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  • Prudential Regulators Finalize Regulatory Capital Rule, Propose New Leverage Ratio for Large Banks

    Consumer Finance

    On July 9, the FDIC and the OCC approved a final rule to implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The same rule was approved on July 2 by the Federal Reserve Board. The final rule (i) increases the minimum common equity tier 1 capital requirement from 2% to 4.5% of risk-weighted assets; (ii) increases the minimum tier 1 capital requirement from 4% to 6% of risk-weighted assets; and (iii) adds a new capital conservation buffer of 2.5% of risk-weighted assets. The rule also establishes a minimum leverage ratio of 4% for all banking organizations. In response to concerns raised by smaller and community banking organizations, the regulators did not finalize more onerous capital requirements that would have substantially increased the risk-weightings for residential mortgages, as explained in more detail in our recent post. The final rule does not change the more stringent limits on the inclusion of mortgage servicing assets and deferred tax assets in regulatory capital calculations, but does extend the phase-in period for community banks. Internationally active banks must begin to implement the new capital rules in January 2014, while all other banking organizations will have until January 2015 to begin to phase in the new capital requirements. Also on July 9, the FDIC and the OCC approved a proposed rule that would require bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody to maintain a tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Failure to exceed the 5% ratio would subject covered companies to restrictions on discretionary bonus payments and capital distributions. The proposed rule also would require insured depository institutions of covered holding companies to meet a 6% supplementary leverage ratio to be considered “well capitalized” for prompt corrective action purposes. The proposal suggests a phase-in period for the rule with an effective date of January 1, 2018. Comments on the proposal are due 60 days after it is published in the Federal Register.

    FDIC Federal Reserve OCC Capital Requirements Basel

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  • FTC Announces Largest Civil Penalty Ever Against Third-Party Debt Collector

    Consumer Finance

    On July 9, the FTC announced that a third-party debt collector and its subsidiaries agreed to pay a $3.2 million civil penalty to resolve allegations that the companies violated the FDCPA and FTC Act by (i) calling individuals multiple times per day, including early in the morning or late at night, (ii) calling even after being asked to stop, (iii) calling individuals’ workplaces despite knowing that the employers prohibited such calls, (iv) leaving phone messages for third parties, which disclosed the debtor’s name and the existence of the debt, and (v) continuing collection efforts without verifying a debt, even after individuals said they did not owe the debt. In addition to the monetary penalty, which the FTC described as the largest it has ever obtained against a third-party collector, the stipulated order requires, with regard to consumers who dispute the validity or the amount of a debt, that the companies close the account and end collection efforts, or suspend collection until they have conducted a reasonable investigation and verified that their information about the debt is accurate and complete. The order also restricts situations in which the defendants can leave voicemails that disclose the alleged debtor’s name and the fact that he or she may owe a debt, and requires the companies to halt or limit other alleged practices. The companies also must record at least 75% of all their debt collection calls beginning one year after the date of the order, and retain the recordings for 90 days after they are made.

    FTC FDCPA Debt Collection

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  • CFPB Publishes Mortgage Rules Readiness Guide

    Lending

    On July 8, the CFPB published a guide intended to help financial institutions prepare to comply with the various mortgage-related rules the CFPB promulgated in January 2013, some of which it continues to revise. The guide briefly describes each of the rules and provides (i) a readiness questionnaire, (ii) frequently asked questions, and (iii) a list of other resources available to companies seeking to come into compliance with the new rules. The readiness questionnaire covers (i) implementation plans, (ii) policies and procedures, (iii) training, (iv) audit/quality control, (v) consumer complaints, and (vi) vendor management.

    CFPB Mortgage Origination Mortgage Servicing

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  • OCC Names Head of Large Bank Supervision

    Consumer Finance

    On July 10, the OCC named Martin Pfinsgraff as Senior Deputy Comptroller for Large Bank Supervision. Mr. Pfinsgraff has been filling that role on an acting basis since Michael Brosnan left the position to become Examiner-in-Charge of an OCC-supervised institution. Mr. Pfinsgraff previously served as Deputy Comptroller for Credit and Market Risk and prior to joining the OCC held senior positions with iJet International, Prudential Insurance Company, and Prudential Investment Corporation.

    OCC Bank Supervision

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  • Fannie Mae, Freddie Mac Provide Additional Information Regarding QM Requirements

    Lending

    On July 2, Fannie Mae and Freddie Mac provided lenders additional information about eligibility criteria for mortgages with application dates on or after January 10, 2014. Recently, the FHFA directed Fannie Mae and Freddie Mac to limit future mortgage acquisitions to loans that meet the requirements for qualified mortgages under the CFPB’s ability-to-repay/qualified mortgage rule. The letters state that, effective January 10, 2014, mortgages will be eligible for sale to either entity only if they (i) are fully amortizing, (ii) have terms no longer than 30 years, and (iii) have points and fees of 3% or less of the total loan amount. In addition, both entities will continue to purchase mortgage loans that are exempt from the ability-to-repay rule. Fannie Mae and Freddie Mac anticipate updating policies regarding representations and warranties, as well as certain policies related to loan eligibility in August 2013, and plan to provide information about how they will test for compliance with the new eligibility criteria in September 2013.

