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FTC, CFPB discuss scope of Fair Credit Reporting Act during Senate Banking Committee hearing
On July 12, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “An Overview of the Credit Bureaus and the Fair Credit Reporting Act” to discuss the scope and enforcement of the Fair Credit Reporting Act (FCRA), the measures undertaken by the CFPB and the FTC to oversee credit bureau data security and accurate credit reporting, and other laws and regulations as they pertain to credit bureaus. Committee Chairman Mike Crapo, R-Idaho, opened the hearing by discussing the need to understand the “current state of data security, data accuracy, data breach policy” given consumers’ increased reliance on technology and recent cybersecurity incidents.
Associate Director for the Division of Privacy and Identity Protection at the FTC, Maneesha Mithal, discussed in prepared remarks the FTC’s role in implementing, enforcing, and interpreting the FCRA, as we all as the importance of educating consumers and businesses about FCRA requirements. According to Mithal, the FCRA continues to be a “top priority” for the FTC as the consumer reporting system evolves and new technologies emerge. Mithal discussed consumer reporting agency (CRA) FCRA compliance requirements concerning, among other things, dispute resolution processes, furnisher obligations, and credit reporting accuracy. Specifically, Mithal commented on the FTC’s more than 30 FCRA enforcement actions, in addition to the more than 60 law enforcement actions taken against companies for allegedly failing to implement reasonable data security practices. Mithal also touched upon the FTC’s business guidance and consumer education efforts concerning FCRA rights and obligations.
Assistant Director for Supervision Policy at the Bureau, Peggy Twohig, similarly discussed the Bureau’s authority over CRAs and furnishers with respect to the agency’s supervisory and enforcement authority, and noted, among other things, that while the agency possesses broad authority to promulgate rules as required to enforce the FCRA, it lacks rulemaking authority under certain sections of the FCRA related to red flags and the disposal of records, which fall under the FTC’s purview. Twohig further commented on the Bureau’s efforts to educate consumers on a variety of topics, including data breaches, credit freezes, and credit and identity monitoring.
Fannie Mae announces Enterprise-Paid Mortgage Insurance Pilot
On July 10, Fannie Mae announced the Enterprise-Paid Mortgage Insurance (EPMI) pilot program, which offers an alternative to the standard borrower-paid mortgage insurance and lender-paid mortgage insurance options offered by private mortgage insurance companies. The EPMI program will allow lenders to deliver Fannie Mae a loan with a greater than 80 percent loan-to-value without lender-acquired private mortgage insurance as long as the lender pays a loan-level price adjustment fee. The EPMI option would then cover the loan under a forward insurance arrangement, which is acquired by Fannie Mae. Fannie Mae would also be responsible for filing the insurance claims and performing monthly reporting.
The initial roll-out was offered to “a diverse, representative cross-section of large, medium, and small lenders” and is subject to a volume limit. Participating lenders may begin delivering EPMI loans to Fannie Mae on or after August 1.
NYDFS recommends online lenders be subject to state licensure and usury limits in new report
On July 11, the New York Department of Financial Services (NYDFS or the Department) released a study of online lending in New York, as required by AB 8938. (Previously covered by InfoBytes here.) In addition to reporting the results of its survey of institutions believed to be engaging in online lending activities in New York, NYDFS makes a series of recommendations that would expand the application of New York usury and other statutes and regulations to online loans made to New York residents, including loans made through partnerships between online lender and banks where, in the Department’s view, the online lender is the “true lender.”
In particular, NYDFS recommends, “[a]ll New York lenders should operate under the same set of rules and be subject to consistent enforcement of those rules to achieve a level playing field for all market participants….” Elsewhere in the report, the Department states that it “disagrees with [the] position” that online lenders are exempt from New York law if they partner with a federally-chartered or FDIC-insured bank that extends credit to New York residents. NYDFS criticizes these arrangements, stating its view that “the online lender is, in many cases, the true lender” because the online lender is “typically … the entity that is engaged in marketing, solicitation, and processing of applications, and dealing with the applicants” and may also purchase, resell, and/or service the loan.
NYDFS also noted that it opposed pending federal legislation that would reverse the Second Circuit’s decision in Madden v. Midland Funding, LLC, which held that federal preemption of New York’s usury laws ceased to apply when a loan was transferred from a national bank to a non-bank. The Department expressed concern that, if passed, the bill “could result in ‘rent-a-bank charter’ arrangements between banks and online lender that are designed to circumvent state licensing and usury laws.”
