InfoBytes Blog

Security at Financial Institution Service Provider Scrutinized by Regulators

Recently, Fidelity National Information Services, Inc. (FIS), a company providing payment processing and other services to banks and other financial institutions, reportedly was the subject of a critical assessment by the FDIC. The FDIC report comes in the aftermath of a 2011 security breach at the company and a subsequent examination by the FDIC, OCC, and the Federal Reserve Bank of Atlanta. According to the report, the FDIC demanded that FIS immediately address eight issues, including risk management and information security issues. The FDIC allegedly also stated that actions taken by the company to date were insufficient given the regulatory concerns and weaknesses identified by the FDIC. The NCUA received the FDIC report and forwarded to credit unions with an advisory note to use the report in managing vendor relations with FIS. The report on FIS comes as regulators are placing enhanced scrutiny on financial institutions’ relationships with third party service providers. In April, the CFPB issued Bulletin 2012-03, providing guidance to regulated entities on the oversight of business relationships with service providers. The CFPB bulletin states that “[t]he CFPB expects supervised banks and nonbanks to have an effective process for managing the risks of service provider relationships” and lists specific minimum steps that should be a part of service provider oversight.

FDIC CFPB Vendors Privacy/Cyber Risk & Data Security

State Law Update: Michigan E-Signature Rule, Numerous Mortgage Licensing Changes

Michigan Court Rule Change Allows Electronic Signatures. Recently, the Michigan Supreme Court approved a rule change that allows the use of electronic signatures for any document filed in the state court system, including any signature required by a law or court rule to be notarized or made under oath. Several States Adjust Mortgage Registration, Licensing Regulations. Recently, five states amended their laws to clarify the scope of their mortgage-related registration and licensing requirements. First, New Hampshire passed House Bill 247, which exempts from licensing requirements mortgage bankers and brokers who negotiate three or fewer residential mortgage loans in a calendar year. The bill will take effect July 13, 2012. New Hampshire also enacted House Bill 408 to provide an exemption for attorneys, which took effect on May 29, 2012. Second, Louisiana enacted, effective immediately, House Bill 508, which defines "regularly engaged" to clarify thresholds for activity requiring licensure as a mortgage loan originator or mortgage broker or lender. Third, Mississippi enacted Senate Bill 2897, which makes several changes to the state’s S.A.F.E. Mortgage Act including a change to the definition of mortgage loan originator to exclude certain activities. The changes go into effect July 1, 2012. Fourth, in Michigan, the Governor recently signed Senate Bill 908, which immediately amends the Mortgage Loan Originators Licensing Act to require, among other things, that a person have an approved sponsor in the NMLS in order to be licensed as a mortgage loan originator. Finally, New York enacted Senate Bill 3779, which as of January 1, 2013 will exempt from licensing any individual, person, partnership, association, corporation or other entity which makes three or fewer loans in a calendar year and no more than five in a two year period, provided that no such mortgage loans were solicited, processed, placed or negotiated by a mortgage broker, mortgage banker or exempt organization. New York also extended again its emergency rules regarding mortgage loan originator licensing, this time through August 12, 2012.

Mortgage Licensing Electronic Signatures

NMLS Releases First Ever Quarterly Reports

On June 6, NMLS released for the first time two quarterly publications that together provide a comprehensive overview of all individuals, mortgage companies, and depository institutions originating residential mortgages in the United States. The first report, the Nationwide View of State-Licensed Mortgage Entities, compiles data concerning companies, branches, and mortgage loan originators who are state-licensed or state-registered through NMLS. The report provides information about new applications activity, the legal status of licensed or registered companies, and state-by-state licensing data. The second report, the NMLS Federal Registry Quarterly Report, provides summary information about the charter type of federally registered entities and state-by-state summary data.

Mortgage Licensing NMLS

Fannie Mae Appoints New CEO

On June 5, Fannie Mae announced that Timothy J. Mayopoulos will be its next president and CEO, effective June 18, 2012. Mr. Mayopoulos is currently executive vice president, chief administrative officer, and general counsel at Fannie Mae. Prior to joining Fannie Mae, he was executive vice president and general counsel at Bank of America Corporation and a senior manager at Deutsche Bank AG, Credit Suisse First Boston, and Donaldson, Lufkin & Jenrette, Inc. Mr. Mayopoulos will succeed Michael J. Williams, who in January announced his decision to step down.

Fannie Mae

Freddie Mac Adjusts Standard Modification Interest Rate

On June 1, Freddie Mac announced that, as of July 1, 2012, servicers must use a new fixed interest rate when determining a borrower’s eligibility for a Freddie Mac Standard Modification. Previously 5 percent, the new rate will be 4.625 percent. Servicers can also implement the new rate prior to July 1 if they desire.

