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FHFA Director Appeared Before the Senate Banking Committee on May 11; Discussed Fannie/Freddie, Proposed "Underserved Markets Plans"
On May 11, the Senate Committee on Banking, Housing, and Urban Affairs met in open session at 10:00 a.m. to discuss “The Status of the Housing Finance System After Nine Years of Conservatorship.” Federal Housing Finance Agency (FHFA) Director Mel Watt was the only witness scheduled to testify.
The hearing comes after Fannie Mae (Fannie) and Freddie Mac (Freddie) published their first quarter financial reports. On May 2, Freddie announced $2.2 billion in net income in the first quarter—all of which Freddie expects to distribute to the Treasury, bringing the total to $108.2 billion in dividends. Notably, the $2.2 billion figure was down from its fourth quarter net income of $4.8 billion. Similarly, on May 5, Fannie reported net income of $2.8 billion in the first three months of 2017, money that will be sent to Treasury, which brings its total payments to $162.7 billion. The net income was a significant decline from the $5 billion it reported for the fourth quarter of 2016.
Fannie and Freddie also recently released their respective “Underserved Markets Plans” for public comment. As previously covered by InfoBytes, FHFA published a final rule in the December 18 Federal Register implementing certain Duty to Serve provisions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. Among other things, these provisions require Fannie and Freddie to each adopt a formal “Underserved Markets Plan” to improve the availability of mortgage financing for residential properties that serve “very low-, low-, and moderate-income families” in three specified underserved markets: manufactured housing, affordable housing preservation, and rural markets. The Plans can be accessed through the following links:
As explained on the FHFA’s DTS Underserved Markets Plan page, the activities and objectives in each of these Plans may be subject to change based on factors including public input, FHFA comments, compliance with the Enterprises' Charter Acts, safety and soundness considerations, and market or economic conditions. To this end, “views of interested stakeholders are sought on whether the proposed Plans would effectively serve the underserved markets if carried out as proposed, or if there are modifications that each Enterprise should consider making to its proposed Plan to better serve these underserved markets.” The period during which the Enterprises are receiving public input on the proposed Plans will end on July 10.
Pursuant to the same new rule, FHFA has also published a Proposed Evaluation Guidance to provide: (i) FHFA's expectations regarding the development of the Underserved Markets Plans, and (ii) the process by which FHFA will evaluate Fannie’s and Freddie’s achievements under their Plans each year. The deadline for public input on FHFA’s Proposed Evaluation Guidance is June 7.
Rep. Cummings Calls for House Oversight Committee to Assert Jurisdiction Over Financial CHOICE Act
As covered in last week’s InfoBytes, on May 4 the House Financial Services Committee approved the revised Financial CHOICE Act of 2017, H.R. 10, in a party-line vote, 34-26. In a May 3 letter to House Oversight and Government Reform Committee Chairman Jason Chaffetz, Rep. Elijah Cummings (D-Md.), the Ranking Minority Member on that Committee, urged the Committee “not to waive its jurisdiction over the Financial CHOICE Act, H.R. 10”—which he argues includes “numerous provisions that clearly fall within the legislative jurisdiction of the Committee.” Rep. Cummings also states in his letter that the proposed legislation would “destroy key financial regulations and consumer protections” and “place our economy at greater risk of another crisis.” Accordingly, he argues that “[i]t is imperative that the Committee review and vote on [H.R. 10’s] dangerous proposals.”
OCC Appoints Six New Members to Mutual Savings Association Advisory Committee
On May 4, the OCC announced the appointment of six new members to its Mutual Savings Association Advisory Committee (MSAAC). The committee—which is presided over by Michael R. Brickman, the Deputy Comptroller for Thrift and Special Supervision—is tasked with assessing the condition of mutual savings associations, regulatory changes and other actions the OCC may take to ensure the health and vitality of mutual savings associations, and other issues of concern to such institutions.
