InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Biden orders agency action on medical debt
On April 11, the Biden administration released a Fact Sheet regarding an initiative to decrease “malicious” and “predatory” billing and collection practices related to medical debts, including holding medical providers and debt collectors “accountable for harmful practices.” According to the Fact Sheet, the administration has ordered several agencies to take actions intended to “lessen the burden of medical debt and increase consumer protection.” The Fact Sheet provides “guidance to all agencies to eliminate medical debt as a factor for underwriting in credit programs,” and states, among other things, that the: (i) FHFA is reviewing the credit models that Fannie Mae and Freddie Mac use; (ii) USDA is discontinuing “the inclusion of any recurring medical debts into borrower repayment calculations”; and (iii) VA is reviewing its underwriting guidelines to ensure it minimizes or eliminates medical debt reporting as a proxy for creditworthiness. Additionally, the Fact Sheet noted that the Department of Health and Human Services is requesting data from over 2,000 providers on medical bill collection practices, lawsuits against patients, financial assistance, financial product offerings, and third party contracting or debt buying practices. The Fact Sheet also noted that the CFPB “will investigate credit reporting companies and debt collectors” in regard to “patients’ and families’ rights,” which includes targeting “coercive credit reporting” and determining whether medical debts should be included in consumer credit reports.
FHFA suspends foreclosure for borrowers applying for HAF funds
On April 6, FHFA announced that servicers with mortgages backed by Fannie Mae and Freddie Mac are required to suspend foreclosure activities for up to 60 days if the servicer is notified that a borrower has applied for mortgage assistance under the Treasury Department’s Homeowner Assistance Fund (HAF). As previously covered by InfoBytes, the HAF was created to provide direct assistance for mortgage payments, property insurance, utilities, and other housing-related costs to help prevent delinquencies, defaults, and foreclosures after January 21, 2020.
HUD proposes 40-year term for loan modifications
On April 1, HUD published a proposed rule in the Federal Register to increase the maximum term limit allowable on loan modifications for FHA-insured mortgages from 360 to 480 months. According to the proposed rule, the update would allow mortgagees to provide a 40-year loan modification option to borrowers who may not qualify for loss mitigation options and is intended to help borrowers experiencing a financial hardship, including those impacted by the Covid-19 pandemic, obtain affordable monthly payments. The proposed rule noted that “[i]ncreasing the maximum term limit to 480 months would allow mortgagees to further reduce the borrower’s monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA-insured mortgages the ability to retain their homes after default.” Additionally, the proposal would align FHA with Fannie Mae and Freddie Mac, “which both currently provide a 40-year loan modification option.” Comments are due by May 31.
FHFA orders stress tests for Fannie and Freddie
On March 16, FHFA published orders applicable March 10 for Fannie Mae and Freddie Mac (GSEs) with respect to stress test reporting as of December 31, 2021, under Dodd-Frank as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under Dodd-Frank, certain federally regulated financial companies with total consolidated assets of more than $250 billion are required to conduct periodic stress tests to determine whether the companies have the capital necessary to absorb losses as a result of severely adverse economic conditions. The orders are accompanied by Summary Instructions and Guidance, which include stress test scenarios and revised templates (baseline, severely adverse, and variables and assumptions) for regulated companies to use when reporting the results of the stress tests (orders and instructions are available here). According to the Summary Instructions and Guidance, the GSEs have until May 20 to submit baseline and severely adverse results to FHFA and the Federal Reserve Board, and must publicly disclose a summary of severely adverse results between August 1 and 15.
5th Circuit remands shareholders’ net worth sweep claims to lower court
On March 4, a split U.S. Court of Appeals for the Fifth Circuit, on remand from the U.S. Supreme Court, sent a shareholders’ suit back to the district court for further proceedings consistent with the Supreme Court’s decision in Collins v. Yellen, in which the Supreme Court, relying on its decision in Seila Law LLC v. CFPB, held that FHFA’s leadership structure was unconstitutional because it only allowed the president to fire the FHFA director for cause. (Covered by InfoBytes here.) In Collins, the Supreme Court reviewed the 5th Circuit’s en banc decision stemming from a 2016 lawsuit brought by a group of Fannie Mae and Freddie Mac (GSEs) shareholders against the U.S. Treasury Department and FHFA, in which shareholders claimed that the Housing and Economic Recovery Act of 2008 (Recovery Act), which created the agency, violated the separation of powers principal because it only allowed the president to fire the FHFA director “for cause.” The shareholders also alleged that FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). (Covered by InfoBytes here.) At the time, while the en banc appellate court reaffirmed its earlier decision that FHFA’s structure violated the Constitution’s separation of powers requirements, nine of the judges concluded that the appropriate remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the ‘for cause’ restriction is declared removed. We go no further.”