Freddie Mac Mortgage Servicing

Eighth Circuit Holds Oral Promise to Postpone Foreclosure Sale Is Not Enforceable under Minnesota Law

On May 21, the U.S. Court of Appeals for the Eighth Circuit held that an oral promise to postpone a foreclosure sale is not enforceable under the Minnesota Credit Agreement Statute (MCAS). Brisbin v. Aurora Loan Services LLC, No. 11-2218, 2012 WL 1813435 (8th Cir. May 21, 2012). At issue was a provision of the MCAS that prohibits a debtor from "maintain[ing] an action on a credit agreement unless the agreement is in writing, expresses consideration, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor.” The borrower alleged that a promise to postpone a foreclosure sale does not fall within the definition of “credit agreement” because it is not a “financial accommodation” and, therefore, is not subject to this restriction. “Credit agreement” is defined in part as “an agreement to lend or forbear repayment of money . . . or to make any other financial accommodation.” The court rejected the borrower's argument, first noting that “financial accommodation” includes a financial accommodation in the nature of a forbearance agreement and that "forbearance" includes refraining from enforcing a debt. The court reasoned that because foreclosure is a means of enforcing a debt, a promise to postpone a foreclosure sale falls squarely within the plain meaning of a forbearance agreement—therefore, a promise to postpone a foreclosure sale is a “credit agreement” under the MCAS. The court also rejected the borrower’s arguments that there was a genuine question of material fact as to whether the borrower detrimentally relied on the promise to postpone the sale of her home, as well as whether the borrower triggered the notice of postponement required by the Minnesota foreclosure-by-advertisement statute. The court reasoned that the borrower did not make a concrete statement of how she would have repaid the debt had the foreclosure sale been postponed, and that the foreclosure-by-advertisement statute only applies when a foreclosure sale actually is postponed by the mortgagee, which was inapplicable in this case.

D.C. Federal Court Holds FCRA Credit Report Notice Requirements Apply to Auto Dealers Engaging in Third Party Financing Transactions

On May 22, the U.S. District Court for the District of Columbia rejected the National Automobile Dealer's Association's (NADA) challenge to an FTC determination that an automobile dealer that executes a credit contract based on a third party financing source "uses a consumer report" under FCRA, and, thus, must provide prospective buyers with a “risk-based pricing notice.” National Automobile Dealers Assoc. v. Federal Trade Commission, No. 11-cv-01711, 2012 WL 1854088 (D.D.C. May 22, 2012). A “risk-based pricing notice” must be provided to buyers who, based upon information contained in their consumer reports, are offered credit at terms “materially less favorable than the most favorable terms available to a substantial proportion of consumers.” The notice is intended to alert buyers to the existence of negative information in their credit reports to enable them to correct any inaccuracies. The FTC's 2011 amendments to the Fair Credit Risk-Based Pricing Regulations clarified that even in the context of a third-party transaction—where the auto dealer is not the ultimate source of financing and does not physically obtain a consumer's credit report—the auto dealer must provide a risk-based pricing notification. According to NADA, the FTC’s interpretation placed an unreasonable burden on auto dealers who outsource financing to banks or other entities. NADA also argued that the interpretation was arbitrary and capricious and that it was not entitled to Chevron deference. In its ruling, the court rejected these challenges, stating, among other things, that the FTC's determination was "eminently reasonable" and consistent with the overall regulatory scheme of FCRA because auto dealers are able to obtain credit report information and are best suited to convey that information to consumers. NADA intends to appeal the decision.

FTC FCRA Auto Finance

Arizona Supreme Court Holds Beneficiary Does Not Have to Prove Right to Foreclose

On May 18, the Arizona Supreme Court held that the beneficiary under a deed of trust need not prove the right to foreclose prior to initiating non-judicial foreclosure proceedings. Hogan v. Washington Mutual Bank, N.A., No. CV-11-0115, 2012 WL 1835540 (Ariz. May 18, 2012) (en banc). In Hogan, the borrower argued that the beneficiary could not foreclose without first proving the right to collect under the note. The court rejected this argument and stated that Arizona’s non-judicial foreclosure statute did not require the beneficiary to prove ownership of the note prior to foreclosure. The court also rejected the borrower’s argument that the trustee was required to comply with Arizona’s codification of the UCC because the Arizona UCC does not apply to liens on real property. Finally, the borrower claimed that the proper note-holder could later pursue a second collection for the same debt if the beneficiary was not entitled to prove ownership of the note. The court rejected this reasoning because Arizona law does not permit deficiency judgments against debtors with foreclosed residential property similar to that of the borrower (i.e., 2.5 acres or less). The court concluded by noting that the “[Arizona] legislature balanced the concerns of trustors, trustees, and beneficiaries in arriving at the current statutory process,” and to hold otherwise would upset the legislature’s purpose.

Colorado Division of Real Estate Clarifies Mortgage Company Registration Exemptions

On May 22, the Colorado Division of Real Estate issued a position statement concerning exemptions from registration as a Mortgage Company. The position statement clarifies the applicability of an exemption to registration that is available to entities including wholesale lenders, private mortgage insurance companies that provide contract underwriting services, and lead generating companies.

Tennessee Enacts Legislation Requiring Reasonable Basis to File Liens

On May 15, Tennessee enacted SB2980, a bill that established provisions relating to liens on real or personal property. Under the bill, it is a misdemeanor to knowingly prepare, sign, or file any lien or other document intended to encumber real or personal property without a reasonable basis for doing so. The bill becomes effective on July 1, 2012.