One week before the en banc D.C. Circuit is scheduled to hear oral argument regarding the constitutionality of the Consumer Financial Protection Bureau’s (CFPB) structure in CFPB v. PHH, the Ninth Circuit has taken up the issue as well. In an order issued May 17, 2017, the Ninth Circuit granted permission for interlocutory appeal to address the question of whether the CFPB’s structure is unconstitutional and, if it is, what the proper remedy is. Continue Reading CFPB Constitutionality Question Headed to 9th Circuit
Last week was busy for the financial technology industry (Fintechs) and non-bank regulators.
New York joined the Conference of State Bank Supervisors (CSBS) in filing a lawsuit against the Office of the Comptroller of the Currency (OCC), and announced plans to adopt a uniform licensing system for Fintechs. CSBS issued its support of the lawsuit, announced Vision 2020 for Fintechs, and invited industry to participate in developing the uniform licensing system (the Nationwide Multistate Licensing System, or NMLS) chosen by most state regulatory agencies as the universal platform for licensing and supervising the Fintech business sector.
Learn more about Vision 2020 and NMLS 2.0 in Mayer Brown’s Legal Update.
On May 15, the Supreme Court held that a debt collector does not violate the Fair Debt Collections Practices Act (FDCPA) by knowingly attempting to collect a debt in bankruptcy proceedings after the statute of limitations for collecting that debt has expired. As explained in Mayer Brown’s Decision Alerts, the FDCPA generally prohibits a debt collector from using false, deceptive, or misleading representations or means in collecting debts. In the opinion for the Court, Justice Breyer looked to state law to determine whether the creditor had a right to payment. Under Alabama law, a creditor has the right to payment of a debt even after the limitations period has expired. Accordingly, a creditor may legitimately claim the existence of a debt even if the debt is no longer enforceable in a collection action. Likewise, the streamlined rules of bankruptcy proceedings mean that it is not obviously “unfair” for a creditor to inject an additional claim into the proceedings, even if it would be unfair for a creditor to file a standalone civil action to collect a time-barred debt.
In addition, the Court also held that the Federal Arbitration Act (FAA) preempts any state law that discriminates against arbitration on its face, and any rule that disfavors contracts with features of an arbitration agreement. Mayer Brown, which represented the petitioner before the Court, explained the case in its Decision Alerts. The FAA requires courts to place arbitration provisions on an equal footing with other contract terms. However, the Kentucky Supreme Court had refused to enforce two arbitration provisions executed by individuals holding powers of attorney, because the power-of-attorney documents did not specifically mention arbitration or the ability to waive the principals’ right to trial by jury. The Supreme Court held that Kentucky’s rule violates the FAA by singling out arbitration agreements for disfavored treatment, explaining that “the waiver of the right to go to court and receive a jury trial” is a “primary characteristic of an arbitration agreement.” The Court explained that the FAA “cares not only about the ‘enforce[ment]’ of arbitration agreements, but also about their initial ‘valid[ity]’—that is, about what it takes to enter into them.” The Court also pointed out that a contrary interpretation would make it “trivially easy” for courts hostile to arbitration to undermine the FAA—“indeed, to wholly defeat it.”
For more docket reports and decision alerts, go to Mayer Brown’s appellate.net.
After leaving residential mortgage lenders guessing for many years, the California Department of Business Oversight (“DBO”) finally provided the industry with some guidance on the documentation licensees may use to verify compliance with the state’s per diem statutes.
The California per diem statutes (Financial Code § 50204(o) and Civil Code § 2948.5) prohibit a lender from requiring a borrower to pay interest for more than one day prior to the disbursement of loan proceeds, subject to some limited exceptions.
In 2007, the DBO issued Release No. 58-FS (the “2007 Release”), which provided guidance on acceptable evidence of compliance with Financial Code § 50204(o):
- A final, certified HUD-1 that reflects the disbursement date;
- Written or electronic records of communications between the licensee and the settlement agent verifying the disbursement date of loan proceeds and identifying the name of the settlement agent providing the information and the electronic or business address used to contact the settlement agent; or
- Contemporaneous written or electronic records of oral communications between the licensee and the settlement agent verifying the disbursement date of loan proceeds and identifying the name and telephone number of the settlement agent providing the information.
Of course, much has changed since 2007, including the enactment and implementation of TRID, which replaced the HUD-1 with the Closing Disclosure. Continue Reading Carpe Per Diem Redux — California Clarifies How to Document Compliance
Once again, the Consumer Financial Protection Bureau (“CFPB”) is providing compliance tips through its Supervisory Highlights for lenders making non-Qualified Mortgages (“non-QMs”). In its latest set of Highlights, the CFPB addresses how a lender must consider a borrower’s assets in underwriting those loans, and clarifies that a borrower’s down payment cannot be treated as an asset for that purpose, apparently even if that policy has been shown to be predictive of strong loan performance.
The Dodd-Frank Act and the CFPB’s Ability to Repay Rule generally require a lender making a closed-end residential mortgage loan to determine that the borrower will be able to repay the loan according to its terms. A lender may choose to follow the Rule’s safe harbor by making loans within the QM parameters. Alternatively, a lender may opt for more underwriting flexibility (and somewhat less compliance certainty). When making a non-QM, a lender must consider eight mandated underwriting factors and verify the borrower’s income or assets on which it relies using reasonably reliable third-party records. As one of those eight factors, the lender must base its determination on current or reasonably expected income from employment or other sources, assets other than the dwelling that secures the covered transaction, or both. Continue Reading CFPB Prohibits Considering Down Payments for Non-QMs
Several of Mayer Brown’s Consumer Financial Services partners will be featured at the upcoming Legal Issues and Regulatory Compliance Conference in Miami, sponsored by the Mortgage Bankers Association.
