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  • FHFA requests feedback on single-family pricing framework

    Agency Rule-Making & Guidance

    Recently, the FHFA issued a request for input (RFI) on a single-family pricing framework for Fannie Mae and Freddie Mac (GSEs), including feedback on policy priorities and goals that FHFA should pursue in its oversight of the framework. “Through this RFI, FHFA seeks input on how to ensure the pricing framework adequately protects the [GSEs] and taxpayers against potential future losses, supports affordable, sustainable housing and first-time homebuyers, and fosters liquidity in the secondary mortgage market,” FHFA Director Sandra L. Thompson said in the announcement. The RFI also seeks input on the GSEs’ single-family upfront guarantee fees and whether it is appropriate to continue linking those fees to the Enterprise Regulatory Capital Framework. FHFA explained that guarantee fees are intended to cover the GSEs’ administrative costs, expected credit losses, and cost of capital associated with guaranteeing securities backed by single-family mortgage loans. Comments on the RFI are due August 14.

    Agency Rule-Making & Guidance Federal Issues FHFA Fannie Mae Freddie Mac GSEs Mortgages

  • FTC proposes changes to Health Breach Notification Rule

    Agency Rule-Making & Guidance

    On May 18, the FTC issued a notice of proposed rulemaking (NPRM) and request for public comment on changes to its Health Breach Notification Rule (Rule), following a notice issued last September (covered by InfoBytes here) warning health apps and connected devices collecting or using consumers’ health information that they must comply with the Rule and notify consumers and others if a consumer’s health data is breached. The Rule also ensures that entities not covered by HIPAA are held accountable in the event of a security breach. The NPRM proposed several changes to the Rule, including modifying the definition of “[personal health records (PHR)] identifiable health information,” clarifying that a “breach of security” would include the unauthorized acquisition of identifiable health information, and specifying that “only entities that access or send unsecured PHR identifiable health information to a personal health record—rather than entities that access or send any information to a personal health record—qualify as PHR related entities.” The modifications would also authorize the expanded use of email and other electronic methods for providing notice of a breach to consumers and would expand the required content for notices “to include information about the potential harm stemming from the breach and the names of any third parties who might have acquired any unsecured personally identifiable health information.” Comments on the NPRM are due 60 days after publication in the Federal Register.

    The same day, the FTC also issued a policy statement warning businesses against making misleading claims about the accuracy or efficacy of biometric technologies like facial recognition. The FTC emphasized that the increased use of consumers’ biometric information and biometric information technologies (including those powered by machine learning) raises significant consumer privacy and data security concerns and increases the potential for bias and discrimination. The FTC stressed that it intends to combat unfair or deceptive acts and practices related to these issues and outlined several factors used to determine potential violations of the FTC Act.

    Agency Rule-Making & Guidance Federal Issues Privacy, Cyber Risk & Data Security FTC Consumer Protection Biometric Data Artificial Intelligence Unfair Deceptive UDAP FTC Act

  • CFPB issues guide on collecting small-biz data

    Agency Rule-Making & Guidance

    The CFPB recently issued a compliance guide for its final rule implementing Section 1071 of the Dodd-Frank Act. Consistent with Section 1071, the final rule (issued at the end of March) will require financial institutions to collect and provide to the Bureau data on lending to small businesses, defined as an entity with gross revenue under $5 million in its last fiscal year (covered by InfoBytes here). The guide: (i) includes a detailed summary of the final rule’s requirements, including data reporting deadlines; (ii) provides comprehensive information on the types of data financial institutions need to collect and report on small business lending applications and decisions; and (iii) includes parameters for covered institutions and covered originations. The guide further breaks down reportable data points and explains the final rule’s “firewall” provision, which states that employees and officers of a financial institution or its affiliates “involved in making any determination” on a reportable application are generally prohibited from accessing applicant demographic information relating to ethnicity, race, sex, and status as a minority-owned, women-owned, or LGBTQI+-owned business. The guide specifies that certain exceptions may apply to situations where an employee involved in decision-making must have access to the data to fulfill their assigned job duties (e.g. a loan officer or loan processor). In these situations, financial institutions are required to provide notice to applicants that employees and officers involved in decision-making may have access to their demographic data.

