By Lisa M. Goolik, J.D.
The Federal Deposit Insurance Corporation is continuing to hear from banks that are concerned with proposed changes to the way the FDIC assesses deposit insurance for small established banks. So far, the FDIC has heard from commenters concerned with: how the changes would impact community banks that are active construction lenders; the definition of “core deposits;” and the proposed treatment of reciprocal deposits under the “adjusted brokered deposit ratio.”
Change in methodology. In July, the FDIC published a proposed rule that would revise the methodology it uses to estimate the probability of failure for banks with less than $10 billion in assets that have been insured for at least five years. The FDIC would eliminate risk categories for small banks (other than new small banks and insured branches of foreign banks) and apply the model to all established small banks. The changes are intended to ensure that banks that take on greater risks will pay more for deposit insurance.
Weighted charge-offs. In a comment letter submitted last month, Carl Dodson, executive vice president and chief operating officer for John Marshall Bank, feared the weighted loan charge‐off rate in the proposed model would force community banks to reduce lending activity in the construction and C&I segments, “both of which are critical to a strong and growing economy.”
According to Dodson, the high charge‐off rates in the construction loan and C&I segments would create a very large “Loan Mix Index” for banks focusing on these two segments, which would result in higher deposit insurance assessment rate for these banks. As an example, Dodson noted that the proposed rule would increase the bank’s assessment rate from 5 basis points to over 6.5 basis points, which would increase its insurance premiums by 30 percent—to over $500,000 annually.
“Core deposits.” Paul C. Livermore, chief financial officer and executive vice president of The First National Bank in Sioux Falls, wrote to express his concerns regarding the proposed definition of “core deposits,” which is defined as “Domestic office deposits (excluding time deposits over the deposit insurance limit and the amount of brokered deposits below the standard maximum deposit insurance amount).”
In his letter, Livermore states that “there is no effective means for an issuer of brokered deposits [to know] whether or not those deposits are held by the beneficial owners in lots below the FDIC limit” because brokered deposits are typically issued in the form of a single master certificate held by Depository Trust Corp (DTC). DTC maintains records of the custodians, such as brokerage firms and trust companies, which hold the underlying lots on behalf of the end users. “Only if DTC provided the names of its custodian customers and they in turn provided the names of the beneficial holders on whose behalf they hold brokered CDs could a bank issuer actually know who the end investors are and in what block sizes they hold the deposits,” said Livermore.
Reciprocal deposits. A significant number of commenters have submitted letters challenging the proposed treatment of reciprocal deposits. Under the proposed methodology, reciprocal deposits would no longer be excluded from the “adjusted brokered deposit ratio.” As explained in a letter submitted by David C. Blackburn, chief financial officer for First United Bank, the inclusion of reciprocal deposits in the proposed assessment system “could result in assessment rates that are unnecessarily higher for banks that have reciprocal deposits on their balance sheets.”
However, the commenters argued, reciprocal deposits share more characteristics with traditional core deposits than brokered deposits. In particular, they noted that reciprocal deposits typically come from a bank’s long term local customers, and the bank sets the interest rates based on local market conditions. “Reciprocal deposits, therefore, do not present any of the concerns that traditional brokered deposits do: instability, risk of rapid asset growth, and high cost,” wrote Jay H. Lee, executive vice president of risk management for AimBank in Littlefield, Texas.
The commenters all suggested that the FDIC not only retain the current system’s exclusion of reciprocal deposits from the definition of “brokered” for assessment purposes, but also support legislation to explicitly exempt reciprocal deposits from the statutory definition of brokered deposit.
For more information about the FDIC's proposal, subscribe to the Banking and Finance Law Daily.
Monday, August 31, 2015
Thursday, August 27, 2015
Regulators cry foul over four-second rule review of debt collection complaint
By Andrew A. Turner, J.D.
The Consumer Financial Protection Bureau and the Federal Trade Commission are supporting a consumer against a debt collection law firm's appeal of a decision in which a federal district court in New Jersey found that the firm violated the Fair Debt Collection Practices Act when it brought suit after only a four second-review of a case. The CFPB and FTC have filed an amici curiae brief in Bock. v. Pressler & Pressler, LLP (U.S. Court of Appeals, 3rd Cir.), arguing that the lack of meaningful attorney involvement violated the FDCPA in a state-court collection action brought after mostly automated review.
The case involves a debt-collection lawsuit over a defaulted credit card debt. Midland Funding, LLC, a large debt buyer, enlisted Pressler & Pressler, LLP, a law firm specializing in collecting consumer debts, to collect the debt on its behalf. While an attorney reviewed the complaint before filing, the firm’s computer records show that this scan lasted four seconds and that the attorney also reviewed 672 complaints that same day, and approved all but 10 of them. There was no other attorney review before the complaint was filed.
In the district court decision (Bock. v. Pressler & Pressler, LLP, June 30, 2014), Judge Kevin McNulty said: “The process by which Pressler prepares complaints almost entirely involves automation and non-attorney personnel. There is nothing wrong with that; the FDCPA does not mandate drudgery or enshrine outmoded business methods. The state court complaint filed in the state action here, however, was reviewed by an attorney for approximately four seconds. The case law is sparse, and it is possible for reasonable people to disagree as to what constitutes reasonable attorney review. But whatever reasonable attorney review may be, a four-second scan is not it.”
For more information about debt collection issues, subscribe to the Banking and Finance Law Daily.
The Consumer Financial Protection Bureau and the Federal Trade Commission are supporting a consumer against a debt collection law firm's appeal of a decision in which a federal district court in New Jersey found that the firm violated the Fair Debt Collection Practices Act when it brought suit after only a four second-review of a case. The CFPB and FTC have filed an amici curiae brief in Bock. v. Pressler & Pressler, LLP (U.S. Court of Appeals, 3rd Cir.), arguing that the lack of meaningful attorney involvement violated the FDCPA in a state-court collection action brought after mostly automated review.
The case involves a debt-collection lawsuit over a defaulted credit card debt. Midland Funding, LLC, a large debt buyer, enlisted Pressler & Pressler, LLP, a law firm specializing in collecting consumer debts, to collect the debt on its behalf. While an attorney reviewed the complaint before filing, the firm’s computer records show that this scan lasted four seconds and that the attorney also reviewed 672 complaints that same day, and approved all but 10 of them. There was no other attorney review before the complaint was filed.
In the district court decision (Bock. v. Pressler & Pressler, LLP, June 30, 2014), Judge Kevin McNulty said: “The process by which Pressler prepares complaints almost entirely involves automation and non-attorney personnel. There is nothing wrong with that; the FDCPA does not mandate drudgery or enshrine outmoded business methods. The state court complaint filed in the state action here, however, was reviewed by an attorney for approximately four seconds. The case law is sparse, and it is possible for reasonable people to disagree as to what constitutes reasonable attorney review. But whatever reasonable attorney review may be, a four-second scan is not it.”
For more information about debt collection issues, subscribe to the Banking and Finance Law Daily.
Wednesday, August 26, 2015
ABA seeks clear path for compliance before TRID rule rollout
By J. Preston Carter,
J.D., LL.M.
In a letter to the federal financial regulators, American
Bankers Association President and CEO Frank Keating is asking the Federal
Financial Institutions Examination Council to explain its policy for examining
and supervising financial institutions in the initial months after the
TILA-RESPA integrated disclosure (TRID) rule becomes effective. The Consumer
Financial Protection Bureau recently finalized the extension of the TRID rule’s
effective date to Oct. 3, 2015.
Keating’s letter points out that the CFPB indicated regulators
will be sensitive to the good-faith efforts of lenders to comply with the TRID
rules in a timely manner. Keating asks the FFIEC to “formally establish a
transition period and clarify how regulators will oversee and examine regulated
institutions for TRID compliance during this time.” By doing so, he continued,
the FFIEC would “provide needed certainty to the credit markets and encourage
lenders to continue to provide mortgage credit to qualified borrowers.”
Bankers will be more likely to maintain credit flows, said
Keating, if they have greater assurance that supervisory reviews will reflect
consideration of factors such as the dates compliance systems were received, operational
problems that required debugging efforts, the extent to which necessary
training was possible before systems are fully operational, and the adequacy
and reasonableness of training programs once systems are functional. Keating
contends that “in light of the volume, intricacies and delays associated with
the TRID regulations, the only way to realistically ensure an orderly
transition is to confirm that supervisory standards work in tandem with lender
efforts to refine and debug systems following the effective date.”
For more information about the TILA, subscribe to the Banking and Finance Law Daily.
Tuesday, August 25, 2015
Bank collecting bad credit card account not a debt collector
By Richard A. Roth, J.D.
A national bank collecting a defaulted credit card account it bought from another bank was not a debt collector as defined by the Fair Debt Collection Practices Act, according to the U.S. Court of Appeals for the Eleventh Circuit. Employing a precision analysis of the act, the court decided that it was irrelevant that the consumer’s debt was in default when Capital One Bank (USA) acquired it. Capital One did not qualify as a debt collector because debt collection was not the principal purpose of the bank’s business and the bank did not regularly collect debts due to anyone else (Davidson v. Capital One Bank (USA), N.A., Aug. 21, 2015, Wilson, C.)
The consumer had settled an earlier suit over the account with HSBC Bank by agreeing to pay $500; however, he never made the payment, and HSBC obtained a judgment from the court. The account was included in $28 billion of accounts that Capital One later bought from HSBC.
Shortly after the purchase, Capital One sued the consumer, not for the $500 settlement but rather for $1,149.96, which it claimed was the balance due on the delinquent account. The consumer responded by filing a class action against Capital One claiming FDCPA violations. That suit was dismissed when the district court judge decided that Capital One did not meet the statutory definition of debt collector and thus was not covered by the act.
What is a debt collector? The FDCPA applies only to debt collectors, and it defines what a debt collector is in 15 U.S.C. §1692a(6), the appellate court first said. A company that does not fit that definition is not obligated to meet the requirements of the act.
