Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On February 3, the Illinois Housing Development Authority (IHDA) published recently adopted Emergency Rules, effective January 23, 2012, to establish a new program through which the IHDA will finance or refinance mortgage loans to persons and families of low and moderate income who meet certain qualifications. The IHDA cited a serious shortage of decent, safe and sanitary residential housing in the state due to recurring critical shortages of funds in private lending institutions available to certain buyers. The new program is intended for non-first time homebuyers and supplements an existing similar program for first-time homebuyers. The emergency rules will expire after 150 days, or upon adoption of permanent rules. Illinois also announced two additional new housing efforts in early February. First, the Illinois Foreclosure Prevention Network, a multi-agency effort coordinated by the IHDA, will connect struggling homeowners with assistance and resources to prevent foreclosures. Second, the Illinois Building Blocks Program, also administered by the IHDA, will focus on six communities and provide (i) financing to rehabilitate vacant properties to prepare them for productive use and sale, (ii) assistance to homeowners to purchase homes in pilot communities, and (iii) support for existing homeowners in the communities to prevent additional foreclosures.
NCUA Publishes Advance Notice Regarding Use of Financial Derivatives Transactions to Offset Interest Rate Risk
On February 3, the NCUA published a second advance notice of proposed rulemaking seeking additional comments to identify the conditions for federal credit unions to engage in certain derivatives transactions to offset interest rate risk. The second notice follows one issued in June 2011, which requested comment on potentially modifying NCUA’s rule on investment and deposit activities to allow such derivative transactions. The current notice focuses on the ability of federal credit unions to independently engage in derivative transactions, without the oversight of a third-party provider. The NCUA is seeking comment on eligibility requirements and safety and soundness considerations that might limit the types of derivatives that federal credit unions may use, exposure limits, and counterparty risk. Comments responding to the notice must be received by April 3, 2012.
On February 2, the National Credit Union Administration (NCUA) issued a final rule amending Part 741 of its insurance rules to require certain federally insured credit unions (FICUs) to adopt written interest rate risk policies and programs. These interest rate risk policies and programs must include five elements: (i) Board approval, (ii) Board oversight and management implementation, (iii) risk-measurement systems to assess the interest rate risk sensitivity of earnings and/or asset and liability values, (iv) internal controls to monitor adherence to interest rate risk limits, and (v) decision-making that is informed and guided by interest rate risk measures. The new rule applies to all FICUs with assets greater than $50 million and to any FICU with assets between $10 million and $50 million that has a Supervisory Interest Rate Risk Threshold ratio (SIRRT ratio) greater than 1:1. FICUs can calculate their SIRRT ratio by adding together their portfolios of first mortgage loans and investments with maturities greater than five years, and dividing that figure by the FICU’s net worth. The final rule also contains guidance on how to develop an interest rate risk policy and program that is based on generally recognized best practices for safely and soundly managing interest rate risk. The rule is effective September 30, 2012.
On February 9, U.S. Attorney General Eric Holder, HUD Secretary Shaun Donovan, Iowa Attorney General Tom Miller, and several other state and federal officials jointly announced an approximately $25 billion agreement in principle between the federal government, 49 state attorneys general and the five largest mortgage servicers to settle various mortgage servicing and foreclosure related issues. Oklahoma Attorney General E. Scott Pruitt later announced an "independent mortgage settlement" between Oklahoma and the five servicers. The national-level agreement - with Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, and Ally Financial (the servicers) - was the culmination of several state and federal investigations and extended negotiations between the parties. The settlement's terms require a commitment of approximately $20 billion in financial relief for homeowners. In addition, the servicers will pay $5 billion in cash to the state and federal governments, including $1.5 billion to establish a Borrower Payment Fund that will provide payments to qualifying borrowers whose homes were sold or foreclosed on between January 1, 2008 and December 31, 2011. The $25 billion agreement includes more than $766.5 million in monetary sanctions assessed by the Federal Reserve Board. An additional $394 million of penalties from the Office of Comptroller of the Currency are held in abeyance provided four of the servicers make payments and take other actions under the settlement with a value equal to at least the penalty amounts assessed for each servicer by the OCC. In addition to the financial compensation offered in the settlement, the servicers will conduct future business under new servicing standards, which include (i) restrictions on the default management process known as "dual tracking", (ii) a requirement for the institutions to provide a