InfoBytes Blog

Diligence Firm Objects to RMBS Working Group Subpoena

On September 24, a firm that handles due-diligence matters for financial institutions filed its opposition to a motion filed  by the U.S. Attorney’s Office for the District of Connecticut, on behalf of the federal-state RMBS Working Group, to compel production of documents and information the group sought in a July subpoena. In its brief, the firm reviews its cooperation to respond to “six years of subpoenas, investigatory demands, and formal and informal requests for information,” and summarizes the volume and types of information it has provided to the DOJ and the Working Group to date as a third-party witness in connection with the 16 companies the Working Group has identified as subjects of its RMBS investigations. The firm notes the “substantial expense” it has incurred “to educate an ever-growing, and often-changing, number government attorneys and investigators.” The firm argues that the Working Group’s most recent subpoena, which seeks “every document and communication for all 193 clients and for almost 5,000 e-mail custodians,” constitutes a “fishing expedition” and violates the firm’s rights under the Fourth Amendment.

Mortgage Origination RMBS Investigations

Special Alert: CFPB Finalizes Additional Amendments to the 2013 Mortgage Rules

On September 13, the CFPB finalized another set of amendments to its January 2013 mortgage rules. Whereas previous amendments focused largely on the ability-to-repay/qualified mortgage rule, these amendments – originally proposed in late June 2013 – principally address several important questions that have emerged during the implementation process for the mortgage servicing and loan originator compensation rules. We have prepared a Special Alert regarding these latest amendments.

The amendments provide guidance on complying with the rules and, in several cases, the CFPB revised the proposed amendments in response to concerns raised by the industry during the comment period.  Nevertheless, the volume and complexity of the new requirements and the number of outstanding issues still present a daunting task for many industry participants as they work to implement the rules by January 2014.  The CFPB declined industry requests to provide additional time for compliance and, except as discussed in our Special Alert, has not indicated whether additional amendments will be forthcoming.

Questions regarding the matters discussed in the Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

• Jeffrey P. Naimon, (202) 349-8030
• John P. Kromer, (202) 349-8040
• Clinton R. Rockwell, (310) 424-3901
• Joseph M. Kolar, (202) 349-8020
• Jeremiah S. Buckley, (202) 349-8010

CFPB Mortgage Origination Mortgage Servicing

Director Cordray's Statements Offer Insight Into CFPB Activities

During a September 12 House Financial Services Committee hearing and in a recent interview published in the Washington Post, CFPB Director Richard Cordray made a number of statements that shed light on a wide range of topics related to the agency’s thinking and priorities. As discussed in more detail below, Director Cordray and House committee members touched on, among other things, the status of the CFPB’s small business lending data and HMDA rules, efforts to implement the CFPB’s mortgage rules (in particular the QM rule), small-dollar lending, and the CFPB’s collection and use of consumer information.

In addition, in his interview with the Washington Post, Director Cordray confirmed that the CFPB will be writing rules that apply the Electronic Fund Transfer Act (EFTA) to prepaid cards and govern debt collection practices. He also promised additional enforcement actions against debt collectors and “activity” on payday lending.

Highlights from House Hearing:

• Mortgage Rule/QM Implementation and Impact: A number of committee members from both sides of the aisle raised concerns about the impact of the CFPB’s mortgage rules, particularly its ATR/QM rule. Members are concerned with the complexity and regulatory burden of the rules, and that the ATR/QM rule is drawn too narrowly and will limit credit availability. The concerns of community bankers were again front and center—members stated that the rules unnecessarily burden community bankers and limit their ability to make loans, which may, in turn, force them to exit the mortgage market. Mr. Cordray described the various changes to the ATR/QM rule designed to accommodate community banks, reviewed the CFPB’s implementation process and resources, and pledged to continue to work to inform bankers of those accommodations and resources. More broadly, however, he stated that most institutions have told the CFPB that they will be in substantial compliance when the rules take effect in January 2014 and he did not indicate any intention to delay the effective dates of any of the mortgage rules.

