Housing reform plan would alter federal role in mortgage finance

By Andrew A. Turner, J.D.

The Trump administration has released a plan proposing to wind down government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The proposal was included in a comprehensive plan to reform and reorganize the federal government entitled "Delivering Government Solutions in the 21st Century." In 2017, President Donald J. Trump signed an Executive Order directing the Office of Management and Budget to work on a comprehensive plan to reorganize the Executive Branch. After a year of planning, including getting input from stakeholders, agencies, and the public, the White House has released a proposal intended to make the federal government more responsive and accountable.

 

According to the Fact Sheet provided, the report outlines the administration’s analysis and recommendations for structural realignment of the Executive Branch. The proposal includes plans to transform the way the federal government delivers support for the U.S. housing finance system to ensure more transparency and accountability to taxpayers, and to minimize the risk of taxpayer-funded bailouts. Proposed changes include ending the conservatorship of Fannie Mae and Freddie Mac, reducing their role in the housing market, and providing an explicit, limited federal backstop that is on-budget and apart from the Federal support for low- and moderate-income homebuyers.

 

Other proposed changes affecting the banking and finance sector include the following.

1. Consolidate and streamline financial education and literacy programs currently operating across more than 20 federal agencies to ensure effective allocation of Federal financial literacy resources and avoid unneeded overlap and duplication.
2. Transition federal agencies’ business processes and recordkeeping to a fully electronic environment, and end the National Archives and Records Administration’s acceptance of paper records by Dec. 31, 2022. This would improve agencies’ efficiency, effectiveness, and responsiveness to citizens by converting paper-based processes to electronic workflows, expanding online services, and enhancing management of Government records, data, and information.

Reaction to proposal. Senate Banking Committee member Bob Corker (R-Tenn), issued a statement on the plan, stating that the proposal "closely resembles the approach we laid out in recent legislative drafts developed on a bipartisan basis in the Senate" and that he is hopeful the reorganization plan help "address the last unfinished business of the financial crisis." Corker added that he agrees that "creating competition is a critical step as we work to shrink Fannie and Freddie and put an end to ‘too big to fail’ mortgage companies."

 

In response to the proposal to reform GSE principles, the Community Home Lenders Association (CHLA) applauded the administration for calling for the end of the conservatorship of Fannie Mae and Freddie Mac. However, the statement noted that CHLA "continues to have significant concerns about adding GSE guarantors, which could facilitate vertical integration and hurt small lenders and consumers."

 

According to a statement by Ed DeMarco, president of the Housing Policy Council division of Financial Services Roundtable, the organization is "pleased" with the proposal and is ready to work with the administration "on ending the failed GSE-based system that has resulted in decade-long conservatorships and toward a market-based system that serves homebuyers, fosters competition, and protects taxpayers."

 

DeMarco stated that the country needs a modernized housing finance system with competitors for Fannie Mae and Freddie Mac, a market based on private capital, and a catastrophic government backstop for the secondary market that provides protection for the taxpayers and the economy. The Housing Policy Council supports action on the issue."

 

The Mortgage Bankers Association (MBA) commented on the proposal to reform the government's role in housing finance. David H. Stevens, CMB, President and CEO of the MBA, stated that the proposal "includes many core principles that MBA has long advocated for, such as an explicit government guarantee on MBS only as a catastrophic backstop, allowing for multiple guarantors and ensuring small lender access."”

 

FHFA proposes new capital requirements for Fannie Mae, Freddie Mac. In an earlier development, the Federal Housing Financing Authority released a proposed rule on capital requirements for Fannie Mae and Freddie Mac and invited comments on the proposal. The regulatory capital requirements for the Enterprises have been suspended since 2008 and will continue to be suspended, as long as the Enterprises are in conservatorship. The proposed rule would implement a new framework for risk-based capital requirements and a revised minimum leverage capital requirement for the Enterprises.

 

By proposing this rule, FHFA is not attempting to take a position on housing finance reform and the proposed rule is not connected to efforts or ideas about recapitalizing the Fannie Mae and Freddie Mac or administratively releasing them from conservatorship. FHFA continues to believe that it is the role of Congress to determine the future of housing finance reform and what role, if any, Fannie Mae and Freddie Mac should play in that reform.

