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  • CFPB, 13 State Attorneys General Take Action Against Private Equity Firm for Allegedly Aiding For-Profit College Company’s Predatory Lending Scheme

    Lending

    On August 17, the CFPB announced a proposed settlement against a private equity firm and its related entities for allegedly aiding a now bankrupt for-profit college company in an illegal predatory lending scheme. In 2015, the CFPB obtained a $531 million default judgment against the company based on allegations that it made false and misleading representations to students to encourage them to take out private student loans. (See previous InfoBytes summary here.) However, the company was unable to pay the judgment because it had dissolved and its assets were distributed in its bankruptcy case that year. Because of the company’s inability to pay, the CFPB indicated that it would continue to seek additional relief for students affected by the company’s practices.  In a complaint filed by the CFPB on August 17 in the U.S. District Court for the District of Oregon, the Bureau relied on its UDAAP authority to allege that the private equity firm engaged in abusive acts and practices when it funded the college company’s private student loans and supported the college company’s alleged predatory lending program.  Specifically, the CFPB alleged that the private equity firm enabled the company to “present a façade of compliance” with federal laws requiring that at least 10 percent of the for-profit school’s revenue come from sources other than federal student aid in order to receive Title IV funds.  The Bureau further alleged that both the company and the private equity firm knew that the high-priced loans made under the alleged predatory lending scheme had a “high likelihood of default.” According to the complaint, the private equity firm continues to collect on the loans made under the alleged predatory lending program. In regard to these loans, the proposed order requires the private equity firm to, among other things: (i) forgive all outstanding loan balances in connection with certain borrowers who attended one of the company’s colleges that subsequently closed; (ii) forgive all outstanding balances for defaulted loans; and (iii) with respect to all other outstanding loans, reduce the principal amount owed by 55 percent, and forgive accrued and unpaid interest and fees more than 30 days past due.

    Relatedly, New York Attorney General Eric T. Schneiderman,  announced on August 17 that his office, in partnership with the CFPB and 12 other state attorneys general, had reached a $183.3 million nationwide settlement with the private equity firm in partnership with the CFPB. According to a press release issued by AG Schneiderman’s office, under the terms of the settlement, an estimated 41,000 borrowers nationwide who either defaulted on their loans or attended the company’s colleges when it closed in 2014 are entitled to full loan discharges—an amount estimated to be between “$6,000 and $7,000.”

    Lending State AG CFPB Student Lending UDAAP

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  • Oregon Enacts Law Regulating Residential Mortgage Loan Servicers

    State Issues

    On August 2, Oregon Governor Kate Brown signed into law the Mortgage Loan Servicer Practices Act (SB 98), which places certain residential mortgage loan servicers under the supervision of the state’s Department of Consumer and Business Services (DCBS) and requires them to comply with a range of requirements. Among other things, the law gives licensing, examination, investigation, and enforcement authority to the DCBS, and requires applicable residential mortgage loan servicers to: (i) obtain and renew a license through the DCBS if they “directly or indirectly service a residential mortgage loan” in Oregon; (ii) maintain “sufficient liquidity, operating reserves and tangible net worth”; (iii) notify the DCBS in writing before certain operational changes occur; and (iv) comply with a range of consumer protection, antifraud, and recordkeeping requirements, including those related to borrower communications, payment processing, and fee assessments. The law becomes operative on January 1, 2018, and applies “to service transactions for residential mortgage loans that occur on or after” that date.

    State Issues State Legislation Reverse Mortgages Lending Mortgage Servicing

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  • NCUA Seeks Comments on Comprehensive Regulatory Reform Agenda

    Agency Rule-Making & Guidance

    On August 16, the National Credit Union Association (NCUA) announced plans to publish in the Federal Register a notice requesting comments on its four-year regulatory reform agenda. As an independent agency, the NCUA is not required to comply with President Trump’s Executive Order 13777, which compels agencies to review and carry out regulatory reform, but it chose to voluntarily comply with the spirit of this Order by forming an internal regulatory reform task force to determine if any of the agency’s existing regulations should be eliminated, revised, improved, or clarified. The Task Force Report outlines its initial findings and recommendations for the amendment or repeal of regulatory requirements that it has determined are outdated, ineffective, or excessively burdensome. The report provides a three-tiered prioritization approach to regulatory reform based on “degree of impact and degree of effort” covering a four-year period, where “impact” focuses on the “magnitude of the benefit that would result from the change, and how broadly the stakeholder community would be impacted”, and “effort” considers the time and energy required to make the change.

    Tier 1 recommendations, assigned the highest level of priority with a two year target time frame, address the following key recommendations: (i) revisions to the “loans to members and lines of credit to members” rules, which govern federal credit union loan maturity limits, single borrower limits, third-party servicing of indirect vehicle loans and executive compensation plans; (ii) modernization of the federal credit union bylaws; (iii) revisions to the agency’s chartering and field of membership manual; (iv) potential changes to capital planning and stress test threshold requirements; and (v) implementation of certain fidelity bond and insurance coverage requirements.

