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Ten More States Adopt Uniform MLO Test
On July 1, the CSBS announced that ten additional state agencies will use the new National SAFE MLO test. Twenty state agencies adopted the test when it initially was introduced in April 2013. The uniform test combines both the national and state testing requirements of the SAFE Act, replaces the separate, state-specific tests for the states that adopt it, and streamlines the license application process for mortgage loan originators (MLOs) seeking licenses in multiple states. The CSBS reports that an additional five state agencies are scheduled to adopt the test by the start of 2014.
New York Federal Court Holds Courts Possess Power to Accept or Reject DPA
On July 1, in the U.S. District Court for the Eastern District of New York held that it has the power to accept or reject a deferred prosecution agreement (DPA), and to retain supervisory power over the implementation of a DPA. U.S. v. HSBC Bank USA, N.A., No. 12-00763, 2013 WL 3306161 (E.D.N.Y. Jul, 1, 2013). In 2012, a major international bank holding company announced agreements with U.S. law enforcement authorities and federal bank regulators to end investigations into alleged inadequate compliance with anti-money laundering and sanctions laws by the holding company and its U.S. subsidiaries. As part of the resolution, the companies entered into a DPA, which the parties filed with the court and asked the court hold the case in abeyance to exclude part of the DPA from the federal Speedy Trial Act. In reviewing the request for abeyance, the court held that it has broader supervisory power to approve or reject the agreement in its entirety and that such power extends to implementation of the agreement. The court approved the DPA, but retained authority to monitor its execution and implementation. The court explained that “by placing a criminal matter on the docket of a federal court, the parties have subjected their DPA to the legitimate exercise of that court's authority.” Under its supervisory powers holding, which the court characterized as “novel,” the court could later move to modify the agreement. More broadly, the court’s assessment of its supervisory power potentially calls into question the certainty and finality of DPAs, which could impact the use of that prosecutorial tool.
Special Alert: CFPB Finalizes Additional Amendments to ATR/QM Rule; Agencies Propose Appraisal Rule Amendments
On July 10, the Consumer Financial Protection Bureau ("Bureau") finalized important amendments (the "Amendments") to its ability-to-repay / qualified mortgage rule (the "QM / ATR Rule") that are intended to ease certain compliance challenges with making qualified mortgages ("QMs"). In response to industry concerns on the extensive underwriting requirements in Regulation Z's new Appendix Q, the Bureau acknowledged that certain of its provisions were "not well-suited to function as regulatory requirements" and, as a result, finalized major revisions to the methodology for determining a consumer's monthly debt and income for purposes of making a QM under the 43% debt-to-income ("DTI") underwriting alternative.
The Amendments, which had been proposed in April of this year (the "April Proposal"), also finalize clarifications to its mortgage servicing and escrows rules that were issued this January. Like the mortgage rules themselves, the Amendments will take effect on January 10, 2014.
Separately, on the same date, the Bureau, together with the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and Office of the Comptroller of the Currency (the "Agencies") issued proposed amendments to their January 2013 final rule governing appraisal practices.
Click here to read the special alert.
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030, jnaimon@buckleyfirm.com
- Clinton R. Rockwell, (310) 424-3901, crockwell@buckleyfirm.com
- John P. Kromer, (202) 349-8040, jkromer@buckleyfirm.com
- Joseph M. Kolar, (202) 349-8020, jkolar@buckleyfirm.com
- Jon Langlois (202) 349-8045, jlanglois@buckleyfirm.com
CFPB Puts Creditors, Third-Party Collectors on Notice Regarding Unfair, Deceptive, and Abusive Debt Collection Practices
On July 10, the CFPB issued new debt collection guidance that, among other things, seeks to hold CFPB-supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive (UDAAP) when collecting their own debts, in much the same way debt collectors are held accountable for violations of the FDCPA. Bulletin 2013-07 reviews the Dodd-Frank Act UDAAP standards, provides a non-exhaustive list of debt collection acts or practices that could constitute UDAAPs, and states that even though creditors generally are not considered debt collectors under the FDCPA, the CFPB intends to supervise their debt collection activities under its UDAAP authority.
Separately, in Bulletin 2013-08, the CFPB provided guidance to creditors, debt buyers, and third-party collectors about compliance with the FDCPA and sections 1031 and 1036 of Dodd-Frank when making representations about the impact that payments on debts in collection may have on credit reports and credit scores. The Bulletin states that potentially deceptive debt collection claims are a matter of “significant concern” to the CFPB and describes the CFPB’s planned supervisory activities and other actions the CFPB may take to ensure that the debt collection market “functions in a fair, transparent, and competitive manner.”
In addition, the CFPB announced that it will begin accepting consumer complaints related to debt collection, and published five “action letters” that consumers can use to correspond with debt collectors. The letters address the situations when the consumer: (i) needs more information on the debt; (ii) wants to dispute the debt and for the debt collector to prove responsibility or stop communication; (iii) wants to restrict how and when a debt collector can contact them; (iv) has hired a lawyer; (v) wants the debt collector to stop any and all contact.