 

According to the agency’s Fact Sheet: Proposed Rule on Enterprise Capital, after the Enterprises went into conservatorship in 2008, the FHFA identified the need for a new risk management framework for the Enterprises’ business decisions. That framework is the Conservatorship Capital Framework, initially implemented in 2017. The Conservatorship Capital Framework is the foundation for the proposed rule, which will:

• transparently communicate FHFA’s views as a financial regulator about capital adequacy as Congress and the administration work to determine the future of housing finance reform;
• update the existing capital rule by drawing on regulatory developments implemented in response to the financial crisis;
• allow market participants to comment on the proposed capital requirements for the Enterprises and other entities playing the same or similar roles after housing finance reform; and
• help inform FHFA’s views as conservator about refinements that may be appropriate to the framework that will continue to apply as long as the enterprises remain in conservatorship.

The new framework in the proposed rule includes a granular assessment of credit risk specific to different mortgage loan categories, as well as market risk, operational risk, and going concern buffer components. For single-family and multifamily loans and guarantees, the proposed credit risk capital requirements use look-up tables consisting of base grids and risk multipliers to adjust capital requirements for the risk characteristics of each type of mortgage asset, so that an Enterprise’s required capital will change as the composition of its book of business changes.

 

The market risk component establishes requirements for the market risk associated with certain assets, ranging from single-family whole loans to commercial mortgage-backed securities. The operational risk component establishes a capital requirement of 8 basis points for all assets and guarantees, and the going-concern buffer component establishes a 75 basis point requirement for most assets and guarantees.

 

The proposal also includes two alternatives for an updated minimum leverage capital requirement. Under the first approach, the 2.5 percent alternative, the Enterprises would be required to hold capital equal to 2.5 percent of total assets and off-balance sheet guarantees related to securitization activities. Under the second approach, the Enterprises would be required to hold capital equal to 1.5 percent of trust assets and 4 percent of non-trust assets, where trust assets are defined as Fannie Mae mortgage-backed securities or Freddie Mac participation certificates held by third parties and off-balance sheet guarantees related to securitization activities, and nontrust assets are defined as total assets as determined in accordance with GAAP plus off-balance sheet guarantees related to securitization activities minus trust assets.

For more information about mortgage finance, subscribe to the Banking and Finance Law Daily.

CFPB structure found unconstitutional

By J. Preston Carter, J.D., LL.M.

Holding that the Consumer Financial Protection Bureau’s structure is unconstitutional, the U.S. District Court for the Southern District of New York found that the Bureau lacks the authority to bring claims under the Consumer Financial Protection Act and, therefore, terminated it as a party to a lawsuit against RD Legal Funding, alleged to have scammed former NFL players and 9/11 medical workers into taking cash advances on payouts from settlement agreements that functioned as usurious loans, void under New York state law. However, according to the court, the New York Attorney General has independent authority to bring claims under the CFPA. The Court concluded that the "NYAG has alleged plausibly claims under the CFPA and under New York law," and it denied RD Legal Funding’s motion to dismiss the complaint (Consumer Financial Protection Bureau v. RD Legal Funding LLC., June 21, 2018, Preska, L.).

Constitutionality. RD Legal Funding argued that the CFPB is unconstitutionally structured and, therefore, lacks the authority to bring claims under the CFPA. The court acknowledged the decision of the U.S. Court of Appeals for the District of Columbia Circuit in PHH Corp. v. CFPB, which found that the CFPB’s single director structure was not unconstitutional, but said, "Of course, that decision is not binding on this Court." Instead, the court agreed with the dissenting opinion of Judge Kavanaugh that the CFPB "is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director."

However, the court went beyond Kavanaugh’s opinion that the remedy would be to sever the "for-cause removal provision." Instead, it agreed with Judge Henderson’s dissenting opinion that "A severability clause ‘does not give the court power to amend’ a statute. Nor is it a license to cut out the ‘heart’ of a statute. Because section 5491(c)(3) [the for-cause removal provision] is at the heart of Title X [Dodd Frank], I would strike Title X in its entirety."

Ratification. Another issue addressed by the court was the CFPB’s Notice of Ratification, in which it attempted to ratify its decision to file this enforcement decision prior to the appointment of the CFPB’s Acting Director, Mick Mulvaney, asserting that, because the President may remove Mulvaney at will, RD Legal Funding may not obtain dismissal on the grounds that the instant action was initially filed by a Director at the CFPB removable only for cause. However, the court dismissed that argument, agreeing with RD Legal Funding that the CFPB’s Ratification does not address accurately the constitutional issue raised in this case, which concerns the structure and authority of the CFPB itself, not the authority of an agent to make decisions on the CFPB’s behalf.

