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Texas Supreme Court Allows Capitalization Of Interest, Fees, Escrow Items For Home Equity Loan Modifications
On May 16, The Texas Supreme Court held that the state constitution does not prohibit the restructuring of a home equity loan as long as the original loan met constitutional requirements and terms of the original extension of credit are maintained. Sims v. Carrington, No. 13-638, 2014 WL 1998397 (Tex. May 16, 2014). The court’s holding came in response to a series of questions certified by the U.S. Court of Appeals for the Fifth Circuit, which asked whether (i) a modification agreement that capitalizes past due interest, fees, property taxes or insurance premiums into the principal, but does not satisfy or replace the original note, is a modification or refinance for purposes of the constitutional home equity lending provisions; (ii) the capitalization of past-due interest, fees, property taxes, or insurance premiums constitutes an impermissible “advance of additional funds” under regulations implementing the constitutional provisions; (iii) a modification must comply with constitutional requirements that a home equity loan have a maximum loan-to-value ratio of 80%; and (iv) repeated modifications convert a home equity loan into an open-end account that must comply with certain constitutional requirements related to home equity lines of credit. The Texas Supreme Court determined that the restructuring of a home equity loan that involves capitalization of past-due amounts owed under the terms of the initial loan and a lowering of the interest rate and the amount of installment payments, but does not involve the satisfaction or replacement of the original note, an advancement of new funds, or an increase in the obligations created by the original note, is not a new extension of credit, and is thus not required to comply with the constitutional requirements. The court further held that such a restructuring (i) is not an “advance of additional funds” if those amounts were related to the original loan; and (ii) is not subject to LTV limits because it is not a new extension of credit. Finally, the court held that repeated restructurings, as described, do not convert the loan into a line of credit subject to other restrictions, explaining that in the case of a line of credit repeat transactions are contemplated upfront, a situation that “does not remotely resemble” the modification at issue here.
FinCEN Advisory Addresses Risks Presented By Citizenship-by-Investment Program
On May 20, FinCEN issued Advisory FIN-2014-A004, warning financial institutions about the risk of illicit financial activity conducted by individuals with passports from St. Kitts and Nevis (SKN), which allows individuals to obtain passports through a citizenship-through-investment program. The program offers citizenship to any non-citizen who either invests in designated real estate with a value of at least $400,000, or contributes $250,000 to the SKN Sugar Industry Diversification Foundation. FinCEN believes that illicit actors are using the program to obtain SKN citizenship in order to mask their identity and geographic background for the purpose of evading U.S. or international sanctions or engaging in other financial crime. FinCEN advises financial institutions to conduct risk-based customer due diligence to mitigate the risk that a customer is disguising his or her identity for such an illicit purchase. FinCEN further reminds institutions of SAR filing obligations related to known or suspected illegal activity and potential OFAC obligations.
OCC Integrates Interagency Rules, Proposes Integrated Licensing Rules
On May 16, the OCC issued a final rule to integrate its interagency rules, which would combine, without any substantive amendments, rules related to consumer protection in insurance sales, BSA compliance, management interlocks, appraisals, disclosure and reporting of CRA-related agreements, and the FCRA. On May 21, the OCC issued a notice of proposed rulemaking to integrate the OCC’s licensing rules. The OCC states that for many of the licensing rules, the proposal incorporates the licensing provisions for federal savings associations into the existing national bank rule, but in other cases, the proposal includes separate rules for national banks and federal savings associations because the rules do not apply to both charters, are better organized as separate rules, or are difficult to integrate because of their differences and complexity. Some rules that would continue to apply only to national banks are revised to be consistent with the changes proposed for federal savings associations. The OCC also proposes substantive changes to certain licensing rules to “eliminate unnecessary requirements, promote fairness in supervision, and further the safe and sound operation of the institutions the OCC supervises.”
California DBO Announces New Online Portal For Certain Licensees
On May 19, the California Department of Business Oversight announced it will transition certain license application and maintenance functions to a new online system. Beginning June 18, 2014, companies and individuals seeking licensure under the California Finance Lenders Law, the California Deferred Deposit Transaction Law, and the Escrow Law will visit a new online self-service portal to (i) submit applications for licensure; (ii) view the status of their license application; (iii) submit Annual Report information; and (iv) update contact information. Later this year licensees will be able to pay application, renewal, and qualification fees using this portal.