Federal Reserve Approves Final Regulatory Capital Rules
On July 2, the Federal Reserve Board approved a final rule to implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The rule will require all banks to hold increased levels of higher quality capital. Specifically, the rule (i) increases the minimum common equity tier 1 capital requirement from 2% to 4.5% of risk-weighted assets; (ii) increases the minimum tier 1capital requirement from 4% to 6% of risk-weighted assets; and (iii) adds a new capital conservation buffer of 2.5% of risk-weighted assets. These minimum capital requirements remain unchanged from the agencies proposal issued last June. The rules also establish a minimum leverage ratio of 4% for all banking organizations.
The Federal Reserve Board received more than 2,600 comments on its proposed capital rules, most of which came from community banks. In response to concerns raised by smaller and community banking organizations, the Federal Reserve Board walked away from more onerous capital requirements that would have substantially increased the risk-weightings for residential mortgages. Instead, the final rule retains the risk-weights under current regulations for residential mortgage loans, provided they are not restructured or modified. Consistent with the proposal, residential mortgage exposures that are modified pursuant to the U.S. Treasury’s Home Affordable Mortgage Program (HAMP) will receive more favorable risk-weightings than other modified or restructured mortgage loans. In addition, the final rule would allow banking organizations that are not subject to the advanced approaches rule to make a one-time election to opt out of the requirement to include unrealized gains and losses in their regulatory capital. Moreover, the final rule permits banks with less than $15 billion in assets to grandfather certain existing trust preferred securities in their capital accounting. The final rule does not change the more stringent limits on the inclusion of mortgage servicing assets and deferred tax assets in regulatory capital calculations.
The final rule also extends the phase-in period for community banks. Internationally active banks must begin to implement the new capital rules in January 2014, while all other banking organizations will have until January 2015 to begin to phase in the new capital requirements.
Dealer Pleads Guilty to Criminal Violations of the SCRA
On June 27, the U.S. Attorney for the Northern District of Alabama announced that a used car dealer pleaded guilty to charges that he violated the Servicemembers Civil Relief Act (SCRA). United States v. Nuss, No. 13-102 (N.D. Ala. Plea entered Jun. 27, 2013). In March, a federal grand jury returned a two-count indictment charging the car dealer with failing to follow the SCRA when asked to do so by an Alabama National Guard member who had been called to active duty in Afghanistan. The guardsman allegedly had sent a letter from his deployed location, in which he asked that his interest rate be reduced to six percent as required by the SCRA. According to the indictment, the dealer refused to reduce the interest rate, and hired two individuals to repossess the guardsman’s vehicle without first obtaining a SCRA-required court order. Notably, the dealer entered his plea without a plea agreement with the government. He is scheduled for sentencing on September 12, 2013. The maximum penalty for each SCRA violation is one year in prison, and a $100,000 fine.
California AG Releases Data Breach Report, Proposes Data Security Policy Changes
On July 1, California Attorney General Kamala Harris (AG) released a report analyzing data breaches reported to her office in 2012, the first year companies were required to report to the AG any breach involving more than 500 state residents. The report identifies 131 data breach incidents that put the personal information of 2.5 million individuals at risk. The AG noted that the report is not required by the law, but provides support for the AG’s recommendations to companies, law enforcement agencies, and the legislature about how data security could be improved. Those policy recommendations focus on (i) data encryption, (ii) information security, (iii)notice letters, and (iv) the definition of personal information.
Specifically, the AG claimed that the information for 1.4 million Californians would have been protected if companies had encrypted data, and urges companies to encrypt digital personal information when moving or sending it out of their secure network. The AG pledged to prioritize enforcement investigations of breaches involving unencrypted personal information. The AG’s report notes that a large percentage of breaches surveyed resulted from the failure of information security controls and references requirements under state law to protect the personal information of California residents.
The AG also stated that companies should make their data breach notices to consumers easier to read, and that the state legislature should consider expanding breach notice requirements to cover breaches involving passwords. The AG highlighted a pending bill, SB 46, that would revise the notice requirement’s definition of personal information to require reporting of breaches involving information that would permit access to an online account - user name or email address, in combination with a password or security question and answer. That bill has already passed the state Senate and was approved by the Assembly’s Judiciary Committee. It is scheduled to be considered by the Assembly’s Appropriations Committee on July 3, 2013.
Spotlight on Student Lending (Part 2 of 2): Lessons Learned from CFPB Reports
In 2012 and 2013, the Consumer Financial Protection Bureau released several major reports and held field hearings focused on private student lending and servicing. In addition to recent CFPB activity, on June 25, 2013, the Senate Banking Committee held a hearing regarding private student loans at which, among other witnesses, the CFPB’s Student Loan Ombudsman Rohit Chopra testified.
