The Consumer Financial Protection Bureau (“CFPB”) announced a Request for Information (“RFI”) about alternative data on February 16, 2017, seeking insights into the benefits and risks of using unconventional financial data in assessing a consumer’s creditworthiness. On the same day, the CFPB held a hearing in Charleston, West Virginia, inviting consumer groups, industry representatives, and others to comment on the use of alternative data.

The CFPB estimates that 45 million Americans have difficulty getting a loan under traditional underwriting criteria, because they do not have a sufficient credit history. According to the CFPB, the use of alternative data may support those Americans’ creditworthiness and allow them better access to financing at more affordable rates. Alternative data includes sources such as timely payment of rent, utilities, or medical bills, as well as bank deposit records, and even internet searches or social media information—data that credit bureaus do not traditionally consider. However, a consumer who lacks a credit history but who makes timely rent and utility payments may be as likely to repay a loan as another consumer with a higher credit score. Continue Reading CFPB Calls for Comment on Alternative Data

Two-for-one is harder than it sounds. President Trump’s recently-issued executive order on reducing regulations, requiring the repeal of two regulations for each new one issued, provided agencies with precious little guidance. According to the Office of Management and Budget (OMB), the executive order applies only to “significant regulatory actions” of executive agencies (not independent agencies like the CFPB, SEC, FHFA, or the federal banking agencies). It requires an analysis of cost savings, but appears to exempt regulations “required by law.” A lawsuit has already been filed, claiming that the order is unconstitutional and contrary to the will of Congress. To learn more, applicable agencies are instructed to call OMB. However, you can learn more about the two-for-one executive order in Mayer Brown’s Legal Update.

Since the 2008 beginning of the Nationwide Multistate Licensing System (f/k/a the Nationwide Mortgage Licensing System) (the “NMLS”), the most unnecessary information licensees or license applicants must provide to establish or maintain an MU1 Account Record is the identification of each affiliate and subsidiary that provides financial services or settlement services. The applicant or licensee only needs to disclose the name and address, relationship to the applicant or licensee, and business line of each affiliate or subsidiary. Although that information is largely innocuous, it presents issues for applicants and licensees, particularly with respect to providing this information for their affiliates, because: (i) the NMLS provides no clear guidance as to which entities are affiliates, (ii) the information on affiliates is not readily known or available to entities under common ownership with scores of companies operating nationwide or on a multinational basis, (iii) the information must be kept up-to-date, and (iv) the licensee must make an attestation each time it makes a change in its MU1 Account Record that any information previously submitted remains accurate and complete. For many applicants and licensees, it is frustrating to identify, assemble, confirm the accuracy of, track, and report on affiliates when the information seems to serve no purpose to state regulators in deciding whether to approve or deny a license request or renewal.

As mentioned above, concerns and confusion have arisen in being required to identify affiliates for NMLS purposes if the identified entities are not regarded as affiliates under the most common and widely-accepted definition of affiliate. Some licensees may consider a 25%-or-more common ownership test, rather than a 10% test, to be the appropriate measure for purposes of disclosing affiliates, as this is the measure used under federal banking law and the banking laws of many states. As the information that the NMLS requests of the affiliates of applicants and licensees is not material to issuing or renewing a license, the NMLS should discontinue requiring the disclosure.

We have long questioned the purpose for requiring this information on commonly-owned affiliates when presenting comments to the Conference of State Bank Supervisors (“CSBS”) and the Policy Committee of state regulators that administer the NMLS. With the 2017 NMLS User Conference set to take place in Austin, Texas in mid-February, and with CSBS and state regulators beginning to consider the development of a new NMLS 2.0, we thought it would be appropriate and informative to again raise our concerns during the Ombudsman session at the Conference and with those tasked with creating NMLS 2.0. Attached is the letter we presented to the NMLS.  We welcome any thoughts or comments you may have and can convey them to CSBS and state regulators, on a company-anonymous basis, if you would have us do so.

On January 31, 2017, the CFPB released its Prepaid Rule Small Entity Compliance Guide to facilitate comprehension of and the implementation of the new prepaid rule on October 1, 2017. As described in our prior Legal Update, the CFPB issued the final prepaid rule in October 2016 which amends Regulation E to cover prepaid accounts including payroll card accounts, government benefit accounts, and other types of prepaid products.  The Compliance Guide details requirements of the new rule and provides examples to help illustrate key aspects including what constitutes a prepaid account, the entities subject to the new rule, disclosure obligations, and error resolution procedures, among others.

