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  • Federal Reserve Announces Off-Site Electronic Loan File Review Process

    Consumer Finance

    On April 19, the Federal Reserve issued a letter announcing a new off-site loan file review program available to banking institutions with less than $50 billion in total assets. According to the letter, recent technological advancements, i.e. secure data transmission and electronic file imaging, allow the Federal Reserve to collect and review loan file information off-site “without compromising the effectiveness of the examination process.” To determine if the off-site loan review program is appropriate for an institution, the Federal Reserve will consider the following: (i) if the institution uses a secure transmission method to submit the loan file data; (ii) if the institution can provide loan data and imaged documents that are legible, easily viewable, and properly organized; and (iii) if the loan files are sufficiently comprehensive, allowing examiners to reach a conclusion regarding the appropriate rating of a credit without requesting additional information. Regarding adjustments to the examination process of an off-site loan review, the letter cautions that examiners will need to allocate sufficient time before an examination begins to ensure loan file data was successfully transmitted to the Reserve Bank, and communicate with institutional management throughout the examination process. Finally, the letter discusses the scope of the off-site examination process verses that of an on-site examination process, noting that (i) certain portions of examination work will remain off-site regardless of whether the institution is participating in the new off-site program; and (ii) at examiners’ discretion, Reserve Banks “may hold either off-site or on-site discussions with the institution’s management regarding preliminary loan review findings such as the appropriateness of individual credit ratings assigned by [a state member bank or foreign banking organization] and the completeness of credit file documentation.”

    Examination Federal Reserve Electronic Records

  • FTC to Host Fintech Forum on Marketplace Lending

    Consumer Finance

    On April 14, the FTC announced the first of a series of events intended to examine consumer protection across several areas of emerging financial technology. Scheduled to take place in Washington, D.C. on June 9, the first forum will focus on marketplace lending, bringing together industry participants, consumer groups, researchers, and government representatives to examine (i) the different models used by companies in the industry; (ii) potential consumer benefits; (iii) potential consumer protection concerns; and (iv) how existing consumer protection laws may apply to companies in the industry.

    FTC Online Lending Fintech

  • DOJ Settles with New Jersey Mortgage Lender Over False Claims Act Violations

    Lending

    On April 15, the DOJ announced a $113 million settlement with a New Jersey-based mortgage company to resolve allegations that the mortgage lender violated the False Claims Act. According to the DOJ, the mortgage company – acting as a direct endorsement lender in HUD’s Federal Housing Administration (FHA) program – knowingly originated and accepted FHA-insured mortgage loans that did not properly comply with HUD origination, underwriting, and quality control requirements. As part of the settlement agreement, the mortgage company agreed that it failed to (i) meet HUD underwriting requirements from January 1, 2006 through December 31, 2011; (ii) adhere to FHA’s quality control requirements between 2006 and 2008 by not sharing with production and underwriting management its early payment default quality control review; (iii) perform timely quality control reviews or perform audits of early payment defaults between 2008 and 2010; and (iv) report improperly originated loans between 2006 and 2011. The DOJ’s investigation further found that, after conducting a review of FHA loans underwritten between 2007 and 2012, the mortgage company self-reported to HUD only one of hundreds of loans that the company identified as not meeting FHA mortgage insurance requirements. Per the settlement agreement, the mortgage company must make an initial payment of $26 million by May 2, 2016.

    HUD DOJ False Claims Act / FIRREA

  • U.S. Court of Appeals for the D.C. Circuit Hears Oral Arguments Regarding CFPB's Interpretation of RESPA

    Consumer Finance

    On April 12, the U.S. Court of Appeals for the D.C. Circuit held oral arguments in the case PHH Corporation v. CFPB. The primary issue in the case is whether the CFPB is constitutionally and statutorily authorized to assess a $109 million penalty against the petitioner, a nonbank mortgage lender (Lender), for allegedly violating Section 8 of the Real Estate Settlement Procedures Act (RESPA) by referring customers to certain mortgage insurance companies that purchased mortgage reinsurance at fair market value from an affiliate of the Lender. According to CFPB Director Richard Cordray, this practice was a violation of Section 8’s prohibition on kickbacks for referrals, because the mortgage insurers allegedly only purchased mortgage reinsurance in order to receive customer referrals from the Lender.

