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Financial Services Law Insights and Observations

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  • Virginia Enacts Transitional Mortgage Licensing Bill

    Lending

    On March 24, Virginia Governor Terry McAuliffe signed SB 118, which, effective July 1, 2014, will permit transitional licensing of mortgage loan originators (MLO). The bill grants the State Corporation Commission (SCC) authority to issue temporary MLO licenses to certain MLOs licensed in other states. The SCC will only issue a transitional MLO license to applicants it determines (i) have never had a mortgage loan originator license revoked by any governmental authority; (ii) have not been convicted of, or pled guilty or nolo contendere to a felony during a defined period prior to the date of the application; (iii) have become registered through, and obtained a unique identifier from, the Nationwide Mortgage Licensing System and Registry; and (iv) are employed by a person licensed by the SCC as a mortgage lender or mortgage broker. Further, any transitional MLO license issued by the SCC will expire on the earlier of (i) the date the SCC issues or denies a Virginia MLO license for the applicant; or (ii) 120 days from the date the transitional MLO license was issued. Also notable, is that the bill allows the SCC to issue transitional licenses to MLOs from federally regulated institutions who transition employment to a Virginia mortgage bank, but only after federal law is changed to allow such transitional licenses. The CFPB has interpreted federal law to prohibit such transitional licenses.

    Mortgage Licensing Mortgage Origination Licensing

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  • D.C. Circuit Rejects Merchant Challenge To Higher Cap On Debit Card Transaction Fees

    Fintech

    On March 21, the U.S. Court of Appeals for the D.C. Circuit held that the Federal Reserve Board's final rule imposing a 21-cent per transaction limit on debit card interchange fees (up from a 12-cent per transaction limit in its proposed rule) was based on a reasonable construction of a “poorly drafted” provision of the Dodd-Frank Act and that the Board acted reasonably in issuing a final rule requiring debit card issuers to process debit card transactions on at least two unaffiliated networks. NACS v. Bd. of Governors of the Fed. Reserve Sys., No. 13-5270, 2014 WL 1099633 (D.C. Cir. Mar. 21, 2014). The action was brought by a group of merchants challenging the increase to the interchange fee cap and implementation of anti-exclusivity rule for processing debit transactions that was less restrictive than other options. In support of their challenge, the merchants argued that in setting the cap at 21 cents the Board ignored Dodd-Frank’s command against consideration of “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.” The court held, in a decision that hinged on discerning statutory intent from the omission of a comma, that when setting the fee cap the Board could consider both the incremental costs associated with the authorization, clearance, and settlement of debit card transactions (ACS costs) and other, additional, non-ACS costs associated with a particular transaction (such as software and equipment). The court further concluded that the Board could consider all ACS costs, network processing fees, and fraud losses. The court, however, remanded the question of whether the Board could also consider transaction-monitoring costs when setting the fee cap, given that monitoring costs are already accounted for in another portion of the statute. Finally, the court rejected the merchants’ argument that the Board’s final rule should have required the card issuers to allow their cards to be processed on at least two unaffiliated networks per method of authentication (i.e., PIN authentication or signature authentication) holding that the statute goes no further than preventing card issuers or networks from requiring the exclusive use of a particular network.

    Payment Systems Dodd-Frank Federal Reserve Debit Cards

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  • FHFA Resolves Additional RMBS Suits

    Securities

    Recently, the FHFA announced the resolution of several lawsuits it filed against private label securities issuers. In 2011, the FHFA sued 18 financial institutions alleging federal securities law violations, and in some cases common law fraud, with regard to the sale of private label residential mortgage backed securities to Fannie Mae and Freddie Mac. On March 26, one financial institution agreed to pay $9.33 billion—including cash payments and a purchase of securities from Fannie Mae and Freddie Mac—to resolve a case filed against the institution and cases filed against two other institutions it had acquired. On March 21, a separate institution agreed to pay $885 million to resolve the FHFA’s allegations. The FHFA has claims remaining in seven of the 18 suits it filed.