In general, a debt collector is anyone who uses interstate commerce or the mail “in any business the principal purpose of which is the collection of any debts,” or who “regularly collects, or attempts to collect . . . debts owed or due or asserted to be owed or due another.” It also distinguishes between debt collectors, who are covered by the act, and creditors, who are not covered.
A creditor is the person who offers or extends credit or a person to whom a debt is owed, i.e. a debt buyer. The act excludes from creditor status any person collecting a debt owed to another “to the extent such activity . . . concerns a debt which was not in default at the time it was acquired by such person.”
Was the bank covered? The court characterized the consumer’s position as being that anyone who acquires a bad debt for collection purposes is a debt collector, while anyone who acquires a debt that is not in default is a creditor. Debt collectors are covered by the FDCP, but creditors are not.
This simple one-or-the-other interpretation was rejected by the court because it did not account for the basic definition of “debt collector.”
Before anyone can be a debt collector under the act, he must fall into one or the other of the two initial categories, the court said: either the principal purpose of his business must be debt collection or he must regularly collect debts owed to other persons. Whether the debt was delinquent is irrelevant.
Put differently, the question of whether a debt was in default was relevant only to whether the person who acquired the debt was a creditor. A person who acquired a delinquent debt was not a creditor, but only would be a debt collector if one of the debt collector definitions applied, the court said.
Capital One did not meet either of the two definitions, the court then concluded. First, the principal purpose of Capital One’s business was not debt collection.
Second, Capital One only regularly collects debts it owns, not debts due to other persons. The court made clear that it was irrelevant that the debts were originated by a difference creditor and were acquired by Capital One after they became delinquent. All that mattered was that the debts were owed to Capital One at the time when the bank tried to collect them.
Contrary decisions. Despite the Eleventh Circuit’s assertion that its decision was compelled by the plain language of the FDCPA, other appellate courts have reached the contrary conclusion.
The U.S. Court of Appeals for the Sixth Circuit said that “For an entity that did not originate the debt in question but acquired it and attempts to collect on it, that entity is either a creditor or a debt collector depending on the default status of the debt at the time it was acquired” (Bridge v. Ocwen Federal Bank).
Similarly, addressing an unusual situation of a mortgage loan servicer that mistakenly believed a mortgage to be in default, the U.S. Court of Appeals for the Seventh Circuit said that “the Act treats assignees as debt collectors if the debt sought to be collected was in default when acquired by the assignee, and as creditors if it was not” (Schlosser v. Fairbanks Capital Corp.).
For more information about debt collections, subscribe to the Banking and Finance Law Daily.
A national bank collecting a defaulted credit card account it bought from another bank was not a debt collector as defined by the Fair Debt Collection Practices Act, according to the U.S. Court of Appeals for the Eleventh Circuit. Employing a precision analysis of the act, the court decided that it was irrelevant that the consumer’s debt was in default when Capital One Bank (USA) acquired it. Capital One did not qualify as a debt collector because debt collection was not the principal purpose of the bank’s business and the bank did not regularly collect debts due to anyone else (Davidson v. Capital One Bank (USA), N.A., Aug. 21, 2015, Wilson, C.)
The consumer had settled an earlier suit over the account with HSBC Bank by agreeing to pay $500; however, he never made the payment, and HSBC obtained a judgment from the court. The account was included in $28 billion of accounts that Capital One later bought from HSBC.
Shortly after the purchase, Capital One sued the consumer, not for the $500 settlement but rather for $1,149.96, which it claimed was the balance due on the delinquent account. The consumer responded by filing a class action against Capital One claiming FDCPA violations. That suit was dismissed when the district court judge decided that Capital One did not meet the statutory definition of debt collector and thus was not covered by the act.
What is a debt collector? The FDCPA applies only to debt collectors, and it defines what a debt collector is in 15 U.S.C. §1692a(6), the appellate court first said. A company that does not fit that definition is not obligated to meet the requirements of the act.
In general, a debt collector is anyone who uses interstate commerce or the mail “in any business the principal purpose of which is the collection of any debts,” or who “regularly collects, or attempts to collect . . . debts owed or due or asserted to be owed or due another.” It also distinguishes between debt collectors, who are covered by the act, and creditors, who are not covered.
A creditor is the person who offers or extends credit or a person to whom a debt is owed, i.e. a debt buyer. The act excludes from creditor status any person collecting a debt owed to another “to the extent such activity . . . concerns a debt which was not in default at the time it was acquired by such person.”
Was the bank covered? The court characterized the consumer’s position as being that anyone who acquires a bad debt for collection purposes is a debt collector, while anyone who acquires a debt that is not in default is a creditor. Debt collectors are covered by the FDCP, but creditors are not.
This simple one-or-the-other interpretation was rejected by the court because it did not account for the basic definition of “debt collector.”
Before anyone can be a debt collector under the act, he must fall into one or the other of the two initial categories, the court said: either the principal purpose of his business must be debt collection or he must regularly collect debts owed to other persons. Whether the debt was delinquent is irrelevant.
Put differently, the question of whether a debt was in default was relevant only to whether the person who acquired the debt was a creditor. A person who acquired a delinquent debt was not a creditor, but only would be a debt collector if one of the debt collector definitions applied, the court said.
Capital One did not meet either of the two definitions, the court then concluded. First, the principal purpose of Capital One’s business was not debt collection.
Second, Capital One only regularly collects debts it owns, not debts due to other persons. The court made clear that it was irrelevant that the debts were originated by a difference creditor and were acquired by Capital One after they became delinquent. All that mattered was that the debts were owed to Capital One at the time when the bank tried to collect them.
Contrary decisions. Despite the Eleventh Circuit’s assertion that its decision was compelled by the plain language of the FDCPA, other appellate courts have reached the contrary conclusion.
The U.S. Court of Appeals for the Sixth Circuit said that “For an entity that did not originate the debt in question but acquired it and attempts to collect on it, that entity is either a creditor or a debt collector depending on the default status of the debt at the time it was acquired” (Bridge v. Ocwen Federal Bank).
Similarly, addressing an unusual situation of a mortgage loan servicer that mistakenly believed a mortgage to be in default, the U.S. Court of Appeals for the Seventh Circuit said that “the Act treats assignees as debt collectors if the debt sought to be collected was in default when acquired by the assignee, and as creditors if it was not” (Schlosser v. Fairbanks Capital Corp.).
For more information about debt collections, subscribe to the Banking and Finance Law Daily.
Monday, August 24, 2015
New York AG announces ad campaign to help homeowners avoid scams
By Stephanie K. Mann, J.D.
New York Attorney General Eric T. Schneiderman has announced a targeted advertising campaign and consumer education initiative to help New York homeowners spot, avoid, and report mortgage rescue scams. Mortgage rescue scams prey on homeowners who are in foreclosure or at risk of foreclosure. Typically, the scammers will provide what seems like a lifeline out of foreclosure, but then will bilk the homeowner while providing little or no help.
The advertisements will target homeowners in areas of the region hardest-hit by these scams, appearing on billboards and in Facebook ads, particularly in ZIP codes that have reported these types of scams most frequently. The ads will direct homeowners to AGScamHelp.com where homeowners can find access to the Homeowner Protection Program (HOPP)—a network of almost 90 housing counseling and legal service agencies funded by the AG’s office to provide free services to homeowners facing foreclosure.
“The most powerful tools to stop mortgage rescue scams are educated, vigilant homeowners,” said Schneiderman. “These scams are particularly pernicious because they take victims of the housing crash and make them victims again. My office will do all we can to ensure homeowners have the tools they need to protect themselves and we will continue to vigorously pursue scammers who target vulnerable homeowners.”
The AGScamHelp.com site and the related advertising campaign is supported using funds from the National Mortgage Settlement, the $25 Billion Agreement between 49 State Attorneys General, and the nation’s five largest Mortgage Servicers.
Nationwide, mortgage rescue scammers have conned $100 million from more than 42,000 homeowners, according to a December 2014 report by the Center for NYC Neighborhoods and the Lawyers Committee for Civil Rights Under Law. To date, New York homeowners have submitted over 2,700 foreclosure rescue scam complaints to the Lawyer Committee for Civil Rights, documenting at least $8.25 million in losses. New York homeowners trail only California and Florida in the number of complaints reported to the Loan Modification Scam Database.
AGScamHelp App. In 2014, Schneiderman launched a web-based app in response to an uptick in complaints from lawyers and housing counselors about the prevalence of mortgage rescues scams. Homeowners can easily access AGScamHelp on their computers, smartphones and tablets. AGScamHelp has several informational features:
For more information about preventing mortgage scams, subscribe to the Banking and Finance Law Daily.
New York Attorney General Eric T. Schneiderman has announced a targeted advertising campaign and consumer education initiative to help New York homeowners spot, avoid, and report mortgage rescue scams. Mortgage rescue scams prey on homeowners who are in foreclosure or at risk of foreclosure. Typically, the scammers will provide what seems like a lifeline out of foreclosure, but then will bilk the homeowner while providing little or no help.
The advertisements will target homeowners in areas of the region hardest-hit by these scams, appearing on billboards and in Facebook ads, particularly in ZIP codes that have reported these types of scams most frequently. The ads will direct homeowners to AGScamHelp.com where homeowners can find access to the Homeowner Protection Program (HOPP)—a network of almost 90 housing counseling and legal service agencies funded by the AG’s office to provide free services to homeowners facing foreclosure.
“The most powerful tools to stop mortgage rescue scams are educated, vigilant homeowners,” said Schneiderman. “These scams are particularly pernicious because they take victims of the housing crash and make them victims again. My office will do all we can to ensure homeowners have the tools they need to protect themselves and we will continue to vigorously pursue scammers who target vulnerable homeowners.”
The AGScamHelp.com site and the related advertising campaign is supported using funds from the National Mortgage Settlement, the $25 Billion Agreement between 49 State Attorneys General, and the nation’s five largest Mortgage Servicers.
