Thursday, April 30, 2015
The Consumer Financial Protection Bureau recentky published its third Fair Lending Report to Congress recounting fair lending activities in supervision, enforcement, rulemaking, interagency coordination, outreach, and interagency reporting during 2014.. According to the CFPB, it has taken “important strides” over the last year in its efforts to protect consumers from credit discrimination and broaden access to credit, as it identifies new fair lending risks and monitors institutions for compliance.
The report provides some insight into the areas that the bureau has targeted as areas of concern. The current fair lending report sees the CFPB applying fair lending principles to mortage lending, indirect auto lending, and Home Mortgage Disclosure Act reporting.
Patrice Alexander Ficklin, Director of Fair Lending and Equal Opportunity at the bureau, notes that the current report focuses on the bureau’s progress in identifying areas of fair lending risk and ensuring compliance, plus how the bureau endeavors to inform, educate, and learn from institutions and markets that it oversees. She states that, over the last year, the CFPB’s fair lending supervisory and public enforcement actions directed institutions to provide approximately $224 million in remediation to about 303,000 consumers. Ficklin adds that 2014 marked the Office of Fair Lending’s second public enforcement action in the credit cards market.
Progress. The report highlights a number of areas in which the bureau and Office of Fair Lending “have taken important strides over the last year in our efforts to protect consumers from credit discrimination and broaden access to credit, as we identify new fair lending risks and monitor institutions for compliance.”
Mortgage lending. The bureau’s Fair Lending supervision program has included Equal Credit Opportunity Act-targeted reviews at institutions responsible for approximately 40 percent of the applications and originations reported pursuant to HMDA. Mortgage lending continues to be a key priority for the Office of Fair Lending, with a focus on HMDA data integrity and potential fair lending risks in the areas of redlining, underwriting, and pricing.
Indirect auto lending. The bureau continued its work in overseeing and enforcing compliance with ECOA in indirect auto lending through supervisory and enforcement activity, including monitoring compliance with its previous supervisory and enforcement actions. The CFPB also released a Supervisory Highlights report specifically dedicated to activity in this area.
Credit cards. The bureau continued its fair lending work in the credit cards market. In June 2014, the CPB announced a public enforcement action against Synchrony Bank, formerly known as GE Capital, for failing to provide certain debt settlement offers to consumers based on national origin. Because the company self-identified the violation and fully cooperated, the bureau assessed no civil money penalties. However, the company provided $169 million in consumer relief to about 108,000 borrowers excluded from debt relief offers.
Rulemaking and guidance. In August 2014, the CFPB published a proposed rule to amend Regulation C, which implements HMDA, to require covered lenders to report additional data elements, among other changes. It received several hundred comments on the proposal. In November 2014, the bureau issued a guidance bulletin reminding lenders that requiring unnecessary documentation from consumers who receive Social Security disability income may raise fair lending risk. The ECOA prohibits discrimination against an applicant because all or part of the applicant’s income derives from any public assistance program. The bulletin outlined the standards and guidelines that may help lenders comply with the law and help to ensure that consumers who receive Social Security disability income have fair and equal access to credit. In addition, the report adds, throughout the year, the Office of Fair Lending collaborates with the Office of Supervision to provide guidance and information on market trends through Supervisory Highlights.
For more information about the CFPB's reports, subscribe to the Banking and Finance Law Daily.
Wednesday, April 29, 2015
The Volcker Alliance is a non-partisan, non-profit organization founded by former Chairman of the Federal Reserve Board Paul A. Volcker to address the challenge of effective execution of public policies and to help rebuild public trust in government.
- a concentrated banking system consisting of a handful of extremely large, exceedingly complex, globally active, and highly diversified institutions, with huge trading books and even, in some cases, ownership of industrial assets such as coal mines, oil tankers, and power plants;
- the emergence of shadow banking, as a bigger part of the whole financial system; and
- equities markets that have become fragmented, more complex, and less transparent, in part as a result of technological advances, with increasing participation from unregulated entities, such as high-frequency trading firms.
- interagency jurisdictional conflicts that have “often resulted in delays or inaction on critical matters”;
- no single agency having a comprehensive understanding of the risks in the financial system, as each agency remained focused only on its area of supervision; and
- increased opportunities for regulatory arbitrage.
- oversight and surveillance;
- supervision and regulation; and
- investor protection and capital market conduct.
For more information about financial regulatory reform, subscribe to the Banking and Finance Law Daily.