The split Supreme Court had affirmed the 5th Circuit’s en banc decision regarding the FHFA’s structure, but left intact the net worth sweep and remanded the case to the appellate court to determine “what remedy, if any, the shareholders are entitled to receive on their constitutional claim.” Justice Samuel Alito, who wrote for the majority, stated that “[a]lthough the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office. As a result, there is no reason to regard any of the actions taken by the FHFA in relation to the third amendment as void.”
On remand, the en banc 5th Circuit majority ordered the district court to decide whether the shareholders suffered compensable harm from the unconstitutional removal provision, observing that the Supreme Court left open the possibility that the unconstitutional restriction on the President’s power to remove the FHFA director could have inflicted compensable harm. Noting that the Supreme Court had sketched “possible causes and consequences of such harm along with the Federal Defendants’ denial of any such harm,” the majority stressed that “it became clear” during oral argument that “the prudent course is to remand to the district court to fulfill the Supreme Court’s remand order.”
However, five of the appellate judges dissented from the majority decision on the grounds that nothing in the Supreme Court’s decision precluded the 5th Circuit from deciding the harm issue, pointing out that the appellate court could “easily do so in light of [its] previous conclusion that ‘the President, acting through the Secretary of the Treasury, could have stopped [the Net Worth Sweep] but did not.’” The dissenting judges noted that because the shareholders failed to point to sufficient facts to cast doubt on the 5th Circuit’s previous decision, the appellate court “should modify the district court’s judgment by granting declaratory relief in the Plaintiff’s favor, stating that the ‘for cause’ removal provision as to the Director of the FHFA is unconstitutional. In all other respects, we should affirm.”
FHFA finalizes enterprise regulatory capital framework
On February 25, FHFA announced a final rule, which amends the Enterprise Regulatory Capital Framework (ERCF) by refining the prescribed leverage buffer amount (leverage buffer) and risk-based capital treatment of retained credit risk transfer (CRT) exposures for Fannie Mae and Freddie Mac (collectively, GSEs). Among other things, the final rule: (i) replaces the fixed leverage buffer equal to 1.5 percent of a GSE's adjusted total assets with a dynamic leverage buffer equal to 50 percent of the GSE's stability capital buffer; (ii) replaces the prudential floor of 10 percent on the risk weight assigned to any retained CRT exposure with a prudential floor of 5 percent on the risk weight assigned to any retained CRT exposure; and (iii) removes the requirement that a GSE must apply an overall effectiveness adjustment to its retained CRT exposures in accordance with the ERCF’s securitization framework. Additionally, the final rule implements technical corrections to provisions of the ERCF that were published in December 2020. (Covered by InfoBytes here.) The ERCF amendments and technical corrections will be effective 60 days after publication in the Federal Register.
FHFA re-proposes GSE seller/servicer eligibility requirements
On February 24, FHFA re-proposed updated eligibility standards that Fannie Mae and Freddie Mac (collectively, GSEs) mortgage sellers and servicers would have to meet. The updated proposed requirements are designed to provide transparency and consistency of capital and liquidity requirements for sellers and servicers with different business models, and would differentiate between the servicing of Ginnie Mae mortgages and GSE mortgages. FHFA noted that the updated proposed requirements, which reflect coordination with other federal agencies, also incorporate feedback from a January 2020 proposal (covered by InfoBytes here), as well as lessons learned from the Covid-19 pandemic.
Under the updated proposed requirements, all GSE sellers and servicers (both depositories and non-depositories) would be required to maintain a tangible net worth requirement of $2.5 million, plus 35 basis points of the unpaid principal balance for Ginnie Mae servicing and 25 basis points of the unpaid principal balance for all other 1-to-4 unit residential loans serviced, including GSE loans. Current GSE sellers and servicers, as well as new applicants, will be required to comply with the updated proposed requirements by December 31, 2022, minus the exception that Capital and Liquidity Plan requirements must be submitted to the GSEs by December 31, 2023, and are due annually by the end of each year thereafter. Comments on the proposed changes are due in 60 days. FHFA stated it anticipates finalizing the updated proposed requirements in the second quarter of 2022, with most requirements taking effect six months after finalization.