Nationwide, mortgage rescue scammers have conned $100 million from more than 42,000 homeowners, according to a December 2014 report by the Center for NYC Neighborhoods and the Lawyers Committee for Civil Rights Under Law. To date, New York homeowners have submitted over 2,700 foreclosure rescue scam complaints to the Lawyer Committee for Civil Rights, documenting at least $8.25 million in losses. New York homeowners trail only California and Florida in the number of complaints reported to the Loan Modification Scam Database.
AGScamHelp App. In 2014, Schneiderman launched a web-based app in response to an uptick in complaints from lawyers and housing counselors about the prevalence of mortgage rescues scams. Homeowners can easily access AGScamHelp on their computers, smartphones and tablets. AGScamHelp has several informational features:
- Search Government-Vetted Companies: AGScamHelp will allow consumers to search the name of an individual or company to determine if that entity is a “government-vetted” agency. If the company searched is not a government-vetted agency, the consumer will be told to proceed with caution and advised with several tips on how to identify signs of a foreclosure rescue scam.
- Locate Nearby Counseling Partners: The web-based app also features an interactive map that will allow a consumer to find the nearest Homeowner Protection Program grantee.
- Report Scams: Consumers who have already been contacted by or are in the process of working with a company suspected of operating a foreclosure rescue scam will also have the option to file a complaint with the Attorney General’s Office.
- Get Tips: AGScamHelp offers details on how to recognize signs of a foreclosure rescue scam, including samples of scam letters and other resources utilized by fraudsters to target homeowners, and provides information about recent foreclosure scams that have been the subject of enforcement actions brought by the Attorney General’s Office and other law enforcement agencies.
For more information about preventing mortgage scams, subscribe to the Banking and Finance Law Daily.
Thursday, August 20, 2015
UDAAP once again on CFPB radar
By Katalina M. Bianco, J.D.
This week brought two new enforcement actions by the Consumer Financial Protection Bureau, both based on UDAAP violations. After four years in operation, the bureau has not offered a definitive ruling on what actions are in violation of UDAAP but has publicly stated that the key to getting a handle on the slippery definition lies in the CFPB's enforcement actions. Use them as teaching tools because that's what we intend, says the bureau. So here are a couple additional tools for the week. The bureau brought actions against a provider of health care services and a company that deals in pension advances.
Springstone Financial, LLC, a provider of consumer loan products for financing health-care services through partner banks, was ordered by the CFPB to compensate the victims of credit enrollment tactics found to be deceptive by the bureau. In its investigation of Springstone’s business practices, the bureau found that many consumers who signed up for Springstone’s deferred-interest loan product at dental offices to pay for dental work were led to believe that the product was interest free.
Specifically, the CFPB found that that providers who were trained and monitored by Springstone to market the deferred-interest loan product misled consumers about the terms and conditions of the product during the application process. In some cases, dental office staff told consumers that the deferred-interest product was a “no-interest” loan and failed to mention they would have to pay 22.98 percent interest on the loan if they did not pay it off in full by the end of the promotional period. More than 3,200 consumers may have been affected by these deceptive practices.
Redress. To ensure that harmed consumers are appropriately compensated, and that consumers will no longer be subject to these illegal practices, a consent order between the CFPB and Springstone requires Springstone to refund $700,000 to more than 3,200 consumers and establish a “Redress Plan” whereby Springstone will notify affected consumers and issue a credit or send a reimbursement check to those consumers with an open Springstone account. For those consumers with a closed or inactive account, Springstone will mail a reimbursement check;
In addition to compensating any consumers affected by its deceptive practices, the consent order also requires Springstone to, among other things: seek a “determination of non-objection” from the CFPB if it intends to market or sell any product substantially similar to the terms and conditions of its Deferred-Interest Loan Product, including retroactive interest, in the future; and submit a Compliance Plan designed to ensure that the sales and marketing of the deferred-interest product comply with applicable federal consumer financial laws and the terms of the consent order;
Adding insult to injury. Commenting on the consent order, CFPB Director Richard Cordray stated, “Deceiving patients in need of medical care into paying for services with risky credit adds insult to injury. The Bureau will not tolerate financial companies or their providers taking advantage of distressed patients and their loved ones with misleading sales pitches.”
One day later. The CFPB announces that the bureau and the New York Department of Financial Services brought suit against Pension Funding, LLC, and Pension Income, LLC for inducing pensioners to borrow against their future benefits through deceptive advertising and not fully disclosing the costs involved. The agencies are charging that the companies misrepresented loans as sales of future benefits and failed to disclose the resulting high interest rates and fees.
Transactions described. According to the agencies’ joint complaint, the two companies and three controlling individuals targeted pensions recipients, including military veterans, with advertisements claiming to offer pension buyouts, meaning that no interest would be paid. The companies would receive eight years of a consumer’s pension income in exchange for a single advance. However, when the various fees paid by borrowers were considered, the money advanced actually carried interest rates that averaged more than 28 percent, the complaint alleges.
The companies also told consumers that no life insurance was needed because the transactions were not loans, while in fact life insurance premiums were funded by the companies’ receipts and paid by the companies. This increased the fees paid by the borrowers.
Collections. While the companies purported not to be making loans, the contracts left consumers with the legal ability to redirect their ongoing pension payments to an account other than the account established by the companies. The companies “aggressively pursued” consumers who did so, and the contracts provided that in such a case all remaining payments would be immediately due.
For more information about CFPB enforcement activity, subscribe to the Banking and Finance Law Daily.
This week brought two new enforcement actions by the Consumer Financial Protection Bureau, both based on UDAAP violations. After four years in operation, the bureau has not offered a definitive ruling on what actions are in violation of UDAAP but has publicly stated that the key to getting a handle on the slippery definition lies in the CFPB's enforcement actions. Use them as teaching tools because that's what we intend, says the bureau. So here are a couple additional tools for the week. The bureau brought actions against a provider of health care services and a company that deals in pension advances.
Springstone Financial, LLC, a provider of consumer loan products for financing health-care services through partner banks, was ordered by the CFPB to compensate the victims of credit enrollment tactics found to be deceptive by the bureau. In its investigation of Springstone’s business practices, the bureau found that many consumers who signed up for Springstone’s deferred-interest loan product at dental offices to pay for dental work were led to believe that the product was interest free.
Specifically, the CFPB found that that providers who were trained and monitored by Springstone to market the deferred-interest loan product misled consumers about the terms and conditions of the product during the application process. In some cases, dental office staff told consumers that the deferred-interest product was a “no-interest” loan and failed to mention they would have to pay 22.98 percent interest on the loan if they did not pay it off in full by the end of the promotional period. More than 3,200 consumers may have been affected by these deceptive practices.
Redress. To ensure that harmed consumers are appropriately compensated, and that consumers will no longer be subject to these illegal practices, a consent order between the CFPB and Springstone requires Springstone to refund $700,000 to more than 3,200 consumers and establish a “Redress Plan” whereby Springstone will notify affected consumers and issue a credit or send a reimbursement check to those consumers with an open Springstone account. For those consumers with a closed or inactive account, Springstone will mail a reimbursement check;
In addition to compensating any consumers affected by its deceptive practices, the consent order also requires Springstone to, among other things: seek a “determination of non-objection” from the CFPB if it intends to market or sell any product substantially similar to the terms and conditions of its Deferred-Interest Loan Product, including retroactive interest, in the future; and submit a Compliance Plan designed to ensure that the sales and marketing of the deferred-interest product comply with applicable federal consumer financial laws and the terms of the consent order;
Adding insult to injury. Commenting on the consent order, CFPB Director Richard Cordray stated, “Deceiving patients in need of medical care into paying for services with risky credit adds insult to injury. The Bureau will not tolerate financial companies or their providers taking advantage of distressed patients and their loved ones with misleading sales pitches.”
One day later. The CFPB announces that the bureau and the New York Department of Financial Services brought suit against Pension Funding, LLC, and Pension Income, LLC for inducing pensioners to borrow against their future benefits through deceptive advertising and not fully disclosing the costs involved. The agencies are charging that the companies misrepresented loans as sales of future benefits and failed to disclose the resulting high interest rates and fees.
Transactions described. According to the agencies’ joint complaint, the two companies and three controlling individuals targeted pensions recipients, including military veterans, with advertisements claiming to offer pension buyouts, meaning that no interest would be paid. The companies would receive eight years of a consumer’s pension income in exchange for a single advance. However, when the various fees paid by borrowers were considered, the money advanced actually carried interest rates that averaged more than 28 percent, the complaint alleges.
The companies also told consumers that no life insurance was needed because the transactions were not loans, while in fact life insurance premiums were funded by the companies’ receipts and paid by the companies. This increased the fees paid by the borrowers.
Collections. While the companies purported not to be making loans, the contracts left consumers with the legal ability to redirect their ongoing pension payments to an account other than the account established by the companies. The companies “aggressively pursued” consumers who did so, and the contracts provided that in such a case all remaining payments would be immediately due.
For more information about CFPB enforcement activity, subscribe to the Banking and Finance Law Daily.
Wednesday, August 19, 2015
NYDFS fines Promontory $15M; places moratorium on industry work
By John M. Pachkowski, J.D.
Following the release of an Aug. 3, 2015, report by the New York Department of Financial Services that found Promontory Financial Group, LLC lacked independent judgment in the preparation and submission of reports to the NYDFS in 2010-2011, the agency and Promontory have entered into an agreement to resolve the conduct outlined in the report.
NYDFS report. The report chronicled the results of a two-year investigation by the NYDFS into Promontory’s work for Standard Chartered Bank pertaining to the bank’s compliance with Bank Secrecy Act/Anti-Money Laundering laws and regulations, and sanctions imposed by the Office of Foreign Assets Control. As part of its work, Promontory produced a number of reports and made various presentations to the bank and government authorities, including the NYDFS’ successor, the New York State Banking Department (NYSBD). These reports included interim reports throughout 2010, final reports in January and March of 2011, and updates to those final reports in October 2011.