Tuesday, April 28, 2015
Friday, April 24, 2015
The House debated on April 21, 2015, over a bill that would require the director of the Consumer Financial Protection Bureau to establish a Community Bank Advisory Council, a Credit Union Advisory Council, and a Small Business Advisory Board to advise and consult with the CFPB. The measure, as written and passed by the House Financial Services Committee, was supported by both Democrats and Republicans, but a recent amendment by Committee Chair Jeb Hensarling (R-Texas) has sparked debate, and the bipartisan bill now has become a subject of controversy.
The House went on to approve H.R. 1195, the Bureau of Consumer Financial Protection Advisory Boards Act, by a vote of 235 to 183 on Aprill 22. H.R. 1195 was first introduced in April 2014 in the 113th Congress. Representatives Robert Pittenger (R-NC) and Denny Heck (D-Wash) reintroduced the bill in March of this year, which passed the Committee by a vote of 53-5. Following the House vote, Chairman Hensarling praised the legislation stating, “An agency as powerful as the CFPB will benefit from the advice of small businesses, community banks and credit unions. The CFPB should listen to them so it can issue smart regulations rather than dumb regulations that harm Main Street America.”
Controversy arises. The bill as amended would reduce the cap on the total amount of funding that could be requested by the bureau director for fiscal years 2020 and 2025. Detractors say the bill would provide for substantial cuts to the CFPB budget, affecting its ability to carry out its mission to protect consumers. Supporters say the cuts are not drastic and should not affect the CFPB’s work.
Waters speaks out. Representative Maxine Waters (D-Calif), Ranking Member of the Financial Services Committee, lashed out against Republicans for “yet another underhanded attempt” to undermine the CFPB. Waters said the “once bipartisan bill” was a “was a good and decent measure.” The lawmaker supported the bill as written but said the bill before the House now “is just the latest instance of Financial Services Committee Republicans snatching defeat from the jaws of victory.” She said the amendment means that the CFPB budget would be cut by about $45 million over the next five years and by $100 million over the next ten years, capping it at “substantially less” then the bureau currently is able to request.
“The truth of the matter is that after several years of attempting to cap CFPB funding, the Republicans have chosen to transform Mr. Heck’s bill into a vehicle to make drastic cuts to the CFPB’s budget.”
Neugebauer supports bill. In remarks prepared for delivery, Rep. Randy Neugebauer (R-Texas), Chairman of the Financial Institutions and Consumer Credit Subcommittee, offered support for the bill. He said H.R. 1195 “is essential to provide small businesses a voice in the regulatory process, and to help ensure community banks and credit unions continue to have a voice at the CFPB going forward.”
The legislator noted that the Congressional Budget Office estimated that implementing H.R. 1195 would increase direct spending by $9 million over the next decade. “Republicans simply reduced the maximum amount that the CFPB can draw from the Federal Reserve over the same 10 years to offset this cost. To put this into perspective, the CFPB by statute can draw approximately $6.7 billion over this time period. The offset we are debating amounts to 0.1% of this amount.”
Neugebauer said that if that reduction “really threatens the Bureau’s mission, perhaps it is time to examine the Bureau’s current spending priorities. I am quite confident we can debate spending problems at the CFPB for the rest of the afternoon.”
Administration stance. The Obama administration issued a statement of policy on H.R. 1195 that makes its stance on the bill quite clear. As written, the administration does not oppose the bill. However, the administration said that it “strongly opposes” H.R. 1195 as recently amended by House passage because of the reduction in the cap on CFPB funding.
The statement referred to the CBO estimate that implementing the bill would increase direct spending by $9 million over the 2015-2025 period, meaning pay-as-you-go procedures would apply, but noted that the CBO also estimated that enacting the bill would not affect revenues or discretionary spending because the CFPB is permanently authorized to spend amounts transferred from the Federal Reserve System.
The administration referred to the amendment to lower the cap on funding is “problematic.” According to the administration’s statement, “As the CFPB's funding is already capped under law and only increased in line with increases in the Federal Government's employment cost index, this lower cap is solely intended to impede the CFPB's ability to carry out its mission of protecting consumers in the financial markets.” The administration said that the reductions “could result in, among other things, undermining critical protections for families from abusive and predatory financial products.”
The statement of policy ended with a definitive remark as to the administration's position on the bill. “If the President were presented with H.R. 1195 as currently amended, his senior advisors would recommend that he veto the bill.”
For more information about H.R. 1195, subscribe to the Banking and Finance Law Daily.
Thursday, April 23, 2015
Senator David Vitter (R-La.), member of the Senate Judiciary Committee, is pressing Loretta Lynch, nominee for Attorney General, for answers to questions he has about her involvement with HSBC and the megabank’s compliance with the terms of a Deferred Prosecution Agreement. He also is interested in hearing what Lynch has to say about allegations that British Prime Minister David Cameron has become involved in the HSBC case. Vitter said he is concerned with the message the handling of HSBC sends to Wall Street.
