FTC Enforcement Action against Debt Collector Ends in Record Settlement

The Federal Trade Commission's recent announcement that it entered into a record settlement with "the world's largest debt collection operation" demonstrates that it intends to continue its vigorous enforcement of the Fair Debt Collection Practices Act (FDCPA).

Under the settlement, filed in a Texas federal district court, the defendants must pay a $3.2 million civil penalty for violations of Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices, and the FDCPA. According to the FTC, this represents "the largest [civil penalty] ever obtained by the [FTC] against a third-party debt collector."

The FTC's complaint alleged that the defendants engaged in unlawful conduct that included:

  • Making unsubstantiated representations in telephone calls that consumers owed debts, despite such consumers having previously indicated that they did not
  • Calling debtors three or more times per day and at times known to be inconvenient to the debtor
  • Continuing to call debtors after being asked in writing to stop communications
  • Calling debtors' workplaces despite knowing that the employers prohibited such calls
  • Leaving recorded messages that disclosed the debtor's name and the existence of the debt on answering machines on which the greeting included no name, or a name different from that of the debtor
  • Continuing to call non-debtors for a debtor's location information without a reasonable belief that the non-debtors' previous denial of knowing that information was erroneous or incomplete
  • Making deceptive representations about stopping future calls

In addition to payment of the record civil penalty, the FTC's proposed stipulated order requires the defendants to follow specific procedures and time frames for conducting investigations after a person disputes owing a debt or its amount. It also includes standards the defendants must follow for leaving recorded messages and recordkeeping requirements for calls to obtain location information.

For six years, the defendants are required by the order to tape-record at least 75 percent of calls with anyone contacted in collecting a debt and maintain the recordings for 90 days. For five years, the defendants must include a specified disclosure in all written debt collection communications that advises debtors how to contact the defendants or the FTC with complaints and obtain information about their legal rights when dealing with collectors. For 10 years, defendants must follow certain recordkeeping requirements, such as maintaining records containing specified information on all employees involved in debt collection and all consumer complaints, and retain such records for five years.

The debt collection industry is also facing increased scrutiny from the Consumer Financial Protection Bureau, which shares FDCPA enforcement jurisdiction as to nonbanks with the FTC. In addition, as discussed in our previous legal alert, the CFPB recently issued two bulletins warning creditors and servicers that are not covered by the FDCPA that their collection practices are subject to the CFPB's authority under Section 1031 of the Dodd-Frank Act, which prohibits "unfair, deceptive, or abusive" acts or practices.

The FTC does not have supervisory and examination authority and only has authority to investigate and bring enforcement actions against nonbank third-party debt collectors and debt buyers. In contrast, the CFPB has authority to supervise and examine certain nonbank debt collectors and debt buyers (e.g., larger ones, those that pose significant risks to consumers, and those that act as service providers to other entities supervised by the CFPB) for compliance with the FDCPA and Section 1031 of the Dodd-Frank Act. The CFPB also can investigate and bring enforcement actions against nonbank debt collectors and debt buyers, regardless of their size, for violations of those same laws.

- Barbara S. Mishkin

Ohio Federal Court Addresses Privacy Rights around Employee Smartphones

A recent Ohio federal court decision serves as a reminder that companies need to review their Bring Your Own Devices (BYOD) policies to ensure that employees are adequately informed about the communications that corporate employers can monitor during and after employment.

In Lazette v. Kulmatycki, the U.S. District Court for the Northern District of Ohio ruled that a former employer may violate the Stored Communications Act (SCA) by accessing electronic information through a company-issued smartphone after an employee has left the company. In this case, a former employee alleged that her former supervisor continued to read 48,000 personal e-mails on her company-issued BlackBerry for 18 months after she had turned in the device.

The employee was told that she could use the device for work as well as personal matters. Before she turned in the phone, she deleted her work e-mails, but inadvertently left her personal e-mail account accessible. Her former supervisor continued to read opened and unopened mail until she changed her password.

A violation of the SCA occurs when someone "(1) intentionally accesses without authorization a facility through which an electronic communication service is provided; or (2) intentionally exceeds an authorization to access that facility; and thereby obtains … access to a wire or electronic communication while it is in electronic storage in such system[.]" The court rejected the defendants' argument that the SCA's congressional intent is to reach computer hackers only. It found that the Act's purpose is generally to "prohibit persons and entities from intentionally accessing electronic data without authorization or in excess of authorization."