    Agency Rule-Making & Guidance Federal Issues CFPB Small Business Small Business Lending Section 1071 Dodd-Frank Compliance

  • FHFA rescinds GSE fee based on DTI ratios

    Agency Rule-Making & Guidance

    On May 10, FHFA announced it is rescinding a debt-to-income-based loan-level pricing adjustment announced in January. As previously covered by InfoBytes, FHFA made several changes relating to upfront fees for certain borrowers with debt-to-income (DTI) ratios above 40 percent. The updated and recalibrated pricing grids also included the upfront fee eliminations announced last October to increase pricing support for purchase borrowers limited by income or by wealth, FHFA said at the time. The implementation of the DTI pricing adjustment, which would have affected loans acquired by Fannie Mae and Freddie Mac, was delayed to August 1, but after the mortgage industry and other market participants expressed concerns about implementation challenges, FHFA made the decision to rescind the DTI-ratio based fee to provide additional transparency. The agency will issue a request for public input on the single-family guarantee fee pricing framework shortly.

    Agency Rule-Making & Guidance Federal Issues FHFA Mortgages Consumer Finance Fannie Mae Freddie Mac GSEs

  • CFPB: Reopening a closed account could be a UDAAP

    Agency Rule-Making & Guidance

    On May 10, the CFPB released Circular 2023-02 to opine that unilaterally reopening a closed account without a customer’s permission in order to process a transaction is a likely violation of federal law, particularly if a bank collects fees on the account. “When a bank unilaterally chooses to open an account in someone’s name after they have already closed it, this is a fake account,” CFPB Director Rohit Chopra said in the announcement. “The CFPB is acting on all fronts to halt the harvesting of illegal junk fees.”

    The Bureau described receiving complaints from consumers about banks reopening closed accounts and then assessing overdraft/nonsufficient funds fees and monthly maintenance fees. Such practices, the Bureau warned, may violate the Consumer Financial Protection Act’s prohibition on unfair acts or practices. Consumers may experience substantial injury including monetary harm by paying fees due to the unfair practice, the Bureau said, explaining that because consumers likely cannot reasonably avoid the injury, “[a]ctual injury is not required; significant risk of concrete harm is sufficient.” Aside from subjecting consumers to fees, when a bank processes a credit through a reopened account, the consumers’ funds may become available to third parties, including those that do not have permission to access such funds, the Bureau warned, adding that there is also a risk that banks may furnish negative information to consumer reporting agencies if reopening the account overdraws the account and the consumer does not quickly repay the amount owed. The Bureau further noted that deposit account agreements typically indicate that a financial institution “may return any debits or deposits to the account that the financial institution receives after closure and faces no liability for failing to honor any debits or deposits received after closure.”

    The Circular explained that rather than reopening an account when a third party attempts to deposit or withdraw money from it, banks should decline the transactions. This allows customers the opportunity to update their information with the entity attempting to access a closed account while avoiding potential fees. “Reopening a closed account does not appear to provide any meaningful benefits to consumers or competition,” the Bureau said in the Circular. “While consumers might potentially benefit in some instances where their accounts are reopened to receive deposits, which then become available to them, that benefit does not outweigh the injuries that can be caused by unilateral account reopening.”

    Agency Rule-Making & Guidance Federal Issues CFPB Consumer Finance Fees Junk Fees Overdraft NSF Fees CFPA UDAAP Unfair

  • FHA implements provisions for transitioning LIBOR-based ARMs

    Agency Rule-Making & Guidance

    On May 2, FHA published Mortgagee Letter (ML) 2023-09 to implement provisions of the Adjustable Rate Mortgages (ARM): Transitioning from LIBOR to Alternative Indices final rule that was published in the Federal Register at the beginning of March. (Covered by InfoBytes here.) The final rule replaces LIBOR with the Secured Overnight Financing Rate (SOFR) as the approved index for newly-originated forward ARMs, codifies HUD’s approval of SOFR as an index for newly-originated home equity conversion mortgages (HECM) ARMs, and establishes “a spread-adjusted SOFR index as the Secretary-approved replacement index to transition existing forward and HECM ARMs off LIBOR.” The ML provides interest rate transition directions for mortgagees and announces the availability of updated HECM model loan documents, which have been revised to be consistent with the final rule and the ML. The provisions in the ML have various effective dates.

    Agency Rule-Making & Guidance Federal Issues FHA LIBOR Mortgages SOFR HECM

  • CFPB proposal would apply ATR requirements to PACE financing

    Agency Rule-Making & Guidance

    On May 1, the CFPB announced a proposed rule which would prescribe ability-to-repay (ATR) rules to residential Property Assessed Clean Energy (PACE) financing and apply TILA’s civil liability provisions for violations. The proposal, required by Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, would amend Regulation Z to address how TILA applies to PACE transactions to account for the unique nature of PACE loans. PACE loans are designed to finance clean energy improvements on a borrower’s home and are secured by that residence. The Bureau explained that the loans are repaid through a borrower’s property tax payments, which increase over time and which remain with the property even if the borrower sells the property.

