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President Obama Nominates Two Senate Staff Members as SEC Commissioners
On May 23, President Obama nominated Michael Piwowar and Kara Stein to be members of the Securities and Exchange Commission. Both nominees currently serve as staff members in the U.S. Senate. Mr. Piwowar is a chief economist for the Senate Banking Committee’s Republicans. He would replace Troy Paredes, whose term is expiring, for a full five-year term set to end on June 5, 2018. Ms. Stein is senior aide to Senator Jack Reed (D-RI) and would replace Elisse Walter, whose term has already expired, for a term that would expire on June 5, 2017.
Minnesota Adds Loss Mitigation Requirements, Prohibits Dual Tracking
On May 24, Minnesota enacted SF 1276, which adds pre-foreclosure requirements for most mortgage servicers. Effective August 1, 2013, servicers must notify a borrower in writing of available loss mitigation options before referring the loan for foreclosure. Servicers also must, after receiving a modification or loss mitigation request, exercise reasonable diligence in obtaining documents and information from the mortgagor to complete a loss mitigation application, facilitate the submission and review of loss mitigation applications, and give the mortgagor a reasonable amount of time to provide the required documents. The law further requires servicers to timely review and offer a modification to eligible mortgagors, or timely offer other loss mitigation options for which the mortgagor is eligible. Effective October 31, 2013, except under certain circumstances, servicers generally are prohibited from (i) referring a loan to foreclosure while a loss mitigation or modification request is pending, and (ii) moving for a foreclosure order on loans that already have been referred if the servicer subsequently receives a loss mitigation application. The law also requires servicers to halt foreclosure sales in some instances and prohibits a servicer from moving for a foreclosure order if a mortgagor is in compliance with the terms of a modification or if a short sale has been approved.
Federal District Court Denies OCC's Motion Seeking Reconsideration of Order Compelling Production of Materials Subject to Bank Exam Privilege
On May 23, the U.S. District Court for the Southern District of New York denied the OCC’s motion for reconsideration of an April 2013 order in which the court compelled a bank and the OCC to produce various investigative files and regulatory communications over the OCC’s objection that the bank examination privilege protected such production. Wultz v. Bank of China, No. 11-1266, 2013 WL 2284881 (S.D.N.Y. May 23, 2013). In support of its motion to reconsider, the OCC argued that (i) the court failed to properly weigh long-standing principles; (ii) the decision “will be construed as an erosion of the bank examination privilege that ultimately will undermine the bank supervisory process;” and (iii) the OCC never waived the privilege and appropriately and in good faith relied upon the procedures set forth under its Touhy regulation. The court disagreed and explained that, although the OCC argued that it did not waive its right to assert privilege over the documents, the OCC never affirmatively asserted privilege over any of the specific materials at issue, or even over clearly specified categories of documents. The court also reasoned that the OCC failed to support its positions that the Second Circuit’s approach to Touhy regulations should not apply in this case and that the court failed to properly weigh the risk of a chilling effect in overriding the bank examination privilege, stating that it is “not necessary for every judicial consideration of the chilling effect to be accompanied by a lengthy paean to the virtues of candor in regulatory communications.”
Federal Reserve Board Report Finds Interchange Fee Exemption Benefiting Small Issuers
On May 23, the Federal Reserve Board issued a report showing that the exemption designed to protect small debit card issuers from interchange fee standards applied to large issuers is working as intended. The report indicates that depository institutions with consolidated assets of less than $10 billion, which are exempt from the interchange fee standard in Regulation II, received fee revenue of 43 cents per transaction in 2012 – roughly the same as the average received before Regulation II took effect. While the Dodd-Frank Act exempted small issuers from the interchange fee standard set in the regulation, it did not provide an exemption from the statute’s prohibition on network exclusivity. As a result, Regulation II requires every debit card issuer, regardless of size, to have at least two unaffiliated networks on every debit card. According to the report, most small issuers that responded to a survey about the effect of the network exclusivity provisions of the rule indicated that significant compliance costs were not incurred.
FTC Releases Agenda for Mobile Security Forum
On May 24, the FTC released the agenda for its June 4, 2013 forum on mobile security issues. The forum will address mobile malware, how it spreads, its impact on U.S. consumers, and the role of mobile platforms and others in the mobile ecosystem – from chipmakers to app developers – in securing mobile devices and data.
Alabama Clarifies Supervision Authority Over Bank Affiliates, Service Providers
On May 23, Alabama enacted a bill that clarifies the Alabama Banking Department’s authority to examine subsidiaries and affiliates of state banks and bank holding companies when the Banking Superintendent believes such a company is not operating in compliance with state laws or safe and sound banking practices. The bill, HB 529, also grants the Banking Department authority to examine bank service companies on the same as-needed basis. Finally, the bill clarifies the Superintendent’s right to promulgate regulations and adds bank holding companies in as an entity that may rely on interpretations of banking laws and regulations. The bill took effect immediately.
