InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB updates Mortgage Servicing Examination Procedures
On January 18, the CFPB released an updated version of its Mortgage Servicing Examination Procedures, detailing the types of information examiners should gather when assessing whether servicers are complying with applicable laws and identifying consumer risks. The examination procedures, which were last updated in June 2016, cover forbearances and other tools, including streamlined loss mitigation options that mortgage servicers have used for consumers impacted by the Covid-19 pandemic. The Bureau noted in its announcement that “as long as these streamlined loss mitigation options are made available to borrowers experiencing hardship due to the COVID-19 national emergency, those same streamlined options can also be made available under the temporary flexibilities in the [agency’s pandemic-related mortgage servicing rules] to borrowers not experiencing COVID-19-related hardships.” Servicers are expected to continue to use all the tools at their disposal, including, when available, streamlined deferrals and modifications that meet the conditions of these pandemic-related mortgage servicing rules as they attempt to keep consumers in their homes. The Bureau said the updated examination procedures also incorporate focus areas from the agency’s Supervisory Highlights findings related to, among other things, (i) fees such as phone pay fees that servicers charge borrowers; and (ii) servicer misrepresentations concerning foreclosure options. Also included in the updated examination procedures are a list of bulletins, guidance, and temporary regulatory changes for examiners to consult as they assess servicers’ compliance with federal consumer financial laws. Examiners are also advised to request information on how servicers are communicating with borrowers about homeowner assistance programs, which can help consumers avoid foreclosure, provided mortgage servicers collaborate with state housing finance agencies and HUD-approved housing counselors to aid borrowers during the HAF application process.
DOJ revises corporate enforcement policy applicable to all criminal matters including FCPA cases
On January 17, Assistant Attorney General Kenneth A. Polite, Jr. delivered remarks at Georgetown University Law Center, during which he announced changes to the DOJ’s Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy. Polite provided background information on the DOJ Criminal Division’s voluntary self-disclosure incentive program, the FCPA Pilot Program, that was announced in 2016 and expanded in 2017 to become the FCPA Corporate Enforcement Policy (covered by InfoBytes here). This policy, Pilot said, has been applied to all corporate cases prosecuted by the Criminal Division since at least 2018, and provided, among other things, that “if a company voluntarily self-discloses, fully cooperates, and timely and appropriately remediates, there is a presumption that [the DOJ] will decline to prosecute absent certain aggravating circumstances involving the seriousness of the offense or the nature of the offender.” The policy also provided a maximum 50 percent reduction off the low end of the applicable sentencing guidelines penalty range to companies that self-disclosed violations where a criminal resolution is warranted. Last year, following a request by the Deputy Attorney General to have all DOJ components write voluntary self-disclosure policies, the Criminal Division conducted an assessment of its existing policy. Pilot said the division is now announcing the first significant changes to the policy since 2017.
Under the updated policy, companies are offered “new, significant and concrete incentives to self-disclose misconduct,” Polite said, explaining that “even in situations where companies do not self-disclose, the revisions to the policy provide incentives for companies to go far above and beyond the bare minimum when they cooperate with [DOJ] investigations.” He emphasized that the revisions clarify that companies will face very different outcomes if they do not self-disclose, meaningfully cooperate with investigations, or remediate. However, the revisions provide a path that incentivizes even more robust compliance on the front-end in order to prevent misconduct and requires even more robust cooperation and remediation on the back-end should a crime occur.
Polite stated that prosecutors might decline to bring charges against a company over crimes with aggravating factors if the company can demonstrate that it: (i) made voluntary disclosures immediately upon becoming aware of an allegation of misconduct; (ii) had an effective compliance program already in place at the time of the misconduct that allowed it to identify the misconduct and led it to voluntarily self-disclose; and (iii) provided exceptional cooperation and extraordinary remediation. Should a company fail to take these steps, it risks “increasing its criminal exposure and monetary penalties,” Polite warned, emphasizing that the DOJ’s “job is not just to prosecute crime, but to deter and prevent criminal conduct.” He added that the DOJ will recommend a reduction in fines of at least 50 percent and up to 75 percent (except in the case of a criminal recidivist) for companies that voluntarily report wrongdoing and fully cooperate with investigations. Even companies that do not voluntarily disclose wrongdoing but still fully cooperate with an investigation and timely and appropriately remediate could still receive a 50 percent reduction off the low end of the guidelines for fines, Polite said. “The policy is sending an undeniable message: come forward, cooperate, and remediate. We are going to be closely examining how companies discipline bad actors and reward the good ones.”