Beside finding that Promontory lacked independent judgment, the report also found that certain testimony regarding key issues provided by Promontory witnesses during the course of the NYDFS’s investigation lacked credibility. The report also noted that “ends of justice and the public advantage would not be served by providing Promontory with access to confidential supervisory information.”
NYDFS agreement. Under the terms of the Aug. 18, 2015, agreement, Promontory was required to:
Quality and integrity. In a brief statement, Eugene Ludwig, the founder and chief executive officer of Promontory Financial Group, said, “We are glad to have resolved this matter.” He added, “We remain committed to quality and integrity in carrying out our work.”
Prior NYDFS actions. The action against Promontory is the latest taken by the NYDFS against firm providing consultancy services to the banking industry in New York State.
Roughly a year ago, PricewaterhouseCoopers (PwC) Regulatory Advisory Services has agreed to a series of measures imposed by the NYDFS. In its settlement, PwC has agreed to voluntarily abstain from accepting consulting engagements at financial institutions regulated by NYDFS; pay a $25 million penalty to the state of New York; and establish and implement procedures and safeguards for engagements that meet the standards established by NYDFS. Also, PwC withheld over 20 percent of the director’s compensation after the director’s misconduct during the engagement came to light during DFS’s investigation.
Also, in June 2013, Deloitte Financial Advisory Services settled with NYDFS over its work done for Standard Chartered following the bank’s 2004 written agreement with the NYSBD and Federal Reserve Bank of New York. Under its settlement, Deloitte agrees to a one-year, voluntary suspension from consulting work at financial institutions regulated by the DFS, make a $10 million payment to the state of New York, and implement a set of reforms designed to help address conflicts of interest in the consulting industry.
For more information about enforcement actions against consulting firms, subscribe to the Banking and Finance Law Daily.
Following the release of an Aug. 3, 2015, report by the New York Department of Financial Services that found Promontory Financial Group, LLC lacked independent judgment in the preparation and submission of reports to the NYDFS in 2010-2011, the agency and Promontory have entered into an agreement to resolve the conduct outlined in the report.
NYDFS report. The report chronicled the results of a two-year investigation by the NYDFS into Promontory’s work for Standard Chartered Bank pertaining to the bank’s compliance with Bank Secrecy Act/Anti-Money Laundering laws and regulations, and sanctions imposed by the Office of Foreign Assets Control. As part of its work, Promontory produced a number of reports and made various presentations to the bank and government authorities, including the NYDFS’ successor, the New York State Banking Department (NYSBD). These reports included interim reports throughout 2010, final reports in January and March of 2011, and updates to those final reports in October 2011.
Beside finding that Promontory lacked independent judgment, the report also found that certain testimony regarding key issues provided by Promontory witnesses during the course of the NYDFS’s investigation lacked credibility. The report also noted that “ends of justice and the public advantage would not be served by providing Promontory with access to confidential supervisory information.”
NYDFS agreement. Under the terms of the Aug. 18, 2015, agreement, Promontory was required to:
- Pay a $15 million monetary penalty and cannot claim any type of tax offset based on the monetary payment.
- Take a 6-month voluntary abstention from new consulting engagements that require the NYDFS to authorize the disclosure of confidential information under New York Banking Law §36(10). That provision allows the NYDFS to revoke a consultant's access to confidential supervisory information if continued access to that information would not serve “the ends of justice and the public advantage.” Virtually all consulting and monitoring work at regulated financial institutions requires access to confidential supervisory information.
- Agree that its actions during the Standard Chartered engagement did not meet the NYDFS’s current requirements for consultants performing regulatory compliance work for entities supervised by the NYDFS.
- Acknowledge that any report submitted to the NYDFS must be objective and reflect its best independent judgment. Regarding all pending and future matters in which it or its client submits a report to the NYDFS, Promontory will document any changes to such a report that it makes at the suggestion of a client or the client’s counsel.
Quality and integrity. In a brief statement, Eugene Ludwig, the founder and chief executive officer of Promontory Financial Group, said, “We are glad to have resolved this matter.” He added, “We remain committed to quality and integrity in carrying out our work.”
Prior NYDFS actions. The action against Promontory is the latest taken by the NYDFS against firm providing consultancy services to the banking industry in New York State.
Roughly a year ago, PricewaterhouseCoopers (PwC) Regulatory Advisory Services has agreed to a series of measures imposed by the NYDFS. In its settlement, PwC has agreed to voluntarily abstain from accepting consulting engagements at financial institutions regulated by NYDFS; pay a $25 million penalty to the state of New York; and establish and implement procedures and safeguards for engagements that meet the standards established by NYDFS. Also, PwC withheld over 20 percent of the director’s compensation after the director’s misconduct during the engagement came to light during DFS’s investigation.
Also, in June 2013, Deloitte Financial Advisory Services settled with NYDFS over its work done for Standard Chartered following the bank’s 2004 written agreement with the NYSBD and Federal Reserve Bank of New York. Under its settlement, Deloitte agrees to a one-year, voluntary suspension from consulting work at financial institutions regulated by the DFS, make a $10 million payment to the state of New York, and implement a set of reforms designed to help address conflicts of interest in the consulting industry.
For more information about enforcement actions against consulting firms, subscribe to the Banking and Finance Law Daily.
Tuesday, August 18, 2015
Can a RESPA ‘mortgage servicing transfer’ notice trigger an FDCPA obligation?
By Thomas G. Wolfe, J.D.
Under certain circumstances, can a mortgage loan servicer’s notice to a borrower of a transfer of servicing responsibilities to another party—in keeping with the federal Real Estate Settlement Procedures Act—also trigger an obligation for the loan servicer to comply with a separate notice requirement of the federal Fair Debt Collection Practices Act? Yes, according to a recent ruling by the U.S. Court of Appeals for the Second Circuit.
In its Aug. 12, 2015, decision (Hart v. FCI Lender Services, Inc.), the Second Circuit ruled that a mortgage servicer’s RESPA-related letter, notifying a consumer about the transfer of his mortgage loan servicing, also constituted an “initial communication” in connection with the collection of a debt, thereby triggering a notice requirement of the federal Fair Debt Collection Practices Act. In reaching its decision, the federal appellate court allowed the consumer’s proposed class action, claiming violations of the FDCPA, to proceed.
By way of background, the consumer obtained a mortgage loan from GMAC Mortgage, LLC, the original lender and servicer of the loan. Later, FCI Lender Services, Inc., assumed the loan servicing obligations from GMAC. According to the court’s opinion, the consumer was in default on his mortgage loan when FCI assumed those servicing responsibilities.
In July 2012, FCI sent the consumer a letter, entitled “Transfer of Servicing Letter,” notifying him that FCI had become his mortgage loan servicer. Among other things, the letter referenced the consumer’s rights conferred by RESPA and provided further details about the servicing transfer, including the timeliness of payments during the transfer and how the consumer could dispute matters regarding his account.
In addition, FCI’s letter included an attached “Notice,” stating, “This is an attempt to collect upon a debt, and any information obtained will be used for that purpose.” The attachment, referencing the FDCPA, also sought to convey certain consumer rights under the FDCPA.
In February 2013, the consumer filed a lawsuit against FCI as a proposed class action, alleging that FCI violated the FDCPA by sending him the July 2012 letter. According to the consumer, FCI failed to identify the current creditor and misstated his “debtor’s rights.” In response, FCI asked the trial court to dismiss the consumer’s lawsuit, contending that its letter was intended “merely to comply with RESPA” by providing certain information, and was not aimed at collecting a debt. The consumer appealed the trial court’s dismissal of his FDCPA claim to the Second Circuit.
For purposes of the appeal, the parties agreed that FCI was a “debt collector” covered by the FDCPA and that the July 2012 letter from FCI to the consumer was FCI’s “initial communication” to him. However, the parties disagreed about whether the July 2012 letter was an initial communication “in connection with the collection of any debt,” that would have triggered specified notice requirements under the FDCPA.
The Second Circuit concluded that whether a communication is “in connection with the collection of a debt” is a question of fact “to be determined by reference to an objective standard.” The court stressed that, “at the motion to dismiss stage” of the litigation, the court was called upon to view the July 2012 letter objectively: whether a consumer receiving the communication could reasonably interpret it as being sent ‘in connection with the collection of a debt, rather than inquiring into the sender’s subjective purpose’.”
Applying this standard, the Second Circuit determined that the consumer plausibly alleged that the letter was a “communication in connection with the collection of [a] debt” so that FCI was required to provide the consumer with “a §1692g notice” under the FDCPA. In the court’s view: (1) the letter was, at a minimum, an attempt to collect a debt; (2) regardless of FCI’s intent to comply with RESPA in transmitting the letter, a reasonable consumer could view the letter as both providing information required by RESPA and attempting debt collection; (3) defective “§1692g notices” pose particular dangers to consumers; and (4) the court’s ruling was consistent with the remedial nature of the FDCPA.
Consequently, in light of the Second Circuit’s recent decision, it would behoove a mortgage loan servicer that notifies a borrower of a transfer of loan servicing—in compliance with RESPA—to also ask itself whether a consumer receiving that communication could reasonably interpret it as being sent in connection with the collection of a debt.
For more information about mortgage servicing under RESPA and the FDCPA, subscribe to the Banking and Finance Law Daily.
Under certain circumstances, can a mortgage loan servicer’s notice to a borrower of a transfer of servicing responsibilities to another party—in keeping with the federal Real Estate Settlement Procedures Act—also trigger an obligation for the loan servicer to comply with a separate notice requirement of the federal Fair Debt Collection Practices Act? Yes, according to a recent ruling by the U.S. Court of Appeals for the Second Circuit.
In its Aug. 12, 2015, decision (Hart v. FCI Lender Services, Inc.), the Second Circuit ruled that a mortgage servicer’s RESPA-related letter, notifying a consumer about the transfer of his mortgage loan servicing, also constituted an “initial communication” in connection with the collection of a debt, thereby triggering a notice requirement of the federal Fair Debt Collection Practices Act. In reaching its decision, the federal appellate court allowed the consumer’s proposed class action, claiming violations of the FDCPA, to proceed.