The court highlighted that the employee "neither knew nor approved" of her supervisor accessing her personal e-mails. And even if the employee inadvertently left her personal e-mail account accessible, such actions would not establish "implied consent," as the employee was unaware of the possibility that others might access her future e-mails from the account.

The court was careful to distinguish between the employee's e-mail account—which was a "facility" under the SCA—and her computer or BlackBerry, which were not a facility. This ruling is consistent with the Fifth Circuit's recent ruling in Garcia v. City of Laredo.

The court also found that protection under the SCA only extended to personal e-mails that the employee had not opened. E-mails that had been opened and not deleted did not constitute "electronic storage" because they were not being kept "for the purposes of backup protection." As a result, the supervisor's reading of the previously opened e-mails may not violate the SCA. This finding highlights a current split among the U.S. Courts of Appeals, some of which, including the Ninth Circuit, have held that opened e-mails are protected under the SCA.

The Lazette case is a timely reminder to corporate employers with dual-use policies that employers do not necessarily have unfettered rights to all communications that exist, or may be accessed, through a company-provided device or computer. To the contrary, access to accounts protected under the SCA requires explicit employee consent.

The webinar "Avoiding the Pitfalls of 'Bring Your Own Device' Policies," presented on June 12, 2013, may be of interest. Slides and a recording of the webinar are available for your reference. 

- Philip N. Yannella

Despite Controversy, Implementation of U.S. Basel III Capital Regime Moves Forward

Editor's Note: This is the first in a proposed series of articles that will discuss the evolution of the Basel capital regime.

In June 2012, the Board of Governors of the Federal Reserve System (the "Board"), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) issued proposed regulations that would establish a newer, more comprehensive capital framework for U.S. banking organizations. The proposed regulations are intended to implement the Basel III capital regime as modified by U.S. legal requirements mandated by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Certain aspects of these rules met with strenuous objections from the banking industry. This was especially true regarding application of Basel III standards to community banks. As recently as April of this year, legislation introduced with some fanfare by Senators Sherrod Brown (D-Ohio) and David Vitter (R-La.) calls into question the adequacy of Basel III as a response to the recent banking crisis, particularly concerning the prevention of an undue concentration of large financial institutions that are "too big to fail." 

Notwithstanding the vociferousness of the critics, on July 2, 2013, the Federal Reserve promulgated final Basel III capital rules substantially unchanged from those proposed a year ago. The most stringent capital requirements for "advanced approaches banking organizations"—those with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures—were kept in the final rules. The only changes of note were those affecting community banks and other small banking organizations. The Board's action was followed closely by adoption of Basel III rules by the OCC and the FDIC, though the latter was adopted by a split vote of the Board of Directors. 

The U.S. version of Basel III will apply to:

  • All national banks, state member banks, and state nonmember banks
  • All federal and state savings associations
  • Bank holding companies other than those with less than $500 million in consolidated assets, provided they do not:
    • Engage in significant nonbank activities
    • Conduct significant off-balance sheet activities
    • Have a significant amount of SEC-registered debt or equity
  • Savings and loan holding companies (SLHCs), other than:
    • Grandfathered unitary SLHCs with more than half of their assets or revenues in commercial activities
    • SLHCs that are insurance underwriting companies or that have more than 25 percent of their assets in insurance underwriting subsidiaries
  • Any of the above that are subsidiaries of foreign banks

The Board's Basel III release was approximately 1,000 pages long. In this series, we will cover the key aspects of the final rules, as well as the treatment of community banking organizations. 

Even as U.S. regulators uncork their strong capital brew, events at the Bank for International Settlements have also been developing rapidly. At the same time that the Federal Reserve final rules were released, the Basel Committee on Bank Supervision (BCBS) updated its assessment methodology for global systemically important banks (G-SIBs) and issued disclosure requirements. To help banks and participating jurisdictions prepare for the implementation of the G-SIB framework, the BCBS intends to finalize and publish by November 2013 certain elements of the regime. This publication will occur one year in advance of timeline set out in 2011 to enable banks to calculate their scores and higher loss absorbency requirements using year-end 2012 data before the requirements come into effect based on year-end 2013 data.