    Freddie Mac Fannie Mae Qualified Mortgage

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  • Tenth Circuit Affirms Dismissal of Securities Act Claims Against Banks That Underwrote Stock of Failed Mortgage Lender

    Securities

    On July 9, the U.S. Court of Appeals for the Tenth Circuit affirmed a district court’s order dismissing claims brought by investors against banks that had underwritten a mortgage lender’s stock offerings. Slater v. A.G. Edwards & Sons, Inc., No. 11-2170, 2013 WL 3390038 (10th Cir. Jul. 9, 2013). The lender, which focused on the adjustable-rate mortgage market, attempted to raise new capital through a series of stock offerings in 2007 and 2008 before filing for bankruptcy in 2009. Investors in those offerings filed suit after the stock price dropped following the lender’s disclosure that it had been subject to margin calls triggered by a decline in the value of certain Alt-A mortgages that backed securities the lender had purchased. The investors alleged that documents related to the offerings violated Section 11 of the Securities Act because they did not disclose, among other things, the existence of the Alt-A MBS. In affirming dismissal of the claims against the underwriters, the Tenth Circuit concluded that plaintiffs had not alleged “an actionable misrepresentation or omission at the time of [the] stock offerings.” The court explained that the lender was not under any obligation to disclose the MBS to make its statements true and accurate, and that the picture it provided was materially accurate, in part because the prospectus warned that the lender’s liquidity conditions could worsen.

    RMBS

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  • CFPB Publishes 2014 List of Rural Counties

    Lending

    On July 2, the CFPB published a final list of rural and underserved counties for use in 2014. Several of the CFPB’s new mortgage rules include provisions and exceptions related to creditors who operate in predominantly rural or underserved counties, including the ability-to-repay/qualified mortgage rule and the TILA escrows rule. The CFPB notes that the list has changed based on 2010 census data such that some small creditors will lose eligibility for certain mortgage rule exemptions. Based on those changes and extensive feedback the CFPB has received about the definition of rural and underserved counties, the CFPB reminded institutions that it (i) recently revised its ability-to-repay rule to extend the ability to originate balloon QMs to certain small creditors that do not operate predominantly in rural or underserved areas during the period from January 10, 2014, to January 10, 2016, (ii) recently proposed to extend the same treatment to these small creditors for purposes of the high-cost mortgage balloon exemption, and (iii) proposed to extend eligibility for the rural or underserved exemption from the escrow requirement to creditors that operated predominantly in rural or underserved counties in any of the previous three years.

    CFPB Qualified Mortgage

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  • HUD Updates Pre-Foreclosure and Deed-in-Lieu of Foreclosure Requirements, Extends Unemployment Forbearance

    Lending

    On July 9, HUD issued Mortgagee Letter 2013-23, which updates pre-foreclosure sale (PFS) and deed-in-lieu (DIL) foreclosure requirements for FHA-approved mortgagees. For a standard PFS, the letter details (i) the deficit income test that mortgagees must use to determine hardship, (ii) the supporting documentation required for such tests, (iii) the method for calculating cash reserve contributions, and (iv) the requirements for approving a PFS based on imminent default. The letter also explains the eligibility requirements for streamlined PFS and DIL, including with regard to military servicemembers. Among numerous other policy changes, HUD also updated the disclosure requirements for all PFS and DIL transactions and outlined certain arms-length requirements for PFS transactions. Mortgagees must implement the new policies by October 1, 2013. Recently, HUD also issued Mortgagee Letter 2013-22 to extend indefinitely its policy to provide special forbearance for unemployed borrowers. That policy, detailed in Mortgagee Letter 2011-23, was set to expire on August 1, 2013.

    Foreclosure Mortgage Servicing HUD

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  • Ninth Circuit Holds Repeated Erroneous Default Notices Can Be ECOA Adverse Action

    Lending

    On July 3, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit held that a mortgage servicer’s alleged repeated delivery of notices of default and acceleration to borrowers who were current on their obligation could be “adverse action,” triggering the ECOA notification requirements. Schlegel v. Wells Fargo Bank, No. 11-6816, 2013 WL 3336727 (9th Cir. July 3, 2013). According to the borrowers, although they received a discharge in bankruptcy, they reaffirmed their mortgage loan, subject to a modification that apparently reduced their monthly payment obligation. The borrowers claimed that the servicer did not correct its records to reflect the loan modification and sent several notices of default and acceleration. The Ninth Circuit held that, while sending a mistaken default notice would not necessarily constitute an adverse action, the conduct alleged in the complaint, in which the creditor repeatedly stated that the obligation was immediately due and payable, fell within the definition of an “adverse action” as, among other things, a “revocation of credit.” Therefore, the court reversed the district court’s dismissal of the borrowers’ claim that the mortgage servicer had failed to provide a notification within 30 days after taking adverse action, as required under ECOA. The appellate court, however, upheld the district court’s dismissal of the borrowers’ claim under the FDCPA, holding that the complaint failed to adequately allege that the servicer was a “debt collector” under the FDCPA — i.e., either that its principal business was the collection of debts or that it was collecting the subject debt “for another.”

    FDCPA Mortgage Servicing ECOA

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  • CFPB Releases Spring Rulemaking Agenda

    Consumer Finance

    On July 3, the CFPB released its spring 2013 regulatory agenda. Among the agenda items are three rulemaking activities listed for the first time: (i) “prerule activities” related to payday loans and deposit advance products anticipated for January 2014, (ii) “further action” on debt collection regulations expected in October 2013, and (iii) “prerule activities” related to Gramm-Leach-Bliley Act privacy notices planned for November 2013. The agenda also indicates that the CFPB expects, among other things, to (i) finalize its integrated mortgage disclosures rule in October 2013, (ii) issue a final student loan servicer “larger participant” rule in September 2013, and (iii) propose a rule regarding general purpose reloadable prepaid cards in December 2013. The agenda does not mention any planned activities related to small business lending data collection or auto finance issues.

    CFPB Payday Lending Prepaid Cards Student Lending Debt Collection Agency Rule-Making & Guidance

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