“In the course of her nomination process, Ms. Lynch has gone against her word on whether she would take action against these sorts of cases. And it has international implications—HSBC’s case is being traced all the way to Prime Minister Cameron,” Vitter said. “This empty threat sends a message to Wall Street and foreign governments alike that the Justice Department will turn a blind eye to non-compliance.”
HSBC was charged in 2012 with helping drug dealers launder money and with illegally completing transactions for clients in Iran, Libya, Syria, and other countries under U.S. economic sanctions. As the U.S. Attorney for the Eastern District of New York at the time, Lynch entered into the DPA with HSBC rather than pursuing criminal charges. Vitter previously asked Lynch for information on the case and has stated that he will vote against Lynch for AG, in part because he has not received answers to his questions.
In a letter to Lynch, Vitter wrote that two new issues have spurred further questions about Lynch’s dealings with HSBC. A report from an independent compliance monitor revealed that HSBC officers have been uncooperative in fulfilling the terms of the DPA. Vitter referred to The New York Times coverage of the report which indicates that HSBC has been found by the independent monitor to have “a basic lack of cooperativeness” toward internal auditors.
Vitter noted that in response to written questions for the record of the Senate Judiciary Committee about the DPA, Lynch said that should HSBC fail to comply and cooperate, Lynch would take remedial action against the bank. The lawmaker said that Lynch “clearly failed” to take remedial action, “which demonstrates a pattern of lax enforcement of mega banks and sends a message to Wall Street that the Justice Department will turn a blind eye to non-compliance and corporate recidivism.”
The second issue that has arisen concerns whistleblower allegations that British Prime Minister David Cameron urged President Obama against pursuing a criminal prosecution against HSBC for fear that it would result in HSBC losing its U.S. banking charter and would no longer be able to conduct business in the United States. “Interestingly, President Barack Obama and Prime Minister Cameron met at the White House on March 14, 2012 and the joint remarks available on the White House’s Press Office website make clear that banks were discussed,” Vitter wrote.
Vitter included in his letter a list of direct questions stemming from the issues surrounding HSBC, the compliance report, the allegations that Prime Minister Cameron intervened with President Obama on behalf of HSBC, and whether that intervention influenced Lynch’s decision to secure a DPA rather than prosecute. The lawmaker also asked Lynch point blank if she would investigate and, if appropriate, prosecute HSBC for tax evasion should she be confirmed as AG.
For more information about Vitter and Lynch, subscribe to the Banking and Finance Law Daily.
Wednesday, April 22, 2015
Tuesday, April 21, 2015
By Richard A. Roth, J.D.
A debt collector that sued a consumer for a deficiency judgment after a mortgage foreclosure and foreclosure sale was collecting a debt, a U.S. District Court Judge has decided. Contrary to the arguments of the debt collector, the amount owed did arise from a transaction and did meet the Fair Debt Collection Practices Act definition of “debt,” the judge decided in what he said was a case of first impression (Baggett v. Law Offices of Daniel C. Consuegra, P.L. (M.D. Fla., 3:14-cv-1014-J-32PDB, April 15, 2015).
The foreclosure suit resulted in a judgment that, after the property was sold, the homeowner still owed nearly $65,000, and the debt collector then acquired the promissory note and sued to collect the deficiency. The homeowner countered with a suit alleging several different FDCPA violations. The debt collector attempted to convince the judge that the FDCPA did not apply because the mortgage deficiency did not constitute a debt.
Transaction. The key to the debt collector’s position was that the obligation to pay the deficiency did not arise from a transaction, which is a requirement for what is a debt under the FDCPA. The payment obligation arose from the deficiency determination in the foreclosure suit, not the underlying promissory note, the debt collector claimed.
The judge disagreed, saying that the deficiency could not be separated from the note. The foreclosure judgment was for payment on the debt represented by the note, the judge decided, and no deficiency action would exist without the note. In other words, the obligation to pay the deficiency arose from the transaction evidenced by the note, and a suit to collect the deficiency was debt collection activity.
For more information about fair debt collection practices, subscribe to the Banking and Finance Law Daily.
Saturday, April 18, 2015
Senator Elizabeth Warren (D-Mass) believes that without rules and accountability, financial markets do not work. She is proposing steps to complete the “unfinished business of financial reform and regulation of financial markets.”
- strengthening legal accountability for big financial firms and senior executives;
- breaking up the big banks and restricting the Federal Reserve Board’s emergency lending authority;
- changing current tax laws that encourage excessive risk-taking and discourage long-term growth; and
- regulating the shadow banking sector.