  Rep. Huizenga (R-MI) focused on the ATR/QM rules’ inclusion of affiliate charges in the 3% points and fees cap and asked if the CFPB would support changing it. Director Cordray stated that the CFPB is “happy to think further” about the issue and can provide “technical assistance,” but that the rule reflects congressional intent and any substantive change would require legislation. He also acknowledged discussions with the Representative’s staff about whether title insurance should be treated differently because it is regulated.

• Cumulative Regulatory Burden: Several members raised a broader concern about the cumulative burden of regulations on financial institutions. Rep. Capito (R-WV) asked specifically about the CFPB’s regulations streamlining initiative and for evidence that it actually is moving forward. Mr. Cordray cited the CFPB’s work to eliminate an ATM notice requirement, which was removed by legislation before the CFPB finalized its effort, and explained that the CFPB now is focused on limiting burdens related to Gramm-Leach-Bliley Act privacy notices. He did not identify any other specific efforts to eliminate regulatory burden, but stated generally that the CFPB attempts to address duplicative and unnecessarily burdensome provisions in all of its rulemakings.

• TILA/RESPA Integration Rule: Two members – Reps. Miller (R-CA) and Perlmutter (D-CO) – asked about an aspect of the CFPB’s proposed TILA-RESPA integrated disclosure that would identify title insurance as “optional.” The members expressed concern that identifying it as such would not serve consumers. Mr. Cordray was not familiar with the issue, but pledged to revisit it. He also confirmed, as expected, that the final TILA-RESPA rule will be published this fall. (The CFPB’s recent rulemaking agenda stated more specifically October 2013.) Mr. Cordray promised an adequate implementation period.

• Small Business Lending and HMDA Rules: Rep. Velasquez (D-NY), who also serves as ranking member of the Small Business Committee, asked about the status of a rule to implement Dodd-Frank Act amendments to ECOA that require financial institutions to report information concerning credit applications made by women- or minority-owned businesses and small businesses. Mr. Cordray stated that the Bureau understands the importance of this data but was proceeding carefully because the rulemaking is outside the Bureau’s “comfort zone,” which is addressing consumer issues. In particular, he noted the Bureau was seeking to work with agencies that are more knowledgeable in this area, such as the Small Business Administration. However, he added that the CFPB internally has begun developing a rulemaking to implement changes to HMDA data collection. He explained that the CFPB expects that the HMDA rulemaking will inform its small business lending rule effort, and may overlap in parts.

• Small Dollar or “Payday” Lending: Small-dollar lending, particularly through the Internet, remains an active topic for both Congress and the CFPB. Several members raised a general concern with the growth of online lending and potential consumer protection challenges, while others accused the CFPB and other federal authorities of attempting to eliminate the practice altogether. Director Cordray recited the supervision and enforcement challenges associated with online lending and stated that it is a “subject of some considerable scrutiny right now, by [the CFPB] and by others.” He declined to comment more specifically on the CFPB’s involvement in reported efforts by the DOJ, the FDIC, and state authorities with regard to online lenders and the banks that process payments for them. Mr. Cordray later added that the CFPB considers the challenges of “offshore” lending to differ from those presented by Native American lenders. While both are difficult for state authorities to address, the CFPB does not consider tribal lenders to be “offshore” and believes that it is well established in federal law that the federal government can regulate tribal businesses and activities affiliated with tribes.

  Rep. Luetkemeyer (R-MO) mentioned a bill he first introduced last year to address some of these issues by creating a national charter for qualified non-depository creditors. Mr. Cordray responded that he did not have a position on the proposal at this time. Last year, the proposal met opposition from the OCC, state attorneys general, and state bank regulators.

  In response to Rep. Meeks (D-NY), who expressed concern about borrowers who need access to small dollar loans, Mr. Cordray stated that he believes financial institutions could make small dollar loans cheaply.

• Supervision and Enforcement: Rep. Neugebauer (R-TX) and others inquired about the CFPB’s examination and enforcement programs. Mr. Neugebauer asked about the CFPB’s application of the “abusive” prong in the Dodd-Frank Act “UDAAP” standard and about the scope of the CFPB’s information requests. With regard to “abusive practices,” Director Cordray stated that examiners are looking only at practices that meet the statutory definition. He explained that he has difficulty with the abusive standard, and that, in his view, something that is abusive is likely also unfair and deceptive. He promised that the CFPB will “tread carefully” and will not be “wild and overly aggressive” in its application of the abusive standard. With regard to information requests, Mr. Cordray agreed that the CFPB’s practice should be to only sample data and information in connection with exams, but added that in enforcement situations the CFPB may need much more data. Some members also criticized the salaries paid to CFPB staff, while others complained about the lack of experience of some examiners.