    RMBS FHFA

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  • President Signs Flood Insurance Bill

    Lending

    On March 21, President Obama signed the Homeowner Flood Insurance Affordability Act of 2013, which includes several provisions impacting previously enacted mandatory flood insurance purchase requirements. The bill, among other things, delays from July 6, 2014 to January 1, 2016, a prior mandate that all flood insurance premiums be escrowed, and excludes from the mandatory escrow requirements (i) home equity lines of credit; (ii) junior or subordinate lien loans when flood insurance is provided for in connection with a superior lien loan secured by the same property; (iii) nonperforming loans; (iv) loans with a term of 12 months or less; (v) business purpose loans; and (vi) loans secured by property that is part of a  condominium, cooperative, or other project development, if the property is covered by flood insurance provided by and paid for, as a common expense, by the condominium association, cooperative, homeowners association, or other applicable group. The bill also mandates that FEMA make available a high-deductible policy for residential properties that increases the maximum loss deductible for damages to covered properties from $5,000 to $10,000. Further, the bill excludes from the mandatory flood insurance purchase requirements detached structures not used as a residence but, in doing so, allows lenders flexibility to require that flood insurance be maintained on such structures.

    Flood Insurance

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  • DOJ Opinion Release Discusses FCPA Risk Related To Investment Bank's Buyout Of Minority Shareholder

    Financial Crimes

    Recently, the DOJ issued its first opinion release of 2014 regarding application of the FCPA. In this instance, an investment bank and securities issuer who was a majority shareholder of a foreign financial services company sought the DOJ’s opinion with regard to the bank’s purchase of the remaining minority interest from a foreign businessman who now serves as a senior foreign official. The DOJ determined that based on the facts and representations described by the requestor, the only purpose of the payment to the official would be consideration for the minority interest. The DOJ explained that although the FCPA generally prohibits an issuer from corruptly giving or offering anything of value to any “foreign official” in order to assist “in obtaining or retaining business for or with, or directing business to” the issuer, it does not “per se prohibit business relationships with, or payments to, foreign officials.” In this situation, the DOJ determined, based on numerous, fact-intensive considerations, that the transfer of value as proposed would not be prohibited under the FCPA. The DOJ found no indications of corrupt intent, citing, among other things, the proffered purpose to sever the parties’ existing financial relationship to avoid a conflict of interest, and the use of a reasonable alternative valuation model. The DOJ also determined the bank demonstrated that the parties would appropriately and meaningfully disclose their relationships before the sale closed, and that the bank would implement strict recusal and conflict-of-interest-avoidance measures to prevent the shareholder/foreign official from assisting the bank in obtaining or retaining business. As with all Opinion Releases under the FCPA, the DOJ cautioned that the opinion has no binding application to any other party.

    FCPA Anti-Corruption DOJ Financial Crimes

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  • California Proposes Rule To Clarify Scope Of Licensing Exemption

    Consumer Finance

    Earlier this month, the California Department of Business Oversight (DBO) issued a notice and request for comment on a proposed amendment to regulations that implement the California Finance Lenders Law (CFLL) and the California Residential Mortgage Lending Act (CRMLA). The proposed amendment would clarify  that non-depository operating subsidiaries, affiliates, and agents of federal banks and other financial institutions do not fall within the licensure exemption for a bank or savings association under the CFLL and the CRMLA. The DBO views the proposed amendment as required in light of the Dodd-Frank Act’s elimination of federal preemption over such entities by the OCC. Comments on the proposal are due by May 7, 2014.

    Mortgage Origination Consumer Lending Licensing

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  • Hawaii Notifies Collection Agencies Of Change In Reciprocal States

    Consumer Finance

    On March 18, the Hawaii Department of Commerce and Consumer Affairs published a notice advising collection agencies that due to changes in state licensing laws in Indiana, Nevada, and North Dakota, those states no longer qualify as “reciprocal states” such that licensure in those states can be used to obtain or renew a Hawaii collection agency designation. Hawaii law allows an out-of-state collection agency to obtain a state collection agency designation by demonstrating the company is licensed under the laws of a state (i) whose requirements to be licensed, permitted, or registered as a collection agency are substantially similar to Hawaii’s requirements; and (ii) that allows similar reciprocal arrangements for Hawaii-licensed agencies. The Department advises that any agency currently using one of the three states identified as the basis for its Hawaii collection agency designation must identify a new reciprocal state on its renewal application. Colorado, Illinois, Michigan, Minnesota, Nebraska, New Mexico, and Wisconsin are identified by the Department as states that meet its definition of a reciprocal state. Because the renewal constitutes a change to the current information on file, the Department will not accept an “online” license verification in lieu of a completed original “Verification of License” form.