    Tier 2 recommendations, which provide a three-year target time frame, address the following key recommendations: (i) revisions to aggregate loan participation limits; (ii) conducting a review to determine whether prior NCUA approval is required to purchase and assume liabilities from market participants other than federal credit unions; and (iii) easing restrictions on investment activities not required by the Federal Credit Union Act.

    Tier 3 recommendations, which provide a four-year target time frame, address the following key recommendations: (i) enhanced third-party due diligence rules; (ii) changes concerning loans and credit lines to members to “[e]nhance Federal preemption where possible and appropriate” in an effort to reduce overlap with state laws and regulatory burden; and (ii) conducting a review of the regulation pertaining to security programs, suspected crimes and transactions reporting, catastrophic acts, and Bank Secrecy Act compliance.

    Comments on the proposed plan are due 90 days after publication in the Federal Register.

    Agency Rule-Making & Guidance NCUA Federal Register Lending

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  • OFAC Settles Alleged Iran Sanction Violations with International Freight Forwarder

    Financial Crimes

    On August 17, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced it had reached a $518,063 civil settlement with a California-based international freight forwarder for alleged violations of sanctions against Iran. OFAC claimed that the company shipped “used and junked cars and parts” from the U.S. to Afghanistan, via Iran, on 140 separate occasions from approximately April 2010 through June 2012. OFAC alleged that each instance of this conduct, which the company “did not voluntarily self-disclose,” violated OFAC’s Iranian Transactions and Sanctions Regulations (ITSR). See 31 C.F.R. § 560.204.

    Had the company not settled, OFAC determined that civil monetary penalties ranged from approximately $1.5 million to $35 million. In establishing this range, OFAC alleged that the following were aggravating factors: (i) the company “demonstrated a reckless disregard for U.S. sanctions requirements by failing to exercise a minimal degree of caution or care in transshipping goods through Iran”; (ii) the company’s “President and co-owner knew and approved of the transshipments via Iran”; (iii) the company “provided an economic benefit to Iran through its pattern of conduct and the volume of transactions in which it engaged”; and (iv) the company is “sophisticated” and has “experience with U.S. export laws and OFAC regulations, particularly the ITSR.”

    As for mitigating factors, OFAC alleged that: (i) the goods “did not appear to have an end use in Iran”; (ii) the company “has no prior OFAC sanctions history”; (iii) the company is a “small business,” and the alleged violations “constituted less than one percent of its total shipments” during the relevant time period; (iv) the company “had an OFAC compliance program in place” during the relevant time period; (v) the company “took remedial steps”; and (vi) the company “cooperated with OFAC’s investigation.”

    Financial Crimes OFAC Sanctions Treasury Department

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  • Buckley Sandler Insights: Succession Scenarios at the CFPB

    Federal Issues

    Expectations that President Trump will fire CFPB Director Richard Cordray have given way to rumors that Cordray will soon resign to pursue elected office in Ohio. As a result, the uncertainty about his tenure has given way to uncertainty surrounding the selection of a successor. The law is not clear on whether current Acting Deputy Director David Silberman becomes the acting director pursuant to statute or whether the president has the authority to select someone else for that role. Buckley Sandler Chairman & Executive Partner Andrew L. Sandler and Partner Benjamin K. Olson examine the potential outcomes in a Law360 article “Personnel Is Policy: Succession Possibilities at the CFPB.”

    Federal Issues CFPB Cordray

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  • CFPB Issues New Student Loan Repayment Study

    Consumer Finance

    On August 16, the CFPB published a study of student loan repayment patterns over a 14-year period. The report, entitled “Data Point: Student Loan Repayment,” analyzed borrower balance and payment status data from the Bureau’s Consumer Credit Panel (CCP). By tracking overall repayment history for borrowers who entered repayment at different points in time, the CFPB observed borrower behavior, including delinquency patterns for those who have not paid down their loan balances. Key findings in the report include:

    • Borrowers with recent repayment periods have repaid their loans fully at rates similar to those with repayment periods starting 15 years ago when the loan amount is held constant. “However, 25 to 30 percent of the borrowers in the older cohorts do not pay off their loans within the standard 10-year repayment period, and the more recent cohorts appear to be following the same trend.”
    • An apparent relationship exists between the loan amount and repayment speed. Borrowers with loan amounts less than $5,000 are two and a half to four times more likely to fully repay their loans within eight years of entering repayment than borrowers with loans of $50,000 or more. Additionally, more than 40 percent of all borrowers entering repayment today have loan amounts exceeding $20,000—a 20 percent increase from 15 years ago.
    • The proportion of student loan borrowers aged 35 or older doubled between 2002 to 2014, whereas the proportion of borrowers younger than 25 declined from 30 to 15 percent between 2002 to 2014. Notably, the CFPB found “remarkably little variation in repayment speed by consumer age despite potential differences in income or resources.”
    • Of the student loan borrowers making loan payments large enough to reduce loan balances, recent cohorts are reducing their loan balances faster than earlier cohorts.
    • There is an increase in the proportion of borrowers—particularly those with loans less than $20,000—not making large enough payments to lower their loan balances. Specifically, the Bureau claims this trend is in part due to the prevalence of income-driven repayment plans as well as borrowers who are either delinquent or in default on their loans.

