We recently discussed the efforts of the Alternative Reference Rates Committee (ARRC) to prepare for the upcoming discontinuance of LIBOR as an index rate for residential mortgage and consumer loans. Our alert examined ARRC’s recommendations regarding an appropriate substitute rate (the Secured Overnight Financing Rate, or SOFR) and ARRC’s recommended changes to implement SOFR.  We also noted that Fannie Mae and Freddie Mac (the GSEs) were expected to issue guidance that SOFR was an appropriate substitute for LIBOR and provide transition steps.

On February 5, 2020, Fannie Mae issued Lender Letter LL-2020-01, and Freddie Mac issued Bulletin 2020-1, both of which included the following announcements and key dates:

  • All Fannie Mae/Freddie Mac uniform notes and riders have been updated to include the ARRC recommended fallback language, applicable in the event LIBOR is no longer available or appropriate as a rate for residential adjustable-rate mortgage loans (ARMs). The updated forms are available for use now, but must be used for ARMs with note dates on or after June 1, 2020.
  • To be eligible for delivery to a GSE, LIBOR ARMs must have application dates on or before September 30, 2020.
  • LIBOR ARMs must be in mortgage-backed securities (MBS) pools with issue dates on or before December 1, 2020, or purchased as whole loans on or before December 31, 2020. All LIBOR ARM plans will be retired by the end of the year.
  • The GSEs anticipate that they will be able to accept whole loan and MBS delivery of SOFR ARMs during the second half of 2020. Additional details regarding SOFR ARM plans will be detailed in the coming months.
  • Beginning on a yet-to-be-determined date in 2021, the GSEs will retire all constant maturity Treasury securities (CMT) plans, and will no longer acquire CMT-indexed ARM loans. The GSEs caution against increased use of CMT-indexed ARMs as lenders wind down their use of LIBOR ARMs.

The GSEs’ issuances do not address the replacement of LIBOR on existing ARM loans, although we expect them to provide guidance on that later this year.

A new Memorandum of Understanding (MOU) between the Consumer Financial Protection Bureau (CFPB) and the US Department of Education (ED) appears to signal an end to the turf war between these two agencies regarding the handling of complaints related to federal student loans. It also ends a period during which the CFPB and ED failed to maintain an MOU, as required by the Dodd-Frank Act. Continue Reading Back to School: CFPB and ED Agree to New MOU

On February 6, 2019, Mayer Brown’s Kris Kully will participate on a panel to discuss lingering questions about mortgage loan originator compensation, at HousingWire’s engage.talent event in Dallas. The event features experts sharing tools for attracting and retaining top-tier mortgage executives, branch managers, loan officers, and underwriters.

Please join Lauren Pryor on Wednesday February 5, 2020 at the IMB 2020 conference to discuss trends in mortgage M&A deals, including structural options, pricing considerations and risk analysis. https://www.mba.org/conferences-and-education/event-mini-sites/independent-mortgage-bankers-conference/schedule?id=12754_690697&expand=true

On Friday, January 24, the Consumer Financial Protection Bureau (“Bureau” or “CFPB”) published a Policy Statement clarifying how it intends to exercise its authority to prevent abusive acts or practices under the Dodd-Frank Act. According to CFPB Director Kathy Kraninger, the purpose of the Policy Statement is to promote clarity, which in turn should encourage both compliance with the law and the development of beneficial financial products for consumers.  The Policy Statement describes how the Bureau will use and develop the abusiveness standard in its supervision and enforcement work, pursuant to a three-part, forward-looking framework. Under the framework, the Bureau will: (1) generally rely on the abusiveness standard to address conduct only where the harm to consumers outweighs the benefit, (2) avoid making abusiveness claims where the claims rely on the same facts that the Bureau alleges are unfair or deceptive, and (3) not seek certain types of monetary relief against a covered person who made a good-faith effort to comply with a reasonable interpretation of the abusiveness standard. The Policy Statement suggests that the Bureau will use its abusiveness authority even less frequently than it has in the past. While that may be welcome news to regulated parties, it is also likely to mean slower development of meaningful guideposts as to what constitutes abusive conduct. Continue Reading CFPB Announces Policy Regarding Prohibition on Abusive Acts or Practices

The Federal Housing Finance Agency is continuing to consider how Fannie Mae, Freddie Mac, and the Federal Home Loan Banks should address Property Assessed Clean Energy (“PACE”) programs. PACE programs are established by state and local governments to allow homeowners to finance energy-efficient projects through special property tax assessments. The obligation to repay results, in many jurisdictions, in a tax lien that takes priority over existing and future liens on the property.