By way of background, the consumer obtained a mortgage loan from GMAC Mortgage, LLC, the original lender and servicer of the loan. Later, FCI Lender Services, Inc., assumed the loan servicing obligations from GMAC. According to the court’s opinion, the consumer was in default on his mortgage loan when FCI assumed those servicing responsibilities.
In July 2012, FCI sent the consumer a letter, entitled “Transfer of Servicing Letter,” notifying him that FCI had become his mortgage loan servicer. Among other things, the letter referenced the consumer’s rights conferred by RESPA and provided further details about the servicing transfer, including the timeliness of payments during the transfer and how the consumer could dispute matters regarding his account.
In addition, FCI’s letter included an attached “Notice,” stating, “This is an attempt to collect upon a debt, and any information obtained will be used for that purpose.” The attachment, referencing the FDCPA, also sought to convey certain consumer rights under the FDCPA.
In February 2013, the consumer filed a lawsuit against FCI as a proposed class action, alleging that FCI violated the FDCPA by sending him the July 2012 letter. According to the consumer, FCI failed to identify the current creditor and misstated his “debtor’s rights.” In response, FCI asked the trial court to dismiss the consumer’s lawsuit, contending that its letter was intended “merely to comply with RESPA” by providing certain information, and was not aimed at collecting a debt. The consumer appealed the trial court’s dismissal of his FDCPA claim to the Second Circuit.
For purposes of the appeal, the parties agreed that FCI was a “debt collector” covered by the FDCPA and that the July 2012 letter from FCI to the consumer was FCI’s “initial communication” to him. However, the parties disagreed about whether the July 2012 letter was an initial communication “in connection with the collection of any debt,” that would have triggered specified notice requirements under the FDCPA.
The Second Circuit concluded that whether a communication is “in connection with the collection of a debt” is a question of fact “to be determined by reference to an objective standard.” The court stressed that, “at the motion to dismiss stage” of the litigation, the court was called upon to view the July 2012 letter objectively: whether a consumer receiving the communication could reasonably interpret it as being sent ‘in connection with the collection of a debt, rather than inquiring into the sender’s subjective purpose’.”
Applying this standard, the Second Circuit determined that the consumer plausibly alleged that the letter was a “communication in connection with the collection of [a] debt” so that FCI was required to provide the consumer with “a §1692g notice” under the FDCPA. In the court’s view: (1) the letter was, at a minimum, an attempt to collect a debt; (2) regardless of FCI’s intent to comply with RESPA in transmitting the letter, a reasonable consumer could view the letter as both providing information required by RESPA and attempting debt collection; (3) defective “§1692g notices” pose particular dangers to consumers; and (4) the court’s ruling was consistent with the remedial nature of the FDCPA.
Consequently, in light of the Second Circuit’s recent decision, it would behoove a mortgage loan servicer that notifies a borrower of a transfer of loan servicing—in compliance with RESPA—to also ask itself whether a consumer receiving that communication could reasonably interpret it as being sent in connection with the collection of a debt.
For more information about mortgage servicing under RESPA and the FDCPA, subscribe to the Banking and Finance Law Daily.
Monday, August 17, 2015
New York Fed’s blog series on market liquidity launches today
By Lisa M. Goolik, J.D.
The Federal Reserve Bank of New York's Liberty Street Economics blog is planning a series this week that explores and discusses different facets of the "evolving nature of market liquidity." Last week, the New York Fed announced that the series would begin today and run through Friday, Aug. 21, 2015.
Series lineup. Throughout the week, the blog series will present different dimensions of market liquidity. The five blog posts that are slated to appear are:
- "Has U.S. Treasury Market Liquidity Deteriorated?"
- "Liquidity During Flash Events"
- "High Frequency Cross-Market Activity in U.S. Treasury Markets"
- "The Evolution of Workups in the U.S. Treasury Securities Market"
- "Dealer Balance Sheet Stagnation"
The authors also suggest that perhaps the liquidity concerns are not so much about average liquidity levels but about liquidity risk, caused by the recent events, such as those on Oct.15, 2014, and the "seemingly unexplained price changes in the dollar-euro and German Bund markets. The authors indicate that they will attempt to measure liquidity risk in a future post.
For more information about the New York Fed, subscribe to the Banking and Finance Law Daily.
Thursday, August 13, 2015
New York City law aimed at bank performance in low-income neighborhoods is unconstitutional
By Andrew A. Turner, J.D.
For more information about federal preemption of impermissible attempts to regulate banks, subscribe to the Banking and Finance Law Daily.
A New York City law requiring banks bidding on municipal deposits and investments to submit community development plans describing the loans, investments, and bank services they would provide to minority and low-income neighborhoods is unconstitutional, according to a federal district judge. “While the animating concerns of the City Council are valid, the means by which it sought to harness banks to redress those concerns intrudes on the province of the federal and state governments,” the court said (The New York Bankers Association v. The City of New York, Aug. 7, 2015, Failla, K.).
The City’s Responsible Banking Act established a Community Investment Advisory Board (CIAB), to assess the “credit, financial and banking services needs throughout the City with a particular emphasis on low and moderate income individuals and communities.” The CIAB was authorized to seek information from banks about the number of foreclosure actions, loan modifications, and the number of loans at least sixty days delinquent.
Based on the information gathered, the CIAB was to “establish benchmarks, best practices, and recommendations” for meeting needs it identified. The CIAB’s findings were to be published in an annual report evaluating how each Deposit Bank performed and identifying improvement areas. This report was allowed to be used by the Banking Commission when evaluating whether to designate or de-designate an institution as a Deposit Bank.
A change in mayoral administrations had a major impact on the history of the Act. The Bloomberg administration concluded that the RBA was thoughtful but misguided, delaying implementation of the Act. Subsequently, the de Blasio administration concluded that the Act was an appropriate exercise of the City’s discretion and moved ahead with appointment of CIAB members.
Preemption analysis. In determining whether the RBA was preempted by federal law, the issues were whether the law was regulatory in nature and in conflict with federal and state law.
The legislation arose from concerns that federal and state laws were ineffectual in the collection of information and influence over bank conduct regarding community reinvestment in New York City. The RBA was intended to remedy these shortcomings by “encouraging” banks to modify loans, increase lending, and provide more products and services to underserved or poorly-served segments of the population. This left little doubt in the court’s mind that the purpose of the law was to regulate banks.
It was also found that the law did not serve a proprietary purpose. The district judge pointed to the fact that the RBA would cost the City more than $500,000 per year, but would “yield the City—as banking customer—no discernible financial benefits.”
In addition, the court found that the RBA regulates conduct through public shaming of banks and threatening to withdraw deposits from banks that do not provide information to the CIAB. Banking Commission discretion in considering the CIAB Report was viewed as irrelevant. The law authorizes the Banking Commission to consider its rankings, even encouraging it, by requiring the CIAB to send the Banking Commission its Annual Report. “A law need not remove all discretion from an agency’s hands to be considered regulatory.”
The RBA conflicted with federal law in various ways:
- authorizing examination of bank books and records;
- regulating or influencing core banking activities; and
- imposing greater burdens and a different focus than the Community Reinvestment Act.
The court also agreed that the RBA is preempted by New York state law because the New York Banking Law evinces its intention to occupy the field of banking regulation for state-chartered institutions.
Wednesday, August 12, 2015
‘Stayin’ alive’—the challenge of living wills: Richmond Fed
By J. Preston Carter, J.D., LL.M.
Living wills aren’t for humans only. The Dodd-Frank Act requires large financial firms, those called “too-big-to-fail,” to prepare “living wills” detailing how they could be resolved under the Bankruptcy Code without threatening the rest of the financial system or requiring government assistance.
The Federal Reserve Bank of Richmond’s August Economic Brief explores the benefits and challenges of developing credible living wills—resolution plans for systemically important financial institutions, known as SIFIs. The Brief states that living wills should help regulators make SIFIs resolvable through bankruptcy with minimal disruption to the economy as a whole. However, regulators face significant challenges in making these large and complex financial institutions resolvable.
For more information about living wills for too-big-to-fail, subscribe to the Banking and Finance Law Daily.
Living wills aren’t for humans only. The Dodd-Frank Act requires large financial firms, those called “too-big-to-fail,” to prepare “living wills” detailing how they could be resolved under the Bankruptcy Code without threatening the rest of the financial system or requiring government assistance.
The Federal Reserve Bank of Richmond’s August Economic Brief explores the benefits and challenges of developing credible living wills—resolution plans for systemically important financial institutions, known as SIFIs. The Brief states that living wills should help regulators make SIFIs resolvable through bankruptcy with minimal disruption to the economy as a whole. However, regulators face significant challenges in making these large and complex financial institutions resolvable.
Background. The
Dodd-Frank Act requires each SIFI to create a plan that a bankruptcy court
could follow if the institution fell into severe financial distress. The plan
must set out a path for resolution without public bailouts and with minimal disruption
to the financial system.
However, if the Federal Reserve Board and the Federal
Deposit Insurance Corporation find that the best feasible plan does not set out
a credible path to resolving the firm without public support, they have the
power to require the firm to increase its capital or liquidity, limit its
growth, activities, or operations, and even divest assets to make such
resolution a credible option in the future.
Regulators’
challenges. Although living wills can help to curb the “too big to fail”
problem, regulators face a number of challenges in achieving this goal. In
“Living Wills for Systemically Important Financial Institutions: Some ExpectedBenefits and Challenges,” authors Arantxa Jarque and David A. Price consider
the challenges confronted by regulators who must oversee the transition of
SIFIs to resolvability, and some possible approaches to managing them.
Short-term financing.
One of the challenges facing policymakers is that SIFIs in their present form
have large liquidity needs. In the event of distress, finding interim funding
may be important to minimize losses and market disruption. Therefore, the authors
state, regulators assessing a living will should consider who could
realistically provide the funding.