Kansas Bill Phases Out Mortgage Registration Tax
On May 14, Kansas Governor Sam Brownback signed HB 2643, which gradually eliminates the state’s mortgage registration tax. Under current law, state-chartered banks must charge mortgage loan borrowers a registration tax. Over a five-year period, the bill will gradually replace mortgage registration tax revenue with other fees collected by county registers of deeds applicable from all mortgage lenders. In addition, beginning on January 1, 2015 the maximum fee for recording single family mortgages of $75,000 or less will be $125.
Nevada Federal District Court Stays Discovery Based On Lack Of Jurisdiction Over Foreign Website Operator
On May 15, the U.S. District Court for the District of Nevada granted a motion to stay discovery pending adjudication of the motion to dismiss on the grounds that it likely lacked personal and specific jurisdiction over the foreign operator of a passive website that conducted no act in Nevada other than the use of an allegedly infringing trademark, notwithstanding the website’s marketing claims of a significant U.S. presence. Best Odds Corp. v. iBus Media Ltd., No. 13-2008, slip op. (D. Nev. May 15, 2014). The court’s “peek” at the defendant’s pending motion to dismiss arguments led to the conclusion that it lacked personal jurisdiction over defendant despite plaintiff’s allegation, among others, that the defendant’s media kit stated that its website has a “significant U.S. presence” because that statement did not “approximate physical presence.” The court further concluded that it lacked specific jurisdiction, holding that the foreign operator’s site was passive and the operator did not purposefully direct its activities at the forum state or consummate a transaction within the forum state. The court rejected the plaintiff’s argument that the website was not passive because it allowed users to access third party travel websites to make reservations in the United States.
CFPB Report Highlights Nonbank Supervisory Findings
On May 22, the CFPB published its Spring 2014 Supervisory Highlights report, its fourth such report to date. In addition to reviewing recent guidance, rulemakings, and public enforcement actions, the report states that the CFPB’s nonpublic supervisory actions related to deposit products, consumer reporting, credit cards, and mortgage origination and servicing have yielded more than $70 million in remediation to over 775,000 consumers. The report also reiterates CFPB supervisory guidance with regard to oversight of third-party service providers and implementation of compliance management systems (CMS) to mitigate risk.
The report specifically highlights fair lending aspects of CMS, based on CFPB examiners’ observations that “financial institutions lack adequate policies and procedures for managing the fair lending risk that may arise when a lender makes exceptions to its established credit standards.” The CFPB acknowledges that credit exceptions are appropriate when based on a legitimate justification. In addition to reviewing fair lending aspects of CMS, the CFPB states lenders should also maintain adequate documentation and oversight to avoid increasing fair lending risk.
Nonbank Supervisory Findings
The majority of the report summarizes supervisory findings at nonbanks, particularly with regard to consumer reporting, debt collection, and short-term, small-dollar lending:
Consumer Reporting
Following its adoption of its larger participant rule for consumer reporting agencies (CRAs) in July 2012, CFPB examiners reviewed CRAs’ dispute handling processes and CMS, and found among other things that (i) some CRAs lacked a formal or adequate CMS, and/or their boards and senior managers exercised insufficient oversight of the CMS; (ii) some CRAs failed to establish sufficient FCRA compliance policies, including with regard to dispute-handling procedures, and (iii) some failed to adequately supervise vendors, including call center and ancillary product vendors. CFPB examiners also found that (i) at least one CRA did not monitor or track consumer complaints; (ii) at least one CRA failed to forward all relevant consumer dispute materials to the furnisher, as required by FCRA; and (iii) at least one refused to accept disputes from certain consumer submitted online or by phone.
Debt Collection
The CFPB finalized its debt collector larger participant rule in October 2012 and since that time its examiners have observed debt collectors engaged in the following allegedly illegal or unfair and deceptive practices: (i) intentionally misleading consumers about litigation; (ii) making excessive calls to consumers; and (iii) failing to investigate consumer credit report disputes.
