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SEC Announces Departure of Enforcement Director, Names New General Counsel and Chief Accountant
On January 9, the SEC announced that its Enforcement Director, Robert Khuzami, is leaving the agency. Mr. Khuzami was appointed to the position in February 2009. The SEC press release credits him with, among other things, restructuring the division and aggressively pursuing financial crisis-related cases and insider trading enforcement, which, together with other enforcement activities, yielded the all-time record number of 735 SEC enforcement actions in FY 2011 and another 734 actions in FY 2012. Earlier in the week, the SEC announced that Geoffrey Aronow will serve as the agency’s General Counsel. Mr. Aronow previously served as the Director of the Division of Enforcement at the CFTC for nearly four years, but most recently was in private practice. Last week, the SEC named Paul Beswick as Chief Accountant, head of the agency office responsible for establishing and enforcing accounting and auditing policy. Mr. Beswick joined the SEC in September 2007 and has filled the position in an acting role since July 2012.
Ninth Circuit Affirms Dismissal of Unfair Competition Claims over Teaser Rates
On January 9, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of a putative class action against a national bank over its adjustable rate mortgage disclosure and payment application. O’Donnell v. Bank of Am., N.A., No. 11-16351, slip op. (9th Cir. Jan. 9, 2013). On appeal, the borrowers argued that the district court erred in holding that their California state-law claims for common law fraud and violations of the Unfair Competition Law based on the lender’s alleged concealment of material facts about the loans’ escalating principal balances and interest rates are preempted by the National Bank Act and OCC regulations. The borrowers also challenged the district court’s dismissal of their state-law breach of contract claim based on allegations that the lender improperly applied payments solely toward satisfying part of the interest owed while adding the remaining interest to the principal balance. In affirming the dismissal, the appeals court held that the fraud and unfair competition claims are expressly preempted because they would force the lender to make additional disclosures not required by federal law. The appeals court also affirmed the district court’s holding that the FTC Act does not provide a private right of action and therefore cannot be employed as a premise for the borrowers’ unfair competition claim. With regard to the borrowers’ breach of contract claim, the court held that the mortgage contract did not include any representation that the lender would apply payments to principal if the payment failed to cover the accrued interest, and, therefore, the borrowers failed to state a plausible claim.
Basel Committee Relaxes Liquidity Standards
On January 7, the Basel Committee released its revised Liquidity Coverage Ratio (LCR), a component of the comprehensive Basel III accords that also address capital standards. The committee’s LCR is intended to promote short-term resilience of a bank's liquidity risk and reduce the risk of the banking sector harming the broader economy by failing to absorb shocks arising from financial and economic stress. The LCR requires that a bank have an adequate stock of unencumbered high-quality liquid assets that can be converted into cash easily and immediately in private markets to meet a 30-day liquidity stress scenario. The revised LCR updates standards originally adopted by the Committee in 2010. Given slower than expected strengthening of the banking system and the broader economy, and in response to industry requests, the Committee decided to expand the range of eligible assets to include corporate debt, unencumbered equities, and highly-rated residential mortgage-backed securities. The Committee also clarified its intention to allow banks use their high-quality liquid assets in times of stress. Finally, the Committee revised the timetable for phase-in of the standard. The standard will take effect as planned on January 1, 2015, but the minimum requirement will begin at 60%, rising 10 percentage points each year until full implementation on January 1, 2019.
Fannie Mae Obtains Comprehensive Settlement of Repurchase Claims Against Major Lender
On January 7, Fannie Mae and a national bank announced a comprehensive settlement to resolve all outstanding and future repurchase requests on nearly all single-family loans originated by the bank (and other lenders it later acquired) over a nine-year period and subsequently delivered to Fannie Mae. The announcement states that the loans had an outstanding unpaid principal balance of $297 billion as of November 30, 2012. Fannie Mae alleges that the lenders breached representations and warranties on the loans. The bank agreed to pay $3.55 billion in cash to Fannie Mae and to repurchase roughly 30,000 loans with cumulative unpaid principal balances and interest of $6.75 billion. On the loans retained by Fannie Mae, the bank remains responsible for certain payment and other obligations with respect to mortgage insurance rescissions, cancellations and denials, as well as its servicing, third-party indemnification, and recourse obligations. Finally, Fannie Mae and FHFA approved the transfer of servicing rights for roughly one million loans from the bank to specialty servicers, which FHFA stated is designed to benefit borrowers and reduce future credit losses to Fannie Mae.
Fannie Mae Clarifies Foreclosure Sherriff's Costs Reimbursement Process
On January 9, Fannie Mae issued a Servicing Notice regarding claims for reimbursement of foreclosure sheriff’s costs. Noting that some states require that the sheriff’s office perform some or all of the tasks associated with completing a foreclosure sale, the notice clarifies that when a servicer files a claim for reimbursement of the sheriff’s costs associated with foreclosure activities, Fannie Mae may require that the servicer provide supporting documentation with its request. Fannie Mae prefers that such costs be documented in a cost sheet on the sheriff’s office letterhead, but the notice includes an attachment listing other acceptable forms of documentation. The notice provides other reminders regarding the sheriff’s costs claim reimbursement process and supporting documentation.