The question is, according to the authors, would a failing
SIFI, given the short-term financing needs that its size and structure imply,
be able to obtain sufficient financing to see it through the bankruptcy
process? If not, authorities may feel compelled to provide emergency financing,
“effectively providing a bailout and encouraging moral hazard.”
To maintain a credible commitment not to provide financing—that
is, not to rescue the firm—policymakers may need to limit the reliance of some
SIFIs on maturity mismatch (for example, accepting deposits that can be
withdrawn on demand and using them to fund long-term loans). The authors
believe that once policymakers have established a credible commitment not to
rescue firms in distress, “the lack of a safety net would cause the price of
debt to become more sensitive to the amount of maturity transformation, leading
SIFIs to restrain their reliance on short-term funding and reducing the need
for short-term financing.”
Organizational
complexity. Another potential obstacle to making institutions resolvable is
that they may have highly complex structures. The authors found the challenge
here to be the difficulty faced by regulators in untangling relationships and
determining which parts are most important to the stability of the overall
financial system and could be taken over by another institution.
However, the authors point out that the Dodd-Frank Act gives
regulators the power to require SIFIs to reduce their complexity. Also, market
forces could prove helpful, the authors stated. Once regulators have
established the credibility of their commitment not to rescue, the authors
believe that debt holders would “have an incentive to monitor institutions for
excessive complexity that might reduce their ability to recover their money in
a bankruptcy proceeding.”
Cross-border issues.
One aspect of the complexity of systemically important institutions is that
they often operate across numerous national boundaries. The authors note that
while supervision of global institutions “is an everyday event in which
cross-border matters are dealt with routinely,” resolution of the institutions
is a rarity, leaving room for uncertainty about what a cross-border resolution
would look like.
The authors fear the possibility that multiple proceedings
may be problematic due to inconsistent legal regimes in different countries or
difficulties in learning about an institution’s foreign-based operations. Part
of the answer to these concerns may be found in “country level
separability”—making sure the local operations of an institution are resolvable
independently of its foreign-based entities.
The more self-contained and self-supporting an institution’s
operations within a country become, the authors contend, the less that
cross-border issues will reduce the value of the firm in resolution and the
more credibly regulators can commit to a no-bailout policy.
Transparency.
Even if SIFIs achieve financing structures and organizational structures that
make them resolvable, the authors write, this outcome will not lead to market
discipline if market participants do not believe that resolvability has
happened. This becomes another challenge for regulators: deciding whether
markets will accept the agencies’ own determinations about resolvability, or
whether markets will need to see some of the underlying facts for themselves.
Regulators need to decide how much transparency in living wills is desirable.
A conflict can arise between maintaining the confidentiality
of proprietary information and the public’s legitimate interest in assessing
whether a firm’s ability to be resolved without assistance has been achieved.
The authors said, “The right level of public transparency for living wills is
an open question.”
Summary. The
authors summarized by stating that challenges posed by short-term financing
needs, organizational complexity, and cross-border issues may require
regulators to use the enhanced authority granted to them by the Dodd-Frank Act
to impose changes in firm structure that ensure resolvability. However, market
forces should eventually push firms toward such changes, as well—once the
financial system understands that the living wills process significantly
decreases the probability of bailouts. And, sufficient “transparency in the
living wills process is key to achieving this outcome.”
Tuesday, August 11, 2015
‘Seat’ at CFPB ‘table’ goal of King/Rounds bill
By Katalina M. Bianco, J.D.
Senators Angus King (I-Maine) and Mike Rounds (R-SD) introduced legislation that would create a new small business advisory panel within the Consumer Financial Protection Bureau. The “Bureau of Consumer Financial Protection Advisory Board Enhancement Act” (S. 1963) is intended to ensure that small businesses, community banks, and credit unions have a stronger “voice” in the bureau’s rulemaking process, the lawmakers said.
In addition to creating a new small business advisory panel, S. 1963 would make permanent the community bank and credit union panels within the CFPB. The measure also would require each committee to adequately represent members from rural and underserved areas. Similar legislation, H.R. 1195, passed the House of Representatives in April 2015.
“Small businesses, community banks and credit unions are invaluable forces in America’s economy, and they deserve a seat at the table as the CFPB makes important and far-reaching financial decisions,” said King.
“As the CFPB continues to make decisions that affect every American, it is critical for rural areas, community banks, small businesses and credit unions to have a voice,” said Rounds.
ICBA reacts to bill. In a letter to King and Rounds, the Independent Community Bankers of America expressed support of the bill, stating that the Community Bank Advisory Council is an “invaluable forum” for community bankers to exchange information and perspectives with the CFPB on bureau rulemaking. The ICBA also commended the bill for ensuring that the CBAC would include community bankers from community banks serving rural areas as well as minority banks serving underserved communities.
For more information about S. 1963 and other CFPB-related legislation, subscribe to the Banking and Finance Law Daily.
Senators Angus King (I-Maine) and Mike Rounds (R-SD) introduced legislation that would create a new small business advisory panel within the Consumer Financial Protection Bureau. The “Bureau of Consumer Financial Protection Advisory Board Enhancement Act” (S. 1963) is intended to ensure that small businesses, community banks, and credit unions have a stronger “voice” in the bureau’s rulemaking process, the lawmakers said.
In addition to creating a new small business advisory panel, S. 1963 would make permanent the community bank and credit union panels within the CFPB. The measure also would require each committee to adequately represent members from rural and underserved areas. Similar legislation, H.R. 1195, passed the House of Representatives in April 2015.
“Small businesses, community banks and credit unions are invaluable forces in America’s economy, and they deserve a seat at the table as the CFPB makes important and far-reaching financial decisions,” said King.
“As the CFPB continues to make decisions that affect every American, it is critical for rural areas, community banks, small businesses and credit unions to have a voice,” said Rounds.
ICBA reacts to bill. In a letter to King and Rounds, the Independent Community Bankers of America expressed support of the bill, stating that the Community Bank Advisory Council is an “invaluable forum” for community bankers to exchange information and perspectives with the CFPB on bureau rulemaking. The ICBA also commended the bill for ensuring that the CBAC would include community bankers from community banks serving rural areas as well as minority banks serving underserved communities.
For more information about S. 1963 and other CFPB-related legislation, subscribe to the Banking and Finance Law Daily.
Monday, August 10, 2015
New York AG warns landlords on SCRA compliance
By Stephanie K. Mann, J.D.
Landlords near Watertown, N.Y. should cautious and ensure that they are complying with the Servicemembers Civil Relief Act, says New York Attorney General Eric T. Schneiderman. The warning came in the wake of the deployment of 2,500 servicemembers stationed at the Fort Drum U.S. Army Base located in upper state New York. “The protections in the Servicemembers Civil Relief Act are not optional and my office will be vigilant in shielding deploying servicemembers from those seeking to take advantage of them,” Schneiderman said.
According to Schneiderman, servicemember complaints indicated that some landlords have attempted to avoid complying with the SCRA by not recognizing the first written notice that a servicemember would be vacating a rental unit by the end of August 2015. Schneiderman cautioned landlords that if they have received written notice in response to a notification, certification, or verification from the servicemember’s commanding officer prior to receipt of official orders, the SCRA timing protections will be considered triggered by the first written notice from the servicemembers.
Schneiderman added that if a servicemember provides a landlord a lease termination notice prior to Aug. 1, 2015, in response to a notification, certification, or verification from the servicemember’s commanding officer, the SCRA mandates that the servicemember’s lease be immediately terminated, with no penalty fees for early termination or the forfeiture of a security deposit.
Schneiderman urged servicemembers who believe they have been adversely impacted to contact his office and file a complaint. Last month, Governor Andrew Cuomo announced that his administration reversed a prior state banking department determination that had allowed unlicensed lenders to make high interest rate loans to servicemembers who were stationed in New York but were not permanent New York residents.
For more information about SCRA compliance, subscribe to the Banking and Finance Law Daily.
Landlords near Watertown, N.Y. should cautious and ensure that they are complying with the Servicemembers Civil Relief Act, says New York Attorney General Eric T. Schneiderman. The warning came in the wake of the deployment of 2,500 servicemembers stationed at the Fort Drum U.S. Army Base located in upper state New York. “The protections in the Servicemembers Civil Relief Act are not optional and my office will be vigilant in shielding deploying servicemembers from those seeking to take advantage of them,” Schneiderman said.
According to Schneiderman, servicemember complaints indicated that some landlords have attempted to avoid complying with the SCRA by not recognizing the first written notice that a servicemember would be vacating a rental unit by the end of August 2015. Schneiderman cautioned landlords that if they have received written notice in response to a notification, certification, or verification from the servicemember’s commanding officer prior to receipt of official orders, the SCRA timing protections will be considered triggered by the first written notice from the servicemembers.
Schneiderman added that if a servicemember provides a landlord a lease termination notice prior to Aug. 1, 2015, in response to a notification, certification, or verification from the servicemember’s commanding officer, the SCRA mandates that the servicemember’s lease be immediately terminated, with no penalty fees for early termination or the forfeiture of a security deposit.
Schneiderman urged servicemembers who believe they have been adversely impacted to contact his office and file a complaint. Last month, Governor Andrew Cuomo announced that his administration reversed a prior state banking department determination that had allowed unlicensed lenders to make high interest rate loans to servicemembers who were stationed in New York but were not permanent New York residents.
For more information about SCRA compliance, subscribe to the Banking and Finance Law Daily.
Thursday, August 6, 2015
Borrowers have right to cancel private mortgage insurance
By Katalina M. Bianco, J.D.
The Consumer Financial Protection Bureau is nudging lenders about the Homeowners Protection Act requirements on the cancellation and termination of private mortgage insurance. CFPB Bulletin 2015-03 is intended to help mortgage servicers comply with the HPA. Notably, the CFPB said it had identified substantial confusion over the cancellation and termination of PMI, and bureau examinations have uncovered violations of several provisions.
“Consumers should not be billed for unnecessary private mortgage insurance,” said CFPB Director Richard Cordray. “We will continue to supervise mortgage servicers to ensure they are treating borrowers fairly, and today’s guidance should help servicers come into compliance with the Homeowners Protection Act.”