Noting that many online lenders remain unlicensed in New York, the Department states that “[d]irect supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery….” To this end, NYDFS recommended lowering the interest rate threshold for licensure from 16 percent to 7 percent.
Although NYDFS stressed that its survey results may be unreliable due to uneven response rates, it reported that, for respondents, the average median APR for online loans to businesses was 25.9%, the average median APR for online loans to individuals for personal use was 14.8%, and the average median APR for the underbanked customers was 19.6% (New York currently caps interest for civil liability at 16% and at 25% for criminal liability).
Overall, the report appears to forecast a more difficult regulatory and enforcement environment in New York for online lenders, as has been the case in West Virginia and Colorado.
Trump issues Executive Order removing ALJs from competitive service
On July 10, President Trump issued an Executive Order (EO) excepting Administrative Law Judges (ALJs) from the federal government’s competitive hiring service. The EO is in response to the recent Supreme Court decision in Lucia v. SEC, which held that ALJs are “inferior officers” subject to the Appointments Clause of the Constitution. (Previously covered by InfoBytes here.) The EO allows federal agencies to hire ALJs without going through the Office of Personnel Management (OPM) competitive selection process, which will give agencies the ability to select candidates who meet the agency’s specific needs— providing greater “flexibility and responsibility for ALJ appointments,” according to the White House announcement. The announcement emphasizes that the EO “reduces the legal uncertainty” over new ALJ appointments under the Appointments Clause in order to safeguard agencies’ enforcement of federal laws.
FDIC provides relief for storm-hit areas of Texas
On July 3, the FDIC issued Financial Institution Letter FIL-37-2018 to provide regulatory relief to financial institutions and facilitate recovery in areas of Texas affected by severe storms and flooding from June 19 through the present. The FDIC is encouraging institutions to consider, among other things, extending repayment terms and restructuring existing loans that may be affected by the natural disasters. Additionally, the FDIC notes that institutions may receive favorable Community Reinvestment Act (CRA) consideration for community development loans, investments, and services in support of disaster recovery.
SEC and broker-dealer settle charges for allegedly failing to report suspicious transactions
On July 9, the SEC announced it had reached a settlement with a broker-dealer for allegedly failing to file suspicious activity reports (SARs), as required by the Bank Secrecy Act. According to the SEC’s complaint, the broker-dealer allegedly “knew, suspected, or had reason to suspect” that at least 47 advisors previously terminated by the broker-dealer had engaged in suspicious transactions. However, the broker-dealer filed SARs related to only 10 of the advisors—3 of which were filed after the SEC brought an enforcement action against the advisors. Suspicious transactions by the advisors involved (i) engaging in suspicious transfers of funds; (ii) engaging in “cherry-picking” patterns; (iii) charging excessive advisory fees; (iv) improperly accessing customer accounts to make trades; and (v) using the broker-dealer’s custodial platform despite registration lapses. The SEC asserted that the broker-dealer’s failure to file SARs for suspicious transactions violated the Securities Exchange Act. While neither admitting nor denying the allegations, the broker-dealer has agreed to the entry of a permanent injunction and will pay a $2.8 million civil penalty.
Basel Committee updates global systemically important bank assessment methodology and framework
On July 5, the Basel Committee on Banking Supervision (BCBS), the primary global standard setter for the prudential regulation of banks, released an updated version of its Global systemically important banks: revised assessment methodology and the higher loss absorbency requirement. The BCBS conducted a review of the original framework—first published in 2011 and updated in 2013—and noted that, based on its review, member jurisdictions’ experience, and feedback received during a public consultation last year, “the framework is meeting its primary objective by requiring [global systemically important banks (G-SIBs)] to hold higher capital buffers and providing incentives for such firms to reduce their systemic importance.” BCBS further stated that the core elements of the framework will be maintained to enhance the stability of the regulatory environment following the finalization of the Basel III post-crisis reforms.
Among other enhancements, the framework provides the following updates:
- amends the definition of cross-jurisdictional indicators consistent with the definition of Bank for International Settlements consolidated statistics;
- introduces a trading volume indicator and modifies the weights in the substitutability category;
- extends the scope of consolidation to insurance subsidiaries;
- revises disclosure requirements;
- provides further guidance on bucket migration and associated higher loss absorbency surcharge when a G-SIB moves to a lower bucket; and
- adopts a transitional schedule for the implementation of these enhancements.