single point of contact for borrowers, (iii) specific protections for military service members beyond those provided by the federal Servicemembers Civil Relief Act, (iv) obligations concerning disclosures and practices related to force-placed insurance, and (v) limitations on servicing fees. The standards also require the servicers to establish (i) updated foreclosure and bankruptcy documentation processes, (ii) enhanced servicer oversight of third party vendors, and (iii) adherence to a new set of loan modification timelines. The terms of the agreement will be filed as a consent judgment in the U.S. District Court for the District of Columbia. Their fulfillment, over the three-year term of the settlement, will be overseen by an independent monitor, North Carolina Commissioner of Banks Joseph A. Smith. In order to ensure timely dissemination of the settlement's terms to those who may be eligible for financial relief, the parties have established a "National Mortgage Settlement" web site, which provides "Servicing Standards Highlights" and outlines key aspects of the servicing settlement. The materials provided by the federal and state officials in announcing the settlement agreement note that the agreement left numerous issues unresolved and does not preclude (i) criminal claims, (ii) securities claims and claims related to the use of an electronic mortgage registry, (iii) loan origination claims in connection with FHA-insured loans, except those covered specifically by this settlement, and (iv) borrower claims. For additional information concerning some of the state-level recoveries and issues the state attorneys general have reserved for potential future action please see California's announcement here and New York's announcement here. Buckley LLP advises clients regarding mortgage servicing issues and conducted a webinar on servicing developments, including a review of the OCC's April, 2011 Consent Orders and related servicing guidance. If you have any questions about the settlement or servicing issues in general please contact a member of our Mortgage Servicing Team.
On February 6, the U.S. Department of Justice and Securities and Exchange Commission announced resolved FCPA enforcement actions against a domestic medical device manufacturer and its UK-based parent company. The combined monetary sanction totals $22.226 million, and the UK parent must retain an independent compliance monitor for a period of eighteen months. The conduct in question, as alleged in the SEC Complaint, involved the use of three UK shell companies created by a distributor in Greece for use as conduits to make payments to physicians in Greece working “at publicly-owned hospitals [and who were] government employees, providing healthcare services in their official capacities.” The commercial relationship between the device manufacturer and the distributor ended in 2008. More details are available in an update from BuckleySandler’s FCPA Team. To remain current on FCPA and anti-corruption developments, please view BuckleySandler’s FCPA Score Card.
On February 7, the Financial Crimes Enforcement Network (FinCEN) released a final rule that subjects nonbank residential mortgage lenders and originators to certain anti-money laundering (AML) regulations already applicable to other types of financial institutions. Under the new regulations, nonbank lenders and originators will be required to establish anti-money laundering programs and file suspicious activity reports (SARs). This final rule follows a proposed rule issued in December 2010. FinCEN noted that this requirement will close a regulatory gap, as well as mitigate some of the money laundering risks and vulnerabilities that have been exploited in the nonbank residential mortgage sector.
The Bank Secrecy Act (BSA) requires FinCEN to promulgate AML rules for “financial institutions,” including “loan or finance companies.” While the BSA does not define “loan or finance company” and the legislative history is silent, FinCEN believes the term should be construed to extend to nonbanks. Based on that interpretation, the final rule, which is substantially similar to the definition included in the proposed rule, alters the existing regulatory definition of “financial institution” to include nonbank residential mortgage lenders and originators. The final rule is intended to cover initial purchase money loans and traditional refinancing transactions facilitated by nonbank lenders and originators. Mortgage servicers are not categorically excluded from the rule and may be covered if they engage in these types of transactions. Notably, this expanded definition is the first step in an incremental approach through which FinCEN eventually will extend the BSA-required AML regulations to other nonbank consumer and commercial loan finance companies.
Under this final rule, a covered nonbank will be required to develop an AML program that includes (i) internal policies, procedures, and controls; (ii) a designated compliance officer; (iii) ongoing employee training; and (iv) a process for independent audits. A covered firm also will have to file a SAR within thirty days of becoming aware of a transaction that (i) involves funds derived from illegal activity or are conducted to hide funds or assets derived from illegal activity; (ii) is designed to evade BSA requirements, (iii) has no business or apparent lawful purpose; or (iv) involves the use of the company to facilitate criminal activity. The rule does not require covered nonbanks to comply with certain other BSA requirements, including currency transaction reports.