For more information about Senator Warren and the proposals, subscribe to the Banking and Finance Law Daily.
Friday, April 17, 2015
Representatives Frank Guinta (R-NH) and Ed Perlmutter (D-Colo) are spearheading a measure intended to rescind what the lawmakers call “flawed” guidance issued by the Consumer Financial Protection Bureau on indirect auto financing. The legislators said that the bureau’s guidance “harms consumers by limiting their ability to obtain discounted auto financing.”
Bureau guidance. The measure, the Reforming CFPB Indirect Auto Financing Guidance Act of 2015 (H.R. 1737) would repeal CFPB Bulletin 2013-02, issued by the bureau in March 2013. The guidance is intended to assist indirect auto lenders with Equal Credit Opportunity Act compliance and is directed toward auto lenders that permit dealers to increase consumer interest rates and compensate dealers with a share of the increased interest revenues.
According to the CFPB, an indirect auto lender’s markup and compensation policies alone may be sufficient to trigger liability under the ECOA if the lender regularly participates in a credit decision and its policies result in discrimination. The disparities triggering liability could arise within a particular dealer’s transactions or across different dealers within the lender’s portfolio. Therefore, an indirect auto lender that permits dealer markup and compensates dealers on that basis may be liable for these policies and practices if they result in disparities on a prohibited basis.
The bulletin included steps that indirect auto lenders subject to CFPB jurisdiction should take to ensure that they are in compliance with the ECOA and implementing Regulation B. The bureau further recommended that indirect auto lenders develop a strong fair lending compliance management program.
H.R. 1737. Lawmakers said that H.R. 1737 would repeal the bulletin because the guidance was “designed to pressure lending institutions into eliminating the availability of auto financing discounts.” Such discounts save consumers millions of dollars each year, they noted.
Guinta expressed concern that the CFPPB guidance was issued without a public comment period for consumers, small businesses, and other stakeholders. The bill would not only repeal the current bureau guidance but provide that any guidance on indirect auto lending in the future have a public notice and comment period before it was finalized.
Other provisions of the measure include a requirement that the CFPB consult with the Federal Reserve Board, Federal Trade Commission, and Department of Justice before issuing guidance and conduct a study on the costs and impact of the guidance on consumers and women-owned, minority-owned, and small businesses.
For more information about the legislation, subscribe to the Banking and Finance Law Daily.
Thursday, April 16, 2015
Mortgage regulators from 43 states have entered into a settlement agreement with nonbank mortgage lender New Day Financial, LLC d/b/a NewDay USA on charges that the lender impermissibly shared test information for mortgage professionals. The regulators also charged that several New Day employees completed continuing education requirements for numerous other New Day employees. The company has agreed to pay $5, 280,000 in administrative penalties to settle the charges.
The charges came as a result of an examination by the state of New Hampshire and a subsequent investigation conducted by the Maryland Commissioner of Financial Regulation. The Multi-State Mortgage Committee (MMC) started an investigation into the charges, “identifying a pattern of inappropriate conduct” by New Day and negotiated the settlement agreement between the state regulators and the company. Karyn Tierney, Chair of the MMC and Deputy Commissioner of the Arkansas Securities Department, said the resolution of the case would “permit the company to continue to operate while ensuring compliance with all state and federal laws.”
This is not the first time New Day has found itself on the receiving end of charges by a regulator. In February of this year, the Consumer Financial Protection Bureau entered into a settlement agreement with the company for deceptive mortgage advertising aimed at veterans and a scheme to pay kickbacks for customer referrals. New Day agreed to pay $2 million to settle the bureau’s charges.
In addition to the monetary penalty, the current settlement agreement and consent order provides for the removal of New Day’s Chief Operating Officer and the hiring of an independent auditor to evaluate New Day’s policies and procedures, and review New Day’s training and education program. New Day also must issue a report within 270 days identifying the steps the company proposes to take to improve its corporate management and governance structures.
For more information about state enforcement activities, subscribe to the Banking and Finance Law Daily.
Wednesday, April 15, 2015
With the announcement by General Electric Company (GE) that it intends to sell a big piece of its subsidiary General Electric Capital Corporation (GECC, the company has first the first salvo to shed the systemically important financial institution (SIFI) designation the Financial Stability Oversight Council (FSOC) pinned on GECC in July 2013. In addition to GECC, FSOC has designated MetLife, Inc., American International Group, Inc., and Prudential Financial, Inc., as nonbank SIFIs.
