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SBA Encourages Greater Use Of Electronic Signatures
Recently, the SBA issued a procedural notice highlighting the acceptance of electronic signatures in its 7(a) and 504 Loan Program. The notice, which outlines various performance standards, is intended to encourage more lenders and agencies to accept electronic signatures. The announcement comes only weeks after the House Small Business Committee introduced legislation intended to “streamline and simplify the loan application process.” The ESIGN Act, enacted in 2000, made valid the use of electronic signatures in signing contracts and documents online, thus streamlining business operations and eliminating paper burdens for consumers.
New Bitcoin Firms May Get Transitional License in New York
On November 2, New York Superintendent Lawsky delivered remarks at the Money 20/20 Conference on the state’s virtual currency and Bitcoin regulation. In October, Lawsky publicly stated that, as a result of the comments received on New York’s proposed BitLicense framework, there would be important changes made to the July 17 proposal. This week, on behalf of the NYDFS, Lawsky announced that additional changes are being considered to address “concern about the compliance costs of regulation on new or fledging virtual currency enterprises.” Specifically, Lawsky introduced the concept of a Transitional BitLicense, which would allow certain small, money transmitting startups to begin operating without huge compliance costs. Lawsky noted four main factors the NYDFS would consider when deciding whether or not to grant a Transitional BitLicense: (i) the nature and scope of the business and the associated risks for consumers; (ii) projected transactional and business volume; (iii) registration status as a Money Services Business with FinCEN; and (iv) previously established mitigating risk controls.
Federal Court Vacates HUD Disparate Impact Rule
On November 3, the United States District Court for the District of Columbia vacated HUD’s Disparate Impact Rule under the Fair Housing Act (FHA). The court, in American Insurance Association v. United States Department of Housing and Urban Development, held that “the FHA prohibits disparate treatment only,” and therefore HUD, in promulgating the Disparate Impact Rule, “exceeded [its] authority under the [Administrative Procedures Act].” (Emphasis in original.)
In the Disparate Impact Rule, HUD provided that “[l]iability may be established under the Fair Housing Act based on a practice’s discriminatory effect . . . even if the practice was not motivated by a discriminatory intent.” 24 C.F.R. § 100.500. It then articulated a burden shifting framework for such claims. Id. § 100.500(c)(1)-(3). In vacating HUD’s Disparate Impact Rule, the court reviewed the text of the FHA and concluded that “the FHA unambiguously prohibits only intentional discrimination.” (Emphasis in original.) The court explained that the FHA lacks the “effects-based language” that makes disparate impact claims cognizable under other anti-discrimination statutes. The court reasoned that this lack of effects-based language created “an insurmountable obstacle to [HUD’s] position regarding the plain meaning of the Fair Housing Act.” The court further reasoned that this textual reading is consistent with the FHA’s statutory scheme and, in the case of insurance products, required by the McCarran-Ferguson Act.
The court also explains that its decision to vacate the Disparate Impact Rule is required by the Supreme Court’s decision in Smith v. City of Jackson, in which the Supreme Court “made it clear that an inquiry into the availability of disparate-impact liability turns on the presence, or absence, of effects-based language.” In so reasoning, the court further noted that “none of the Circuit Courts that have recognized claims of disparate impact subsequent to the Supreme Court’s decision in Smith have either discussed Smith in any detail, or reconsidered their Circuit precedent in light of its holding.” (Emphasis added.) The court also noted that the Supreme Court has three times granted certiorari to address whether disparate impact claims are cognizable under the FHA, most recently in Texas Department of Housing, however, two cases were settled before the Court could rule and the third is currently pending.
This case comes in the wake of the holding of the United States District Court for the Northern District of Illinois that “HUD’s response to the insurance industry’s concerns [regarding the Disparate Impact Rule] was arbitrary and capricious” and remand to HUD “for further explanation.” Property Cas. Insurers Ass’n of Am. v. Donovan, No. 13 C 8564, at 46-47 (N.D. Ill. Sept. 3, 2014).
Even prior to HUD’s rule, the federal enforcement agencies took the position that both the FHA and the Equal Credit Opportunity Act (ECOA) permit disparate impact claims. Today’s decision does not expressly address ECOA. For a discussion of the cognizability of disparate impact claims under the FHA and ECOA, see here, here, and here.