    Debt Collection Licensing

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  • Japanese Trading Company Pleads Guilty In DOJ FCPA Enforcement Action

    Financial Crimes

    On March 19, the DOJ announced that Marubeni Corporation, a Japanese trading company, agreed to plead guilty to violating the FCPA by participating in a seven-year scheme to bribe high-ranking government officials in Indonesia to help the company secure a contract for a power project. The DOJ charged that to conceal the bribes, the company and a consortium partner retained two consultants purportedly to provide legitimate consulting services on behalf of the power company and its subsidiaries in connection with the project. The DOJ asserted, however, that the primary purpose for hiring the consultants was to use them to pay bribes to Indonesian officials.The eight-count criminal information against the company included one count of conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA) and seven counts of violating the FCPA. As part of its plea, the company admitted its criminal conduct and agreed to pay a criminal fine of $88 million, subject to the district court’s approval. Sentencing is scheduled for May 15, 2014. Two years ago, the company entered a deferred prosecution agreement and agreed to pay $54.6 million to resolve allegations it acted as an agent for a joint venture in a scheme to bribe Nigerian officials.

    FCPA Anti-Corruption DOJ Financial Crimes

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  • CFPB Report, Field Hearing, Build Record For Changes To Payday Lending Market

    Consumer Finance

    On March 25, the CFPB released a report and held a field hearing on payday loans. Through both, the CFPB sought to expand the record on which it will formulate new rules to address its concerns about the payday lending market. Director Cordray indicated in his remarks at the field hearing that the CFPB is on the verge of initiating the public phase of a rulemaking.

    The Report

    The report—the first such “Data Point” report from the CFPB’s Office of Research—focuses on “loan sequences,” what the CFPB describes as “a series of loans taken out within 14 days of repayment of a prior loan.” The analysis was performed using the same data obtained from storefront payday lenders through the supervisory process and used by the CFPB in its prior analysis and report.  Like the prior analysis, this latest analysis did not include online payday lending data.  The CFPB acknowledges certain limitations of the data used, including that data collected from different lenders contain different levels of detail and that some lender data did not include default-related information. (Note that the CFSA challenged, under the Information Quality Act, the CFPB’s prior report and the data on which it relied. The CFPB rejected that challenge.)

    The CFPB reports that over 80% of payday loans are rolled over or followed by another loan within 14 days. In addition, the CFPB’s report offers the following findings:

    • State rollover restrictions: Same-day renewals are less frequent in states with mandated cooling-off periods, but 14-day renewal rates in states with cooling-off periods are nearly identical to states without such limitations.
    • Sequence duration and volume: 36% of new loans end with loan being repaid; more than half of loans that are renewed are only renewed one time, but 22% of sequences extend for seven or more loans; 15% of new sequences are extended for 10 or more loans.
    • Loan size and amortization: For more than 80% of the loan sequences that last for more than one loan, the last loan is the same size as or larger than the first loan in the sequence. Loan size is more likely to go up in longer loan sequences, and principal increases are associated with higher default rates.
    • Loan usage: Monthly borrowers are disproportionately likely to stay in debt for 11 months or longer. Among new borrowers (i.e., those who did not have a payday loan at the beginning the year covered by the data), 22% of borrowers paid monthly averaged at least one loan per pay period. The majority of monthly borrowers are government benefits recipients.  Most borrowing involves multiple renewals following an initial loan, rather than multiple distinct borrowing episodes separated by more than 14 days. Roughly half of new borrowers (48%) have one loan sequence during the year. Of borrowers who neither renewed nor defaulted during the year, 60% took out only one loan.

    The Field Hearing

    In remarks to open the hearing, Director Cordray offered his conclusion that “the business model of the payday industry depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan.” He stated that the “fundamental problem is that too many borrowers cannot afford the debt they are taking on or at least cannot afford the size of the payments required by a payday loan.” He identified as a particular concern borrowers who receive monthly payments, including borrowers “who receive Supplemental Security Income and Social Security Disability or retirement benefits, are thus in serious danger of ensnaring themselves in a debt trap when they take out a payday loan.” Director Cordray suggested that state-mandated cooling off periods are insufficient to help consumers avoid these so-called debt traps.