As part of the sale, GE will sell off real estate assets to Wells Fargo and the private equity firm Blackstone, but will retain its financing operations related to aircraft, energy and health care.
“Significant” issuer. In its SIFI designation, FSOC determined that GECC, in its role as one of the largest U.S. savings and loan holding companies, was a “significant” issuer of commercial paper to money market funds and other asset managers. Other factors that led to the designation included the size of its on-balance sheet assets, which rivals those of the biggest bank holding companies and ties to global financial intermediaries.
For more information about SIFIs, subscribe to the Banking and Finance Law Daily.
Tuesday, April 14, 2015
Lender asks Supreme Court whether attorney’s fees should be part of ‘punitive-to-compensatory damages ratio’
Quicken Loans recently petitioned the U.S. Supreme Court to review a $2.17 million punitive damages award upheld by the Supreme Court of Appeals of West Virginia in subprime loan litigation brought by a borrower. In its petition, Quicken Loans contends that the West Virginia Supreme Court “flatly refused to consider [the lender’s] federal constitutional challenge to a $2.17 million punitive damages award that dwarfed, by a 124 to 1 ratio, the less than $17,500 in restitution liability in the case.” Quicken Loans asserts that the borrower’s attorney’s fees and costs, totaling $596,200 in the litigation, should not have been included in the punitive-to-compensatory damages ratio that the state court deemed to be in accord with West Virginia law and not excessive. The dispute arose from a $144,800 mortgage loan obtained by the borrower from Quicken Loans.
According to Quicken Loans, the inclusion of attorney’s fees and costs as part of the compensatory damages calculation for the ratio violated the lender’s substantive due-process rights protected by the Fourteenth Amendment. In addition, Quicken Loans argues that it had not waived its federal constitutional claims in the state court system and that the West Virginia Supreme Court “evaded” its obligation to properly address them (Quicken Loans Inc. v. Brown, March, 25, 2015, Docket No. 14-1191).
It is uncertain whether the U.S. Supreme Court will agree to hear the appeal. Presently, the borrower, who successfully leveled claims of unconscionability under the West Virginia Consumer Credit and Protection Act against Quicken Loans and obtained the $2.17 million punitive damages award, is slated to respond to the lender’s petition by April 29, 2015.
An interesting point raised by the lender in support of its Supreme Court petition centers on the dissenting opinion to the West Virginia Supreme Court’s decision permitting the inclusion of the attorney’s fees in the “punitive-to-compensatory damages ratio” calculation. According to the petition, the dissent recognized that the majority’s opinion “brazenly” ignored federal constitutional due-process issues raised by Quicken Loans in the state court system.
For more information about cases like these, subscribe to the Banking and Finance Law Daily.
Monday, April 13, 2015
- disclaim their past, present, and future involvement in Operation Choke Point or any similar involvement;
- issue an FIL and memorandum for employees clarifying each agency’s policy for documenting and reporting recommendations and orders to insured depository institutions to terminate deposit account relationships; and
- confirm in writing to the Financial Services Committee that the agency heads have informed their employees of the policy, as well as the consequences for violating the policy.
- the FDIC encourages insured depository institutions to serve their communities and recognizes the importance of services they provide;
- the FDIC encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers without regard to the risks presented by an individual customer or the bank’s ability to manage the risk;
- individual customers within broader customer categories present varying degrees of risk; and
- institutions are expected to assess the risks posed by an individual customer on a case-by-case basis and to implement controls to manage the relationship commensurate with the risks associated with each customer.
Friday, April 10, 2015
- The holding company must pay its debt in a way that will allow the debt to be retired within 25 years of being incurred.
- The holding company must reduce its debt-to-equity ratio to no higher than .3-to-1 within 12 years of the debt being incurred.
- Each subsidiary insured depository institution must be kept well capitalized.
- The holding company may not pay any dividends until it has reduced its debt-to-equity ratio to no higher than 1-to-1.
- One commenter suggested that the threshold be increased to $5 billion. The Fed responded that the asset limit is set by statute, and the Dodd-Frank Act effectively prevents the threshold from being raised any higher.
- One commenter urged the Fed to rescind the qualitative requirement that would disqualify a bank holding company or savings and loan holding company with a material amount of outstanding SEC-registered debt or equity securities. The Fed responded that the exclusion reflects its view that "SEC registrants typically exhibited a degree of complexity of operations and access to multiple funding sources."
For more information about the Fed's policy statement, subscribe to the Banking and Finance Law Daily.
Thursday, April 9, 2015
By Katalina M. Bianco, J.D.