The six new members appointed to the committee are:
- J.R. Buckner, President and CEO, First Federal Bank of Kansas City, Kansas City, MO;
- Thomas Fraser, President and CEO, First Federal Lakewood, Lakewood, OH;
- Shirley Hughes, President and CEO, Elizabethton Federal Savings Bank, Elizabethton, TN;
- James McQuade, President and CEO, Dollar Bank, Pittsburgh, PA;
- James Wainwright, CEO, Freehold Savings Bank, Freehold, N.J.; and
- William White, President and CEO, Dearborn Federal Savings Bank, Dearborn, MI.
They join the following current MSAAC members:
- Jeffrey Hyde, President and CEO, Evergreen Federal Savings and Loan Association, Grants Pass, OR;
- Dan Moore, President and CEO, Home Bank, Martinsville, IN.; and
- Charles Timpa, President and CEO, First Federal Bank of Louisiana, Lake Charles, LA.
Additional information concerning the MSAAC, including committee meeting documents, can be accessed through the OCC’s website.
Financial CHOICE Act of 2017 Approved by House Financial Services Committee
On May 4, GOP efforts to overhaul existing financial regulations took a step forward as the House Financial Services Committee approved H.R. 10, a revised version of the “Financial CHOICE Act of 2017” in a party-line vote, 34-26. The vote concluded a two week period that included both a three-day markup, of the GOP-backed legislation—during which several Democrat committee members sought, unsuccessfully, to remove various provisions of the bill—and, a two-day hearing that included testimony from 18 different witnesses.
Originally introduced by Committee Chairman Jeb Hensarling (R-TX) in September 2016, the main focus of the CHOICE Act was to give financial institutions the option of avoiding many of the rules set up by the 2010 Dodd-Frank law if they maintain a high level of capital and are “well-managed” as defined in the bill. The legislation, if enacted, would also end the Dodd-Frank Act’s taxpayer-funded bailouts of large financial institutions and would impose greater penalties on those who commit fraud and insider trading, while also demanding greater accountability from banking regulators. A summary of changes incorporated in the latest iteration of the proposed legislation—recently referred to as “CHOICE Act 2.0”—was released by the Committee last week and included, among other things:
- the elimination of the CFPB supervisory and examination authority;
- a restructuring of the CFPB, FHFA, OCC, and FDIC into bipartisan commissions appointed by the President;
- an opt-out of many regulatory requirements for banks and other financial institutions if they maintain a 10% leverage ratio (among other conditions);
- subjecting the federal banking regulators to greater congressional oversight and tighter budgetary control;
- reforms in bank stress tests;
- materially reducing the authority of the Financial Stability Oversight Council (FSOC) and the establishment of a new process of identifying financial institutions as "systemically important";
- a repeal of the Orderly Liquidation Authority and the creation of a new bankruptcy process for banks;
- a repeal of the Volcker Rule; and
- facilitated capital raising by small companies, including through crowd-funding.
Looking ahead, the House could vote to pass the bill later this month. While a party-line vote would pass the House, the bill will likely need to pick up a minimum of 60 votes—including support from several Democrats—in order for it to pass in the Senate.
Nevada AG Issues Advisory Opinion Finding Assignment of a Retail Installment Sales Contract Does Not Subject Assignee to Licensure or Regulation Under Ch. 675 of the NV Code
Last month, the Office of the Attorney General for the State of Nevada (OAG) issued an Advisory Opinion[1] finding that a retail seller financing its own sales pursuant to the retail installment sales contract (RISC) provisions found in Chapter 97 of the Nevada Revised Statutes (NRS), but which is otherwise not engaging in lending activity, is not required to secure a lender’s license under Chapter 675 of the NRS. In reaching this conclusion, the OAG references another opinion[2]it had issued earlier this year concerning retail installment lending, and noted that “[w]hen a retail seller finances its own sales pursuant to the provisions of Chapter 97, but otherwise engages in no lending activity, the retailer's business activity is governed exclusively by the provisions of Chapter 97” (emphasis added). In light of this earlier holding, the OAG reasoned as follows:
[W]hen a person purchases or takes an assignment of a RISC pursuant to the provisions of Chapter 97 of the NRS, the person’s acceptance of the assignment does not subject the person to regulation or licensure under NRS Chapter 675. Assuming that the person is not independently engaged in lending activity subject to licensure and regulation under NRS Chapter 675, the person’s financing activity is governed exclusively by the provisions of NRS Chapter 97. To the extent that a vehicle dealer adopts the contractual terms of the form RISC as prescribed by the Commissioner in accordance with Chapter 97, the vehicle dealer is permitted to assign the RISC to a financial institution. Although it applies in general terms to certain types of lending activity, NRS Chapter 675 does not specifically abrogate the exclusive provisions of Chapter 97 that govern the parties to a RISC made and assigned pursuant to Chapter 97.