Jesinoski Case Raises TILA Questions
On November 4, the Supreme Court heard oral arguments in Jesinoski v. Countrywide Home Loans, Inc., No. 13-648, to resolve a circuit split on whether under TILA a borrower who has provided notice of rescission within three years must also file a lawsuit within that three-year period, or whether such a borrower may file a lawsuit even after the three-year period lapses. In the court below, the Eighth Circuit Court of Appeals agreed with the creditor that a borrower must file suit within three years to rescind a loan under TILA. As noted in BuckleySandler attorneys’ November 4 article, Justices’ Questioning In Jesinoski May Be Cause For Concern, during oral arguments the Justices closely questioned counsel on the statutory text. While lawyers for the borrowers and the Department of Justice met with little opposition from the bench, the Justices struggled with the argument advanced by counsel for the creditor. Ultimately, as discussed in BuckleySandler’s article, “Questions from both conservative and liberal judges suggest that both camps may be more receptive to the textual reading advanced by the Jesinoskis.” BuckleySandler attorneys also filed an amici curiae brief on behalf of industry groups in this case.
Financial Stability Board Updates List of Global Systemically Important Banks
On November 6, the Financial Stability Board published its annual update of global systemically important banks (G-SIBs). Included in its annual update is the addition of one international bank bringing the total number of institutions on the list to 30. Eight U.S. G-SIBs remain on the list. Coinciding with the updated list, the Basel Committee on Banking Supervision also published updated information regarding denominators and capital thresholds used to calculate bank scores and allocate capital requirements of G-SIBs.
Payment Industry Council Issues Best Practices For Security Awareness
Recently, the Payment Card Industry (PCI) Security Standards Council published guidance to help organizations strengthen their security awareness. The guidance, developed by retailers, banks, and technology providers, details three recommendations for implementing a security awareness program: (i) Assembling a security awareness team, (ii) Developing appropriate security awareness content for your organization, and (iii) Creating a security awareness checklist. The PCI Security Standards Council is an open global forum comprised of more than 650 organizations, including banks, merchants, processors, and vendors, responsible for the development, management, education, awareness, and standards to increase payment data security.
Tokenization Introduced to Tackle Cyber Crime
On November 3, a large financial services company announced the rollout of its Token Service (Service) for online, mobile app, and in-store mobile purchases. The Service is designed to increase security and reduce magnetic-stripe card fraud. Based on EMVCo’s Payment Tokenization Specification and Technical Framework, the Service offers four main features: (i) token vault to store and designate tokens; (ii) ability to issue tokens; (iii) lifestyle management services to manage tokens; and (iv) anti-fraud and risk management services for institutions issuing the cards. The Service is currently available in the U.S. and is scheduled to launch internationally in 2015.
Webinar Recap: Discussing "The New CFPB Mortgage Origination Rules Deskbook"
On October 28, 2014, BuckleySandler presented the webinar “Discussing The New CFPB Mortgage Origination Rules Deskbook.” Contributors Joseph Kolar discussed the need for the book and highlighted information from specific chapters. The webinar was moderated by Jeffrey Naimon. This webinar recap covers the highlights from their discussion. For more information about the CFPB Deskbook, including information on obtaining hard copies, email CFPBDeskbook@buckleyfirm.com.
The purpose of the CFPB Deskbook is simple – consolidate in a clear, organized format, material from all of the many sources of regulatory guidance on the Consumer Financial Protection Bureau’s (CFPB) mortgage origination rules. .
Kolar followed their general discussion of the book with an overview of what they consider some of the most valuable chapters, including, among others:
- ATR / QM Rule -- Incomplete Loan File (Chapter 1)
- The CFPB explicitly declined to adopt a rule, similar to the familiar parol-evidence rule of contract law, under which only the written record of a credit decision at origination could be considered in a later ability-to-repay / QM challenge by the borrower.
- While this can leave creditors vulnerable to borrower claims in such a challenge that the written record is incomplete and fails to reflect information the borrower supplied.
- Calculating Points and Fees (Chapter 2)
- While the rule and commentary are clear on the treatment of private mortgage insurance, the term “prorated” is never defined in the rule itself. This leaves the term up for definition by contracts or state law. However, the CFPB did develop a calculation to define “prorate” –only offered orally in a CFPB staff webinar.
- The CFPB Deskbook includes transcripts of this webinar and explains the calculation.
- BuckleySandler also has published a Special Alert on the CFPB’s October 2014 rule amendments, which provide a points-and-fees cure mechanism. An update to the CFPB Deskbook describing those amendments also is coming soon.
- Loan Originator Compensation Rules (Chapter 4)
- Naimon described the proxy rules applicable to the ban on term-based loan originator compensation as “a quagmire.” The CFPB Deskbook offers clarification on issues related to proxy such as geography, loan origination channels and borrower income levels.
- Point Banks (Chapter 4)
- Since the loan originator compensation rule was released, organizations have sought clarification as to what a point bank actually is and if are they allowed. The CFPB offered clarification on these questions in preamble language, which is captured in the CFPB
- TILA-RESPA Integrated Disclosures (TRID) Rule (Chapter 10)
- While this rule is not yet in place, the CFPB Deskbook includes a summary of the rule, as well as discussions of issues raised most often by our clients regarding the rule.