• CFPB Data Collection: Numerous members assailed Mr. Cordray with regard to the CFPB’s collection and use of consumer information, and the CFPB’s alleged failure to respond to information requests submitted by Republican members. Mr. Cordray asserted that the CFPB’s data collection and use is legal and necessary. He objected to the characterization that the CFPB has delayed its response to the committee, and indicated that he will be back to testify on this topic in the coming weeks.

Excerpts from Washington Post Interview:

(For the original Washington Post interview, please click here.)

• Debt Collection:  “We will be undertaking rulemaking in the debt-collection area. The work on that will get started later this fall. Debt collection is an area that is in need of revision and updating. It’s a very problematic area, one of the most complained-about areas by the public. It’s only gotten worse in the wake of the financial meltdown because so many people owe debt. An estimated 30 million Americans have a debt collector chasing after them now, so it’s a very salient issue now for the public. The Fair Debt Collection Act was passed in 1977, and there were never any provisions for rules to be written under it, so it hasn’t kept pace with the times. It’s now 35 years old, and there is room for us to update the act to take account of various court decisions, changes in the industry, changes among the consumer public to improve coverage so people are protected and treated fairly. That’s an important area for us and an area where we’ve already had some activity moving toward rulemaking. We’re also examining debt collectors. We’ve done some enforcement actions involving debt collection, and there will be more. We’ve put out a bulletin on first-party debt collectors, making clear that they’re also covered under existing law. And we’re starting to provide some tools for consumers to use, such as the template letters they can use to try and avoid undue harassment and abuse from debt collectors.”

• Small Dollar or “Payday” Lending:  “We put out the white paper on payday lending and the deposit advance products in late spring. That is leading us toward policy work in the area. There is some follow-up research work we’re doing that has been underway since the first paper came out. But there will be activity in this area in the near future. The issue coming out recently of online payday lenders who are relying on financial banks to be the mechanism for financing and collecting the money really has been interesting. Frankly, the work in that area involves coordination with both federal regulators and state officials, and it can even be international, with some online lenders originating from outside of the United States now. It’s an area where we’ve been building partnerships as well as thinking about the policy work that we need to do, and we’re making progress.” (See our prior post on the CFPB payday lending white paper.)

• Prepaid Cards:  “The fact that prepaid cards are not covered by ­consumer-protection laws at the moment is a compelling need for us to write regulations to get them covered. We’re moving forward to write rules to make sure they are protected under [the Electronic Fund Transfer Act (EFTA)]. It’s a real front-burner issue for us.” (Note that on September 12, the CFPB also issued a bulletin on the application of EFTA to payroll cards.)

• Ability-to-Pay Requirements for Non-Mortgage Products:  “It’s something that we are thinking about. Some of the most interesting issues for me have been the ones where we start to see some of the same philosophical issues extending across different markets, but potentially in different ways. So ability to pay in the mortgage market is arguable at its zenith because it’s a huge dollar transaction. You can justify more demands on the lenders and the borrower to make sure that transaction works. In the credit card context, under the [Credit Card Accountability Responsibility and Disclosure Act of 2009], there is an ability-to-repay provision in there. But it operates in a somewhat different way for credit cards than it should for mortgages. They’re different kinds of transactions, different size, different scope. You can get in and out of credit cards in a hurry. Not so easy to get in and out of mortgages. How it applies to smaller-dollar lending is a further differentiation. It’s something that we’re having to think about. The general principle, though, of ability to repay as the basis for making loans is just common sense. The lender should care about whether the borrower can repay because they’re the ones lending the money. They’re the ones at risk. The market is no longer so straightforward. With mortgages, for example, the ability to repay was arguably lost if you could sell into the secondary market. There are a number of consumer groups that have been pushing [the ability-to-repay model] as a broad principle across markets. There is quite a bit to what they’re saying. How it would apply from one market to another is worth further analysis, and that’s something we’re engaged in analyzing.”