Hensarling statement. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) applauded the decision for confirming "what House Republicans have said all along, that the Bureau’s structure is unconstitutional." He added that the Financial CHOICE Act, passed by the House on June 8, 2017, fixes the constitutional defects identified by the District Court by subjecting the Bureau to the control of the people’s elected representatives.

ABA response. Responding to the ruling, the America Bankers Association released a statement that it "has long believed that the Bureau should be more accountable to Congress and that a five-member, bipartisan commission—as originally envisioned in drafts of the Dodd-Frank Act—would balance the Bureau’s needs for independence and accountability, while broadening perspectives on rulemaking and enforcement."

Consumer groups expect reversal on appeal. The Consumer Federal of America stated that the court’s "order is likely to be reversed on appeal because it cobbles together some of the most extreme views of the CFPB and also severability jurisprudence." According to the Center for Responsible Lending, "The impact of the district court’s decision is unclear, but this extreme ruling disregards the holding of the full D.C. Circuit Court of Appeals, which affirmed the agency’s constitutionality."

Public Citizen also expects the decision to be overturned on appeal. "Applying longstanding U.S. Supreme Court precedent, the en banc D.C. Circuit Court of Appeals correctly ruled earlier this year that the CFPB’s structure is constitutional. Congress created the CFPB to protect American consumers from big banks and financial industry rip-offs, which is why the financial industry is working so hard to destroy the agency."

For more information about the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.

Community bankers comment on how CFPB can improve rulemaking processes

By Thomas G. Wolfe, J.D.

In response to the Consumer Financial Protection Bureau’s Request for Information (RFI), the Independent Community Bankers of America (ICBA) has submitted comments to the CFPB on the Bureau’s “overall efficiency and effectiveness of its rulemaking processes.” In its June 7, 2018, comment letter, the ICBA stresses the restrictive impact of existing federal laws and regulations on the Bureau’s rulemaking authority. Accordingly, the ICBA makes recommendations for the Bureau’s improvement in the agency’s adherence to specified requirements of the Administrative Procedure Act, Small Business Regulatory Enforcement Fairness Act (SBREFA), and Dodd-Frank Act. Further, the ICBA urges the Bureau to exercise its exemption authority under the Dodd-Frank Act to “tailor regulations to exempt community banks from any final rule that hampers community banks’ ability to provide financial services and products to their customers.”

In March 2018, the CFPB announced that it was seeking input on the efficiency and effectiveness of the “discretionary aspects” of its rulemaking processes. The pertinent RFI asked for input on both the positive and negative aspects of the Bureau’s rulemaking processes as well as specific suggestions regarding those processes.

ICBA recommendations. Among other things, the ICBA’s comment letter, authored by ICBA Assistant Vice President and Regulatory Counsel Rhonda Thomas-Whitley, recommends that the Bureau improve its rulemaking processes by:

• allowing additional time for “small entity representatives” to review SBREFA meeting materials and prepare for a SBREFA panel, while also allowing Bureau staff time to “obtain appropriate knowledge” on the topic;
• ensuring that any final SBREFA report include justifications for any feedback that will not be considered or reflected in a proposed rule;
• ensuring feedback received from small entity representatives is reflected in proposed and final rules;
• streamlining the notice of proposed rulemaking (NPRM) by providing a concise list of areas in which the Bureau seeks comments;
• adding a table of contents to the NPRM;
• establishing longer comment periods for proposed rules that do not have a statutory deadline;
• responding in a timely fashion to a stakeholder's request to extend a comment period;
• streamlining the number of pages in a final rule by “limiting content to the summary, background, section-by-section analysis, and legal authority;”
• adding a table of contents to a final rule that includes links to sections and documents;
• including a separate “red-lined final rule” to allow for the speedy identification of changes to existing regulations;
• simultaneously releasing all implementation and supporting materials with a final rule;
• responding promptly to stakeholder requests to extend compliance deadlines—rather than “delaying a decision to a few days before the deadline;”
• working with other prudential regulators to facilitate release of examination procedures “six to nine months before a final rule’s effective date;” and
• using its Dodd-Frank exemption authority to exempt community banks from final rules that hamper the banks from providing financial products and services to customers.

