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Federal Register Publishes CFPB Arbitration Proposal; Comment Period Closes August 22
On May 24, the CFPB’s proposed rule on arbitration agreements was published in the Federal Register. As previously covered in InfoBytes, the CFPB’s proposal seeks to ban covered providers of most financial consumer products and services from including mandatory pre-dispute arbitration clauses in consumer agreements. Comments on the proposal are due by Monday, August 22, 2016.
CFPB, Federal Banking Agencies, and NCUA Issue Interagency Guidance Regarding Deposit Reconciliation Practices
On May 18, the CFPB, the Federal Reserve, the OCC, the FDIC, and the NCUA issued interagency guidance on supervisory expectations regarding customer account deposit reconciliation practices. According to the guidance, banks create a “credit discrepancy” if they credit a customer a different amount than the total of the items the customer tried to deposit into an account. In further explaining what constitutes a credit discrepancy, the guidance states, “the customer may deposit $110 to an account, but may indicate on the deposit slip that only $100 has been tendered. In this case, the financial institution may credit $100 to the customer’s account as indicated on the deposit slip without reconciling the $10 discrepancy.” According to the guidance, some financial institutions fail to correct the inconsistencies between the dollar value of items deposited to the customer’s account and the amount actually credited to that same account. This is a potential violation of (i) the Expedited Funds Availability Act’s, as implemented by Regulation CC, requirement to make deposited funds available for withdrawal within prescribed time limits; (ii) the FTC Act’s ban of unfair or deceptive acts or practices; and (iii) the Dodd-Frank Act’s prohibition of unfair, deceptive, or abusive acts or practices. In addition to reminding financial institutions of their obligations to comply with the aforementioned applicable laws, the guidance stresses that financial institutions are expected to “adopt deposit reconciliation policies and practices that are designed to avoid or reconcile discrepancies, or designed to resolve discrepancies such that customers are not disadvantaged.”
HUD Determines Down Payment Assistance Programs Eligible for FHA Insurance
This week, FHA Principal Deputy Assistant Secretary for Housing and Head of FHA, Edward Golding, issued a letter informing stakeholders that “HUD has determined that housing finance agency down payment assistance programs are legal and consistent with the National Housing Act.” We note that the letter was not a Mortgagee Letter nor was it published in the Federal Register and may be considered informal guidance.
In the letter, Golding advised that:
- Government entities may provide borrowers with funds for down payments on FHA loans; and
- Loans that include down payment assistance (DPA) provided by state and local housing finance agencies (HFA) continue to be eligible for FHA insurance.
Golding’s letter emphasized the benefits of DPA programs, commenting that such programs facilitate access to homeownership for low- and moderate-income families. Still, Golding noted that FHA will continue to monitor and mitigate any potential risk associated with DPA programs: “[w]e will work diligently to reduce the impact of these risks on our portfolio. We know it is possible to accomplish this as the research shows carefully designed programs perform better.”
Golding’s letter purports to resolve a matter of dispute regarding DPA between FHA and the HUD Office of Inspector General (OIG). Last year, HUD OIG audited an Arizona-based mortgage lender and issued a report concluding that the lender originated FHA loans that included gift DPA that did not comply with FHA rules and regulations. Specifically, the audit found that, among other things:
- The lender inappropriately allowed premium pricing to be used as a source for the borrowers’ down payments, which were not true gifts and were indirectly repaid by the borrowers through a higher premium rate;
- The lender used programs that had a circular funding mechanism (i.e., the program was structured to generate revenues through the sale of mortgage-backed securities); and
- The lender did not perform due diligence to ensure DPA was eligible.
After the audit, Golding issued a letter to reaffirm FHA’s support of certain DPA programs. Golding’s letter also stated that “[t]he intent of [FHA] rules regarding down payment assistance is clear and allows HFAs the discretion necessary to fund these programs appropriately.” HUD’s General Counsel (GC), Helen Kanovsky, also issued a memorandum to Golding regarding DPA programs concluding that:
- Governmental entities are a permissible source of funds for down payments on FHA loans;
- FHA does not place limitations or prohibitions on how a government entity raises funds for its DPA program; and
- FHA rules on premium pricing are not violated if the borrower and the lender agree on interest rates in relation to DPA programs.
The memorandum also noted that it did not support OIG’s audit conclusions that FHA rules regarding premium pricing or gift DPA were violated. We note that, similar to Golding’s letter from this week, the letter and the memorandum were not issued as Mortgagee Letters and were not published in the Federal Register.
Notwithstanding Golding’s letter after the audit and HUD GC’s memorandum, HUD OIG continues to audit lenders and issue reports on this issue.
The Obama Administration also responded to the DPA uncertainty earlier this year by releasing the FY 2017 Budget Proposal, which would amend the National Housing Act to clarify that “down payment assistance from state and local governments and their respective agencies and instrumentalities are not impermissible sources of down payment assistance.”