Short-term, Small-dollar Lending
The Dodd-Frank Act grants the CFPB supervisory authority over payday lenders without having first to adopt a larger participant rule. The CFPB launched its payday lender supervision program in January 2012 and reports that its examiners have found, among other things, that in seeking to collect payday loan debt some lenders engaged in the following allegedly unfair or deceptive practices: (i) threatening to take legal actions they did not actually intend to pursue; (ii) threatening to impose additional fees or to debit borrowers’ accounts, regardless of contract terms; (iii) falsely claiming they were running non-existent promotions to induce borrowers to call back about their debt; and (iv) calling borrowers multiple times per day or visiting borrowers’ workplaces.
CFPB Extends Remittance Rule Amendments Comment Period
On May 14, the CFPB extended for 10 days the comment period on the latest proposed amendments to its international remittance rule. The comment period, originally set to expire on May 27, 2014, will close on June 6, 2014.
FHFA Director Outlines Strategic Plan
On May 13, FHFA Director Mel Watt presented a new strategic plan for the FHFA under his direction, which will focus on fulfilling the FHFA’s obligations under current law, and will shift away from efforts to position the agency—and Fannie Mae and Freddie Mac—for a potential future role in a reformed secondary market. Mr. Watt discussed the representation and warranty framework changes announced by Fannie Mae and Freddie Mac (see Byte below), and also announced that (i) for loans with DTI above 43%, the FHFA will continue to permit the use of compensating factors in each company’s underwriting standards; (ii) the FHFA will not alter loan limits, as proposed under prior leadership; (iii) the FHFA will not expand HARP but will “retarget” the program to capture already qualified borrowers; and (iv) the FHFA will launch a new modification pilot program. Mr. Watt’s remarks did not cover principal reduction or servicing rights transfers, but during a question and answer session he indicated both issues are on the FHFA’s agenda for further consideration. Further, Mr. Watt explained that under his leadership the FHFA will not seek to affirmatively reduce Fannie Mae’s and Freddie Mac’s footprint, though the FHFA will continue to work to increase the role of private capital, and soon will issue a request for comment on potential guarantee fee changes. The FHFA also will focus on private mortgage insurance counterparties, including by strengthening master policies and eligibility standards for private mortgage insurers. Finally, the FHFA will continue to build a common single-family securitization platform and transition Fannie Mae and Freddie Mac to a single common security, but the FHFA is taking steps to “de-risk” the securitization platform project, including by emphasizing that the agency’s top objective for the common platform is to ensure that it works for the benefit of Fannie Mae and Freddie Mac and their current securitization operations.
11th Circuit First To Define "Instrumentality" Under FCPA
On May 16, the U.S. Court of Appeals for the Eleventh Circuit became the first circuit court to define “instrumentality” under the FCPA. U.S. v. Esquenazi, No. 11-15331 (11th Cir. May 16, 2014). The FCPA generally prohibits bribes to a “foreign official” defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” Two individuals appealed their convictions and sentences imposed for FCPA and related violations, arguing that the telecommunications company whose employees they were alleged to have bribed in exchange for relief from debt owed to that company was not, as the government asserted and a jury found, an “instrumentality” of a foreign government. As the court explained, “instrumentality” is not defined in the FCPA, and no circuit court has yet offered a definition. The court held that, based on the statutory context of the term following amendment of the FCPA in 1998 to implement the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, an instrumentality is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own." The court explained that to determine control, triers of fact should consider (i) the foreign government’s formal designation of the entity; (ii) whether the government has a majority interest in the entity; (iii) the government’s ability to hire and fire the entity’s principals; (iv) the extent to which the entity’s profits, if any, go directly into the governmental fisc, and the extent to which the government funds the entity if it fails to break even; and (v) the length of time those indicia have existed. The court added that the factors to consider in determining whether an entity performs a function of the government include: (i) whether the entity has a monopoly over the function it exists to carry out; (ii) whether the government subsidizes the costs associated with the entity providing services; (iii) whether the entity provides services to the public at large in the foreign country; and (iv) whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function. In this case, the court determined that the telecommunications company at issue was an instrumentality under the FCPA, and after applying that decision to the convicted individuals’ specific challenges, affirmed their convictions and sentences.