about how they will test for compliance with the new eligibility criteria in September 2013.