On Sunday, May 7, Kris Kully will participate in a Compliance Essentials panel, providing an Overview of Consumer Protection Compliance (the Dodd Frank Rules). Anyone new to the conference, or new to the industry, should make a point to attend that session. Also on Sunday, Melanie Brody will bring the attendees up to date on ECOA litigation, in the Litigation Forum (TILA, RESPA, ECOA, Fair Housing Act).
On Monday, May 8, Larry Platt will head to the dais for the panel on Expedited Processes, Day One Certainty, and More, discussing advancements in origination processes that may render representations and warrants unnecessary and eMortgages a reality. Later that afternoon, Krista Cooley will participate in a panel on Dealing with False Claims Act Matters, providing suggestions for avoiding liability under the statute.
On Tuesday, May 9, Phil Schulman will discuss the status of the PHH case, as well as the Prospect Consent Orders and their effects on marketing and advertising activities. Gus Avrakotos will participate in a panel discussing State Regulatory Developments.
Finally, you won’t want to miss Wednesday’s Conference Supersession, in which Kris Kully will return to address any remaining questions.
The NMLS Money Services Businesses (MSB) Call Report, described by the Conference of State Bank Supervisors (CSBS) as “a new tool within the Nationwide Multistate Licensing System (NMLS) that will streamline MSB reporting, improve compliance by the industry, and create the only comprehensive database of nationwide MSB transaction activity,” is now live in the NMLS, and the initial report is due May 15, 2017.
Since state regulators decided to transition the licensing of money services businesses on to the NMLS, they have been developing a more uniform report, which standardizes a number of definitions and the categorization of transactions, by which MSBs could report on their money service-related activities through the NMLS. Further, with the development and use of a more standardized MSB report, the need for MSBs to have additional tracking and reporting systems that can slice and dice transactions into each state’s unique buckets is reduced or eliminated.
Consequently, the new MSB Call Report was adopted by CSBS and released in NMLS on April 1, 2017. As a former Assistant Commissioner with the State of Maryland, I served on both the MSB Call Report Working Group and the NMLS Policy Committee (NMLSPC). The NMLSPC was responsible for recommending the approval of the Report, which was envisioned to operate along the lines of the Mortgage Call Report required of mortgage finance licenses, to CSBS. Continue Reading Money Services Businesses Call Report Q1 Submission Deadline Quickly Approaching
Dealing the Consumer Financial Protection Bureau (CFPB) another setback, on April 21, 2017, the DC Circuit Court of Appeals refused to enforce a Civil Investigative Demand (CID) issued by the CFPB. The decision is likely to have broad implications for how the CFPB identifies the nature and scope of its investigations in its CIDs, which to date have provided investigation subjects with little information about the nature of the CFPB’s concerns. More precisely defined investigations could provide significant benefits to CID recipients, as well as establish a basis to challenge the requests set forth in CIDs. To learn more about the ruling and its implications, read our Legal Update.
On the theory that Fannie Mae and Freddie Mac cannot remain in conservatorship forever, on April 20, 2017, the Mortgage Bankers Association (MBA) issued a proposal for reform of Fannie Mae and Freddie Mac, titled “GSE Reform: Creating a Sustainable, More Vibrant, Secondary Mortgage Market” (accessible at the MBA’s GSE Reform web page). While the ultimate fate of any GSE reform effort in the current political environment is uncertain, there is at least a consensus that the Congress and the Trump administration should undertake such an effort, and each has promised to do so. The MBA’s proposal is intended to provide a voice for the mortgage banking industry in that process.
The proposal includes a mixture of changes to the GSE system as it exists today, and maintenance of existing processes and structures the MBA believes work well. It proposes a replacement or conversion of the GSEs with “Guarantors,” which would guaranty mortgage backed securities (MBS). The Guarantors would be structured as “private utilities”, meaning that they would be privately owned, but established through a government charter for the primary or exclusive purpose of providing the MBS guaranty, and heavily regulated. Think of a privately owned electric company, that is granted the right to participate in the electricity market, on the condition that it complies with various regulatory requirements and oversight, including rate approvals. The proposal even quotes from a paper regarding investor-owned electrical utilities. The expectation, as stated in the proposal, is that the Guarantors would be “low-volatility companies that would pay steady dividends over time, not growth companies that aggressively seek to expand market share or generate above-market returns.” Guarantors’ MBS guaranty would then be supplemented with an explicit government guaranty of the MBS, which would only be used if a Guarantor failed, and would only be used to support the MBS, not the Guarantors and their private investors.
The following is an outline of key elements of the MBA’s proposal, divided into elements reflecting changes to the current system, and those reflecting continuation of the current system in a similar form. Continue Reading MBA Issues Proposal on GSE Reform
The California Department of Business Oversight* (“DBO”) appears to have backed off of its pronouncement late last year that lenders may not deliver per diem disclosures to all borrowers.
California’s infamous per diem statutes (Fin. Code § 50204(o); Civ. Code § 2948.5) have been the basis of scores of licensing agency examination findings and actions for many years now, resulting in significant refunds and penalties. In fact, just last week the DBO announced that a lender had agreed to pay a settlement of $1.4 million for per diem violations. That is just one of many such settlements that often run into the many hundreds of thousands of dollars or more. One reason for this is the lack of certainty in agency interpretation. Just one example of that uncertainty was addressed by the DBO at the California Mortgage Bankers Association’s (“CMBA’s”) Legal Issues and Regulatory Compliance Conference this past December. Continue Reading Carpe Per Diem Disclosure — California Department of Business Oversight Clarifies its Position