Despite Golding’s letter this week, a news website has reported that David Montoya, HUD’s Inspector General, “strongly disagree[s]” with HUD’s assessment of DPA programs. Specifically, it has been reported that Montoya issued the following statement: “we believe this specific aspect, where external lenders are originating FHA loans with ineligible down payment assistance gifts and secondary financing and agree to inflate the interest rate on the borrowers’ FHA loans, violates the law and harms borrowers.” A spokesperson noted that an OIG audit of a lender using funds derived from premium pricing to pay for gift DPA is still underway.
U.S. House Passes SAFE Transitional Licensing Act to Give Greater Job Mobility to Mortgage Loan Originators
On May 23, the U.S. House of Representatives unanimously passed by voice vote H.R. 2121, the SAFE Transitional Licensing Act of 2015. Congressman Steve Stivers (R-OH) introduced H.R. 2121 in April 2015 with the purpose of “providing regulatory relief for loan originators in an effort to make a smooth employment transition between bank and non-bank entities.” As passed, H.R. 2121 would amend the SAFE Mortgage Licensing Act of 2008 to give eligible mortgage loan originators (MLOs) the ability to continue originating loans while awaiting a decision on their application for a state originator license. This temporary authority would apply when MLOs switch jobs (i) from a depository institution, where a state originator license is not required, to a state-licensed non-bank lender, where such a license is required; or (ii) from a state-licensed lender in one state to a state-licensed lender in another state, where a new state originator license is required. In both cases, this temporary authority would expire upon the grant, denial, or withdrawal of the license application, or, if an application is deemed incomplete, 120 days after the application was submitted.
FTC Chairwoman Ramirez Provides Testimony on Pending Consumer Protection Legislation
On May 24, FTC Chairwoman Edith Ramirez provided testimony before the U.S. House of Representatives on pending legislation pertaining to the agency’s jurisdiction to regulate certain marketplace areas affecting consumers. Consumer protection bills under consideration and discussed by Chairwoman Ramirez include, but are not limited to, (i) H.R. 5111, the Consumer Review Fairness Act, which, according to the FTC, “would help to prevent companies from silencing truthful consumer reviews or products and services”; (ii) H.R. 4526, the Stop Online Booking Scams Act, which would require online travel sites to provide disclosures regarding their affiliation with hotels; and (iii) H.R. 5104, the Better On-line Ticket Sales Act, which is intended to make sure that consumers (“not just scalpers with specialized software”) are able to purchase online tickets to certain events. Chairwoman Ramirez also provided insight regarding H.R. 5239, the Protecting Consumers in Commerce Act, which would remove the telecommunications common carrier exemption from the FTC Act. In support of H.R. 5239, Ramirez commented, “[r]emoving the exception from the FTC Act would enable the FTC to bring its extensive law enforcement experience to bear in protecting consumers of common carriage services against unfair and deceptive practices in the same way that it can protect against unfair and deceptive practices for other services.” Further expressing the FTC’s opposition to certain pending legislation, FTC Ramirez noted that H.R. 5109, the Clarifying Legality and Enforcement Action Reasoning Act, would require that the FTC submit to Congress an annual report regarding its consumer protection investigations, “describing both those that result in agency action as well as those that are closed.” Chairwoman Ramirez contends that submitting such a report would not only be time consuming and costly, but would risk harming the reputation of companies against whom the FTC did not take formal action.
U.S. House Members Seek Information Related to Financial Institution-Fintech Relationship
On May 24, twelve U.S. congressmen – eleven Republican – sent a letter to the Government Accountability Office (GAO) requesting information on how the U.S. financial system’s regulatory structure affects the relationship between financial firms and fintech companies. This request follows a separate April 18 letter from three Democratic senators requesting that the GAO complete a study on the fintech industry, and comes after a GAO report, which was published in February but publicly released in March, that assessed the U.S. financial system’s regulatory structure, including the impacts of fragmentation and overlap in financial regulation. The most recent letter requests that the GAO supplement its February report by providing information concerning: (i) how the GAO’s findings of fragmentation and overlap in financial regulation “slowed or otherwise harmed innovation, and restricted the ability of financial firms . . . from pursuing new technological ventures”; (ii) how collaboration between financial firms and fintech companies has “helped financial firms streamline processes and become more efficient in delivering products and services”; (iii) “what challenges . . . both financial institutions and fintech companies have with the existing regulatory structure”; and (iv) how federal regulators can “streamline” collaboration between financial firms and fintech ventures, and what best practices U.S. regulators can consider to foster a “culture of collaboration” – such as the “regulatory sandbox” offered by the U.K. Financial Conduct Authority’s Project Innovate.