FinCEN solicits feedback on beneficial ownership reporting requirements
On January 17, the Financial Crimes Enforcement Network (FinCEN) published two notices and requests for comment in the Federal Register related to the reporting process the agency intends to use to collect beneficial ownership data pursuant to the Beneficial Ownership Information Reporting Requirements final rule (published last September and covered by InfoBytes here). Under the final rule, most corporations, limited liability companies, and other entities created in or registered to do business in the U.S. will be required to report information about their beneficial owners to FinCEN. The first notice and request for comments invites interested parties to provide feedback on the application that will be used to collect information from individuals who seek to obtain an optional FinCEN identifier. The second notice and request for comments requests feedback on a report that certain entities will be required to file with FinCEN. The electronically filed report will identify the reporting entity’s beneficial owners, and—in certain cases—the individual who “directly filed the document with specified governmental authorities that created the entity or registered it to do business, as well as the individual who was primarily responsible for directing or controlling such filing, if more than one individual was involved in the filing of the document.” Comments on both notices are due by March 20.
FHFA outlines MSR guidance for managing counterparty credit risk
On January 12, FHFA released an advisory bulletin communicating supervisory expectations for Fannie Mae and Freddie Mac (the Enterprises) related to the valuation of mortgage servicing rights (MSRs) for managing counterparty credit risk. FHFA emphasized that Fannie and Freddie’s “risk management policies and procedures should be commensurate with an Enterprise’s risk appetite[] and based on an assessment of seller/servicer financial strength and MSR risk exposure levels.” FHFA relayed that while sellers and servicers assign values to their MSRs, the Enterprises should implement their own processes to evaluate the reasonableness of seller/servicer MSR values. FHFA explained that Fannie and Freddie are “exposed to counterparty credit risk when seller/servicers provide representations and warranties that mortgage loans conform with its selling guide requirements,” and reiterated that “[f]ailure to meet such obligations and commitments may cause the Enterprise to incur credit losses and operational costs.”
The advisory bulletin lays out risk management expectations to ensure MSR values are reasonable, objective, and transparent, and provides guidance covering several areas, including (i) objective evaluation of MSR values; (ii) MSR valuations for mortgage loans owned or guaranteed by Fannie and Freddie as well as stress testing; (iii) MSR valuations for mortgage loans not owned or guaranteed by Fannie or Freddie; (iv) market data input; (v) use of third-party providers; (vi) frequency of evaluations; and (vii) discount to MSR values when servicing rights are terminated. The advisory bulletin is applicable only to MSRs for single-family mortgage loans and is effective April 1.
HUD discusses steps to address appraisal bias
On January 12, HUD Secretary Marcia L. Fudge announced at a Brookings Institute event that HUD is creating a process that people seeking FHA financing can use to request a review of their appraisal if they believe the results may have been affected by racial bias. According to the announcement, under the reconsideration of value (ROV) proposal, lenders will have clear guidance on how to review requests from borrowers for an ROV for the appraisal conducted in conjunction with their application for FHA-insured mortgage financing. The proposal also provides guidance for obtaining a second appraisal when material deficiencies are documented, and the appraiser is unwilling to resolve them. Fudge noted that the proposal “represents the first step to solidify the processes that lenders must follow when a borrower requests a [ROV] review if concerns arise around unlawful discrimination in residential property valuations.” Fudge also noted that the proposal supports the Biden-Harris administration’s PAVE Action Plan commitments and the continued work of the Interagency Task Force. As previously covered by InfoBytes, in March 2022, HUD delivered the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) Action Plan to President Biden. PAVE focuses primarily on actions to substantially reduce racial bias in home appraisals, as well as steps federal agencies can “take using their existing authorities to enhance oversight and accountability of the appraisal industry and empower homeowners and homebuyers to take action when they receive a valuation that is lower than expected.”