    In appealing the CFPB’s action, counsel for the Lender argued that the CFPB is attempting to effectively rewrite Section 8 to prohibit activities expressly permitted by the statute’s implementing regulation, Regulation X, as well as prior agency guidance and the plain language of the statute itself. According to the Lender, its mortgage reinsurance practices had long been understood to be legal, were widespread throughout the country, and aligned with existing HUD guidance. The Lender further argued that Section 8(c)(2) permits entities to refer business so long as the referrals are not compensated, and any payments are equal to the market value cost of services actually provided. In the Lender’s case, counsel argued that the mortgage reinsurance premiums could not have been compensation for referrals, because mortgage reinsurance premiums received by the Lender’s affiliate were equal to the fair market value of mortgage reinsurance services actually rendered. The Lender further argued that the CFPB improperly ignored RESPA’s statutorily-prescribed statute of limitations (SOL) of three years when, under Section 15, RESPA clearly applies the SOL to “any action” – which, in the Lender’s view, would include an administrative action. Finally, the Lender argued that the CFPB’s structure and funding under the Dodd-Frank Act was unconstitutional in that it violated the requirement for separation of powers by, among other things, (i) restricting the President’s removal power to “for cause” removal; (ii) concentrating power in one individual; and (iii) funding the CFPB outside of the Congressional appropriations process.    

    Counsel for the CFPB responded that, during the period in question, mortgage insurance companies only purchased reinsurance from affiliates of lenders who referred them business. According to the CFPB, this type of quid pro quo arrangement is a violation of Section 8 even if the reinsurance premiums were equal to the fair market value of a service rendered. Counsel for the CFPB said that, notwithstanding the fact that the Lender’s conduct was common throughout the financial services industry, it had never expressly been blessed by prior agency guidance, and resulted in the type of market distortion that RESPA was designed to prevent. The CFPB also defended its position that its administrative actions are not subject to an SOL by noting that the Consumer Financial Protection Act, which authorizes the CFPB to take enforcement actions against regulated entities, does not include an SOL for such actions. In response to the challenge to the constitutionality of its structure, the CFPB pointed to the diversity of agency structures throughout the executive branch, including single-headed agencies and agencies that do not rely on Congress for appropriations funding.

    The panel consisted of Judges Kavanaugh, Randolph, and Henderson; Judge Henderson was not present.

    CFPB RESPA Mortgage Insurance PHH v. CFPB Single-Director Structure

  • CFPB Announces Senior Staff Changes

    Consumer Finance

    On April 12, the CFPB announced several senior leadership changes and additions to its team. Elizabeth Ellis, who previously had served as the CFPB’s Deputy Assistant Director for the Office of Financial Institutions and Business Liaison and Senior Advisor to the CFPB’s Chief of Staff, was named the Deputy Associate Director for the External Affairs Division. Seth Frotman will serve as the new Student Loan Ombudsman and Assistant Director for the Office for Students and Young Consumers, positions he previously filled on an acting basis. Katherine Gillespie and Grady Hedgespeth will serve as the Deputy Associate Director for the Consumer Education and Engagement Division and the Assistant Director for the Office of Small Business Lending Markets, respectively. Chris Johnson will serve as the Assistant Director for the Office of Consumer Response, after having served in that role on an acting basis. Finally, John Schroeder was named the Midwest Regional Director for the Office of Supervision Examinations, a position he previously held on an acting basis.    