    The Bureau’s study further recognizes the need to understand how large loan balances could affect consumers’ access to and use of other credit products, such as mortgages. While most borrowers have continued to repay their student loans over the 14-year observation period, the CFPB has suggested that (i) delinquent borrowers may not be taking advantage of alternative repayment options such as income-driven repayment plans, or (ii) servicing delivery platforms may be inadequate for student loan borrowers.

    Consumer Finance CFPB Student Lending

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  • OCC Updates Bank Accounting Guidance

    Agency Rule-Making & Guidance

    On August 15, the Office of the Comptroller of the Currency (OCC) released the annual update to its long-running Bank Accounting Advisory Series (BAAS). Intended to “promote[] consistent application of accounting standards among OCC-supervised banks and federal savings associations,” the BAAS “represents the OCC’s Office of the Chief Accountant’s interpretations of generally accepted accounting principles and regulatory guidance.” The 2017 edition of the BAAS updates guidance on a range of accounting standards issued by the Financial Accounting Standards Board (FASB), and “includes recent answers to frequently asked questions from the industry and examiners.” Several FAQs are updated or deleted, and new FAQs cover the following topics: investments in debt and equity securities; lessee classification and accounting; and transfers of financial assets and servicing.

    This edition of the BAAS also introduces a new approach to recently issued accounting standards. Previous editions covered new accounting standards only after they became effective. But since many FASB Accounting Standard Updates (ASUs) now have different effective dates for public business entities (PBEs) and private companies, this edition also covers ASUs issued through March 31, 2017 that (i) “while not yet effective for all institutions, must be adopted by PBEs beginning in 2018 and may be adopted early by other institutions”; or (ii) “are not yet effective for any institutions but early adoption is allowed.” Accordingly, lavender text boxes include alternative content for both PBEs and early adopters, and gold text boxes include alternative content for early adopters only.

    Agency Rule-Making & Guidance OCC Compliance Banking

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  • Federal Reserve Releases Paper Studying the Evolution and Forward Looking Growth of Fintech

    FinTech

    On August 1, the Federal Reserve Board released a paper on the origins and growth of financial technology, and how these “deep innovations” have the potential to affect financial stability. The paper, “FinTech and Financial Innovation: Drivers and Depth,” was authored by John Schindler and adapted from a speech prepared for Banco Central do Brasil’s XI Annual Seminar on Risk, Financial Stability and Banking. Fintech, according to Schindler’s adaptation of the Financial Stability Board’s definition, is best understood as a “technologically enabled financial innovation that could result in new business models, applications, processes, products, or services with an associated material effect on financial markets and institutions and the provision of financial services.” Schindler considers the following to fall into the definition of fintech: (i) online marketplace lending; (ii) equity crowdfunding; (iii) robo-advice; (iv) financial applications of distributed ledger technology; (v) and financial applications of machine learning (also called artificial intelligence and machine intelligence). The paper provides a deeper discussion into the following topics driving fintech innovation:

    • supply and demand factors of financial innovation, including regulatory changes and changes to financial or macroeconomic conditions, contributing to the use of technologies supporting fintech financial products and services;
    • depth of innovations such as peer to peer lending, high frequency trading, mobile banking and payments, bitcoin, and blockchain all with the “potential to have transformational effects on the financial system”; and
    • demographic demands.

    Schindler’s position is that fintech evolved, in large part, due to a combination of a number of supply and demand factors occurring in a relatively small period of time, which, as a result, drove new financial innovations.

    Fintech Federal Reserve Blockchain Agency Rule-Making & Guidance

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  • Amendments and Proposal to TRID Rule Published in Federal Register, Comments Due October 10

    Agency Rule-Making & Guidance

    As previously reported in a Special Alert, the CFPB issued amendments to its TILA/RESPA Integrated Disclosure rule, which importantly included a concurrent proposal to address the “black hole” issue that prevents creditors from resetting tolerances using the Closing Disclosure except in very limited circumstances. On August 11, the Bureau published the amendments in a final rule and the proposal in the Federal Register. The final rule takes effect October 10, 2017 with mandatory compliance by October 1, 2018. Comments on the proposal are due October 10, 2017.

    Agency Rule-Making & Guidance CFPB TRID RESPA TILA Federal Register

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  • Massachusetts AG Directs Refunds to Homeowners Affected by Force-Placed Insurance Policies

    State Issues

    On August 11, Massachusetts Attorney General Maura Healey announced that “a major Massachusetts insurance company is paying more than $6.3 million in refunds to more than 4,500 homeowners who were improperly charged” for force-placed property insurance. According to the state’s investigation, the company unnecessarily charged some homeowners by force-placing duplicative insurance products, and overcharged others by force-placing commercial policies instead of less expensive residential policies. The company had settled with the AG’s Office in November 2015, paying $565,000 to the state and agreeing to an audit that would identify affected Massachusetts homeowners for refunds. According to the AG’s press release, the company “cooperated fully with the audit.”

    State Issues State AG Force-placed Insurance Settlement

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