CFPB proposes T&C registry for nonbanks
On January 11, the CFPB announced a proposed rule to create a public registry of terms and conditions used in non-negotiable, “take it or leave it” nonbank form contracts that “claim to waive or limit consumer rights and protections.” Under the proposal, supervised nonbank companies would be required to report annually to the Bureau on their use of standard-form contract terms that “seek to waive consumer rights or other legal protections or limit the ability of consumers to enforce or exercise their rights.” The terms and conditions—which would be made publicly available—would include those that address waivers of consumer claims, liability limits, legal action limits, class action bans, arbitration agreements, liquidated damages clauses, as well as other waivers of consumer rights.
The Bureau explained that its proposal is intended to “facilitate public awareness and oversight” about what nonbanks are putting in form contracts. “Some companies slip terms and conditions into their form contracts that try to take away consumer protections, try to limit how consumers exercise their rights, or try to quiet consumer complaints or criticism,” the Bureau stated in its announcement. “[M]ore broadly, the terms and conditions potentially undermine consumer financial protection law.”
The Bureau provided several examples of such terms and conditions, including: (i) unlawful mandatory arbitration agreements that are included in servicemember loan contracts; (ii) credit monitoring service agreements that “undermine credit reporting rights” by prohibiting consumers from pursuing legal action, including class action lawsuits, for FCRA violations; (iii) occurrences where lenders use clauses that waive liability for bank fees that borrowers incur due to repeated payment collection attempts; (iii) mortgage contracts that make “deceptive” use of waivers and limitations that are inconsistent with TILA restrictions; and (v) terms and conditions that try to quiet consumer complaints or criticism.
All supervised nonbanks, including those operating in payday lending, private student loan origination, mortgage lending and servicing, student loan servicing, automobile financing, consumer reporting, consumer debt collection, and international remittances would be subject to the rule. However, the Bureau is proposing certain exemptions for nonbanks with lower levels of receipts. Comments on the proposal are due 30 days after publication in the Federal Register.
“[T]the registry would help regulators and law enforcement more easily detect when companies are offering products and services using prohibited, void, and restricted contract terms described above. This would be especially useful to state and tribal regulators with limited resources to alert or take action against companies violating the law,” CFPB Director Rohit Chopra said in an accompanying statement, adding that the Bureau plans to “use data from the registry to identify supervised nonbanks and the risks their terms and conditions pose, prioritize which firms to examine, and plan the scope of those exams.”
House Financial Services Committee Chairman Patrick McHenry (R-NC) slammed the proposal, saying the “proposed registry of terms and conditions will facilitate the naming and shaming of firms to empower progressive activists. Requiring nonbank financial firms to register publicly with the Bureau is unprecedented—no other industry is required to make public such detailed contract information. The days of Congress giving Director Chopra a free pass for his reckless actions have come to an end.”
The proposed registry follows a proposal announced in December by the Bureau that would create a database of enforcement actions taken against certain nonbank covered entities, which would include all final public written orders and judgments (including any consent and stipulated orders and judgments) obtained or issued by any federal, state, or local government agency for violation of certain consumer protection laws related to unfair, deceptive, or abusive acts or practices. (Covered by InfoBytes here.)