    CFPB

  • CFPB's Jeffrey Langer Lends Perspective on Marketplace Lending

    Consumer Finance

    On April 12, CFPB Assistant Director for Installment Lending and Collections Markets Jeffrey Langer delivered remarks at the San Francisco LendIt USA Conference on the marketplace lending industry. Langer began his remarks by summarizing the CFPB’s Project Catalyst initiative, which was designed to support and encourage consumer-friendly innovation pertaining to financial products and services, such as marketplace lending. Langer, referencing the CFPB’s recently released consumer bulletin on online marketplace lending, commented that marketplace lending is a “young” industry with both potential benefits and potential risks. For example, Langer explained that marketplace lenders may be able to offer consumers faster and more convenient methods of obtaining credit, and may also have fewer overhead costs to pass along to consumers as compared to brick-and-mortar institutions. However, Langer also expressed concerns about the industry’s agility in changing markets, opining that, “[i]t is unclear whether marketplace lenders’ have adequate loan servicing infrastructure or the ability to scale infrastructure quickly and effectively in the event of [an economic] downturn.” According to Langer, “it is simply too soon to know whether marketplace lending will be able to realize its potential as a means of delivering credit at a lower cost to consumers (and small businesses) who have the ability to repay the loans they obtain or whether the marketplace lending business model will prove unable to sustain itself through a full business cycle.” Langer additionally noted that marketplace lenders could face fair lending risk as a result of introducing new types of data and/or analytics in making credit decisions.

    CFPB Fair Lending Online Lending

  • FinCEN Director Calvery: All Cash Real Estate Purchases are an AML Gap to Address

    Lending

    On April 12, FinCEN Director Calvery delivered remarks at the ACAMS AML and Financial Crimes conference. Calvery addressed the vulnerabilities of the real estate market to money laundering. Although FinCEN has addressed a number of vulnerabilities in the mortgage lending industry by imposing AML program requirements on non-bank residential mortgage lenders and originators, Calvery noted that “all cash sales” — that is, properties purchased without a mortgage— are a “gap we must address.” The recent Geographical Targeting Orders (GTO) issued to certain U.S. title insurance companies targeting high-end, all cash real estate sales in New York and Miami are intended to assist FinCEN in gathering information to address this gap. Calvery also noted that FinCEN will continue to engage with its regulatory, law enforcement, and real estate industry partners to determine (i) where the most significant risks lie; (ii) whether additional AML requirements are needed; and (iii) the best approach for mitigating “identified vulnerabilities while balancing the benefits of information gathering tools like the GTOs with potential burden imposed on the industry.”

    FinCEN

  • OCC Names Deputy Comptroller for Compliance Risk

    Consumer Finance

    On April 13, the OCC named Donna Murphy Deputy Comptroller for Compliance Risk. Effective May 1, Murphy will be responsible for supervising the development of policy and examination procedures relating to consumer, BSA/AML, and Community Reinvestment Act issues. Prior to joining the OCC in 2013, Murphy supervised the DOJ’s fair lending enforcement program.

    OCC Anti-Money Laundering Bank Secrecy Act

  • OFAC Issues Burundi Sanctions Regulations

    Federal Issues

    On April 14, OFAC issued the Burundi Sanctions Regulations, 31 CFR part 554 to implement the November 22, 2015 Executive Order 13712, “Blocking the Property of Certain persons Contributing to the Situation in Burundi.” OFAC issued the regulations in abbreviated form to provide immediate guidance to the public. The regulations provide limited definitional and interpretive guidance, and contain a number of licenses permitting U.S. persons to engage in activities otherwise prohibited by Executive Order 13712, including, among others, providing legal services and emergency medical services to designated persons. Persons designated pursuant to Executive Order 13712, i.e., those whose property and interests in property are blocked, are published in the Federal Register and incorporated into OFAC’s List of Specially Designated Nationals and Blocked Persons with the identifier ‘[BURUNDI].’” OFAC intends to issue a more comprehensive set of regulations in the future, which may include additional interpretive and definitional guidance, as well as additional general licenses and statements of licensing policy.

    Sanctions OFAC

  • Massachusetts Division of Banks Issues Letter to Raise Awareness of Money Transfer Services Fraud

    Fintech

    On April 8, the Massachusetts Division of Banks issued a letter to CEOs of licensed money transmitters regarding an increase in consumer scams related to the use of money transfer systems. The Division noted that “it is important that your employees and agents, as well as your customers, become familiar with warning signs of a scam and take appropriate action to avoid them.” To this end, the Division encouraged money transmitters to review existing programs regarding agent monitoring and anti-fraud to ensure, among other things, that (i) staff and agents are appropriately trained to monitor transactions and identify red flags; (ii) staff is authorized to terminate or place a hold on transfers which raise red flags for suspected fraud; and (iii) comprehensive policies, procedures, and training requirements for compliance with the BSA are in place.

    Money Service / Money Transmitters

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