Notably, the Opinion was issued in response to a request from the Commissioner of the Financial Institutions Division of the Nevada Department of Business and Industry (NDBI), seeking a “formal opinion” regarding certain indirect vehicle financing transactions that use the form retail installment contract prescribed for use in the sale of vehicles pursuant to NRS 97.299. Specifically, the Commissioner sought an opinion addressing “[w]hether a financial institution that purchases Retail Installment Sales Contracts ("RISC[ s ]") from motor vehicle dealers in the State of Nevada (i.e. engages in indirect financing) is required to be licensed pursuant to Chapter 675 of the NRS[.]” The Commissioner also requested clarification addressing “[w]hether NRS Chapter 675 requires such a financial institution to have an in-state physical presence[.]”
Comptroller Curry Shares Departing Thoughts on the Fintech “Wave of Innovation” at Conference
In prepared remarks delivered on April 28 at a fintech conference hosted by Northwestern University, Thomas J. Curry—who on May 5, will be stepping down from his role as Comptroller after completing his five-year term—took the opportunity to “share [his] perspective on where financial innovation is today,” as well as what he believes the OCC “is doing to encourage responsible innovation within the banking system.” In so doing, the departing Comptroller also addressed some of the criticism received by the OCC over its recent efforts to move forward with developing a special purpose national bank charter for fintech companies. (See related InfoBytes coverage here.) Among other things, Curry noted that, for him, “one of the most exciting parts of this [fintech] wave of innovation is the potential for technology to expand access to the unbanked and underserved, in the same way that the Internet helped democratize information.” On this point, he explained further that “[d]ata from the FDIC and others show that minorities and other traditionally underserved populations may embrace fintech at even higher rates than the general population.” The outgoing Comptroller also highlighted several ways the OCC’s Office of Innovation is already working to enhance the delivery of financial products and make banking more efficient, including, for instance, its recently-unveiled “Office Hours” initiative, which was created to provide a new means by which stakeholders can seek regulatory guidance. Curry did, however, caution the audience about the importance of proceeding “cautiously,” so as to avoid “compromis[ing] the integrity of the banking system” and/or “allow[ing] untested products to result in unintended consumer harm.”
According to an OCC press release, Curry will be replaced by Keith Noreika, who is slated to become Acting Comptroller of the Currency on May 5, until President Trump appoints, and the Senate confirms, a new comptroller. Noreika began his career in private practice and has advised banks on Volcker Rule, Bank Secrecy Act, and consumer protection regulation compliance and has worked extensively with all of the federal bank regulatory agencies.
Gov. Cuomo Announces New Title Insurance Regulations Target Business Gifts, Ancillary Fees and Transactions with Affiliates
On May 1, New York Governor Andrew M. Cuomo announced two new proposed regulations to “crack down on unscrupulous practices in the title insurance industry.” According to the Governor, the proposed measures were drafted in response to an investigation by the state Department of Financial Services (“NYDFS”), which found that “meals, entertainment, gifts” and other “inducements” provided in exchange for referring business to a title insurance company or agents, were charged to customers under the guise of “marketing expenses.” The first proposed regulation would, among other things, clarify the rules about “meals and entertainment” expenses, and other ancillary fees that title agents or title insurers may charge a customer. The second proposed regulation would require title insurance companies or agents that generate a portion of their business from affiliates to function separately and independently from any affiliate and obtain business from other sources. Importantly, a press release issued by NYDFS explains that “emergency” versions of both of these regulations have already been adopted by NYDFS (in response to the aforementioned investigation). As explained by NYDFS, the emergency rules, which are currently in effect, will remain in effect until final regulations are adopted.