    Based on its payday lending supervisory program, the CFPB has concerns about the following payday practices: (i) inhibiting borrowers from using company payment plans that are intended to assist them when they have trouble repaying their outstanding loans; (ii) use of the electronic payment system in ways that pose risks to consumers; and (iii) unfair or deceptive collection activities, including using false threats, disclosing debts to third parties, making repeated phone calls, and continuing to call borrowers after being requested to stop.

    Director Cordray stated that the Bureau is in “the late stages of its consideration about how [it] can formulate new rules to bring needed reforms to this market.”  His comments and the study findings suggest that these new rules could include, among other things, ability to repay requirements, a two-week or more cooling off period, and limits on the number of rollover or renewal loans. The Director did not provide any additional detail on a rulemaking timeline, but it is likely to take many months . Director Cordray promised that any eventual rule will not limit access to small dollar credit for those who can afford it.

    CFPB Payday Lending Installment Loans Agency Rule-Making & Guidance

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  • California Eliminates Passive Investor Self-Certification From Finance Lenders Law License Application

    Consumer Finance

    Recently, the California Department of Business Oversight (DBO) made a number of changes to the application for a California Finance Lenders Law (CFLL) license that is completed by persons engaged in non-residential lending or brokering.  The changes were made following a 45-day notice and comment period.  (Presumably, these changes also apply, where applicable, to persons engaged in residential lending or brokering and who are thus required to submit applications via the Nationwide Mortgage Licensing System.)

    One of the most significant changes to the application relates to which individuals associated with the owners of an applicant are required to submit a Statement of Identity and Questionnaire and fingerprints to the DBO for investigative purposes.  Since 2007, the application specified as follows:

    If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable, unless the applicant or entity can make the following representation in a separate cover letter that is incorporated by reference into the CFLL application:

     

    1. [(Name of entity)] is a passive investor and is not responsible in any way for the conduct of the applicant’s lending activities in California.  Therefore, it is unnecessary to investigate any individuals managing or controlling [(name of entity)].

     

     

    2.  Describe whether the entity has engaged in any act that would constitute a reason for the California Corporations Commissioner to deny a license under Financial Code Section 22109 and if so, fully disclose the acts.

     

     

    A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission.  The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints.  Statement of Identity and Questionnaires must still be completed for all individuals.  For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the California Corporations Commissioner under Subdivision (o) of Section 25100 of the California Corporations Code.

     

    But now the application no longer provides an option for the applicant to include a self-certification for passive investors concerning investigations.  Instead, the application now specifies as follows:

     

    If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable.  The Commissioner may waive this requirement if it is determined that further investigation is not necessary for public protection.

     

     

    A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission.  The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints.  Statement of Identity and Questionnaires must still be completed for all individuals.  For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the Commissioner of Business Oversight under subdivision (o) of Section 25100 of the California Corporations Code.

     

    In its Final Statement of Reasons for the Adoption of Rules, the DBO acknowledged that not all owners of an applicant may be responsible for the applicant’s lending activities (e.g., pension plans) and that investigating such owners may be burdensome, costly, and unnecessary.  But the DBO explained that it chose to remove the self-certification for passive investors because it “has been subject to abuse by some applicants attempting to use it to evade background investigations or to hide the true identity of the owner(s).”  At the same time, the DBO emphasized that it still retains authority to forego the investigation of passive investors when doing so is consistent with the CFLL.

    As a result of this change, CFLL license applicants (and CFLL licensees whose ownership may change as a result of, for example, an acquisition or internal restructuring) should be prepared for the principal officers, directors, general partners, and managing members, as applicable, of their 10% owners and control affiliates to submit Statements of Identity and Questionnaires and fingerprints, unless they are able to persuade the DBO that investigation of these individuals is not necessary for public protection.  It is our understanding from DBO personnel that one way that this may be accomplished is by providing sufficient evidence that these individuals have been investigated and vetted by another governmental or regulatory agency.

    Consumer Lending Licensing

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