In 2010, the FHFA directed Fannie Mae and Freddie Mac not to purchase or refinance mortgages with PACE liens and urged caution by the Federal Home Loan Banks in accepting collateral for advances that may have PACE liens attached. In its recent Request for Input (“RFI”), the FHFA seeks feedback on honing those PACE policies, including whether it should impose ceilings on loan-to-value ratios or higher Loan Level Price Adjustments in connection with all loans Fannie Mae or Freddie Mac purchase in jurisdictions with PACE programs.

Comments on the RFI are due by March 16, 2020.

Read more in Mayer Brown’s Legal Update.

A United States Magistrate Judge for the United States District Court, Western District of New York, today issued his report and recommendation on the defendants’ motion to dismiss in Petersen et al. v. Chase Card Funding, LLC et al., No. 1:19-cv-00741 (W.D.N.Y. June 6, 2019). The Magistrate Judge recommended dismissal of both the plaintiff’s usury and unjust enrichment claims on preemption grounds, stating that “the preemption analysis boils down to this: does the application of New York’s usury statutes to these defendants ‘prevent’ or ‘significantly interfere’ with Chase USA’s power to sell or assign the receivables generated by its credit card accounts?” The Magistrate Judge answered this question in the affirmative, reasoning that “since applying New York’s usury statutes to defendants would prevent Chase USA’s ability to sell or assign the receivables from its credit card accounts, they are preempted.”

The Magistrate Judge relied on Supreme Court and Second Circuit precedent as to what constitutes a “sale” and an “assignment” citing case law holding that “[i]t is essential that . . . the seller’s right of property must pass to the purchaser” MacDonald v. Commissioner of Internal Revenue, 76 F.2d 513, 514 (2d Cir. 1935) (emphasis added by Magistrate Judge). The Magistrate Judge concluded that “[i]f Chase USA can receive interest exceeding state usury limits but defendants cannot, then Chase USA’s right of property in the receivables has not passed to them, and there has been no sale.” The Magistrate Judge similarly analyzed Chase USA’s right to assign the receivables.

The lawsuit had been filed against Chase Card Funding LLC and Chase Issuance Trust, special purpose entities in the JPMorgan Chase Bank sponsored credit card securitization program, and Wilmington Trust Company, as trustee of Chase Issuance Trust. The putative class action was brought by several New York residents with credit card accounts originated by JPMorgan Chase Bank (which is not named as a defendant), who allege that JPMorgan Chase Bank securitized their credit card receivables in Chase Issuance Trust. The complaint contends that the defendants are required to comply with New York state’s usury law under the United States Court of Appeals for the Second Circuit decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (June 27, 2016) because they are non-bank entities that are not entitled to the benefits of federal preemption.¹

The plaintiffs will have until February 5, 2020 to file any objections to the Magistrate Judge’s report and recommendation (unless otherwise ordered by the district judge).

¹ As reported in the Chase Issuance Trust, Form 10-D, filed July 16, 2019.

According to the Mortgage Bankers Association, the Consumer Financial Protection Bureau intends to revise its Qualified Mortgage definition by moving away from a debt-to-income ratio threshold, and instead adopting a different test, such as one based on the loan’s pricing. The CFPB also apparently indicated it may extend, for a short time, the temporary QM status for loans eligible for purchase by Fannie Mae or Freddie Mac (the “Patch”).

The MBA reports that CFPB Director Kathy Kraninger informed Congress of the agency’s plans for its highly-anticipated QM rulemaking, expected this spring (by late May, but perhaps earlier). In July of last year, the CFPB issued an advance notice of proposed rulemaking to begin addressing the Patch expiration (scheduled for January 2021). For the past five years, the Patch has resulted in a significant presence by the government-controlled enterprises in connection with higher-DTI loans (i.e., those over 43%). The CFPB has insisted it would allow for a “smooth and orderly transition” to the Patch expiration, to give the industry time to respond. According to the recent report, the CFPB will in fact seek to extend the Patch for “a short period.”

The CFPB indicated that a brief Patch extension also is warranted because of other changes the agency intends to make to the general QM definition. Most agree that the general QM, and its reliance on a DTI threshold and the tight income standards in Appendix Q, has unduly restricted affordable credit to worthy borrowers. The CFPB apparently told Congress it intends to move away from its DTI threshold, which could also mean the demise of Appendix Q.

The CFPB may instead adopt a pricing threshold to distinguish QMs from non-QMs going forward. The CFPB otherwise distinguishes loans with an annual percentage rate that exceeds the average prime offer rate by 150 basis points. The CFPB could decide to use that threshold to define QMs in the future.

CFPB also may be considering a common-sense, results-oriented approach – by providing that loans that do, in fact, experience timely payments would be deemed to comply with the ability-to-repay requirement.

While we cannot be certain about the CFPB’s next move until the agency finalizes a rule, the changes described above would afford QM protection to higher-DTI/lower-cost loans that lack certain product features, likely opening those loans to the private capital markets. By changing the QM marketplace, the changes also would, of course, affect the size and nature of the non-QM market. As we previously noted, those changes also could affect the types of loans exempt from credit risk retention in securitizations (QRMs).