West Virginia Enacts Law Defining "Cryptocurrency" in Context of Money Laundering
On April 26, West Virginia Governor Jim Justice approved new legislation (H.B 2585) that defines cryptocurrency in the context of money laundering. Specifically, “cryptocurrency” is defined as “digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, and which operate independently of a central bank.” Furthermore, the term “monetary instruments”—traditionally defined, for example, as coin, currency, checks, gift and prepaid credit cards—would now include cryptocurrency. With respect to the anti-money laundering clause, the legislation makes it unlawful to “conduct or attempt to conduct a financial transaction,” which would include cryptocurrency transactions, “involving the proceeds of criminal activity knowing that the property involved in the financial transaction represents the proceeds of, or is derived directly or indirectly from the proceeds of, criminal activity.” H.B. 2585 also outlines penalty structures for violations of the legislation—misdemeanor or felony charges depending on the severity of the crime—and allows for forfeiture or disgorgement of cryptocurrency.
Federal Regulators Enter Settlement Agreement with Former Chief Compliance Officer Following AML Program Investigation
On May 4, FinCEN and the U.S. Attorney’s Office for the Southern District of New York announced a $250,000 settlement with the former chief compliance officer of an international money transfer company over allegations that he failed to report suspicious activity and knowingly participated in the company’s failure to maintain an effective anti-money laundering program. The settlement resolves a lawsuit filed in December of 2014 against the defendant, in which the district court dismissed the defendant’s motion to dismiss, ruling that the Bank Secrecy Act’s (BSA) general civil penalty provision, § 5321(a)(1), could subject a partner, director, officer, or employee of a financial institution to civil penalties for violations of any provision of the BSA or its regulations, excluding the specifically excepted provisions, and that because § 5318(h) was not listed as one of those exceptions, “the plain language of the statute provides that a civil penalty may be imposed on corporate officers and employees like [the defendant], who was responsible for designing and overseeing [the company's] AML program.” U.S. Dep’t of Treasury v. Haider, No. 15-cv-01518, WL 107940 (Dist. Ct. Minn. Jan. 8, 2016). (See previous InfoBytes summary.) In the stipulation and order of settlement and dismissal, the defendant (i) accepted responsibility for failing to further investigate consumer fraud reports; (ii) is required to pay $250,000 to the Department of the Treasury; and (iii) is banned for three years from performing compliance functions for other U.S.-based money transmitters. Notably, in February 2016, the money transfer company agreed to pay $13 million to settle claims from 49 states and the District of Columbia over charges that it transferred money to third parties that were defrauding customers. As part of the company’s settlement, it was required to ensure its agents attend mandatory compliance training, enhance its comprehensive anti-fraud compliance program, and implement a hotline system for employees to report noncompliance.
OCC Names New Senior Leadership in Midsize and Community Bank Supervision
On May 2, the OCC announced the promotion of two long-time OCC employees to leadership roles within its Community Bank Supervision unit. Starting this May, Scott Schainost will serve as one of two deputies responsible for overseeing the supervision of midsize national banks and federal savings associations where he will oversee a portfolio of companies with assets generally ranging from $5 billion to $60 billion, as well as a number of nationally chartered institutions. This is a new position created to enhance the supervision of midsize banks. Schainost – who has held a variety of positions at the OCC during his 33 years at the agency – started his career as an Assistant Bank Examiner in Kansas City, before moving on to supervise banks of all sizes.
Beginning this June, Troy Thornton will serve as the head of one of the OCC’s four districts that make up community bank supervision, where he will oversee the supervision of more than 390 national banks, federal savings associations, and trust companies, while also overseeing 28 technology service providers spread over nine states from Texas to Florida. His responsibilities will include managing staff in 21 field and satellite offices throughout the district. Thornton began his career at the OCC 31 years ago as a Field Examiner in Texas. He is filling a vacancy left by Gilbert Barker’s retirement in November 2016.