The largest CFPB report, and the one most sweeping in scope, was the Bureau’s study of the private student loan market and characteristics of private student loans that was mandated by Dodd-Frank and issued in July 2012 (Private Student Loans Report). In addition, in October 2012, the Student Loan Ombudsman issued his Annual Report in which, among other things, he characterized the nature of the student loan complaints received through the CFPB’s student loan complaint portal up to that point (Annual Report of the Student Loan Ombudsman). Further, on May 8, 2013, the CFPB issued another report and held a field hearing focused on what it described as the “potential domino effect” of student loan debt on the broader economy and proposing several options to assist private student loan borrowers. Finally, testimony at the above-referenced Senate Banking Committee hearing focused largely on how to increase the low refinancing and modification activity in the private student loan (PSL) market.
Taken together the Bureau’s reports, field hearings, and Congressional testimony put student lenders and servicers on notice that the Bureau will be looking closely at servicing issues, including loan modification and debt collection practices, as well as fair lending and likely fair servicing issues going forward, i.e., consistency in loan modifications and work outs.
With respect to the Private Student Loans Report, the report made clear that, in the fair lending space, the Bureau intends to scrutinize the use of cohort default rate (a statistic calculated by the Department of Education and used to determine which schools will be eligible to participate in federal student aid programs) as an eligibility metric. Likewise, the report recommends that lenders obtain school certification of the student’s education costs to prevent over borrowing.
As for the Annual Report of the Student Loan Ombudsman, from the Bureau’s perspective, the report likely validates the agency’s growing concern over student loan servicing insofar as the three main areas of consumer complaints described in the report are all focused in that area: general servicing concerns, concerns about payment processing, and concerns about inability to obtain loan modifications. The report draws parallels between problems in student loan servicing and those in mortgage loan servicing. For example, the report describes consumer complaints focused on the misapplication of payments, untimely error resolution and consumer difficulty in contacting appropriate personnel (all areas that have been a focus in the mortgage servicing space). So evident were the similarities in the eyes of the CFPB that its student loan ombudsman, Rohit Chopra, urged the Treasury secretary, the CFPB and secretary of education to consider whether mortgage servicing program “fixes” can be applied in the student loan context.
To this end, the Bureau has been sharpening its focus on repayment options in the private student loan market, with signals pointing perhaps to possible new rules setting student loan servicing standards. However, in the meantime, the Bureau has taken some notable steps. First, on February 21, it issued a notice and request for information on policy options to “increase the availability of affordable payment plans for borrowers with existing private student loans. Over 30,000 comments have been received. In addition, on May 8, as mentioned earlier, the Bureau proposed several policy “solutions” to assist student loan borrowers, such as providing “refi relief” for borrowers who have made timely payments, providing a “road to recovery” for borrowers by allowing their loans to be restructured, and providing a “credit clean slate” for borrowers who satisfy the terms of a workout plan. Importantly, though, the Bureau conceded that there are still significant accounting and operational impediments to implementing these “solutions” that require further consideration.
In light of the Bureau’s reports, field hearings, and other public statements, we advise private student lenders focus now on tightening internal controls with respect to fair and responsible lending issues as well as servicing and debt collection practices as those will areas of primary focus by the Bureau in examinations and otherwise going forward.
Questions regarding the matters discussed above may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Andrew R. Louis, (202) 349-8061, alouis@buckleyfirm.com
- Jeffrey P. Naimon, (202) 349-8030, jnaimon@buckleyfirm.com
- Aaron C. Mahler, (202) 349-8024, amahler@buckleyfirm.com
- Sasha Leonhardt, (202) 349-7971, sleonhardt@buckleyfirm.com
CFPB Announces Debt Collection Field Hearing
On June 26, the CFPB announced that its next field hearing will focus on debt collection and will be held in Portland, Maine on July 10, 2013. The event, which is open to members of the public who RSVP, will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups and industry representatives. In the past, the CFPB has made policy announcements in connection with field hearings, and this time may announce, among other things, that it will begin accepting debt collection complaints through its public complaint database.
CFPB Finalizes Rule to Supervise Nonbanks That Pose Risks to Consumers
On June 26, the CFPB issued a final rule outlining new procedures for establishing supervisory authority over nonbanks that it has “reasonable cause” to believe pose “risks to consumers” with regard to consumer financial products or services. The rule outlines the procedures by which the CFPB will notify nonbanks that they are being considered for supervision and how they can respond to the CFPB’s notice. The CFPB’s determination regarding whether and when to issue a “Notice of Reasonable Cause” will be based on complaints collected by the Bureau or on information from other sources, including judicial opinions and administrative decisions. Once supervised, a nonbank is subject to the CFPB’s authority to require reports and conduct examinations, but can petition to end the supervision after two years and annually thereafter. The final rule takes effect 30 days after its publication in the Federal Register.