For more information about comment letters to federal or state regulators from organizations within the financial services industry, subscribe to the Banking and Finance Law Daily.

Financial facilitators used to enable human rights abuses, advisory warns

By Andrew A. Turner, J.D.

The Financial Crimes Enforcement Network has issued an advisory on financial activities of corrupt foreign political figures and their involvement in human rights abuses. The advisory includes a list of 14 red flags for which U.S. financial institutions should be alert.

FinCEN warns that the use of financial facilitators is one way that corrupt senior foreign political figures access the financial system to move or hide illicit proceeds, evade sanctions, or otherwise engage in illegal activity. These corrupt senior foreign political figures and facilitators, according to a FinCEN advisory, often contribute directly or indirectly to human rights abuses.

“FinCEN is issuing this advisory to warn financial institutions about the use of financial facilitators, shell companies, and other schemes corrupt actors and human rights abusers use to move and hide their illicit proceeds and evade sanctions,” said Treasury Undersecretary Sigal Mandelker.

To assist U.S. financial institutions’ effort to insulate themselves from corruption, the advisory highlights a number of typologies used by foreign politically exposed person (PEP) facilitators to obscure and launder the illicit proceeds of high-level political corruption. For example, the typologies used by financial facilitators of corrupt PEPs may include the misappropriation of state assets, the use of shell companies, or the exploitation of the real estate sector.

Misappropriation of state assets. Foreign corrupt PEPs, through their facilitators, may amass fortunes through the misappropriation of state assets and exploit their own official positions to engage in narcotics trafficking, money laundering, embezzlement of state funds, and other corrupt activities. Such PEPs may exploit corporations, including financial institutions that wish to do business with the government to redirect government resources for their own profit.

Use of shell companies. PEP facilitators commonly use shell companies to obfuscate ownership and mask the true source of the proceeds of corruption. Shell companies are typically non-publicly traded corporations or limited liability companies that have no physical presence beyond a mailing address and generate little to no independent economic value.

Corruption in the Real Estate Sector. Real estate transactions and the real estate market have characteristics that make them vulnerable to abuse by illicit actors, including corrupt foreign PEPs or PEP facilitators. For example, many real estate transactions involve high-value assets, opaque entities, and processes that can limit transparency because of their complexity and diversity. In addition, the real estate market can be an attractive vehicle for laundering illicit gains because of the manner in which real estate appreciates in value, “cleans” large sums of money in a single transaction, and shields ill-gotten gains from market instability and exchange-rate fluctuations.

Regulatory obligations. The advisory reminds U.S. financial institutions of their due diligence and suspicious activity report filing obligations related to such corrupt senior foreign political figures and their financial facilitators Consistent with existing regulatory obligations, FinCEN cautioned, “financial institutions should take reasonable, risk-based steps to identify and limit exposure they may have to funds and other assets associated with individuals and entities involved in laundering illicit proceeds, including the proceeds of foreign corruption.”

For more information about the duties of financial institutions, subscribe to the Banking and Finance Law Daily.

Alleged student debt relief scammers settle with FTC

By J. Preston Carter, J.D., LL.M.

The Federal Trade Commission has reached a settlement with Student Debt Relief Group, charged with falsely claiming to be affiliated with the Department of Education, charging consumers up to $1,000 in illegal upfront fees to enter them into free government programs, and collecting monthly fees they falsely claimed would be credited toward consumers’ student loans. The FTC’s complaint charges individual Salar Tahour and his companies—Los Angeles-based M&T Financial Group and American Counseling Center Corp., doing business as Student Debt Relief Group, SDRG, Student Loan Relief Counselors, SLRC, StuDebt, and Capital Advocates Group, with violating the FTC Act and the FTC's Telemarketing Sales Rule. According to the FTC’s complaint, the defendants "bilked at least $7.3 million from consumers struggling to repay their student loans" (FTC v M&T Financial Group, FTC File No. 172 3065, Case No. 2:17-cv-06855-ODW-PLA).

Allegations. The FTC alleged that, instead of using fees paid by consumers to enter them into government programs and pay down their loans, "the defendants pocketed consumers’ money and responded to consumer complaints by changing the name of their companies rather than their business practices." Additionally, the FTC alleged that, to prevent consumers from discovering the scam, the defendants cut consumers off from their loan servicers and the Department of Education by instructing consumers to stop all communication with those entities. Furthermore, the defendants are alleged to have obtained consumers’ Social Security numbers and Federal Student Aid IDs and hijacked consumers’ online student loan accounts. Also, the FTC accused the defendants of routinely placing illegal calls to consumers on the National Do Not Call Registry.

