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FDIC Finalizes Large Bank Assessment Rule
On October 9, the FDIC released a final rule to revise certain definitions included in the large bank pricing assessment system for banks with more than $10 billion in assets. In February 2011, the FDIC published a large bank pricing rule that, among other things, eliminated risk categories and the use of long-term debt issuer ratings. In their place, the FDIC adopted scorecards that combine CAMELS ratings and certain forward-looking measures to assess risk posed by an institution to the FDIC insurance fund. The February rule used existing interagency guidance to define nontraditional mortgage loans, subprime consumer loans, and leveraged commercial loans, but refined the definitions to minimize reporting discrepancies. A subsequent FDIC notice added a requirement that covered institutions include nontraditional mortgage loans, subprime consumer loans, and leveraged commercial loans data in their Call Reports. In response to industry concerns that institutions generally do not maintain data on those loans consistent with the definitions in the February rule, the current final rule extensively renames and revises the definitions of (i) higher-risk consumer loans, (ii) higher-risk consumer and industrial loans, (iii) nontraditional mortgage loans, and (iv) higher-risk securitizations.
South Carolina Attorney General Discusses Decision To Intervene In Case Challenging Dodd-Frank Act
On October 5th, South Carolina Attorney General (AG) Alan Wilson, in an interview with the STAGE Network, discussed the reasons why he and the AG’s of Oklahoma and Michigan determined to join an earlier existing lawsuit in order to dispute the Orderly Liquidation Authority powers granted by Title II of the Dodd-Frank Act. AG Wilson also gave his perspectives on the appropriate balance between effective consumer protection and unduly burdensome regulation, and commented on the increased coordination among state AG’s in financial services related investigations and litigation. A webcast featuring AG Wilson’s views can be reviewed in its entirety at https://www1.gotomeeting.com/register/348234897.
FHFA Finalizes Five Year Plan
On October 9, the FHFA released a final five year strategic plan for its oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs). The plan sets four strategic goals: (i) safe and sound housing GSEs, (ii) stability, liquidity, and access in housing finance, (iii) preservation and conservation of Fannie Mae and Freddie Mac assets, and (iv) preparing for the future of housing finance in the U.S. For each strategic goal, the plan establishes several “means and strategies.” The strategies include several steps the FHFA already is taking, including its ongoing efforts to enhance the use of short sales, promote sound underwriting, and set guarantee fees based on actual risk, as well as its recently released proposal to build a new infrastructure for the secondary market. While the FHFA sought and received comments on the draft version of its strategic plan, it did not identify any such comments as being incorporated in the final document, though it did note that comments may be considered again during the design and implementation of the programs intended to carry out the strategic plan.
California Federal District Court Permits FDIC Suit Against Former Bank Officers to Proceed
On October 5, the U.S. District Court for the Central District of California dismissed several affirmative defenses invoked by a group of former bank officers sued by the FDIC as receiver for a failed bank, including their claim of protection from personal liability for business decisions. FDIC v. Van Dellen, No. 10-4915, 2012 WL 4815159 (C.D. Cal. Oct. 5, 2012). The FDIC sued the former officers, alleging that, in pursuit of bonuses for high loan origination volumes, the officers approved homebuilder loans to unqualified borrowers. As part of their defense, the officers claimed that the court should apply the law of the state of Delaware where the bank was incorporated, and not California law where the bank had its principle place of business. The officers sought to invoke Delaware law protecting officers from personal liability for business decisions. The court disagreed and held that (i) California law applies under any choice of law test and (ii) California’s business judgment rule, both as codified and its common law element, immunizes directors from personal liability but not officers. With regard to the officers’ defense that the FDIC claims were time barred as allegations of professional negligence, the court held that the gravamen of the complaint actually is breach of fiduciary duty, which has a longer statute of limitations. The court also reiterated a previous ruling that the officers could not invoke any defenses that would rely on imputing the bank’s pre-receivership conduct to the FDIC as receiver. The court did agree with the officers that any recoveries made by the FDIC in another case should be considered when assessing damages in this case, and that claims regarding certain loans approved by the bank’s federal regulator should be reviewed by a jury.
Federal Nonbank Charter Legislation Faces Opposition from State AGs
On October 5, forty-one state attorneys general (state AGs) reasserted their interest in enforcing state laws regulating short-term, small dollar lenders, including payday lenders. The National Association of State Attorneys General sent a letter to the leadership of the U.S. House of Representatives and the U.S. Senate urging them to oppose H.R. 6139, the Consumer Credit Access, Innovation, and Modernization Act. As previously reported, the Act, introduced by Reps. Luetkemeyer (R-MO) and Baca (D-CA), would allow the OCC to establish a federal charter for certain nonbanks. The state AGs charge that H.R. 6139 would preempt state laws governing consumer lending and generally would undermine states’ authority with regard to consumer protection enforcement. The state AGs acknowledge that the bill would allow them to enforce violations of federal law, but argue that state laws designed for local markets would be preempted and the state AGs’ ability to target abuses as they emerge would be impaired. During a July hearing on the legislation, the OCC and the Conference of State Bank Supervisors also expressed opposition to the legislation.