Education Dept. releases IDR proposal
On January 10, the Department of Education (DOE) announced a notice of proposed rulemaking (NPRM) to reduce the cost of federal student loan payments. According to the DOE, the regulations fulfill President Biden’s plan to provide student debt relief for approximately 40 million borrowers and to make the student loan system more manageable for student borrowers. As previously covered by InfoBytes, the three-part debt relief plan was announced in August to provide, among other things, up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the DOE, and up to $10,000 in debt cancellation to non-Pell Grant recipients for borrowers making less than $125,000 a year or less than $250,000 for married couples. Plaintiffs, whose loans are ineligible for debt forgiveness under the program, sued the DOE and the DOE secretary claiming the agency violated the Administrative Procedure Act’s notice-and-comment rulemaking procedures and arbitrarily decided the program’s eligibility criteria. Plaintiffs further contended that the DOE secretary does not have the authority under the HEROES Act to implement the program. Specifically, the NPRM would establish that those making less than $30,577 as an individual or a family of four making less than $62,437 would have their monthly payments reduced to $0.
According to the NPRM, the DOE is proposing to amend the regulations governing income-contingent repayment plans by amending the Revised Pay as You Earn (REPAYE) repayment plan. The NPRM noted that the DOE is looking to restructure and rename the repayment plan regulations under the William D. Ford Federal Direct Loan Program, including combining the Income Contingent Repayment (ICR) and the Income-Based Repayment (IBR) plans under the umbrella term of IDR plans. The NPRM would ensure that a borrower’s balance would not grow due to accumulation of unpaid interest if the borrowers otherwise make their monthly payments. Additionally, the NPRM would also establish that for individuals who borrow $12,000 or less, loan forgiveness can occur after making the equivalent of 10 years of payments. That period increases by one year for each additional $1,000 that is borrowed. The DOE released a Fact Sheet on increasing college accountability, which clarifies information on identifying the lowest-financial-value programs, protecting students and delivering value through greater accountability, increasing collaboration with accreditors, and building a record of action.
The DOE also released a request for information (RFI) to solicit comments on identifying the best ways to calculate the metrics that may be used to identify low-financial-value programs and inform technical considerations. Finally, the DOE released a Fact Sheet on transforming IDR. Among other things, the Fact Sheet discusses decreasing undergraduate loan payments, stopping unpaid interest accumulation, and lowering the number of monthly payments required to receive forgiveness for borrowers with smaller loan balances. Comments are due 30 days after publication in the Federal Register.
FTC seeks to ban noncompete clauses
On January 5, the FTC announced a notice of proposed rulemaking (NPRM) regarding banning the use of noncompete clauses in employment contracts. Among other things, the NPRM, would make it illegal for employers to: (i) enter into, or attempt to enter into, a noncompete agreement with a worker; (ii) maintain a noncompete agreement with a worker; or (iii) represent to a worker that the worker is subject to a noncompete agreement. The NPRM also would require employers to rescind existing noncompete agreements and notify workers that those agreements are no longer in effect. The NPRM extends to both paid and unpaid workers as well as independent contractors. It also extends to non-disclosure agreements or agreements to repay training costs upon early termination of employment if such agreements amount de facto to a noncompete. Finally, the NPRM extends to noncompetes related to the sale of a business unless they involve a person who owns at least 25 percent of the sold business. The ban would be pursuant to Sections 5 and 6(g) of the FTC Act, which declare “unfair methods of competition in or affecting commerce” to be unlawful, and authorize the FTC to issue rules prohibiting such methods.
According to FTC Chair Lina M. Khan, noncompete clauses “block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.” She noted that by ending noncompete clauses, “the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.” According to Commissioner Christine S. Wilson’s dissent, the NPRM is a “radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a noncompete clause is unreasonable in duration and scope, given the business justification for the restriction.”
Comments are due by March 10.
DFPI modifies Student Loan Servicing Act proposal
On January 6, the California Department of Financial Protection and Innovation issued modified proposed regulations under the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (covered by InfoBytes here). Last September, DFPI issued proposed rules to clarify, among other things, that income share agreements (ISAs) and installment contracts, which use terminology and documentation distinct from traditional loans, serve the same purpose as traditional loans (i.e., “help pay the cost of a student’s higher education”), and are therefore student loans subject to the Act. As such, servicers of these products must be licensed and comply with all applicable laws, DFPI said. (Covered by InfoBytes here.) The initial proposed rules also (i) defined the term “education financing products” (which now fall under the purview of the Act) along with other related terms; (ii) amended various license application requirements, including financial requirements for startup applicants; (iii) outlined provisions related to non-licensee filing requirements (e.g., requirements for servicers that do not require a license but that are subject to the Student Loans: Borrower Rights Law, which was enacted in 2020 (effective January 1, 2021)); (iv) specified that servicers of all education financing products must submit annual aggregate student loan servicing reports to DFPI; and (v) outlined new clarifications to the Student Loans: Borrower Rights Law to provide new requirements for student loan servicers (covered by InfoBytes here).