• Supervision:  “We have to institute our supervision program for financial institutions that are used to being regulated, but not necessarily used to being regulated with a focus on consumer protection. It’s an adjustment for them. But in the non-bank sphere, they’re often not used to being regulated at all, or only on the state level. In that area, there has been a real shift toward more of a compliance mentality. And our being on the scene and doing this work has caused that shift.”

• Safety and Soundness:  “It’s the right perspective that an institution needs to merge the short-term and long-term thinking about its business model. It’s not a long-term business model to take advantage of your consumers in ways that are not sustainable. That’s what brings safety and soundness regulation and consumer protection regulation back together and really makes them harmonious."

CFPB Payday Lending Mortgage Origination Internet Lending

CFPB Finalizes Additional Modifications to Certain Mortgage Rules

On September 13, the CFPB issued final amendments to its Mortgage Servicing and Loan Originator Compensation rules. The CFPB’s press release states that the amendments (i) clarify what servicer activities are prohibited in the first 120 days of delinquency, (ii) outline procedures for obtaining follow-up information on loss mitigation applications, (iii) facilitate servicers’ offering of short-term forbearance plans, (iv) clarify best practices for informing borrowers about the address for error resolution documents, (v) facilitate lending in rural or underserve areas, (vi) clarify the restrictions on the financing of credit insurance premiums, (vii) clarify the definition of a loan originator, (viii) clarify the points and fees thresholds and loan originator compensation rules for manufactured housing employees, and (ix) revise effective dates of many loan originator compensation rule provisions to align with other mortgage rule effective dates. We are reviewing the actual final amendments and plan to provide more information and analysis in the near future. Please also see our Special Alert on these changes as proposed in June.

CFPB Mortgage Origination Mortgage Servicing Loss Mitigation

CFPB Deputy Enforcement Director Discusses Enforcement Priorities

On August 22, C. Hunter Wiggins, the CFPB’s Deputy Enforcement Director for Policy and Strategy, spoke to the D.C. Bar Antitrust and Consumer Law Section at a session titled “The Consumer Financial Protection Bureau’s Enforcement Priorities.” A summary of his remarks and responses to certain questions follows.

Mr. Wiggins began his presentation by noting that the Bureau did not want to be a “reactive” agency that devotes its limited resources to “cleaning up” after past crises. Instead, his team, which reports to the CFPB’s Director of Enforcement, Kent Markus, is responsible for evaluating and setting strategic priorities that will allow the Bureau to be a proactive organization.

The Bureau has 150 employees in its Office of Enforcement, seven of whom are on the Policy and Strategy Team. In addition, the Enforcement Office has several “Issue Teams,” which include members of the Policy and Strategy team and other Enforcement staff. Each of the “Issue Teams” is focused on one particular market, such as mortgage servicing or credit cards, and is responsible for identifying problems in those markets that should be prioritized for enforcement action. The criteria used include: (1) the number of consumers potentially impacted by a practice; (2) the period of time that practice has been in place (including whether the practice is ongoing); (3) the amount of harm to consumers; (4) whether the practice targets a vulnerable population; (5) whether consumers have the ability to avoid the practice through shopping; (6) whether the practice results in market distortions (such as a “race to the bottom” or competitive harm to legitimate businesses that do not engage in the practice); and (7) barriers to other solutions (such as the lack of a private right of action).

The Bureau allocates its enforcement resources as follows:

• Core Work (50%): This consists of the priority areas in which the Bureau carries out what were described as its “cop on the beat” responsibilities. Each area generally receives a pro rata amount of resources, but this can vary over time. The areas include: (1) auto finance; (2) consumer loans; (3) credit cards; (4) credit reporting; (5) debt collection; (6) debt relief; (7) deposit accounts; (8) fair lending; (9) money services / prepaid cards; (10) mortgage origination; (11) mortgage servicing; (12) payday loans; and (13) student lending.
• Emphasized Priorities (25-35%): Two to four specific, systemic market problems are chosen. As an example, Mr. Wiggins pointed to the Bureau’s actions regarding credit card add-on products over the past year, which he said were prioritized due to the scope of their impact.
• Emerging and Cross-Cutting Priorities (15%): These are new products, services, or markets, or in some cases new aspects of older products and services that may have an impact on a particular population. As an example, Mr. Wiggins referred to the Bureau’s recent action regarding the use of military allotments to collect payments on auto loans made to servicemembers.
• Tactical Priorities (0-10%): These are activities that are useful to the Bureau’s own long-term institutional development. For example, Mr. Wiggins noted areas where the Bureau has sought out partnerships with other agencies to establish or strengthen enforcement relationships with other regulators or law enforcement agencies. Other possible tactical priorities mentioned included pursuing enforcement matters with a regional focus and increasing the Bureau’s ability to use temporary restraining orders as an enforcement tool.