California Federal District Court Affirms Lender's Sole Discretion to Change Rate Index for ARM Loan
On October 3, the U.S. District Court for the Northern District of California held that a lender had no duty to abandon the index to which certain adjustable rate mortgage rates were tied when the index experienced an unprecedented jump. Haggarty v. Wells Fargo Bank, N.A., No 10-02416, 2012 WL 4742815 (N.D. Cal. Oct. 3, 2012). The borrowers, who had entered into two adjustable rate mortgages, sued the lender when their rates increased substantially following a jump in the index to which the adjustable rates were tied. On behalf of themselves and a putative class, the borrowers claimed that the bank breached an implied covenant of good faith and fair dealing by failing to substitute a new index under a clause in the Notes that allowed the lender to choose a new index if the original index was “substantially recalculated.” The court held that the Note language granting the lender ”sole discretion” to determine whether the index had been substantially recalculated insulated the lender from claims that it was required to reach a certain conclusion about the index and the need to substitute a new index. Further, the court held that the borrowers’ attempt to use implied covenants to add contract terms or establish a breach was preempted by the Home Owners’ Loan Act, which in relevant part was intended to avoid inconsistent obligations for lenders regarding interest rate adjustments. The court granted summary judgment in favor of the lender.
FHFA Proposes New Secondary Market Infrastructure
On October 4, the FHFA released a white paper describing the framework for a new mortgage securitization platform and a model Pooling and Servicing Agreement. The proposed changes are part of a larger program to align and improve Fannie Mae’s and Freddie Mac’s (the Enterprises) business practices. Consistent with that program, the new platform would replace the proprietary structures used by the Enterprises with a more efficient common platform. Additionally, it would include certain enhancements and new capabilities. The proposed securitization platform would (i) facilitate broader sharing of credit risk, (ii) perform services related to the issuance and administration of mortgage-backed securities, (iii) be adaptable to policy changes and emerging technologies, and (iv) have an open architecture to drive interoperability. The model Pooling and Servicing Agreement would leverage the existing structures used by the Enterprises and, in doing so, would establish basic contractual requirements for pooling and selling and for the MBS/PC Trust. The FHFA seeks industry comment on the proposed framework, including responses to specific questions posed in the white paper. Comments must be submitted by December 3, 2012 and will be posted for public review.
State Regulators Oppose Basel III Capital Requirements
On October 3, the Conference of State Bank Supervisors (CSBS) announced its opposition to the “highly reactionary” approach federal regulators have proposed to implement the Basel III capital accord. Although they support higher levels and improved quality of capital, the state regulators argue that the transaction-level approach proposed by federal regulators is too complex and leaves the financial system susceptible to more volatility. Instead, the state regulators favor an approach based on risk management and the supervisory process. Further, the state regulators charge that the federal proposal, including the proposed specific risk-weighted asset requirements, lack empirical support. The CSBS argues that the proposed standardized risk-weighted assets present a specific challenge to mortgage lending, and in other areas would replace supervisory judgment and institution-specific analysis. The state regulators believe that implementing Basel III as currently proposed will only increase industry costs, limit credit availability, and force industry consolidation.
Federal District Court Holds Foreclosures Negate Trust's Ability to Enforce Representations and Warranties
On October 1, the U.S. District Court for the District of Minnesota granted a lender’s motion for partial summary judgment finding that a trustee’s foreclosure on properties securing mortgage loans extinguished the loans and rendered them unavailable for repurchase by a lender. MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgage Corporation, No. 11-2542, 2012 WL 4511065 (D. Minn. Oct. 1, 2012). The trustee filed the action to compel the lender to repurchase certain loans the lender sold to the trust, alleging that the lender breached representations and warranties made in connection with the sale. The lender moved for partial summary judgment on the grounds that (i) the loans at issue no longer existed to be repurchased after the trust foreclosed on the properties securing the mortgages, and (ii) the trust failed to provide the lender with “prompt notice” of the alleged breaches on which its repurchase demands were based as was required by the relevant agreement between the parties. In opposition to the lender’s motion, the trustee argued that, notwithstanding its foreclosure on the properties securing the loans, the loans remained available for repurchase given that the relevant agreement between the parties defined “mortgage loans” to include proceeds from any foreclosure sale. The court rejected the trustee’s argument and granted the lender’s motion for partial summary judgment, concluding that the loans no longer existed for repurchase. With respect to the lender’s “prompt notice,” that court said that while it found notice was not “prompt” under the circumstances presented, it could not grant summary judgment on that basis prior to discovery.
CFPB Continues Credit Card Enforcement Activity
On October 1, the CFPB announced a coordinated enforcement action taken by federal regulators against a major credit card company and several of its subsidiaries alleged to have violated multiple consumer financial protection laws. According to the CFPB, the investigations conducted by it and other federal regulators and a state regulator revealed that the companies (i) charged illegal late fees, (ii) discriminated on the basis of age in the offering of credit, (iii) engaged in deceptive marketing, and (iv) failed to properly report consumer credit disputes. To resolve the allegations, the companies agreed to enter into several different consent orders. Two orders obtained by the CFPB and a joint CFPB/FDIC order require three of the subsidiaries collectively to refund approximately $85 million to approximately 250,000 customers and pay a cumulative $18 million in civil money penalties. Likewise, the OCC issued a consent order that includes an additional $500,000 penalty, and provides for restitution that overlaps with the broader restitution ordered by the CFPB. Finally, an order obtained by the Federal Reserve Board, requires the company, and certain of its subsidiaries, to pay an additional $9 million penalty. Furthermore, pursuant to the various orders, the companies agreed to undergo an independent audit and implement enhanced compliance systems to address the alleged illegal practices. This is the third public CFPB-led enforcement action aimed at credit card companies, and the first to go beyond allegations regarding ancillary products and resolve alleged violations of the CARD Act, the Fair Credit Reporting Act, and the Equal Credit Opportunity Act.