    If finalized, the proposed rule would require lenders to assess a borrower’s ability to repay a PACE loan and would (i) clarify an existing exclusion to Regulation Z’s definition of credit relating to tax liens and tax assessments to provide that this specific exclusion “applies only to involuntary tax liens and involuntary tax assessments”; (ii) make several adjustments to PACE financing loan estimate and closing disclosure requirements, including providing new model forms specifically designed for PACE transactions, and exempting PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans and from the requirement to provide periodic statements; (iii) prescribe ATR requirements for residential PACE financing that account for the unique nature of these transactions; (iv) provide that a PACE transaction is not a qualified mortgage; (v) extend TILA Section 130’s ATR requirements and liability provisions to any “PACE company” with substantial involvement in making credit decisions for a PACE transaction; and (vi) clarify how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans.

    The proposed effective date is at least one year after the final rule is published in the Federal Register (“but no earlier than the October 1 which follows by at least six months Federal Register publication”), with the possibility of a further extension to ensure compliance with a TILA timing requirement. Comments on the proposed rule are due July 26 or 30 days after publication in the Federal Register, whichever is later.

    To accompany the proposed rule, the Bureau released several fast facts breaking down and clarifying proposed coverage and the suggested changes. The Bureau also released a data point report documenting research findings on PACE financing in California and Florida from July 2014 through June 2020. Among other things, the report found that PACE loans create an increase in negative credit outcomes for borrowers, particularly with respect to mortgage delinquency. Additionally, PACE borrowers were more likely to have higher interest rates and increased credit card balances and were more likely to live in census tracts with higher percentages of Black and Hispanic residents relative to the average for their states. The report noted that “PACE outcomes improved significantly in California after that State began requiring PACE companies to consider ability to pay before making a loan.”

    Agency Rule-Making & Guidance Federal Issues CFPB PACE Consumer Finance Consumer Protection EGRRCPA Ability To Repay TILA Regulation Z

  • CFPB warns debt collectors on “zombie mortgages”

    Agency Rule-Making & Guidance

    On April 26, the CFPB issued an advisory opinion affirming that the FDCPA and implementing Regulation F prohibit covered debt collectors from suing or threatening to sue to collect time-barred debt. As such, a debt collector who brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt may violate federal law, the Bureau said. The agency stated that numerous consumers have filed complaints relating to “zombie second mortgages,” where homeowners, operating under the assumption that a mortgage debt was forgiven or was satisfied long ago by loan modifications or bankruptcy proceedings, are contacted years later by a debt collector threatening foreclosure and demanding payment of the outstanding balance along with interest and fees.

    The Bureau explained that, leading up to the 2008 financial crisis, many lenders originated mortgages without considering consumers’ ability to repay the loans. Focusing on “piggyback” mortgages (otherwise known as 80/20 loans, in which consumers took out a first lien loan for 80 percent of the value of the home and a second lien loan for the remaining 20 percent of the home’s valuation), the Bureau stated that most lenders did not pursue payment on the second mortgage but instead sold them off to debt collectors. Years later, some of these debt collectors are demanding repayment of the second mortgage and threatening foreclosure, the Bureau said, adding that for many of the mortgages, the debts have become time barred. The Bureau commented that, in most states, consumers can raise this as an affirmative defense to prevent a debt collector from recovering on the debt using judicial processes such as foreclosure. Additionally, because “Regulation F’s prohibition on suits and threats of suit on time-barred debt is subject to a strict liability standard,” a debt collector that sues or threatens to sue “violates the prohibition ‘even if the debt collector neither knew nor should have known that a debt was time-barred,’” the Bureau said. The advisory opinion clarified that these restrictions apply to covered debt collectors, including individuals and entities seeking to collect defaulted mortgage loans and many of the attorneys that bring foreclosure actions on their behalf.

    CFPB Director Rohit Chopra delivered remarks during a field hearing in Brooklyn, New York, in which he emphasized that the Bureau will work with state enforcement agencies to take action against covered debt collectors who break the law. He reminded consumers that they can also sue debt collectors themselves under the FDCPA.

