InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FHFA extends Covid-19 flexibilities until January 31
On December 10, the FHFA announced the extension of several loan origination guidelines put in place to assist borrowers during the Covid-19 pandemic. Specifically, FHFA extended until January 31 existing guidelines related to: (i) alternative appraisal requirements on purchase and rate term refinance loans; (ii) alternative methods for documenting income and verifying employment before loan closing; and (iii) expanding the use of power of attorney to assist with loan closings. The extensions are implemented in updates to Fannie Mae Lender Letters LL-2020-03, LL 2020-04; and Freddie Mac Guide Bulletin 2020-47 and Selling FAQs.
Waters recommends Biden reverse several of Trump's actions
On December 4, Chairman of the House Financial Services Committee, Maxine Waters (D-CA) sent a letter to President-Elect Biden providing a list of regulations and other executive actions taken by the Trump administration that the Biden administration should immediately reverse, as well as recommendations for strengthening other regulations. Among other things, Waters recommended that the Biden administration (i) issue an executive order to prevent evictions by “directing the CDC to extend and improve its public health order so people can remain in their homes until emergency rental assistance is available”; (ii) amend HUD and FHFA policies that impose restrictions and increased costs for certain loans that go into forbearance prior to FHA endorsement or purchase by Fannie Mae or Freddie Mac to ensure these loans are still eligible for FHA insurance and purchase by Fannie and Freddie; and (iii) fully use Coronavirus Aid, Relief, and Economic Security (CARES) Act lending authorities, many of which will terminate at the end of December (covered by InfoBytes here).
Waters also urged the Biden administration to take measures to ensure consumer protections, including by, among other things, dismissing Director Kathy Kraninger, enforcing CARES Act protections, and directing the CFPB to (i) issue guidance to financial institutions to ensure affected borrowers are afforded “appropriate forbearance and loan modifications”; (ii) “work to replace the ’Payday, Vehicle Title, and Certain High-Cost Installment Loans’ rule with [one] that protects consumers from predatory lenders”; (iii) restore the Bureau’s Office of Fair Lending and Equal Opportunity’s roles and responsibilities; and (iv) rescind its recently issued final rule amending certain debt collection rules (covered by InfoBytes here), and instead strengthen “consumer protections against abusive debt collection practices.” Other recommendations address diversity and inclusion, financial stability, investor protection, affordable housing, and international development.
Court enters $41 million default judgment against student debt-relief operators
On December 3, the U.S. District Court of the Central District of California entered a default judgment against a student debt-relief company and one of its owners (collectively, “defaulting defendants”) in an action brought by the CFPB alleging the defaulting defendants (and others not subject to the judgment) charged thousands of customers approximately $11.8 million in upfront fees in violation of the Telemarketing Sales Rule (TSR). As previously covered by InfoBytes, in July, the CFPB filed a complaint against the defaulting defendants, one other company, its owner, and four attorneys, alleging the companies would market its debt-relief services to customers over the phone, encouraging those with private loans to sign up with an attorney to reduce or eliminate their student debt. The businesses allegedly charged the fees before the customer had made at least one payment on the altered debts, in violation of the TSR’s prohibition on requesting or receiving advance fees for debt-relief service or, for certain defendants, the TSR’s prohibition on providing substantial assistance to someone charging the illegal fees. In August, the court approved stipulated final judgments with the other company owner (available here) and three of the attorneys (available here, here, and here).
The court entered into a default judgment against the defendants after they failed to file an answer or otherwise respond to the Bureau’s complaint. The judgment requires the defaulting defendants to pay over $11 million in consumer redress with separate $15 million civil money penalties entered against the company and the owner. Additionally, the defaulting defendants are permanently banned from providing debt-relief services or engaging in telemarketing of any consumer financial product or service.
Satellite company to pay over $200 million for telemarketing violations
On December 7, the DOJ announced a settlement with a satellite service provider totaling over $210 million in penalties to be paid to the United States and four states for alleged violations of the TCPA, the FTC Act, and similar state laws. The settlement stems from an action brought by the United States against the satellite company in 2009 asserting that the company initiated millions of unlawful telemarketing calls to consumers and was responsible for millions of calls made by marketers of the company’s products and services. In 2017, a district court awarded the U.S. and the states of California, Illinois, North Carolina, and Ohio $280 million in civil penalties, with a record $168 million going to the federal government (covered by InfoBytes here). On appeal, the U.S. Court of Appeals for the Seventh Circuit affirmed liability but vacated and remanded the monetary award for recalculation.
The stipulated judgment requires the satellite company to pay over $200 million in civil penalties, with $126 million going to the U.S. government, nearly $40 million to California, over $6.5 million to Illinois, nearly $14 million to North Carolina, and $17 million to Ohio.