- BuckleySandler has also developed a TRID Resource Center.
- ATR / QM Rule -- Incomplete Loan File (Chapter 1)
Special Alert: Federal Court Vacates HUD's Disparate Impact Rule
Today, the United States District Court for the District of Columbia vacated HUD’s Disparate Impact Rule under the Fair Housing Act (FHA). The court, in American Insurance Association v. United States Department of Housing and Urban Development, held that “the FHA prohibits disparate treatment only,” and therefore HUD, in promulgating the Disparate Impact Rule, “exceeded [its] authority under the [Administrative Procedures Act].” (emphasis in original).
In the Disparate Impact Rule, HUD provided that “[l]iability may be established under the Fair Housing Act based on a practice’s discriminatory effect . . . even if the practice was not motivated by a discriminatory intent.” 24 C.F.R. § 100.500. It then articulates a burden shifting framework for such claims. Id. § 100.500(c)(1)-(3).
In vacating HUD’s Disparate Impact Rule, the court reviewed the text of the FHA and concluded that “the FHA unambiguously prohibits only intentional discrimination.” (emphasis in original). The court explained that the FHA lacks the “effects-based language” that makes disparate impact claims cognizable under other anti-discrimination statutes. The court reasoned that this lack of effects-based language created “an insurmountable obstacle to [HUD’s] position regarding the plain meaning of the Fair Housing Act.” The court further reasoned that this textual reading is consistent with the FHA’s statutory scheme and, in the case of insurance products, required by the McCarran-Ferguson Act.
The court also explains that its decision to vacate the Disparate Impact Rule is required by the Supreme Court’s decision in Smith v. City of Jackson, in which the Supreme Court “made it clear that an inquiry into the availability of disparate-impact liability turns on the presence, or absence, of effects-based language.” In so reasoning, the court further noted that “none of the Circuit Courts that have recognized claims of disparate impact subsequent to the Supreme Court’s decision in Smith have either discussed Smith in any detail, or reconsidered their Circuit precedent in light of its holding.” (emphasis added). The court also noted that the Supreme Court has three times granted certiorari to address whether disparate impact claims are cognizable under the FHA, most recently in Texas Department of Housing.
This case comes in the wake of the holding of the United States District Court for the Northern District of Illinois that “HUD’s response to the insurance industry’s concerns [regarding the Disparate Impact Rule] was arbitrary and capricious” and remand to HUD “for further explanation.” Property Cas. Insurers Ass’n of Am. v. Donovan, No. 13 C 8564, at 46-47 (N.D. Ill. Sept. 3, 2014).
Even prior to HUD’s rule, the federal enforcement agencies took the position that both the FHA and the Equal Credit Opportunity Act (ECOA) permit disparate impact claims. Today’s decision does not expressly address ECOA. For a discussion of the cognizability of disparate impact claims under the FHA and ECOA, see here, here, and here.
CFPB Report Highlights Errors In Mortgage And Student Loan Servicing
On October 28, the CFPB released the fifth edition of its Supervisory Highlights report. The report highlighted the CFPB’s recent supervisory findings of regulatory violations and UDAAP violations relating to consumer reporting, debt collection, deposits, mortgage servicing and student loan servicing. The report also provided updated supervisory guidance regarding HMDA reporting relating to HMDA data resubmission standards. With respect to consumer reporting, the report identified a variety of violations of FCRA Section 611 regarding dispute resolution. The report noted findings of several FDCPA and UDAAP violations in connection with debt collection, including: (i) unlawful imposition of convenience fees; (ii) false threats of litigation; (iii) improper disclosures to third parties; and (iv) unfair practices with respect to debt sales. For deposits, the report identified several Regulation E violations found, including: (i) error resolution violations; (ii) liability for unauthorized transfers; and (iii) notice deficiencies. The report outlines four main compliance issues identified in the mortgage servicing industry: (i) new mortgage servicing rules regarding oversight of service providers; (ii) delays in finalizing permanent loan modifications; (iii) misleading borrowers about the status of permanent loan modifications; and (iv) inaccurate communications regarding short sales. Finally, the report outlines six practices at student loan servicers that could constitute UDAAP violations: (i) allocating the payments borrowers make to each loan, which results in minimum late fees on all loans and inevitable delinquent statuses; (ii) inflating the minimum payment due on periodic and online account statements; (iii) charging late fees when payments were received during the grace period; (iv) failing to give borrowers accurate information needed to deduct loan interest payments on tax filings; (v) providing false information regarding the “dischargeable” status of a loan in bankruptcy; and (vi) making debt collection calls to borrowers outside appropriate hours.