FHA Proposes Revisions to Reverse Mortgage Program
On May 18, HUD announced that the FHA proposed a new rule that is intended to “strengthen” its Home Equity Conversion Mortgage (HECM) Program by reinforcing reforms that have taken place in the past two years, and by adding new consumer protections. New revisions to the HECM program outlined in the proposed rule include, but are not limited to, (i) ensuring that required HECM counseling occurs before a mortgage contract is signed; (ii) amending the definition of “property charges” to include utilities as a borrower responsibility; (iii) capping lifetime interest rate adjustments for adjustable interest rate products at 5%; (iv) requiring as a condition of eligibility for loan assignment that the HECM mortgage be in lien status prior to homeowners association and condo association liens; and (v) creating a “cash for keys” program to “incentivize parties with legal authority to dispose of a property that serves as the security for a HECM to complete a deed in lieu of foreclosure more quickly.” Comments on the proposal are due by Monday, July 18, 2016.
FDIC Issues White Paper on Mobile Financial Services
On May 25, the FDIC published a report titled “Opportunities for Mobile Financial Services to Engage Underserved Consumers.” The report is the product of FDIC qualitative research with consumers and industry stakeholders regarding mobile financial services’ (MFS) potential to increase economic inclusion. The report identifies the following areas as core financial needs for underserved consumers: (i) control over finances, noting that consumers want to know precisely when and why money is withdrawn from an account; (ii) access to money, stressing that consumers expect financial providers to make funds available as quickly as possible; (iii) convenience, emphasizing the value consumers place on features that save time or effort when making a transaction; (iv) affordability, commenting that consumers aim to “minimize or avoid fees for account maintenance and everyday transactions”; (v) security, emphasizing consumers’ need for protection from theft of funds or personal information; (vi) customer service, with a consumer expectation for having access to live help through their preferred banking channel; and (vii) long-term financial management (i.e., advice on money management or the availability of tools to meet financial goals). According to the report, mobile banking “helps meet consumer needs in areas where traditional banking is perceived to be weak.” Specifically, the report states that mobile banking improves the convenience of banking services, helps consumers maintain better control of their finances, and, in some cases, is more affordable than traditional banking. The FDIC concluded that “consumers make tradeoffs when selecting financial services on certain financial needs.” As such, the report makes suggestions based off consumer feedback as to how both MFS and traditional banking services can better streamline their products to best benefit the underserved, and how to address consumers’ real and perceived fears about the security risks of using MFS.
The FDIC’s report follows a May 3 letter seeking input regarding the FDIC’s plans to explore the economic inclusion potential of MFS. The FDIC requested that all feedback be submitted by June 15, 2016.
FinCEN Director Calvery Opines on Agency Efforts to Increase Financial Transparency
On May 24, FinCEN Director Calvery delivered remarks before the House Committee on Financial Services at a hearing entitled “Stopping Terror Finance: A Coordinated Government Effort.” Calvery noted FinCEN’s commitment to fostering an environment of financial transparency, and provided insight on the recent issuance of a final rule, issued on May 6, which clarified customer due diligence (CDD) requirements for financial institutions: “[w]e are confident that the CDD final rule will increase financial transparency and augment the ability of financial institutions and law enforcement to identify the assets and accounts of criminals and national security threats. We anticipate that the CDD rule will also facilitate compliance with sanctions programs and other measures that cut off financial flows to these actors.” Calvery further emphasized the significance of recently proposed beneficial ownership legislation, noting that it and the CDD rule “dovetail together.” Calvery opined that the level of transparency that the proposed legislation and the CDD rule offer would assist law enforcement in identifying who the “real people are that are involved in a transaction,” furthering its efforts to combat money laundering and terrorism, enforce sanctions, and prevent other unlawful abuses of the U.S. financial system. Finally, she noted that the beneficial ownership legislation, if enacted, would provide FinCEN with the ability to collect information on all funds transfers (instead of only monetary instruments, as currently authorized) through the use of geographic targeting orders.
CSBS and MTRA Issue Report on State Supervision of Money Services Businesses
On May 24, the Conference of State Bank Supervisors (CSBS) and the Money Transmitter Regulators Association (MTRA) published a report titled “The State of State Money Services Businesses Regulation and Supervision.” According to the report, money services businesses (MSBs) are losing access to traditional banking services, with many banks “indiscriminately terminating the accounts of MSBs, or refusing to open accounts for any MSBs, thereby eliminating them as a category of customers.” Evidence suggests that banks are terminating or refusing to open MSB accounts partially because of the regulatory scrutiny surrounding the industry and the concern of BSA/AML risks. However, the report recognizes that MSBs are an important part of the financial system at large: “[MSBs], and specifically money transmitters, play a vital role in providing financial services to consumers and small businesses across the country. Countless Americans use MSBs every day to pay bills, purchase items online or send funds to family members and friends domestically and abroad.” Acknowledging the significant role MSBs play in providing financial services to U.S. households, the CSBS’ and MTRA’s report is intended to provide an outline of the states’ system of supervision of MSBs, highlighting that “state regulatory requirements are focused on consumer protection, safety and soundness and adherence to BSA/AML requirements and enforcement through state supervisory programs.”