2nd Circuit: SEC within authority to bring actions for SAR failings
On December 4, the U.S. Court of Appeals for the Second Circuit affirmed summary judgment in favor of the SEC in an action brought by the agency against a penny stock broker-dealer, concluding the agency has the authority to bring an action under Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17a-8 promulgated thereunder for failure to comply with the Suspicious Activity Report (SAR) provisions of the Bank Secrecy Act (BSA). According to the opinion, the SEC filed an action against the broker-dealer for violating the Exchange Act and Rule 17a-8’s reporting, recordkeeping, and record-retention obligations by failing to file SARs as required by the BSA. Both parties moved for summary judgment, with the broker-dealer arguing that the SEC was improperly enforcing the BSA. The district court granted summary judgment in favor of the SEC in part (deferring “its resolution of categories of allegedly deficient SARs pending discovery and additional briefing”) and denied summary judgment for the broker-dealer, concluding that the SEC had authority to bring the action under the Exchange Act. After discovery and additional briefing, the SEC moved for summary judgment on the Rule 17a-8 violations and the district court granted summary judgment as to nearly 3,000 violations on the basis of the broker-dealer’s SARs-reporting and recordkeeping practices and imposed a $12 million civil penalty.
On appeal, the 2nd Circuit agreed with the district court, rejecting the broker-dealer’s argument that the SEC is attempting to enforce the BSA, which only the U.S. Treasury Department has the authority to do. The appellate court noted that the SEC is enforcing the requirements of Rule 17a-8, which requires broker-dealers to adhere to the BSA in order to comply with requirements of the Exchange Act, which does not constitute the agency’s enforcement of the BSA. Moreover, the appellate court concluded that the SEC did not overstep its authority when promulgating Rule 17a-8, as SARs “serve to further the aims of the Exchange Act by protecting investors and helping to guard against market manipulation,” and that the broker-dealer did not meet its “‘heavy burden’ to show that Congress ‘clearly expressed [its] intention’ to preclude the SEC from examining for SAR compliance in conjunction with FinCEN and pursuant to authority delegated under the Exchange Act.” In affirming the $12 million civil penalty, the appellate court stated that the district court acted “within its discretion to impose the [] penalty” considering the broker-dealer’s “systematic and widespread evasion of the law.”
Restaurant chain to pay SEC $125,000 for misleading Covid-19 disclosures
On December 4, the SEC announced a settlement with a national restaurant chain for allegedly making misleading disclosures about the impact of the Covid-19 pandemic on its business operations. According to the order, in the restaurant’s Form 8-Ks filed on March 23 and April 3, the restaurant disclosed that it was “operating sustainably at present under this [off-premise] model” (referring to its to-go and delivery services). However, the SEC asserts that the restaurant did not disclose that it was “losing approximately $6 million in cash per week; and that it had only approximately 16 weeks of cash remaining, even after the $90 million revolving credit facility borrowing,” nor did it disclose the letter it send to its landlords announcing it would not be paying April rent. The SEC asserts the disclosures were materially false and misleading and violated Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 thereunder. Without admitting the findings, the restaurant agreed to pay $125,000 in civil money penalties. This is the first action the SEC has taken against a company for misleading investors
District court denies dismissal and stay of CFPB action
On November 30, the U.S. District Court of the District of Maryland denied a motion to dismiss an action brought by the CFPB against a debt collection entity, its subsidiaries, and their owner (collectively, “defendants”), rejecting the defendants’ argument that the Bureau lacked standing to bring the action. As previously covered by InfoBytes, in September 2019, the Bureau alleged the defendants violated the FCRA, FDCPA, and the CFPA by, among other things, failing to (i) establish or implement reasonable written policies and procedures to ensure accurate reporting to consumer-reporting agencies; (ii) incorporate appropriate guidelines for the handling of indirect disputes in its policies and procedures; (iii) conduct reasonable investigations and review relevant information when handling indirect disputes; and (iv) furnish information about accounts after receiving identity theft reports about such accounts without conducting an investigation into the accuracy of the information. The defendants moved to dismiss the action arguing, among other things, that (i) the Bureau lacks standing to bring the action; and (ii) Director Kraninger’s ratification of the litigation was invalid. In the alternative, the defendants moved to stay the lawsuit until the U.S. Supreme Court issued a ruling in Collins v. Mnuchin (covered by InfoBytes here).
The court denied the motion to stay, concluding that the issues pending before the Supreme Court in Mnuchin may not necessarily apply to the Bureau, as they are different agencies and further, there is no issue of ratification in Mnuchin. Thus, given the “uncertainty surrounding the effect a decision in Collins v. Mnuchin will have on the present case,” the court denied the motion to stay. The court also denied the motion to dismiss, concluding, among other things, that the Supreme Court’s finding in Seila Law LLC v. CFPB (covered by a Buckley Special Alert) that the Bureau had a constitutional defect in its leadership structure under Article II does not diminish the agency’s Article III standing. Moreover, the court concluded that the decision in Seila Law does not mean that the Bureau “lacked authority during the time in which it was led by an improperly removable Director,” and therefore the Bureau had the authority to initiate the September 2019 lawsuit against the defendants. Further, the court held that the July 2020 ratification of the enforcement action was proper.