The Consumer Financial Protection Bureau has taken steps to halt what it charges to be a phantom debt collection scheme cooked up by the scheme’s operation, their companies, affiliated individuals, and service providers. The CFPB’s complaint includes the scheme’s alleged leaders, Marcus Brown and Mohan Bagga.
The bureau is alleging that the scheme involved the use of automated telephone calls, deception, and threats to induce consumers to pay debts that the operators did not own or, in some cases, that the consumers did not actually owe. The CFPB did not estimate the amount of money that was collected other than a reference to “millions of dollars in ill-gotten profits.”
According to the CFPB’s complaint, the persons involved in the scheme used aliases while threatening consumers with arrest, wage garnishment, and “financial restraining orders.” The schemers bought consumers’ personal information from debt brokers or lead generators, according to the bureau, providing them with consumers’ birthdays, Social Security numbers, or other information that allowed them to appear legitimate.
The CFPB specifically alleges that the scheme operators: made multiple threatening robo-calls to consumers that included a call-back number that subjected consumers to threats that included criminal prosecution; misrepresented the operator’s legal right to collect debts; threatened arrests or wage garnishments the operators could not carry out; and used fake business names to create the impression that consumers would be sued if they did not pay.
The bureau said that the scheme was made possible by the involvement of a telemarketing company and four different payment processors, all named in the suit. The telemarketer originated “millions” of automated telephone calls, while the payment processors were essential to the scheme’s ability to accept debit and credit card payments, the CFPB said.
According to the CFPB, the payment processors ignored numerous red flags that should have alerted them to the illegality of the scheme, including consumer disputes that described the scheme and difficulties in communicating with the scheme’s operators.
For more information about the CFPB's enforcement activity, subscribe to the Banking and Finance Law Daily.
Wednesday, April 8, 2015
For more information about mortgage relief scams, subscribe to the Banking and Finance Law Daily.
Tuesday, April 7, 2015
By Richard A. Roth, J.D.
The Office of the Comptroller of the Currency has replaced its guidance on subordinated debt issuance with new guidelines that apply to all subordinated debt of national banks and federal savings associations. It also replaced its sample national bank subordinated debt note with two samples, one to be used if the debt is to be included in regulatory capital and the other for debt that will not be included. However, the sample forms apply only to national banks. Forms for federal thrifts are to be issued in the near future, the OCC says (OCC 2015-22).
Simply put, subordinated debt is debt that in the case of a financial institution’s default or insolvency will not be repaid until all senior debt has been repaid. If a national bank or federal thrift wants to issue subordinated debt, it must satisfy the requirements of the appropriate regulations (12 CFR 5.47 and12 CFR 163.80, respectively). These include not including impermissible terms, making required disclosures, and satisfying restrictions on maturity and prepayment terms.
According to the OCC, banks and thrifts that issue subordinated debt generally want to include it in their tier 2 regulatory capital. In that case, more stringent requirements must be met, beginning with giving the OCC prior notice. Sometimes subordinated debt is issued for funding or liquidity purposes, in which case the higher requirements do not apply; however, the regulations and guidance remain applicable. The guidelines apply to all subordinated debt issued on or after April 3, 2015.
General requirements. The guidelines set out a number of restrictions on all subordinated debt that supplement the requirements of the regulations. For example:
- Representations and warranties may not permit the acceleration of the debt and trigger repayment obligations if the default is based on a change in the financial institution’s status, its default on another agreement, or a violation of its articles of incorporation. Acceleration should be based only on credit-related issues.
- Affirmative covenants may not require an institution improperly to disclose non-public OCC information and must require that financial information be protected from public disclosure by a confidentiality agreement.
- Negative covenants may not unreasonably restrict an institution’s ability to carry out its business or unduly interfere with management. (Examples of banned covenants are given in 12 CFR 5.47.)
- Events of default should not include “minor, insignificant, or nonconsequential events” unless the institution has at least been given a reasonable chance to cure.
- Contemporaneous loan agreements between the institution’s holding company and a third-party lender, which sometimes are used to fund subordinated debt purchases, must be reviewed to ensure they do not require the holding company to induce the bank to violate the guidelines.
- Significant early redemption incentives for the bank are not permitted. The guidelines make no effort to provide a list of such terms, but they explicitly warn against preplanned coupon rate increases.
- Credit-sensitive features that would adjust the coupon rate based on changes in the issuer’s credit standing are banned.
- Raising expectations that a call option will be exercised also is banned. A subordinated debt note’s terms may permit the bank or thrift to call the note after five years, but the issuer may not, when marketing or selling the note, make any statements about future redemption plans.
- Subordinated debt purchase funding may not be provided by the issuing bank or thrift or by any entity the issuer controls.