Question and Answer Session

Mr. Wiggins noted that his responses to questions, which are discussed below, represented his own views and not those of the Bureau.

• RESPA enforcement: Mr. Wiggins was asked if the Bureau was looking at title agents for RESPA compliance. He responded that, in setting priorities, the Bureau focuses on identifying problems, not industries.
• Add-on products: Mr. Wiggins was asked why the Bureau identified credit card add-on products as an “Emphasized Priority” when those products were already receiving significant attention from other regulators. Mr. Wiggins acknowledged the actions of other regulators but said that the Bureau’s review led them to view this as an area where they needed to step in.
• Regulating attorneys: A concern was raised regarding the extent to which the Bureau could regulate the activities of attorneys. Mr. Wiggins responded that, as general matter, the Bureau has no interest in intervening in circumstances where attorneys are merely providing legal advice to clients. However, he noted two Bureau enforcement actions involving potentially problematic attorney conduct: first, a 2012 action against a California law firm allegedly engaged in unfair and deceptive practices related to loan modifications; and second, this week’s suit against a debt-settlement firm that allegedly partnered with attorneys to collect prohibited upfront fees for debt relief services.
• Criminal activity: In response to a question, Mr. Wiggins stated that the Bureau was legally obligated to turn over information regarding suspected criminal activity uncovered during its examinations and investigations to the Department of Justice (DOJ) and that the Bureau has a memorandum of understanding with DOJ for that purpose. However, he emphasized that the CFPB’s examiners and investigators do not look for criminal conduct, such as tax evasion, in the regular course of their duties.
• Employee incentive programs: Mr. Wiggins was asked about the use of employee incentive programs in the area of debt collection. He responded that incentive programs can be problematic to the extent they encourage employees to engage in improper conduct and that the Bureau takes this into account.

CFPB RESPA Enforcement Ancillary Products Mortgage Origination

HUD Issues Three Mortgagee Letters

On August 15, HUD issued three mortgagee letters to announce various changes related to the origination of FHA-insured mortgage loans. Effective for case numbers assigned on or after October 15, 2013, Mortgagee Letter 2013-24 (i) sets forth documentation requirements for conducting credit analysis of collections and judgments, (ii) requires a specified capacity analysis of collection accounts with an aggregate balance equal to or greater than $2,000, (iii) details the required treatment of judgments, and (iv) revises the FHA’s policy on manual downgrades for applications with disputed accounts to reflect the risk associated with derogatory and non-derogatory disputed accounts for factors such as age and size of outstanding balance. In Mortgagee Letter 2013-25, HUD updates FHA’s TOTAL Mortgage Scorecard User Guide to reflect the changes announced in Mortgagee Letter 2013-24. Finally, Mortgagee Letter 2013-26 loosens eligibility requirements for certain borrowers adversely impacted by the recession. Specifically, the letter allows for the consideration of borrowers who have experienced a loss of employment or income, or a combination of both, and can document that: (i) certain credit impairments were the result of a loss of employment or a significant loss of household income beyond the borrower’s control, (ii) the borrower has demonstrated full recovery from the event, and (iii) the borrower has completed housing counseling.