Just one day after the CFPB’s release of the Guide, Senator David Perdue (R-GA) introduced a joint resolution of disapproval aimed at wiping the prepaid rule off the books pursuant to the Congressional Review Act.  Under the CRA, Congress may overturn new federal agency regulations by reviewing them within a certain time period, passing a joint resolution of disapproval in each chamber, and obtaining the president’s signature.  On February 3, Representative Tom Graves (R-GA) followed suit, introducing a similar joint resolution in the House of Representatives.  Stay tuned for updates on whether the prepaid rule’s future may truly be in jeopardy.

Following his campaign promise to dismantle the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), Donald Trump issued an Executive Order on February 3, 2017 that set out “Core Principles” for regulating the financial system.  Trump proclaimed that his administration would be “doing a big number on Dodd-Frank,” yet his recent Executive Order on Core Principles appears to be more of a tempered call for analysis and review rather than an outright demolition of existing financial regulations, especially when read in light of the administration’s more drastic requirement that Executive agencies must eliminate two existing regulations for each new one that it issues. Continue Reading Moving On: Core Principles for Dodd-Frank Reform Omit Mention of Financial Crisis

With all eyes on Washington, DC, and the press abuzz with each movement and action of the newly sworn-in President Trump, Maryland quietly published in the January 20, 2017 issue of the Maryland Register a highly-anticipated request for comment and proposed revisions to its regulations governing a wide range of mortgage finance licensing and practice requirements. Specifically, Maryland seeks to amend the Mortgage Lender, Mortgage Loan Originator (“MLO”), Recordation of Security Instruments for Residential Real Property and Foreclosure Procedures for Residential Real Property regulations. Despite the quiet publication of the proposed regulations, this proposal is actually many months in the making. Over the past two years, Maryland has been communicating both internally and with industry stakeholders to bring much-needed revisions to the regulations. As such, the published proposal addresses the following changes:

  • Addition and clarification of certain definitions, including “initial application,” “mortgage servicing right,” and “transfer of servicing rights”
  • Addition of requirements related to mortgage servicing transfers, which directly affects certain persons who hold mortgage servicing rights
  • Addition of provisions related to electronic records, provision of records to the Commissioner, and loss of records
  • Establishment of data protection standards
  • Allowances to substitute compliance with certain federal laws and regulations for compliance with certain Maryland laws and regulations
  • Specification of the process for obtaining approval of a trade name
  • Alignment of the record-keeping requirements with the statutorily-mandated examination cycle
  • Clarification of the Commissioner’s requirements related to the delivery and receipt of mortgage disclosures
  • Clarification of the Commissioner’s requirements related to the supervision of MLOs
  • Clarification of  the requirement to make certain reports to the Commissioner
  • Clarification of the MLO license application approval and denial process
  • Clarification of the MLO prelicening and continuing education requirements
  • Permission for MLOs to conduct mortgage lending business at certain limited locations that are different from the location appearing on the employer’s license(s)
  • Permission to conduct loan origination activities under an expired license in a certain limited situation
  • Permission for secured party to include the NMLS unique identifier on a security instrument and a notice of intent to foreclose

The Commissioner has not scheduled a public hearing on the proposed regulations, but will accept comments through March 6, 2017.  Interested persons may send comments to Jedd Bellman, Assistant Commissioner, Office of the Commissioner of Financial Regulation, 500 N Calvert Street, Room 402, Baltimore, Maryland 21202; or call 410-230-6390, email jedd.bellman@maryland.gov, or fax 410-333-0475.

We will be reviewing these proposals in greater detail, so should you need assistance submitting comments or have any questions about the Maryland proposals or licensing questions generally, please let us know, as we can help.

On January 20, the Ninth Circuit handed the Consumer Financial Protection Bureau (CFPB) a victory in one of the first cases challenging the CFPB’s investigative authority — although that victory seems tied to the particular facts of the case.

The court held that the CFPB has the authority to investigate the activities of for-profit, small-dollar lenders created by three Indian tribes (the Tribal Lending Entities). Given the unique facts of the case, however, the decision may provide scant guidance for the other pending cases challenging the CFPB’s authority to issue administrative subpoenas known as Civil Investigative Demands (CIDs).