Settlement. Under the settlement order, the defendants are permanently banned from engaging in any type of debt relief activities and from making misrepresentations or unsubstantiated claims related to financial or any other products or services. They also are prohibited from engaging in illegal telemarketing practices.

The order includes a monetary judgment of $11,694,347.49, which is the estimated consumer injury caused by the deceptive practices. Once the defendants turn over nearly all of their available assets, totaling more than $2.3 million, the remainder of the judgment would be suspended due to their inability to pay.

The FTC’s press release notes that the settlement with Student Debt Relief Group is part of a coordinated federal-state law enforcement initiative targeting deceptive student loan debt relief scams announced by the FTC in October 2017, called Operation Game of Loans.

For more information about debt relief scams, subscribe to the Banking and Finance Law Daily.

CFPB drops mortgage lender kickback case

By Colleen M. Svelnis, J.D.

The Consumer Financial Protection Bureau has dismissed its proceedings against a mortgage lender for mortgage insurance kickback violations. CFPB Acting Director Mick Mulvaney ordered the dismissal of the administrative proceeding against PHH Corporation which began under former Director Richard Cordray for allegedly referring consumers to mortgage insurers in exchange for kickbacks in the form of mortgage reinsurance premiums paid by the mortgage insurers. Mulvaney’s order dismissing the proceedings stated that “it is now the law of this case” that PHH did not violate RESPA even if there was a quid pro quo for referrals as long as the required reinsurance was priced at reasonable market value.

In an official statement, PHH Corporation stated “We are extremely gratified to have this matter fully resolved as a result of Acting Director Mulvaney’s decision to dismiss this case. Today’s Order is consistent with our long-held view that we complied with RESPA and other laws applicable to our former mortgage reinsurance activities in all respects.”

Retroactive violations rejected. PHH appealed the Bureau’s decision, arguing that the retroactive application of the Real Estate Settlement Procedures Act had denied the company due process. PHH argued that the CFPB changed a long-standing Department of Housing and Urban Development RESPA interpretation that allowed captive reinsurance arrangements as long as the reinsurance was purchased at market prices, and then applied its reinterpretation of RESPA to past PHH conduct.

In October 2016, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit unanimously rejected the Bureau’s claims that there was no statute of limitations that restricted its ability to enforce RESPA against PHH. To successfully show a RESPA violation by PHH Corporation, the Bureau needed to prove that mortgage insurers paid a PHH-affiliated reinsurer above-market premiums less than three years before the enforcement action was initiated.

The court found that even if the CFPB’s reinterpretation was correct, it could not be applied to earlier conduct. The CFPB could still enforce the RESPA anti-kickback provisions against PHH if it showed that the mortgage insurers paid the PHH reinsurance subsidiary more than the reinsurance was worth, the court said. However, the violation also had to be within the statute of limitations. PHH claimed that most of the relevant activities were more than three years old, which would be too old to be the basis of enforcement.

On appeal, the original three-judge panel decision on the RESPA issues was reinstated by an opinion of the full court, which then remanded the administrative proceeding to the CFPB.

Attorneys for the Bureau and PHH agreed to recommend dismissal of the administrative proceeding and submitted a request to Mulvaney to dismiss the matter. Mulvaney accepted the recommendation. According to Mulvaney’s order, the court’s reinstatement means that PHH did not violate RESPA “if it charged no more than the reasonable market value for the reinsurance it required the mortgage insurers to purchase, even if the reinsurance was a quid pro quo for referrals.”

Support in Congress. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) applauded the dismissal. Hensarling issued a statement calling Mulvaney’s actions “needed to continue the agency’s transformation into one that follows the law as written.” Hensarling stated that former CFPB Director Richard Cordray “unilaterally reversed accepted law with regards to Section 8(c) of RESPA, and did so not with formal rulemaking, but with an ad hoc enforcement action instead.”

Representative Luke Messer (R-Ind) also applauded the decision to dismiss the case. According to Messer, the CFPB “never had the authority to retroactively impose fines beyond the statute of limitations.”

For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.