Following its consideration of public comments on the initial proposed rulemaking, DFPI is proposing the following changes:
- Amendments to definitions. The modified regulations revise the definition of “education financing products” by changing “private loans” to “private education loans,” which are not traditional loans. DFPI explained that changing the term to what is used in TILA will provide consistency for servicers and eliminate operational burdens. While the definition of “education financing products” also no longer includes “income share agreements and installment contracts” in order to align it with TILA, both of these terms were separately defined in the initial proposed rulemaking. The definition of “traditional student loan” has also been revised to distinguish which private student loans are traditional loans and which are education financing products (in order to help servicers determine the applicable aggregate reporting and records maintenance rules). The modifications also revise the definitions of “federal student loan,” “income,” “income share agreement,” “installment contract,” “payment cap,” “payment term,” and “qualifying payments,” remove unnecessary alternative terms for “income share,” and add “maximum payments” as a new defined term.
- Time zone requirement revisions. The modified regulations revise the time zone in which a payment must be received to be considered on-time to Pacific Time in order to protect California borrowers.
- Additional borrower protections. The modified regulations specify that servicers are required to send written acknowledgement of receipt and responses to qualified written requests via a borrower’s preferred method of communication. For borrowers who do not specify a preferred method, servicers must send acknowledgments and responses through both postal mail to the last known address and to all email addresses on record.
- Examinations, books, and records requirement updates. The modified regulations revise the information that servicers must provide in their aggregate reports for traditional student loans, including with respect to: (i) loan balance and status; (ii) cumulative balances and amounts paid; and (iii) aggregate information specific to ISAs, installment contracts, and other education financing products. Additionally, DFPI clarified that while the amount a borrower will be required to pay to an ISA provider in the future is unknown, many ISAs contain an “early completion” provision to allow a borrower to extinguish future obligations, and ISA providers must give this information to borrowers. DFPI further clarified that while servicers may choose to maintain records electronically, they must also be able to produce paper records for inspection at a DFPI-designated servicer location to allow an examination to be conducted in one place.
Comments on the modified regulations are due January 26.
Agencies highlight downpayment assistance, child privacy in regulatory agendas
Recently, the Office of Information and Regulatory Affairs released fall 2022 regulatory agendas for the FTC and HUD. With respect to an FTC review of the Children’s Online Privacy Protection Rule (COPPA) that was commenced in 2019 (covered by InfoBytes here), the Commission stated in its regulatory agenda that it is still reviewing comments. COPPA “prohibits unfair or deceptive acts or practices in connection with the collection, use and/or disclosure of personal information from and about children under the age of 13 on the internet,” and, among other things, “requires operators of commercial websites and online services, with certain exceptions, to obtain verifiable parental consent before collecting, using, or disclosing personal information from or about children.”
HUD stated in its regulatory agenda that it anticipates issuing a notice of proposed rulemaking in March that would address mortgage downpayment assistance programs. The Housing and Economic Recovery Act of 2018 amended the National Housing Act to add a clause that prohibits any portion of a borrower’s required minimum cash investment from being provided by: “(i) the seller or any other person or entity that financially benefits from the transaction, or (ii) any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).” According to the agenda, FHA continues to receive questions about prohibitions on persons or entities that may financially benefit from a mortgage transaction, including “whether down payment assistance programs operated by government entities are being operated in a fashion that would render such assistance prohibited.” A future NPRM would clarify the circumstances in which government entities are deriving a prohibited financial benefit.