The case before the Ninth Circuit involved CIDs issued to the Tribal Lending Entities as part of an investigation into whether small-dollar online lenders were violating federal consumer financial laws. Unlike the other pending challenges to the CFPB’s investigative authority, the Tribal Lending Entities did not claim that the nature of their activities (lending money) was outside the scope of the CFPB’s authority. Instead, they argued that the CFPB’s investigative powers – which are limited to sending CIDs to “persons” – did not authorize the agency to send such demands to tribal entities. The Ninth Circuit disagreed. Continue Reading Ninth Circuit Affirms CFPB Authority to Investigate Tribal Lenders

Financial services companies that hoped for immediate regulatory relief when the Trump Administration assumed control may have to wait a bit longer, because the newly announced freeze on federal regulations does not appear to apply across the board.  “Independent regulatory agencies,” such as the Consumer Financial Protection Bureau (“CFPB”), the Federal Reserve Board, the Office of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), and the Securities and Exchange Commission (“SEC”) may be excluded from that moratorium. Continue Reading How Solid is the “Freeze”? Some Agencies May Be Excluded from White House Regulatory Moratorium

As we reported on January 11th, the December 22nd Memorandum issued by the Kentucky Department of Financial Institutions provides that the state’s Mortgage Licensing and Regulation Act requires licensing of entities holding residential mortgage loan servicing rights.  Based on the Memorandum, a license would be needed by March 1, 2017.

As a licensing obligation exists under that Act for an entity that makes, brokers, purchases, sells, or actually services residential mortgage loans, many companies operating in the state are already licensed under the Act, or rely on an exemption from licensing. However, the Memorandum raised some questions regarding the application of this licensing obligation (i) to entities that have held the servicing rights to Kentucky residential mortgage loan without being licensed, or (ii) to certain institutions exempt from the Act’s license obligations without needing to make a filing with the Department.

On January 19th, in response to our email requests for guidance, Department officials sent us a link to an “FAQ” posted on the Department’s website. The FAQ confirmed our view that the exemption for entities under section 286.8-020(1)(a)-(h) of the Act is “self-executing,” but provided that exempt entities should be prepared to provide proof of a claimed exemption.  Section 286.8-020(1)(a) of the Act provides an exemption from licensing for certain banks, bank holding companies, insurance companies, and REITs under certain conditions. That exemption also applies to the wholly-owned subsidiaries of such entities under certain conditions. Based on the FAQ’s clarification, those institutions, among others, will not need to make an up-front filing with the Department in order to be exempt.

In reply to the second question we posed, the FAQ provides that “[a]s long as an application for licensure is filed with the Kentucky Department of Financial Institutions by March 1, 2017, the Department will not seek penalties for servicing Kentucky mortgage loans prior to March 1, 2017, without a license unless consumer harm is identified” (emphasis in original).

Should you have any questions about the Act’s licensing obligations or exemptions, please let us know.

The Federal National Mortgage Association (Fannie Mae) operates under a corporate charter, which authorizes Fannie Mae “to sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal.” 12 U.S.C. § 1723a(a). On January 18, the U.S. Supreme Court held that this “sue-and-be-sued” clause does not independently grant federal courts subject-matter jurisdiction over all cases involving Fannie Mae.  Instead, the Court (in Lightfoot v. Cendant Mortgage Corporation) held that the clause merely permits Fannie Mae to participate in a suit in any state or federal court that is already endowed with subject-matter jurisdiction over the suit.

The case arose when a mortgage borrower sued Fannie Mae in state court alleging deficiencies in the refinancing, foreclosure, and sale of her home.  Fannie Mae removed the case to federal court, citing the sue-and-be-sued clause as the basis for federal jurisdiction.  The district court denied a motion to remand the case back to state court, and the U.S. Court of Appeals for the Ninth Circuit affirmed that decision.  The Supreme Court agreed to hear the case to resolve a split between the circuits.

On appeal, Justice Sotomayor, writing for a unanimous Supreme Court, explained that the Court had previously addressed the jurisdictional reach of sue-and-be-sued clauses in five other federal charters.  In those cases, the Court had stated that a clause gives rise to federal court jurisdiction if, but only if, it specifically mentions the federal courts.  Fannie Mae’s sue-and-be-sued clause specifically mentions federal courts, but also includes the phrase “any court of competent jurisdiction.”  The Court found that this qualification limited the jurisdictional reach of the clause to any court with an existing source of subject-matter jurisdiction.  Accordingly, the Court held that Fannie Mae’s sue-and-be-sued clause does not grant federal jurisdiction over any case involving Fannie Mae, but instead permits suit in any state or federal court that already has subject-matter jurisdiction.

Accordingly, under Lightfoot, Fannie Mae will no longer be able to remove a case to federal court citing only its charter’s sue-and-be-sued clause.  Instead, in order for a case involving Fannie Mae to be brought in federal court or removed to federal court, there must be an independent source of diversity or federal-question jurisdiction.