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Financial Services Law Insights and Observations

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  • CFPB Announces Advisory Board Members

    Consumer Finance

    On September 12, the CFPB announced the members of three new advisory panels: (i) the Consumer Advisory Board, (ii) the Community Bank Advisory Council, and (iii) the Credit Union Advisory Council. The Consumer Advisory Board is comprised of twenty-five experts from outside of government. Pursuant to the Dodd-Frank Act, it is required to meet at least twice each year and to provide the CFPB with advice "in the exercise of its functions under the Federal consumer financial laws" and "information on emerging practices in the consumer financial products or services industry, including regional trends." The first Consumer Advisory Board meetings will be held on September 27 and 28, 2012. The community bank and credit union councils will advise the CFPB with regard to the impact of its regulations on their respective groups. Additional information about these and other CFPB advisory boards and councils is available on the CFPB's website.

    CFPB

  • UK's FSA Publishes Consultation Paper on Regulatory Reform Implementation

    Federal Issues

    On September 12, in advance of expected legislation that will restructure the United Kingdom's financial services regulatory framework, the Financial Services Authority (FSA) published the first in a series of Consultation Papers meant to support implementation of the reforms. The Parliament is expected to finalize later this year the Financial Services Bill that will abolish the FSA, create the Financial Conduct Authority (FCA) to regulate financial service provider conduct in retail and wholesale markets, and shift safety and soundness regulation to the new Prudential Regulation Authority (PRA), among other changes. The first Consultation Paper outlines changes to split the existing FSA handbook into new rulebooks for the FCA and PRA. All regulated firms are encouraged to review the Consultation Paper, and the FSA has asked for comments to be submitted by December 12, 2012.

    Financial Services Authority UK Regulatory Reform Financial Conduct Authority

  • Fannie Mae, Freddie Mac Update Guidance on Participation in State Hardest Hit Fund Programs

    Lending

    On September 12, Fannie Mae issued Servicing Guide Lender Letter LL-2012-06, which requires servicers to accept funds provided on behalf of a borrower under a state housing finance agency Hardest Hit Fund (HHF) modification assistance program. This includes funds provided in connection with a loan "recast," or re-amortization. Servicers now are permitted to approve a loan recast for a current or delinquent portfolio loan or loan in an MBS pool. Such loan recasts will not be deemed modifications for purposes of determining eligibility for a subsequent modification. With respect to loan modifications involving a change of terms, such as an interest rate reduction or an extension of the term of the loan, servicers may only apply the modification funds in accordance with existing standard or HAMP modification requirements. These changes are effective immediately.

    On September 10, Freddie Mac issued Bulletin 2012-17, which, effective immediately, allows servicers to participate in state housing finance agency HHF modification assistance programs that permit a mortgage to be recast (after applying the state funds to pay arrearages and curtail principal). The bulletin also revises participation requirements for modification assistance programs. In addition, for foreclosure sales conducted on or after November 1, 2012, servicers will now have 450 days for allowable delays due to military indulgence under the Sevicemembers' Civil Relief Act or parallel state laws. Finally, the bulletin announces a technical Servicing Guide change to reflect an increase in the attorney fee limit for foreclosures in Oregon that was implemented earlier this year.

    Freddie Mac Fannie Mae Mortgage Servicing Servicing Guide

  • SEC Names New Deputy Director of Compliance Inspection and Examinations

    Securities

    On September 12, the SEC announced Andrew J. Bowden as the new Deputy Director of the Office of Compliance Inspections and Examinations (OCIE). Mr. Bowden has been with the SEC since November 2011 as the National Associate Director for OCIE's Investment Adviser/Investment Company Examination Program. Prior to joining the SEC, Mr. Bowden was a lawyer in private practice. He replaces Norm Champ who became the Director of the Division of Investment Management in July.

    SEC Enforcement

  • Second Circuit Holds Email Notice of Arbitration Agreement Insufficient

    Fintech

    On September 7, the U.S. Court of Appeals for the Second Circuit held that three plaintiff consumers were not bound to arbitrate certain claims related to their purchase of a discount club membership because email notice of the arbitration clause was insufficient. Schnabel v. Trilegiant Corp., No. 11-1311 WL 3871366 (2nd Cir. Sep. 7, 2012). On appeal of the district court's denial of its motion to compel arbitration, the membership club marketer argued that it provided the plaintiffs with notice of an arbitration provision (i) through a hyperlink appearing on the page the plaintiffs would have seen before enrolling in a service offered by the defendants and (ii) through an email sent to the plaintiffs after their enrollment. The Second Circuit disagreed and affirmed the district court's decision. According to the court, the email notice containing the arbitration clause "was both temporally and spatially decoupled from the plaintiffs' enrollment in and use of [the membership]; the term was delivered after initial enrollment and . . . members such as the plaintiffs would not be forced to confront the terms while enrolling in or using the service or maintaining their memberships." As such, "the email did not provide sufficient notice to the plaintiffs of the arbitration provision, and the plaintiffs therefore could not have assented to it solely as a result of their failure to cancel their enrollment in the defendants' service."  The court did not provide a substantive ruling on notice via a hyperlink, holding instead that the defendants forfeited their argument by failing to raise it in the district court.