- A subordinated debt issuer other than the bank or thrift, or an operating entity of the bank or thrift, then the issuer must be an operating entity whose only asset is its investment in the bank’s or thrift’s capital. Also, the proceeds of the issuance must be immediately available, without limitation, to either the financial institution or its holding company.
Monday, April 6, 2015
As financial regulators continue to look for a solution to the one-size-fits-all approach and the subsequent over-regulation of community banks, the Office of the Comptroller of the Currency is working with members of Congress on potential legislation that would ease the regulatory and supervisory burden on community banks, according to Comptroller of the Currency Thomas J. Curry. The OCC’s goals include making charters more flexible, creating a Volcker Rule exemption, and reducing examination frequency, he said in remarks prepared for the Depositors Insurance Fund.
Curry noted that Massachusetts grants flexible state charters that establish the same banking powers, investment authorities, and supervisory requirements for all state-chartered institutions, regardless of the type of charter an institution holds. This lets Massachusetts bankers run their businesses in the way that adapts to changing conditions without converting between charters.
Federal savings associations should have the same ability, in Curry’s opinion. The OCC is cooperating with members of Congress to draft legislation that would remove from federal law the requirement that a specified percentage of a thrift’s balance sheet must be home mortgages. Federal thrifts would be able to diversify their loan portfolios better without changing supervisors, and that would mean no increased safety and soundness risks, according to the Comptroller.
Examination cycle. Healthy, well-managed community banks only need to be examined once every 18 months, Curry believes. If Congress raises the asset threshold for the 18-month examination cycle to $750 million, from the current $500 million, several hundred community institutions—including more than 100 supervised by the OCC—would qualify for the 18-month examination cycle, he pointed out.
This change would help community banks by reducing their regulatory burden. It also would help regulators by allowing them to focus their resources on institutions that present higher risks.
Volcker Rule. “We do not believe it is necessary to include smaller institutions under the Volcker Rule in order to realize congressional intent,” Curry asserted. Banks and thrifts with less than $10 billion in assets should be exempt from the restrictions on proprietary investments and involvement with investment funds.
Cybersecurity. However, Curry encouraged community bankers to consider more cooperation in creating a defense against cyberattacks. All financial institutions, no matter what their size, are at risk for cyberattacks, noted Curry.
For more information about regulation of community banks, subscribe to the Banking and Finance Law Daily.
Friday, April 3, 2015
The Consumer Financial Protection Bureau has updated its examination procedures to incorporate the new mortgage disclosure rules issued in November 2013. The updates are intended to provide financial institutions and other industry participants with guidance on how the bureau intends to conduct compliance examinations relating to the Truth in Lending Act and Real Estate Settlement Procedures Act and implementing regulations Reg. Z (12 CFR 1026) and Reg. X (12 CFR 1024).
Final rule. The CFPB adopted a final rule in November 2013, effective on Aug. 15, 2015, that integrates mortgage disclosures in order to change the way consumers obtain information when purchasing a home. The rule stemmed from the CFPB’s “Know Before You Owe’ initiative begun in 2011. Prior to the rule, lenders were required to provide two different disclosure forms to consumers applying for a mortgage: a Good Faith Estimate (GFE) developed by the Department of Housing and Urban Development and an “early” Truth in Lending disclosure designed by the Federal Reserve Board. In general, two different forms were required at or shortly before closing on the loan—the HUD-1 and the Fed’s Truth in Lending disclosure.
The Dodd-Frank Act required the bureau to publish rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under TILA and RESPA. The final rule creates two new disclosure forms—the Loan Estimate and the Closing Disclosure.
The Loan Estimate replaces HUD’s Good Faith Estimate and the Fed’s “early” TILA disclosure and is designed to provide disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage for which they are applying. This form will be provided to consumers within three business days after they submit a loan “application.” For purposes of the final rule, an “application” consists of the consumer’s name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought.
The CFPB’s Closing Disclosure replaces the current form used to close a loan, the HUD-1 and the Fed’s revised TILA disclosure. This form is to be given to a consumer at least three business days before the consumer closes on the loan. If the creditor makes certain significant changes between the time the Closing Disclosure form is given and the closing, the consumer must be provided a new form and an additional three-business-day waiting period after receipt of the new form. The need for a new Closing Disclosure is triggered when the creditor: makes a change to the annual percentage rate above 1/8 of a percent for most loans (1/4 of a percent for loans with irregular payments or periods), changes the loan product, or adds a prepayment penalty to the loan. Less significant changes can be disclosed on a revised Closing Disclosure form provided to the consumer at or before closing, without delaying the closing.