Mortgage Origination HUD FHA Mortgagee Letters

Eighth Circuit Extends Recent TILA Rescission Holding

On August 19, the U.S. Court of Appeals for the Eighth Circuit held that borrowers facing foreclosure were required to file suit prior to the foreclosure sale to complete the exercise of their right to rescind under TILA. Hartman v. Smith, No. 12-1947, 2013 WL 4407058 (8th Cir. Aug. 19, 2013). In this case, the bank moved to foreclose after the borrowers failed to make payments to a real estate financing firm with which the borrowers had placed mortgages on the property. After the property was sold at a sheriff’s sale, the borrowers sued the bank and the financing firm, seeking, among other things, to rescind the loans under TILA on the basis that they provided written notice of rescission prior to the foreclosure sale. Applying its recent holding in Keiran v. Home Capital, Inc., 720 F.3d 721 (8th Cir. Jul. 12, 2013) that a borrower seeking rescission under TILA must file suit within three years to preserve the borrower’s right of rescission, the court again held that providing notice under TILA is a necessary but not sufficient predicate to exercising the right to rescind. Here, where the foreclosure sale occurred within the three-year rescission period, the court held that the borrowers were required to file a rescission action in a court prior to the foreclosure sale. Because they failed to do so, the court held that their rescission claim was barred.

TILA Mortgage Origination Mortgage Servicing

Southern District of New York Endorses Use of FIRREA in Mortgage Fraud Cases

On August 16, the U.S. District Court for the Southern District of New York issued a written opinion in support of its May 8, 2013 dismissal of claims for damages and civil penalties under the False Claims Act (FCA) brought by the federal government against a mortgage lender alleged to have sold defective loans to Freddie Mac and Fannie Mae while representing that the loans complied with the enterprises’ requirements. U.S. v. Countrywide Fin. Corp., No. 12-1422, 2013 WL 4437232 (S.D.N.Y. Aug. 16, 2013). Although it dismissed the FCA claims, the court did not dismiss the government’s claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) that the lender’s conduct “affected” a federally insured financial institution – the lender itself. In its opinion, the court rejected the lender’s arguments that FIRREA’s legislative history and policy considerations contradict the government’s position, and instead applied a plain meaning analysis and held that the lender allegedly has paid billions of dollars to settle repurchase claims by Fannie Mae and Freddie Mac as a result of the alleged fraud, which “affected” the lender itself and as such is sufficient to sustain the FIRREA counts. The court also rejected the lender’s argument that the government failed to adequately allege the FIRREA predicate offenses of mail fraud and wire fraud because the alleged misrepresentations were “mere breaches of contract that cannot separately support an action for fraud,” holding that the argument is premised on the “fundamental error” that “mail fraud and wire fraud are subject to the same arcane limitations as common law fraud.” Notably, the court dismissed the government’s FCA claims “with prejudice” because the government failed to plead fraud with particularity with respect to loans sold after the enactment of the Fraud Enforcement and Recovery Act of 2009, which extended the FCA to cover indirect recipients of federal funds.

Mortgage Origination Civil Fraud Actions DOJ False Claims Act / FIRREA

CFPB Releases Second Update of Examination Procedures for Mortgage Rules

On August 15, the CFPB released new TILA and RESPA examination procedures, updated to cover all mortgage origination rules issued through May 29, 2013 and all mortgage servicing rules issued through July 10, 2013. The CFPB intends the updated procedures to help prepare financial institutions and mortgage companies for examinations regarding the new mortgage rules covering ability-to-repay requirements, qualified mortgages, high-cost mortgages, servicing, appraisals for higher-priced mortgage loans, and loan originator compensation.  Please see our summaries of the key rules here and here.

Notably, the new examination procedures do not reflect the amendments proposed by the CFPB in June, which are expected to be finalized shortly.  It is unclear whether the CFPB intends to update the procedures to reflect these and any other amendments.

CFPB TILA RESPA Mortgage Origination

Fannie Mae, Freddie Mac Announce Uniform Dataset to Support CFPB Closing Disclosures

On July 30, Fannie Mae and Freddie Mac announced that they are developing a standardized dataset to support the consolidated closing disclosure forms expected to be finalized by the CFPB in the coming months. The new Uniform Closing Dataset (UCD) is a component of the broader Uniform Mortgage Data Program currently being implemented by Fannie Mae and Freddie Mac, which is designed to standardize the way loan data is defined, captured, and delivered. The enterprises are currently obtaining input from select industry participants and will release the UCD after the CFPB finalizes its rule.

CFPB Freddie Mac Fannie Mae Mortgage Origination