The regulations take effect sixty days after being published in the Federal Register. Covered firms will have 180 days after publication to comply. FinCEN now will turn to finalizing a similar proposed rule applicable to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
If you have questions about the final rule and its implications for your organization, or if you would like help implementing compliance programs to meet the new requirements, please contact a member of our Anti-Money Laundering & Bank Secrecy Act practice group.
New York AG Files Suit Against MERS and Servicers Alleging Deceptive and Fraudulent Foreclosure Practices
On February 3, New York Attorney General Eric Schneiderman filed a lawsuit against MERS and several major banks, challenging the MERS system and alleging that the defendants engaged in fraudulent and deceptive foreclosure practices in violation of state law. Among the allegedly illegal practices, the New York Attorney General claims that the defendants (i) initiated thousands of foreclosure proceedings without proper standing, (ii) submitted in court deceptive and invalid mortgage assignments, (iii) misled borrowers by submitting in court defective mortgage assignments executed by untrained and unsupervised certifying officers and assignments that were automatically generated (i.e. "robosigned"), (iv) created a system that deliberately obscures the chain of title for a loan or hides the current note-holder. The Attorney General is seeking (i) an injunction to stop the practices recited in the complaint, (ii) disgorgement of all profits obtained in connection with those practices, and (iii) payment of other damages and civil penalties.
This week, the U.S. Courts of Appeals for the Second and Eleventh Circuits issued rulings regarding the enforceability of arbitration clauses in customer agreements. On January 31, the Eleventh Circuit, on remand from the U.S. Supreme Court, reversed its earlier unpublished decision that affirmed a district court ruling allowing a consumer class action to proceed against a bank because the class action waiver in the arbitration agreement at issue was substantively unconscionable. The underlying case involves allegations that the bank improperly ordered customer transactions in order to maximize overdraft fees. The bank sought to enforce the arbitration clause in its customer agreement. Given the U.S. Supreme Court's holding in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which held that the Federal Arbitration Act establishes a broad policy requiring arbitration of such disputes, and preempts state law that may allow class actions despite customer arbitration agreements, the Eleventh Circuit vacated its earlier decision and remanded the case to the district court for further proceedings and reconsideration of the bank's original motion to compel arbitration.
On February 1, the Second Circuit decided not to enforce an arbitration agreement, notwithstanding the Supreme Court's decision in Concepcion. In this case, merchants sued a credit card provider arguing that the card provider's interchange fee system violated federal antitrust laws. The card company moved to compel arbitration and enforce a class action waiver provision in the merchant agreement. The Second Circuit vacated a district court decision to enforce the arbitration agreement. That decision in turn was vacated by the Supreme Court and remanded. The Second Circuit, though, did not find that Concepcion altered its original analysis, and the Second Circuit again held that the class action waiver agreement was unenforceable in this case because the practical effect would be to preclude the merchants' ability to pursue statutory rights, an issue not addressed by Concepcion. Consistent with prior Supreme Court caselaw untouched by Concepcion, the merchants proved as a matter of law that the costs of individual arbitration with the lender would be so costly as to deprive them of statutory protections granted by the antitrust laws.
On February 2, Illinois Attorney General Lisa Madigan filed a lawsuit in Cook County Circuit Court alleging that a Florida-based company that prepares documents for use in default servicing and foreclosure actions filed faulty documents with Illinois county recorders. According to a press release issued by the Attorney General, the defendant processes and records mortgage assignments that are used in foreclosure proceedings by some of the largest mortgage lenders and servicers. The defendant's activities in Illinois purportedly violate the state consumer protection statutes, and are alleged to have contributed to the state's mortgage crisis. The state is seeking an order requiring that the company (i) review and correct all documents it unlawfully created and recorded in Illinois, (ii) disgorge all financial gains obtained in connection with the allegedly unlawful practices, and (iii) pay civil penalties.
On February 1, the New York Department of Financial Services (Department) published in the state Register emergency rules regarding the conduct of mortgage loan servicers in the state. The rules are intended to provide clear guidance to servicers regarding the procedures and standards they should follow with respect to loan delinquencies. For example, the rules establish requirements for (i) handling consumer complaints, (ii) handling loss mitigation, (iii) payment of taxes and insurance, and (iv) crediting payments from borrowers and handling late payments. The rules also describe the recordkeeping requirements and specify certain prohibited practices and conduct, including placing homeowners' insurance on property when the servicer has reason to know that the homeowner has an effective policy. The emergency rules are effective as of January 17, 2012 and expire on April 11, 2012. The Department expects to issue a rulemaking to make these rules permanent.