Fed issues supervisory letter covering appeals process
On December 4, the Federal Reserve Board issued supervisory letter SR 20-28 / CA 20-14, which discusses the internal appeals process for material supervisory determinations and its policy regarding the Ombudsman. As previously covered by InfoBytes, in March, the Fed issued final amendments intended to improve and expedite the appeals process. Among other things, the final amendments (i) clarify that Matters Requiring Attention and Matters Requiring Immediate Attention “are appealable material supervisory determinations”; (ii) “permit an institution’s senior management to file an appeal, provided that management informs the institution’s board of directors of their decision to file an appeal and keeps the board informed of the status of the appeal”; (iii) “permit an institution to request an extension of time to file an appeal in appropriate circumstances”; and (iv) “clarify that, at an institution’s request, the initial review panel must schedule a meeting with the institution.” The amended Ombudsman policy formalizes current practices of the office, including receiving supervisory-related complaints and supervisory determination appeals. The Fed requests that Reserve Banks distribute the supervisory letter covering the appeals process changes to their various supervised institutions and to appropriate supervisory staff.
CFPB charges online lender with MLA violations
On December 4, the CFPB announced it filed a complaint in the U.S. District Court for the Northern District of California against a California-based online lender alleging violations of the Military Lending Act (MLA). According to the CFPB, the “action is part of a broader Bureau sweep of investigations of multiple lenders that may be violating the MLA,” which provides protections connected to extensions of consumer credit for active-duty servicemembers and their dependents. The complaint alleges that since October 2016 the lender, among other things, made more than 4,000 single-payment or installment loans to over 1,200 covered borrowers in violation of the MLA. Specifically, the Bureau claims that these violations include (i) extending loans with Military Annual Percentage Rates (MAPR) exceeding the MLA’s 36 percent cap; (ii) requiring borrowers to submit to arbitration in loan agreements; and (iii) failing to make certain required loan disclosures, including a statement of the applicable MAPR, before or at the time of the transaction. The complaint seeks an injunction against the lender that would require the lender to “correct inaccurate information furnished to consumer reporting agencies concerning loans that were void ab initio,” and would prohibit it from collecting on those loans and require it to rescind the credit agreements on those loans. The complaint also seeks damages, redress, disgorgement of ill-gotten gains, and civil money penalties.
FSOC annual report highlights Covid-19 impact on financial stability
On December 3, the Financial Stability Oversight Council (FSOC) released its 2020 annual report. The report reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. The report also highlights the impact of Covid-19 on the economy and the financial system. The report notes that although “policy actions to minimize the effects of the pandemic have been effective at improving market conditions, risks to U.S. financial stability remain elevated compared to last year” and that “the global outlook for economic recovery is uncertain, depending on the severity and the duration of the ongoing pandemic.” Highlights include:
- Nonbank mortgage origination and servicing. FSOC notes that disruptions in mortgage payments due to the pandemic have focused attention on the nonbank sector. In particular, FSOC states that due to a surge in refinancing due to low rates, nonbank servicers have an additional source of liquidity to help sustain operations. However, FSOC cautions that “an increase in forbearance and default rates . . . has the potential to impose significant strains on nonbank servicers.” FSOC recommends federal and state regulators coordinate and share data and information, identify and address potential risks, and strengthen oversight of nonbank companies originating and servicing residential mortgages.
- Alternative Reference Rates. FSOC recommends that the Alternative Reference Rates Committee continue to work to facilitate an orderly transition to alternative reference rates following the anticipated cessation of LIBOR at the end of 2021, and encourages federal and state regulators to “determine whether further guidance or regulatory relief is required to encourage market participants to address legacy LIBOR portfolios.”
- Cybersecurity. FSOC “recommends that federal and state agencies continue to monitor cybersecurity risks and conduct cybersecurity examinations of financial institutions and financial infrastructures to ensure, among other things, robust and comprehensive cybersecurity monitoring, especially in light of new risks posed by the pandemic.” FSOC also supports “efforts to increase the efficiency and effectiveness of cybersecurity examinations across the regulatory authorities.”
- Large bank holding companies. FSOC recommends that financial regulators “continue to monitor and assess the impact of rules on financial institutions and financial markets—including, for example, on market liquidity and capital—and ensure that [bank holding companies] are appropriately monitored based on their size, risk, concentration of activities, and offerings of new products and services.”
Additional topics also addressed include short-term wholesale funding markets, nonfinancial business borrowing, and commercial real estate asset valuations.