The bulletin addresses borrower-requested cancellation, automatic termination, final termination, and PMI refunds.
Borrower-requested cancellation. A borrower may initiate cancellation of PMI coverage for residential mortgage transactions by submitting a written request to the servicer. For a borrower who has initiated cancellation, the HPA provides that if the borrower meets certain requirements, PMI must be cancelled on the “cancellation date.” If the borrower does not meet those requirements on the “cancellation date,” the HPA provides that PMI be canceled at a later date once the borrower meets the specified requirements. “Cancellation date” is defined as, at the option of the borrower, either: the date on which the principal balance of the mortgage is first scheduled to reach 80 percent of the original value of the property (regardless of the outstanding balance), or (2) the date on which the principal balance of the mortgage reaches 80 percent of the original value of the property based on actual payments.
The bulletin outlines additional requirements that a borrower must meet to request cancellation, such as having a good payment history and being current on the loan.
Automatic termination. The HPA provides that if the borrower is current on the loan, the requirement for PMI must automatically be terminated on the “termination date.” The “termination date” is defined as the date on which the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the property securing the loan. If the borrower is not current on the loan on the termination date, the HPA requires that PMI automatically terminate on the first day of the first month beginning after the date that the borrower becomes current on the loan. If these conditions are met, automatic termination of PMI is required even if the current value of the property has declined below the original value.
Final termination. If PMI is not terminated under the borrower-requested cancellation or automatic termination provisions, the HPA provides that a requirement for PMI coverage cannot be imposed beyond the first day of the month following the date that is the midpoint of the amortization period of the loan if, on that date, the borrower is current on the loan.
Because the HPA applies only to residential mortgage loans consummated on or after July 29, 1999, the effective date of the Act, standard 30-year mortgage loans would not have started becoming eligible for final PMI termination under this provision until August 2014. The CFPB reminds servicers that they should have appropriate policies, procedures, and processes in place to ensure that they are terminating borrowers’ PMI coverage consistent with the HPA requirements, particularly with respect to the final termination provisions.
PMI refunds. In one or more mortgage servicing examinations, CFPB examiners have found instances of improper collection of unearned PMI premiums and excessive delays in processing borrower requests for PMI cancellation, according to the bulletin. The bureau also found that some servicers engage in a practice of placing the amount of the returned premiums into the borrower’s escrow account and, in at least one instance, a servicer was cited because its vendor kept the returned premiums in the borrower’s escrow account indefinitely rather than returning the premiums within 45 days as required by the HPA. The CFPB cautions servicers to monitor vendors so as to ensure the timely return of unearned PMI premiums to borrowers.
For more information about private mortgage insurance and the CFPB, subscribe to the Banking and Finance Law Daily.
The Consumer Financial Protection Bureau is nudging lenders about the Homeowners Protection Act requirements on the cancellation and termination of private mortgage insurance. CFPB Bulletin 2015-03 is intended to help mortgage servicers comply with the HPA. Notably, the CFPB said it had identified substantial confusion over the cancellation and termination of PMI, and bureau examinations have uncovered violations of several provisions.
“Consumers should not be billed for unnecessary private mortgage insurance,” said CFPB Director Richard Cordray. “We will continue to supervise mortgage servicers to ensure they are treating borrowers fairly, and today’s guidance should help servicers come into compliance with the Homeowners Protection Act.”
The bulletin addresses borrower-requested cancellation, automatic termination, final termination, and PMI refunds.
Borrower-requested cancellation. A borrower may initiate cancellation of PMI coverage for residential mortgage transactions by submitting a written request to the servicer. For a borrower who has initiated cancellation, the HPA provides that if the borrower meets certain requirements, PMI must be cancelled on the “cancellation date.” If the borrower does not meet those requirements on the “cancellation date,” the HPA provides that PMI be canceled at a later date once the borrower meets the specified requirements. “Cancellation date” is defined as, at the option of the borrower, either: the date on which the principal balance of the mortgage is first scheduled to reach 80 percent of the original value of the property (regardless of the outstanding balance), or (2) the date on which the principal balance of the mortgage reaches 80 percent of the original value of the property based on actual payments.
The bulletin outlines additional requirements that a borrower must meet to request cancellation, such as having a good payment history and being current on the loan.
Automatic termination. The HPA provides that if the borrower is current on the loan, the requirement for PMI must automatically be terminated on the “termination date.” The “termination date” is defined as the date on which the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the property securing the loan. If the borrower is not current on the loan on the termination date, the HPA requires that PMI automatically terminate on the first day of the first month beginning after the date that the borrower becomes current on the loan. If these conditions are met, automatic termination of PMI is required even if the current value of the property has declined below the original value.
Final termination. If PMI is not terminated under the borrower-requested cancellation or automatic termination provisions, the HPA provides that a requirement for PMI coverage cannot be imposed beyond the first day of the month following the date that is the midpoint of the amortization period of the loan if, on that date, the borrower is current on the loan.
Because the HPA applies only to residential mortgage loans consummated on or after July 29, 1999, the effective date of the Act, standard 30-year mortgage loans would not have started becoming eligible for final PMI termination under this provision until August 2014. The CFPB reminds servicers that they should have appropriate policies, procedures, and processes in place to ensure that they are terminating borrowers’ PMI coverage consistent with the HPA requirements, particularly with respect to the final termination provisions.
PMI refunds. In one or more mortgage servicing examinations, CFPB examiners have found instances of improper collection of unearned PMI premiums and excessive delays in processing borrower requests for PMI cancellation, according to the bulletin. The bureau also found that some servicers engage in a practice of placing the amount of the returned premiums into the borrower’s escrow account and, in at least one instance, a servicer was cited because its vendor kept the returned premiums in the borrower’s escrow account indefinitely rather than returning the premiums within 45 days as required by the HPA. The CFPB cautions servicers to monitor vendors so as to ensure the timely return of unearned PMI premiums to borrowers.
For more information about private mortgage insurance and the CFPB, subscribe to the Banking and Finance Law Daily.
Wednesday, August 5, 2015
Is the CFPB ramping up UDAAP enforcement?
By John M. Pachkowski, J.D.
In the two weeks or so following the Consumer Financial Protection Bureau’s fourth birthday, the bureau has not sat back on accolades and criticism thrown its way and is steaming forward with using its powers to enforce provisions of the Dodd-Frank Act prohibiting unfair, deceptive, or abusive acts or practices.
Illegal credit card practices. Citibank entered into a consent order, on July 21, 2015, requiring it to pay $735 million for illegal credit card practices. The CFPB specifically found that Citibank or its subsidiaries deceptively marketed these various debt protection and credit monitoring add-on products during telemarketing calls, online enrollment, and “point-of-sale” application and enrollment at retailers, or when enrolled consumers later called to cancel certain products. The bureau’s enforcement action, joined by the Office of the Comptroller of the Currency, also found that Citibank or its subsidiaries billed consumers for the products without having the authorization necessary to perform the credit-monitoring and credit-report-retrieval services. Finally, the CFPB found that Citibank misled consumers when collecting payment on delinquent retailer-affiliated credit card accounts. For instance, a $14.95 fee associated with a pay-by-phone option was misrepresented as a “processing” fee, and Citibank did not explain that the fee was to post payment to the account on the same day it was made rather than a fee to allow payment.
Offshore payday lending. In a federal lawsuit, filed on July 31, 2015, the CFPB claimed that various actions taken by NDG Financial Corp., and its “maze of interrelated companies,” to collect loan amounts and fees that were void or that consumers had no obligations to repay, were in violation of the Dodd-Frank UDAAP provisions. Other allegations in the lawsuit stated that the companies:
Mortgage payment programs. The bureau also entered into consent orders with LoanCare, LLC, a Virginia-based residential mortgage servicer, and Paymap, Inc., a Colorado-based payment processing company, to resolve charges that they deceived consumers with advertisements for a mortgage payment program that promised tens of thousands of dollars in interest savings from more frequent mortgage payments. The companies agreed to pay more than $38 million to resolve the CFPB’s charges. In the consent order, the bureau found that Paymap was not making more frequent payments to loan servicers, but was holding the money it withdrew in custodial accounts and then making mortgage payments on the original monthly schedule.
Student loan servicing. Although recent UDAAP actions have targeted various consumer financial products or services, student loan servicing practices have garnered the most of the CFPB’s attention in the past few weeks.
Discover Bank and two of its affiliates—The Student Loan Corporation and Discover Products, Inc.—entered into a consent order with the bureau to settle claims that the companies violated the UDAAP provisions in connection with their student loan servicing activities that included more than 800,000 accounts acquired from Citibank. The CFPB claimed that the companies engaged in unfair and deceptive acts and practices relating related to: their failure to furnish clear information regarding the student-loan interest consumers paid; initiating collection calls to consumers at inconvenient times; and overstating the minimum amount due in student-loan billing statements.
The CFPB also sued Student Financial Aid Services, Inc. in a California federal court illegal sales and billing practices. The complaint alleged that unfair and deceptive acts or practices on the part of the company for luring in consumers with misleading information about the total cost of its subscription financial services and then charging them with undisclosed and unauthorized automatic recurring charges. Under the proposed consent order, SFAS would stop its illegal practices and pay $5.2 million to consumers.
Finally, Citigroup Inc. has indicated that its national bank subsidiary, Citibank, N.A., is currently subject to regulatory investigation concerning certain student loan servicing practices. Citigroup noted in its 10-Q, filed on Aug. 3, 2015, that Citibank, N.A., “is cooperating with the investigation” and that “[s]imilar servicing practices have been the subject of an enforcement action against at least one other institution.” The “similar servicing practices” alluded to by Citigroup were the subject of the enforcement action taken against Discover Bank.
For more information about UDAAP, subscribe to the Banking and Finance Law Daily.
In the two weeks or so following the Consumer Financial Protection Bureau’s fourth birthday, the bureau has not sat back on accolades and criticism thrown its way and is steaming forward with using its powers to enforce provisions of the Dodd-Frank Act prohibiting unfair, deceptive, or abusive acts or practices.