    Agency Rule-Making & Guidance Federal Issues CFPB Consumer Finance Debt Collection Mortgages FDCPA Regulation F

  • Agencies release statement on LIBOR sunset; CFPB amends Reg Z to reflect transition

    Agency Rule-Making & Guidance

    On April 26, the CFPB joined the Federal Reserve Board, FDIC, NCUA, and OCC in issuing a joint statement on the completion of the LIBOR transition. (See also FDIC FIL-20-2023 and OCC Bulletin 2023-13.) According to the statement, the use of USD LIBOR panels will end on June 30. The agencies reiterated their expectations that financial institutions with USD LIBOR exposure must “complete their transition of remaining LIBOR contracts as soon as practicable.” Failure to adequately prepare for LIBOR’s discontinuance may undermine financial stability and institutions’ safety and soundness and could create litigation, operational, and consumer protection risks, the agencies stressed, emphasizing that institutions are expected to take all necessary steps to ensure an orderly transition. Examiners will monitor banks’ efforts throughout 2023 to ensure contracts have been transitioned away from LIBOR in a manner that complies with applicable legal requirements. The agencies also reminded institutions that safe-and-sound practices include conducting appropriate due diligence to ensure that replacement alternative rate selections are appropriate for an institution’s products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities. Institutions should also “understand how their chosen reference rate is constructed and be aware of any fragilities associated with that rate and the markets that underlie it,” the agencies advised. Both banks and nonbanks should continue efforts to adequately prepare for LIBOR’s sunset, the Bureau said in its announcement, noting that the agency will continue to help institutions transition affected consumers in an orderly manner.

    The Bureau also issued an interim final rule on April 28 amending Regulation Z, which implements TILA, to update various provisions related to the LIBOR transition. The interim final rule updates the Bureau’s 2021 LIBOR Transition Rule (covered by InfoBytes here) to reflect the enactment of the Adjustable Interest Rate Act of 2021 and its implementing regulation promulgated by the Federal Reserve Board (covered by InfoBytes here). Among other things, the interim final rule further addresses LIBOR’s sunset on June 30, by incorporating references to the SOFR-based replacement—the Fed-selected benchmark replacement for the 12-month LIBOR index—into Regulation Z. The interim final rule also (i) makes conforming changes to terminology used to identify LIBOR replacement indices; and (ii) provides an example of a 12-month LIBOR tenor replacement index that meets certain standards within Regulation Z. The Bureau also released a Fast Facts summary of the interim final rule and updated the LIBOR Transition FAQs.

    The interim final rule is effective May 15. Comments are due 30 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Issues CFPB OCC FDIC LIBOR Nonbank SOFR Regulation Z TILA

  • OCC, FDIC say some overdraft fees may be unfair or deceptive

    On April 26, the OCC and FDIC issued supervisory guidance addressing consumer compliance risks associated with bank overdraft practices. (See OCC Bulletin 2023-12 and FDIC FIL-19-2023.) The guidance highlighted certain practices that may result in increased risk exposure, including assessing overdraft fees on “authorize positive, settle negative” (APSN) transactions and assessing representment fees each time a third party resubmits the same item for payment after being returned by a bank for non-sufficient funds. The agencies provided guidance for banks that may help control risks associated with overdraft protection programs and achieve compliance with Dodd-Frank’s UDAAP prohibitions and section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices.

    The FDIC’s supervisory guidance expanded on the 2019 Consumer Compliance Supervisory Highlights (covered by InfoBytes here), and warned that APSN overdraft fees present risks of unfairness under both statutes as consumers “cannot reasonably avoid” receiving these fees because they lack “the ability to effectively control payment systems and overdraft processing systems practices.” The FDIC cited the “complicated nature of overdraft processing systems” as another impediment to a consumer’s ability to avoid injury. The FDIC also emphasized that risks of unfairness exist both in “available balance” or “ledger balance” methods of assessing overdraft fees, but cautioned that risks may be “more pronounced” when a bank uses an available balance method. Furthermore, the FDIC warned that disclosures describing how transactions are processed may not mitigate UDAAP and UDAP risk. Banks are encouraged to “ensure customers are not charged overdraft fees for transactions consumers may not anticipate or avoid,” and should take measures to ensure overdraft programs provided by third parties comply with all applicable laws and regulations, as such arrangements may present additional risks if not properly managed, the FDIC explained.

    The OCC’s guidance also warned that disclosures may be deceptive under section 5 if they fail to clearly explain that multiple or additional fees may result from multiple presentments of the same transaction. Recognizing that some banks have already implemented changes to their overdraft protection programs, the OCC also acknowledged that “[w]hen supported by appropriate risk management practices, overdraft protection programs may assist some consumers in meeting short-term liquidity and cash-flow needs.” The OCC encouraged banks to explore other options, such as offering low-cost accounts and low-cost alternatives for covering overdrafts, such as overdraft lines of credit and linked accounts. 

    Bank Regulatory Federal Issues OCC FDIC Consumer Finance Overdraft FTC Act UDAP UDAAP Deceptive Unfair Dodd-Frank Fees Agency Rule-Making & Guidance

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