FHFA releases AI/ML risk management guidance for GSEs
On February 10, FHFA released Advisory Bulletin (AB) 2022-02 to Fannie Mae and Freddie Mac (GSEs) on managing risks related to the use of artificial intelligence and machine learning (AI/ML). Recognizing that while the use of AI/ML has rapidly grown among financial institutions to support a wide range of functions, including customer engagement, risk analysis, credit decision-making, fraud detection, and information security, FHFA warned that AI/ML may also expose a financial institution to heightened compliance, financial, operational, and model risk. In releasing AB 2022-02 (the first publicly released guidance by a U.S. financial regulator that specifically focuses on AI/ML risk management), FHFA advised that the GSEs should adopt a risk-based, flexible approach to AI/ML risk management that should also be able “to accommodate changes in the adoption, development, implementation, and use of AI/ML.” Diversity and inclusion (D&I) should also factor into the GSEs’ AI/ML processes, stated a letter released the same day from FHFA’s Office of Minority and Women Inclusion, which outlined its expectations for the GSEs “to embed D&I considerations throughout all uses of AI/ML” and “address explicit and implicit biases to ensure equity in AI/ML recommendations.” The letter also emphasized the distinction between D&I and fairness and equity, explaining that D&I “requires additional deliberation because it goes beyond the equity considerations of the impact of the use of AI/ML and requires an assessment of the tools, mechanisms, and applications that may be used in the development of the systems and processes that incorporate AI/ML.”
Additionally, AB 2022-02 outlined four areas of heightened risk in the use of AI/ML: (i) model risk related to bias that may lead to discriminatory or unfair outcomes (includes “black box risk” where a “lack of interpretability, explainability, and transparency” may exist); (ii) data risk, including concerns related to the accuracy and quality of datasets, bias in data selection, security of data from manipulation, and unfamiliar data sources; (iii) operational risks related to information security and IT infrastructure, among other things; and (iv) regulatory and compliance risks concerning compliance with consumer protection, fair lending, and privacy laws. FHFA provided several key control considerations and encouraged the GSEs to strengthen their existing risk management frameworks where heightened risks are present due to the use of AI/ML.
FHFA issues guidance to GSEs on insider trading
On February 8, the FHFA released AB 2022-01: Insider Trading Risk Management, which provides guidance to Fannie Mae and Freddie Mac (GSEs) on managing insider trading risk and related conflicts of interest. The Bulletin defines illegal insider trading as an individual or entity in possession of material nonpublic information (MNPI), “obtained through their employment or other involvement with a company,” purchasing, selling or otherwise trading their own company’s securities or non-company securities based on MNPI, or “when a person or entity improperly discloses MNPI to a third party.” The Bulletin explains that the GSEs are expected to establish and maintain a compliance program based on risk assessment processes to manage insider trading activities and risks. In order to mitigate these risks, the Bulletin advised the GSEs to “examine the nature of its business and its prior history of insider trading risk events, determine what types of illegal insider trading activities pose the greatest risk, and adopt effective controls to detect and prevent such misconduct.” The Bulletin directs the GSEs to address the following topics: (i) establishing an “effective [corporate] governance framework” for the GSEs; (ii) creating an “effective risk identification and assessment system;” (iii) “identifying, managing, and reporting on insider trading-related controls;” (iv) creating procedures for regular internal surveillance and monitoring of insider trading risks ‘to identify changes or trends in exposures over time;” and (v) developing procedures for effective internal and external disclosures and reporting.
FHFA sets targeted fee increases for certain loans
On January 5, FHFA announced targeted increases to the upfront fees for certain high-balance loans and second home loans sold to Fannie Mae and Freddie Mac (GSEs). Upfront fees for high-balance loans will increase between 0.25 percent and 0.75 percent, tiered by loan-to-value ratio. Upfront fees for second home loans will increase between 1.125 percent and 3.875 percent, also tiered by loan-to-value ratio. In order to continue to provide support for affordable housing, certain loans, including HomeReady, Home Possible, HFA Preferred and HFA Advantage, will not be subject to the increased fees. Additionally, “loans to first time homebuyers in high cost areas with incomes at or below 100 percent of area median income will have no specific high balance upfront fees.” The new fees will take effect April 1, to “minimize market and pipeline disruption,” FHFA stated. Acting Director Sandra Thompson said the fee increases are another step FHFA is taking to strengthen the GSEs’ safety and soundness, while also ensuring access to credit for first-time homebuyers and low- and moderate-income borrowers. “These targeted pricing changes will allow the [GSEs] to better achieve their mission of facilitating equitable and sustainable access to homeownership, while improving their regulatory capital position over time,” Thompson said.