Third Circuit Clarifies Standards for Deciding Motions to Compel Arbitration
On May 28, the U.S. Court of Appeals for the Third Circuit resolved an inconsistency in the circuit regarding the standard a court should apply when deciding a motion to compel arbitration. Guidotti v. Legal Helpers Debt Resolution, L.L.C., No. 12-1170, 2013 WL 2302324 (3rd Cir. May 28, 2013). In this case, several debt settlement firms moved to compel arbitration after being sued by a debtor who claimed the firms defrauded her and similarly situated persons. The court granted arbitration for most of the defendants but denied with regard to two, holding that the debtor’s pleading demonstrated that the parties had no meeting of the minds on an agreement to arbitrate. On appeal, the court held that the record before the district court was insufficient to prove that there was no genuine dispute of material fact regarding the agreement to arbitrate. In doing so, the court explained that it has inconsistently applied a motion to dismiss standard and a motion for summary judgment standard to motions to compel arbitration, which the court believes is in part explained by the Federal Arbitration Act’s (FAA) alternating emphasis on speed and enforcement of private agreements. To reconcile the conflict, the court held that the FAA favors resolving a motion to compel arbitration under the speedier motion to dismiss standard when the affirmative defense of the arbitrability of claims is apparent on the face of the complaint or its supporting documents. However, the court held, when the motion does not have as its predicate a complaint that clearly indicates the affirmative defense of arbitrability, a “more deliberate pace is required” and a summary judgment standard is more appropriate. The court vacated and remanded the district court’s order denying arbitration.
Housing Advocacy Groups Press For National Mortgage Settlement Fair Servicing Data
On May 23, a group of 17 housing and advocacy organizations sent a letter to U.S. District Court Judge Rosemary Collyer – the judge presiding over the consent judgments that constitute the National Mortgage Settlement – questioning whether the homeowner relief activities of the mortgage servicers subject to that settlement are being conducted fairly with regard to borrowers in minority communities. The group urged Judge Collyer to require full public disclosure of the distribution of principal reduction and other loan modification benefits. In particular, the organizations are concerned that servicers may not be complying with state and federal fair housing laws in their distribution of loan modifications. The organizations ask that the servicers be required to report census tract and other data for each mortgage adjustment for which they seek credit under the settlement. In March, the group and other organizations sent a similar, more detailed request to National Mortgage Settlement Monitor Joseph Smith, pressing him to monitor and audit the fair lending compliance of the servicers involved in the settlement. To date, the Monitor has not publicly done so.
NACHA Proposes Clarification of Third Parties in ACH Network
On May 20, NACHA, the organization that manages the ACH Network, requested comment on proposed changes to the NACHA Operating Rules to clarify the definitions, roles, and responsibilities of third parties in the ACH Network. The proposal explains that third parties are performing roles in ACH processing that were not contemplated at the time third parties were first addressed in the rules, and that the line between third parties and originators may sometimes be blurred. The proposal includes specific changes related to related to (i) clear Identification of the originator in consumer debit authorizations; (ii) third parties and receiver authorizations; (iii) definition of third-party sender; (iv) definition of third-party service provider; and (v) third-party sender and third-party service provider audit requirements. Comments on the proposal are due by June 28, 2013.
Special Alert: CFPB Finalizes Amendments to the Ability-to-Repay/Qualified Mortgage Rule
Yesterday afternoon, the Consumer Financial Protection Bureau ("Bureau") finalized important amendments (the "Amendments") to its ability-to-repay / qualified mortgage rule (the "Rule") concerning the extent to which loan originator compensation must be included as "points and fees" under the Rule. The calculation of points and fees is a critical aspect of the Rule because a loan generally cannot be a "qualified mortgage" ("QM") - a designation that provides the lender with a degree of protection against asserted violations of the ability-to-repay requirements - if points and fees exceed 3% of the loan balance. Furthermore, the same calculation method is used to determine whether points and fees exceed 5% of the loan balance for purposes of coverage under the Home Ownership and Equity Protection Act ("HOEPA"). The Amendments, which had been proposed concurrently with the Rule itself in January of this year (the "Concurrent Proposal"), address instances in which the Rule would have required lenders to "double count" payments of loan originator compensation as points and fees.
Despite industry requests, the Amendments make no changes to the provision in the Rule requiring that many payments to creditor affiliates be included in points and fees. In addition to points and fees, the Amendments address how "small creditors" can make QMs, and contain narrow exemptions from the Rule for certain types of creditors and for extensions of credit made pursuant to certain lending programs. Like the Rule itself, the Amendments will take effect on January 10, 2014. Concurrent with the Amendments, the Bureau delayed the effective date of a separate provision, which generally prohibits creditors from financing credit insurance premiums, from June 1, 2013 to January 10, 2014.