    Arbitration

  • FHFA, Fannie Mae, and Freddie Mac Implement New Representation and Warranty Framework

    Lending

    On September 11, the FHFA announced that Fannie Mae and Freddie Mac (the GSEs) are implementing a new representation and warranty framework for all conventional loans sold or delivered to the GSEs on or after January 1, 2013. As detailed in subsequent announcements from the GSEs, including Fannie Mae Selling Guide Announcement SEL-2012-08, Fannie Mae Lender Letter LL-2012-05, Freddie Mac Bulletin 2012-18, and a Freddie Mac Industry Letter, the new framework is designed to improve the GSE loan review process and to clarify lenders' repurchase exposure. With regard to loan review, under the new framework, (i) GSE reviews will generally be conducted between 30 and 120 days after loan purchase, (ii) the GSEs will have consistent timelines for submission of loan file review requests, (iii) loan file evaluation will be more comprehensive and will leverage data from tools currently used by the GSEs, and (iv) the repurchase request appeals process will be made more transparent. For lenders, the new framework will provide relief from certain repurchase obligations for loans that meet specific payment requirements, including for loans with 36 consecutive months of timely payments and HARP loans with a twelve-month acceptable payment history. Lenders will receive additional detailed information about exclusions from this new representation and warranty relief.

    Freddie Mac Fannie Mae Mortgage Origination RMBS FHFA

  • Ohio Supreme Court Holds Website Notice of Sheriff's Sale Does Not Satisfy Due Process

    Fintech

    On September 6, the Supreme Court of Ohio held that notice of a sheriff's sale via the sheriff's website was insufficient to satisfy due process and reversed an appellate court decision that denied a foreclosing lender's motion to set aside the sheriff's sale. PHH Mortg. Corp. v. Prater, No. CA2010-12-095, WL 3848454 (Ohio Sept. 6, 2012). The lender obtained a motion for default judgment and permission to foreclose on a borrower. The sheriff's office tried multiple times to schedule a sale and each time withdrew the sale at the lender's request. The sheriff's office informed the lender in a letter that the sheriff's office no longer would send notices of scheduled sales via letter, and that the lender would need to check the sheriff's website for future notices. Notice subsequently was posted on the website and the property was sold. Both the trial court and intermediate appellate court denied the lender's request to set aside the sale. The lender argued that the sale was invalid because it had not received written notice. In a unanimous decision, the Ohio Supreme Court held that the notice directing the lender to check the sheriff's website was notice of a change in procedure and did not constitute actual notice of the sale. While the court acknowledged that Internet publication may conserve resources, it held that such notice is akin to newspaper notice and is insufficient to satisfy due process. The court agreed with a dissenting appellate court judge who identified e-mail notice as a closer substitute for mail notice, and explained that, in any event, such a change in notice requirements would have to be effectuated through a change to state or local law. The court reversed the appellate court's decision and set aside the sheriff's sale.

    Foreclosure Mortgage Servicing

  • State Law Update: California Amends Mortgage Licensing Statute

    Lending

    On September 7, California enacted Assembly Bill 2666, which updates and clarifies portions of the state's Residential Mortgage Lending Act and Finance Lenders Law to parallel federal implementation of the SAFE Act. The bill requires licensing of individuals who engage in the business of a mortgage loan originator, and sets forth exemptions for employees of nonprofit organizations and government employees. The bill also clarifies requirements for subsidiaries of depository institutions owned and controlled by federally regulated depository institutions, and addresses the validity of certain NMLS records.

    Mortgage Licensing

  • House Passes FHA Solvency Legislation

    Lending

    On September 11, the U.S. House of Representatives voted overwhelmingly to pass legislation that seeks to bolster and protect FHA capital reserves. The bill, H.R. 4264, would set a minimum 0.55% annual premium and would increase the maximum annual premium from 1.55% to 2.05% for all FHA-insured single-family mortgage loans. The bill also would authorize the Secretary of Housing and Urban Development to require lenders to indemnify the FHA for claims paid on loan, if the lender knew or should have known that the loan included serious or material violations of FHA requirements under the direct endorsement program, regardless of whether the violations caused the loss. In cases of fraud or misrepresentation in connection with the origination or underwriting of a loan on which the FHA suffers a loss, the Secretary would be required to seek indemnification from the lender. As a condition of obtaining FHA lending approval, lenders would be required to notify HUD if the lender terminates purchases of FHA mortgages or servicing rights from another FHA lender based on evidence of fraud or material misrepresentation. Finally, under the bill, lenders could have their approval to originate and underwrite FHA mortgages terminated if their delinquency rates are comparatively high.

    HUD FHA

  • State Law Update: Montana Adopts Mortgage Servicer Regulations

    Lending

    On September 6, the Montana Department of Administration published final rules governing mortgage servicers. In 2011, Montana enacted House Bill 90, which made numerous revisions to the Montana Mortgage Broker, Mortgage Lender, and Mortgage Loan Originator Licensing Act concerning the licensing and regulation of mortgage servicers. The bill also updated licensing and other requirements for brokers, lenders and originators. The new regulations implement these amendments, addressing mortgage servicer (i) quarterly reporting requirements, (ii) record keeping requirements and electronic record keeping rules, (iii) renewal application deadlines, and (iv) escrow fund requirements. The final rules also amend existing regulatory definitions and other provisions impacting all mortgage licensees. The adopted regulations largely track the proposed versions, with the exception of changes made in response to comments or to address technical issues.

    Mortgage Licensing Mortgage Origination Mortgage Servicing

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