Massachusetts Division of Banks Proposes Foreclosure Regulation Amendments
On January 7, the Massachusetts Division of Banks announced a public hearing to review proposed amendments to the state’s foreclosure and mortgage modification regulations. The proposed amendments would implement a recently passed law that makes it harder to foreclose in that state, including by creating a pre-foreclosure modification notice requirement for creditors. The amended regulation would (i) establish the processes for a borrower and creditor with regard to the borrower’s right to request a loan modification, (ii) establish the actions that constitute a borrower's good faith response to a creditor's notice of the right to request a loan modification, (iii) define good faith efforts by creditors to avoid foreclosure, and (iv) establish safe harbors for creditors that comply with the loan modification process. The hearing is scheduled for February 6, 2013, and the Division of Banks is accepting public comments on the proposal through February 15, 2013.
D.C. Circuit Reinstates Challenge to HUD Reverse Mortgage Regulations
On January 4, the U.S. Court of Appeals for the District of Columbia held that two widowed spouses have standing to pursue allegations that a HUD regulation defining conditions under which it would insure a reverse mortgage agreement contradicted the governing statute, and in doing so made it easier for lenders to foreclose on homes occupied by surviving spouses. Bennett v. Donovan, No. 11-5288, 2013 WL 45879 (D.C. Cir. Jan. 4, 2012). The surviving spouses, neither of whom were legal borrowers under the reverse mortgages entered into by their spouses, sought declaratory relief that HUD’s regulations requiring that the mortgage be due and payable in full if a borrower dies and the property is not the principal residence of at least one surviving borrower violated the Administrative Procedure Act because the rule is inconsistent with the governing statute. The statute protects “homeowners,” as opposed to “borrowers,” from displacement and defines “homeowner” to include “spouse of the homeowner.” The district court held that the spouses lacked standing to sue HUD because relief for their injuries depended solely on the lenders’ decision whether to foreclose. The appellate court held, however, that in situations like those at issue here, it is within HUD’s power to provide complete relief to the lenders and borrowers, and therefore such relief is likely, as opposed to speculative, and as such is sufficient to establish standing. Though it limited its holding to the standing issue, the court added that it was “puzzled” by HUD’s attempt to justify a rule that appears to contradict the governing statute. Further, the court outlined potential relief that HUD could provide, explaining that HUD could accept assignment of the mortgage, pay off the balance of the loans to the lenders, and then decline to foreclose against the spouses. The court reinstated the case and remanded for further proceedings.
NCUA Files Another Major MBS Suit
On January 4, the NCUA announced another major mortgage-backed securities lawsuit. Similar to prior suits, the NCUA alleges on behalf of three insolvent corporate credit unions that a mortgage securitizer violated federal and state securities laws in the sale of $2.2 billion in mortgage-backed securities to the credit unions. In this case, the NCUA is suing a securities firm for alleged wrongdoing by companies the defendant later acquired. The NCUA complaint alleges the acquired firms made numerous misrepresentations and omissions of material facts in the offering of the securities sold to the failed corporate credit unions, and that underwriting guidelines in the offering documents were “systematically abandoned.” The NCUA argues that these actions caused the credit unions to believe the risk of loss was low, when, in fact, the opposite was true. When the securities lost value, the NCUA claims, the credit unions were harmed and forced into insolvency.
OCC Extends Deadline for Application of Lending Limits Rule
On January 4, the OCC issued a final rule that extends until July 1, 2013 the temporary exception for the application of its lending limits rule to certain credit exposures. In June 2012, the OCC issued an interim final rule to implement Dodd-Frank Act revisions to the statutory definitions of loans and extensions of credit for lending limit purposes to include certain credit exposures arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction. That interim rule gave institutions until January 1, 2013 to comply, and the OCC extended that date to April 2013 through a recent bulletin. The instant rule extends the date once more and explains that, without the extension, institutions that wish to use an internal model method to determine credit exposure for derivative transactions and securities financing transactions may not have sufficient time to develop, receive approval for, and implement such a model.
Senators Ask Regulators to Halt Bank Payday Lending
On January 2, a group of Democratic Senators sent a letter to the Federal Reserve Board, the FDIC, and the OCC seeking action to stop banks from making payday loans. The letter cites the agencies’ “long history of appropriately prohibiting . . . banks from partnering with non-bank payday lenders,” but claims that several banks are currently making payday loans directly to their customers. The products at issue are actually deposit advance loans, which the Senators claim are structured the same as traditional payday loans and put customers in a cycle of debt. The Senators call on the regulators to take “meaningful regulatory action” in response to the problem as they present it, but stop short of identifying specific banks or outlining potential federal legislation.