Illegal credit card practices. Citibank entered into a consent order, on July 21, 2015, requiring it to pay $735 million for illegal credit card practices. The CFPB specifically found that Citibank or its subsidiaries deceptively marketed these various debt protection and credit monitoring add-on products during telemarketing calls, online enrollment, and “point-of-sale” application and enrollment at retailers, or when enrolled consumers later called to cancel certain products. The bureau’s enforcement action, joined by the Office of the Comptroller of the Currency, also found that Citibank or its subsidiaries billed consumers for the products without having the authorization necessary to perform the credit-monitoring and credit-report-retrieval services. Finally, the CFPB found that Citibank misled consumers when collecting payment on delinquent retailer-affiliated credit card accounts. For instance, a $14.95 fee associated with a pay-by-phone option was misrepresented as a “processing” fee, and Citibank did not explain that the fee was to post payment to the account on the same day it was made rather than a fee to allow payment.
Offshore payday lending. In a federal lawsuit, filed on July 31, 2015, the CFPB claimed that various actions taken by NDG Financial Corp., and its “maze of interrelated companies,” to collect loan amounts and fees that were void or that consumers had no obligations to repay, were in violation of the Dodd-Frank UDAAP provisions. Other allegations in the lawsuit stated that the companies:
- Made false representations to consumers that non-payment of debt would result in lawsuit, arrest, imprisonment, or wage garnishment, despite lacking the intention or legal authority to take such actions.
- Included unlawful, irrevocable wage-assignment clauses in loan agreements that allowed the companies to take payments directly from consumers’ employers’ payroll accounts.
Mortgage payment programs. The bureau also entered into consent orders with LoanCare, LLC, a Virginia-based residential mortgage servicer, and Paymap, Inc., a Colorado-based payment processing company, to resolve charges that they deceived consumers with advertisements for a mortgage payment program that promised tens of thousands of dollars in interest savings from more frequent mortgage payments. The companies agreed to pay more than $38 million to resolve the CFPB’s charges. In the consent order, the bureau found that Paymap was not making more frequent payments to loan servicers, but was holding the money it withdrew in custodial accounts and then making mortgage payments on the original monthly schedule.
Student loan servicing. Although recent UDAAP actions have targeted various consumer financial products or services, student loan servicing practices have garnered the most of the CFPB’s attention in the past few weeks.
Discover Bank and two of its affiliates—The Student Loan Corporation and Discover Products, Inc.—entered into a consent order with the bureau to settle claims that the companies violated the UDAAP provisions in connection with their student loan servicing activities that included more than 800,000 accounts acquired from Citibank. The CFPB claimed that the companies engaged in unfair and deceptive acts and practices relating related to: their failure to furnish clear information regarding the student-loan interest consumers paid; initiating collection calls to consumers at inconvenient times; and overstating the minimum amount due in student-loan billing statements.
The CFPB also sued Student Financial Aid Services, Inc. in a California federal court illegal sales and billing practices. The complaint alleged that unfair and deceptive acts or practices on the part of the company for luring in consumers with misleading information about the total cost of its subscription financial services and then charging them with undisclosed and unauthorized automatic recurring charges. Under the proposed consent order, SFAS would stop its illegal practices and pay $5.2 million to consumers.
Finally, Citigroup Inc. has indicated that its national bank subsidiary, Citibank, N.A., is currently subject to regulatory investigation concerning certain student loan servicing practices. Citigroup noted in its 10-Q, filed on Aug. 3, 2015, that Citibank, N.A., “is cooperating with the investigation” and that “[s]imilar servicing practices have been the subject of an enforcement action against at least one other institution.” The “similar servicing practices” alluded to by Citigroup were the subject of the enforcement action taken against Discover Bank.
For more information about UDAAP, subscribe to the Banking and Finance Law Daily.
Tuesday, August 4, 2015
Independent mortgage bankers note their ‘resurgent role’
By Thomas G. Wolfe, J.D.
In issuing a July 2015 “Fact Sheet,” the Mortgage Bankers Association (MBA) presents an interesting portrait of the independent mortgage bankers’ market share of the origination of home-purchase mortgages in the United States over the last several years, despite their size in relation to other financial institutions.
For example, in its Fact Sheet, entitled “The Resurgent Role of the Independent Mortgage Bank,” the MBA states that, since 2008, independent mortgage bankers comprise about 12 percent of all entities required to report under the federal Home Mortgage Disclosure Act. Yet, despite their size in the marketplace, the independent mortgage bankers’ market share of the origination of home-purchase mortgages has increased “from 25 percent in 2008 to 40 percent in 2013.” Similarly, the MBA points out that independent mortgage bankers have originated 58 percent of all government-insured or government-guaranteed purchase mortgages in recent times.
In sketching the business model of an independent mortgage bank, the MBA’s Fact Sheet observes that independent mortgage banks are non-depository institutions that “typically borrow from various warehouse lenders to finance loans prior to their sale in the secondary market.” In addition, independent mortgage banks usually concentrate exclusively on providing home-mortgage financing, mortgage servicing, and other closely related services.
According to the MBA, most independent mortgage banks are privately held companies that are owned and operated by a single individual or a small number of people “whose personal net worth is fully invested in the company.” Consequently, these owners of independent mortgage banks almost always have “skin in the game” and have “strong incentives to manage the business for the long term,” the MBA emphasizes.
Further, the MBA’s Fact Sheet indicates that independent mortgage banks tend to focus much of their lending efforts on government-insured or government-guaranteed loans, which “predominantly serve low- and moderate-income families and first-time buyers.” These government-backed programs typically involve the Federal Housing Administration, Veterans Administration, or Rural Housing Service, among others, the MBA notes.
For more information about the role of independent mortgage banks, subscribe to the Banking and Finance Law Daily.
In issuing a July 2015 “Fact Sheet,” the Mortgage Bankers Association (MBA) presents an interesting portrait of the independent mortgage bankers’ market share of the origination of home-purchase mortgages in the United States over the last several years, despite their size in relation to other financial institutions.
For example, in its Fact Sheet, entitled “The Resurgent Role of the Independent Mortgage Bank,” the MBA states that, since 2008, independent mortgage bankers comprise about 12 percent of all entities required to report under the federal Home Mortgage Disclosure Act. Yet, despite their size in the marketplace, the independent mortgage bankers’ market share of the origination of home-purchase mortgages has increased “from 25 percent in 2008 to 40 percent in 2013.” Similarly, the MBA points out that independent mortgage bankers have originated 58 percent of all government-insured or government-guaranteed purchase mortgages in recent times.
In sketching the business model of an independent mortgage bank, the MBA’s Fact Sheet observes that independent mortgage banks are non-depository institutions that “typically borrow from various warehouse lenders to finance loans prior to their sale in the secondary market.” In addition, independent mortgage banks usually concentrate exclusively on providing home-mortgage financing, mortgage servicing, and other closely related services.
According to the MBA, most independent mortgage banks are privately held companies that are owned and operated by a single individual or a small number of people “whose personal net worth is fully invested in the company.” Consequently, these owners of independent mortgage banks almost always have “skin in the game” and have “strong incentives to manage the business for the long term,” the MBA emphasizes.
Further, the MBA’s Fact Sheet indicates that independent mortgage banks tend to focus much of their lending efforts on government-insured or government-guaranteed loans, which “predominantly serve low- and moderate-income families and first-time buyers.” These government-backed programs typically involve the Federal Housing Administration, Veterans Administration, or Rural Housing Service, among others, the MBA notes.
For more information about the role of independent mortgage banks, subscribe to the Banking and Finance Law Daily.
Monday, August 3, 2015
Perry on financial reform: "We will not bail out a single bank"
By Lisa M. Goolik, J.D.
In a speech last week, former Texas Gov. and Republican presidential candidate Rick Perry warned the nation that another financial crisis is on the horizon and wondered if we had learned anything from the last financial crisis. Perry presented his agenda for Wall Street, advocating undoing much of the Dodd-Frank Act and possibly reinstituting activity limits comparable to those of the Glass-Steagall Act. Perry also made clear his belief that failing banks never should be bailed out by the federal government.
"Wall Street should not be let off the hook for its bad behavior. Banks made a lot of mistakes regarding risk management leading up to the crisis. Some financiers intentionally misled investors and customers. They pushed people into deceptive financial products," said Perry.
Dodd-Frank criticisms. Perry called for substantial changes to many Dodd-Frank provisions, although he did not go so far as to suggest the act should be repealed. According to Perry, the Dodd-Frank Act did not address the cause of the crisis, which Perry believes should be attributed to the affordable housing policies of the Clinton and Bush Administrations.
"Once the smoke cleared, Congress misdiagnosed the problem, passed the wrong remedy, and actually made things worse," said Perry. Rather, Perry suggested that Fannie Mae and Freddie Mac be ended and for their activities to be managed more conservatively, with higher down payments on loans and higher GSE capital requirements, while that process is completed.
Consumer Financial Protection Bureau. Perry did not advocate the elimination of the Consumer Financial Protection Bureau. He did, however, echo complaints that it is too powerful and unaccountable. Perry would address these complaints by changing the bureau’s leadership structure and subjecting it to the congressional appropriations process.
Ending TBTF. Perry also pushed Washington to end “too big to fail,” stating, "we need to restore market forces to banking, where failure is not rewarded or bailed out."
A “fact sheet” released at the time of the speech included several steps that could be taken toward that goal:
- The recent Federal Reserve Board rule requiring global systemically important banks to hold higher levels of capital based on their risk could be strengthened.
- The Dodd-Frank orderly liquidation authority could be replaced with a bankruptcy process that would apply to financial institutions of all sizes.
- Banks could be required to separate traditional banking activities from investment activities—as Glass-Steagall required—or they could be required to hold extra capital against their trading activities.
For more information about the Dodd-Frank Act, subscribe to the Banking and Finance Law Daily.
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