The agencies responsible for the securitization credit risk retention regulations and qualified residential mortgages (“QRMs”) are asking for public input as part of their periodic review of those requirements. Comments on the review are due by February 3, 2020.

Five years ago, in response to the Dodd-Frank Act, an interagency final rule provided that a securitizer of asset-backed securities (“ABS”) must retain not less than five percent of the credit risk of the assets collateralizing the securities. Sponsors of securitizations that issue ABS interests must retain either an eligible horizontal residual interest, vertical interest, or a combination of both. The Act and the rule establish several exemptions from that requirement, including for ABS collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages,” as defined in the rule.

The Act provides that the definition of QRM can be no broader than the definition of a “qualified mortgage” (“QM”), as that term is defined under the Truth in Lending Act (“TILA”) and applicable regulations. QMs are a set of residential mortgage loans deemed to comply with the requirement for creditors to determine a borrower’s ability to repay. The Office of the Comptroller of the Currency (“OCC”), Federal Reserve Board, Federal Deposit Insurance Corporation (“FDIC”), Securities and Exchange Commission (“SEC”), Federal Housing Finance Agency (“FHFA”), and Department of Housing and Urban Development (“HUD”) decided to define a QRM in full alignment with the definition of a QM. The agencies concluded that alignment was necessary to protect investors, enhance financial stability, preserve access to affordable credit, and facilitate compliance. Their rule also includes an exemption from risk retention for certain types of community-focused residential mortgages that are not eligible for QRM status but that also are exempt from the TILA ability-to-pay rules under the TILA. The credit risk retention requirements became effective for securitization transactions collateralized by residential mortgages in 2015, and for other transactions in 2016.

The agencies of the credit risk retention regulations committed to reviewing those regulations and the definition of QRM periodically, and in coordination with the CFPB’s statutorily mandated assessment of QM. Continue Reading Agencies to Review QRM / Securitization Credit Risk Retention Rule

On December 12, 2019, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) together proposed extensive updates to their rules implementing the Community Reinvestment Act (“CRA”).  The CRA requires insured depository institutions to participate in investment, lending, and service activities that help meet the credit needs of their assessment area, particularly low- and moderate-income communities and small businesses and farms.  The last major revisions to the CRA regulations were made in 1995.

The proposed rules would significantly alter how the FDIC and OCC implement the CRA.  Currently, the agencies require banks to direct their CRA activities within the bank’s “assessment areas,” which are determined based on a bank’s physical locations, including its corporate office, branches, and ATMs.  The proposal would redefine assessment areas to include additional areas where the bank collects a substantial portion of its deposits. Thus, a bank might have both facility-based assessment areas and deposit-based assessment areas.  In addition, the proposed rules would allow banks to receive CRA credit for certain activities outside of their assessment areas. By clarifying and expanding when banks can receive credit beyond the immediate areas surrounding bank branches, the proposed rule would relieve pressure in certain saturated markets where banks are already meeting community needs.

The proposed rules would increase the size thresholds for a small loan to a business and a small loan to a farm to loans of $2 million or less to a business or farm and would include a provision for adjusting these loan limits for inflation going forward. These increased thresholds would, in part, account for inflation since the current thresholds were established in 1995.

One of the proposal’s primary objectives is transparency.  Under the proposed rules, the FDIC and OCC would establish a more transparent methodology for calculating each bank’s CRA rating.  The agencies would publish the equations used by examiners, as well as benchmarks required to receive particular ratings. In terms of scoring, proposed new performance standards would assess both units (i.e., number of qualifying activities) and dollars (the quantified value of the bank’s qualifying activities). The proposal also would require the agencies to publish and maintain a publicly available list of examples of qualifying CRA activities and to introduce a process through which banks can seek the agency’s determination as to whether an activity is a qualifying activity before projects are underwritten.

Although the Board of Governors of the Federal Reserve System (the “Fed”) likewise has authority to issue regulations to implement CRA (and has done so jointly with the FDIC and OCC in the past), the Fed so far has declined to participate in this proposal.  Reportedly, the Fed disagreed with the proposal’s emphasis on dollars invested due to a concern that it incentivizes banks to invest in wealthier markets.  At a press conference last Wednesday, Fed Chair Jerome Powell indicated that the Fed still hopes to reach agreement with the other agencies in order to avoid the inevitable confusion that would result from having two separate regulatory regimes applicable to insured depository institutions.

Mayer Brown is reviewing the proposal and will update this post with a more in-depth summary.  Once the proposed rules are published in the Federal Register, they will be open for public comment for 60 days.  Due to the substantial changes being proposed, we are expecting a large number of comment letters from banks, community groups and other stakeholders. This type of response could result in a longer comment period.