Guidance on implementation. Since adopting the final rule, the CFPB has issued guidance intended to help financial institutions with implementation. In April 2014, the bureau released a small entity compliance guide to provide an easy-to-use summary of the TILA-RESPA integrated disclosure rule. The guide also highlights issues that small creditors, and those that work with them, might want to consider when implementing the rule.
Shortly thereafter, the CFPB released a roadmap to completing the integrated Loan Estimate and Closing Document forms. A timeline example intended to illustrate, in calendar form, the process and timing of disclosures, followed on the heels of the roadmap.
For more information about the CFPB guidance, subscribe to the Banking and Finance Law Daily.
Thursday, April 2, 2015
By Katalina M. Bianco, J.D.
The Consumer Financial Protection Bureau has sued a debt collector for allegedly, and illegally, threatening consumers with lawsuits related to their debts. What goes around, comes around? According to the CFPB, the debt collection company threatened criminal prosecution and jail time by creating a false impression for consumers that its communications were from a state or district attorney’s office in order to intimidate them into paying debts for bounced checks. The nationwide debt collection operation and its chief executive officer also are charged with misleading consumers into believing that they must enroll in a costly financial education program to avoid criminal charges.
CFPB allegations. The CFPB alleges in its complaint that National Corrective Group, Inc., a privately-held, California-based corporation that operates nationwide and specializes in the collection of consumer debt for bounced checks, deceived consumers by sending them notices on prosecutors’ letterheads and creating the false impression that consumers may be prosecuted for writing bounced checks. However, the letters went to consumers before any district attorney had determined prosecution was likely. Consumers were told by the company that to qualify for the diversion program and avoid prosecution, they must pay the bounced check debts as well as enroll in the company’s financial education class for an additional fee. The cost of the financial education classes were typically around $200, which was often several times the amount of the alleged bad check debt.
The charges also include several related entities that purchased all of the contracts and assets of National Corrective Group and took over its operation during the course of the CFPB investigation. These companies are Victim Services Inc. and American Justice Solutions, Inc. Mats Jonsson, chief executive officer of National Corrective Group, is specifically named in the suit.
The CFPB alleges that the debt collectors violated the Fair Debt Collection Practices Act (15 U.S.C. §§ 1692e and 1692g) which prohibits making misrepresentations to or deceiving consumers. The CFPB also alleged that the defendants violated the Consumer Financial Protection Act (12 U.S.C. §§ 5531 and 5536) which prohibits deceptive acts or practices in the consumer financial marketplace.
Proposed order. The proposed order would require the companies and Jonsson to pay a $50,000 civil penalty. The poor financial condition of the companies and Jonsson make them unable to pay a greater sum. In addition, the proposed order would prohibit the companies from stating or implying that they are a state or district attorney, using district attorneys' letterheads, and duplicating DA signatures. The companies would also have to stop falsely representing to consumers that failure to pay a debt or enter the bad check diversion program will result in their arrest or imprisonment. The companies would be required to disclose to consumers that the prosecutor's office had not made a decision about whether to charge the consumer with a crime and that many cases are not prosecuted.
The proposed order also states that the companies agree to be subject to the CFPB's supervisory authority under the CFPA for three years from the effective date of the order.
For more information about CFPB enforcement activity, subscribe to the Banking and Finance Law Daily.
Wednesday, April 1, 2015
- the case for reform;
- what should be done;
- what more can be done; and
- what will not be done.
Parrott concluded his brief by observing “if we largely agree that we stand on unstable ground, and we agree on the direction in which we’ll find the ground more firm, why not begin walking?”
In fact, Congress has begun the “walking” mentioned in Parrott’s brief. The first reform initiative was introduced by Reps. John K. Delaney (D-Md), John Carney (D-Del), and Jim Himes (D-Conn). Their legislation, the Partnership to Strengthen Homeownership Act, would, according to a press release, “combine the private sector’s superior ability to price risk with the federal government’s unique ability to provide capacity.”
The bill would establish an insurance program through Ginnie Mae which maintains the full faith and credit of the federal government, but protects taxpayer investment by requiring adequate private sector capital and accurate pricing of government reinsurance. All government guaranteed single-family and multi-family mortgage-backed securities would be supported by a minimum of 5 percent private sector capital, which will stand in a first loss position. The remaining 95 percent of the risk will be shared between Ginnie Mae and a private reinsurer. Fees paid to Ginnie Mae will be allocated to affordable housing programs. The measure also winds down Fannie Mae and Freddie Mac, and allows them to be sold and recapitalized.
For more information about housing finance reform, subscribe to the Banking and Finance Law Daily.