The framework is expected to be implemented in member jurisdictions by 2021.
CFPB Succession: Leandra English steps down, seeks to dismiss appeal; Mulvaney selects close advisor to be new deputy
On July 9, Leandra English filed a motion for voluntary dismissal with the U.S. Court of Appeals for the D.C. Circuit, effectively ending her eight-month legal battle over the appointment of Mick Mulvaney as acting director of the CFPB. The motion follows an announcement released via Twitter on July 6 that English will be stepping down from her position as deputy director of the Bureau “in light of the recent nomination of a new Director.” (As previously covered by InfoBytes, President Trump nominated Kathy Kraninger, currently serving as the associate director for general government at the Office of Management and Budget (OMB), to be the director of the Bureau for a five-year term.) In April, the D.C. Circuit heard oral arguments in English’s litigation. Unlike previous arguments, which focused on the president’s authority to appoint Mulvaney under the Federal Vacancies Reform Act (FVRA), the court spent considerable time discussing Mulvaney’s concurrent role as head of the OMB, and whether that dual role is inconsistent with the Bureau’s independent structure as established by the Dodd-Frank Act. A decision was pending at the time English submitted her dismissal of the case.
Following English’s resignation, Mulvaney announced the selection of Brian Johnson as the Bureau’s acting deputy director. Johnson was Mulvaney’s first advisor hire at the Bureau, and he currently serves as a principal policy director. Prior to joining the Bureau, Johnson was a senior counsel at the House Financial Services Committee.
New York Attorney General announces settlement with auto dealership over deceptive practices targeting non-English speakers
On July 5, the New York Attorney General announced a settlement with an auto dealership to resolve allegations that it engaged in deceptive practices targeted towards non-English speakers. The auto dealership allegedly misled consumers about the actual cost of their purchases and offered false refinancing promises. According to the announcement, the dealership allegedly (i) provided English documents to non-English speaking consumers containing loan terms and aftermarket items different from those discussed during the actual sale, including “supplemental service contracts, gap insurance policies, or special protections for tires, fabric, glass, or paint that added thousands of dollars to the auto sale or lease contracts”; and (ii) told consumers it would refinance their loans at a lower rate after receiving complaints of overcharges and unwanted aftermarket items. However, the Attorney General asserts that the dealership failed to honor the refinancing promises. Under the terms of the settlement, the dealership is required to reform its business practices, refrain from engaging in the alleged deceptive business practices, modify its employee training and complaint handling process, and produce sales and lending documents in languages for non-English speakers prior to the signing of any documentation in English. The dealership must also pay over $423,000 to cover restitution, penalties, fees, and costs to the state.
Florida Supreme Court: Lender may file second suit for deficiency claim provided foreclosure court has not adjudicated the claim
On July 5, the Florida Supreme Court held that Section 702.06, Florida Statutes (2014), allows a lender pursuing a deficiency claim in a foreclosure action in one court to bring a separate action against the homeowner in another court provided the foreclosure court that has reserved jurisdiction has not yet adjudicated the deficiency claim. Section 702.06 provides in part that, “In all suits for the foreclosure of mortgages . . . . [t]he complainant shall also have the right to sue at common law to recover for such deficiency, unless the court in the foreclosure action has granted or denied a claim for a deficiency judgment.” At issue was a residential property that was foreclosed by final judgment. In the judgment, the foreclosure court expressly reserved jurisdiction to rule on any future deficiency claim, although no one tried to adjudicate the claim in that forum. The mortgage loan purchaser filed a separate action against the homeowner in a different court and obtained a deficiency judgment. On appeal from that action, the First District Court of Appeal disagreed with several other Florida appellate courts and concluded that the trial court lacked subject-matter jurisdiction because the original foreclosure court had previously reserved jurisdiction. The high court unanimously disagreed, holding that a “reservation of jurisdiction is not a grant or denial of the claim. The foreclosure court would have only ‘granted or denied’ the deficiency judgment if it had adjudicated the claim. Therefore, [§ 702.06, Fla. Stat.] plainly precludes the separate action only where the foreclosure court has actually ruled on the claim—as held by the Second, Third, Fourth and Fifth District Courts of Appeal.” In issuing its ruling, the high court quashed the decision of the First District Court of Appeal and approved the certified conflict decisions of the four other appellate courts.