On July 5, 2013, the BCBS published a set of proposals that would revise the prudential treatment of banks' equity investments in funds. The proposal's underlying principle is that banks should apply a look-through approach to identify the underlying assets whenever investing in schemes with underlying exposures such as investment funds. As a full look-through approach may not always be feasible, the BCBS proposes a staged approach based on different degrees of granularity of the look-through. The proposal's risk weighting framework is designed to enable application of a consistent risk-sensitive capital framework providing incentives for improved risk management practices. Further, the proposal is designed to help address risks associated with banks' interactions with shadow banking entities.

Finally, on July 19, 2013, the BCBS issued a consultative document on liquidity coverage ratio (LCR) disclosure standards. First introduced in January 2013, the LCR is intended to ensure that a bank has an adequate stock of unencumbered high-quality liquid assets that can be converted into cash easily and immediately in private markets to meet its liquidity needs for a 30 calendar day liquidity stress scenario. (The Federal Reserve has notably stolen the march on the BCBS in this regard for U.S. banking organizations and has already begun implementation of rigorous stress testing based on a variety of market conditions). The BCBS believes that it is important that banks adopt a common disclosure framework to help market participants consistently assess the liquidity risk position of banks. To promote consistency and ease of use of LCR-related disclosures, internationally active banks across Basel member jurisdictions will be required to publish their LCR according to a common template. Comments on this consultative document are due by October 14, 2013. 

Nor is U.S. Basel III regulation likely to remain static for long. When the Board unveiled its final rules, Governor Daniel K. Tarullo issued a statement in which he previewed a considerably more rigorous set of capital requirements for the eight U.S. G-SIBs (Bank of America, Bank of New York/Mellon, Citigroup, Goldman Sachs, J.P. Morgan/Chase, Morgan Stanley, State Street, and Wells Fargo). When added to the Basel III final rules and the Board's stress testing requirements, these capital requirements could well have a major impact on the cost and availability of credit. We shall discuss these additional requirements if and when they are promulgated. 

- Keith R. Fisher

Criminal Background Check Policies under Fire from the EEOC

The Equal Employment Opportunity Commission (EEOC) continues to crack down on allegedly discriminatory employer policies and practices involving criminal background checks. For financial institutions subject to laws that bar certain individuals with criminal convictions from the industry, this means applying such requirements strictly in accordance with the governing mandate and being prepared to defend policies and practices that exceed the strict legal requirements. 

EEOC Attack on Policy at Dollar General

On June 11, 2013, the EEOC filed a lawsuit in federal court against Dollar General, alleging that the employer's use of criminal background checks to screen job applicants disproportionately excluded African Americans from employment in violation of Title VII of the Civil Rights Act of 1964. The agency has long warned that criminal record exclusions have a disparate impact on race and national origin and that basing employment decisions on these records may violate the law if not job-related and consistent with business necessity.

According to the EEOC complaint, Dollar General maintains a policy whereby the company conditions all job offers on the results of a criminal background check. Two applicants filed EEOC charges against the company, alleging that they were unlawfully denied employment as a result. Dollar General granted the first applicant a conditional employment offer even after she had disclosed a six-year-old conviction for possession of a controlled substance. The complaint goes on to allege that Dollar General revoked the offer upon receiving the results of her background check, because company policy regarded her type of conviction as a bar to employment for 10 years. Dollar General similarly revoked the second applicant's offer after a background check erroneously indicated a criminal conviction, according to the complaint, and Dollar General refused to reinstate the offer even after she advised the store manager that the report was in error.

The Dollar General lawsuit provides a clear message that the EEOC is bringing renewed scrutiny to the use of background checks and other policies that broadly screen and disqualify applicants from employment. The EEOC has placed "eliminating barriers in recruitment and hiring" as its top priority in the most recent Strategic Enforcement Plan, stating that the agency will renew enforcement efforts regarding pre-employment tests, background checks, date-of-birth inquiries, and other "screening tools" that restrict the application process or "channel" individuals into specific jobs due to their status in a particular group. An Enforcement Guidance issued by the EEOC in April 2012 advises employers on crafting background check policies that may stand up to administrative scrutiny.

Implications for Financial Industry Employers

The lawsuit against Dollar General also raises questions about how the EEOC will continue to regard pre-employment background checks conducted under state or federal laws that prohibit individuals with criminal records from holding particular positions or engaging in certain occupations. 

Federal laws restrict individuals with specified criminal histories from employment in federally insured banks, among others. Continuing developments affecting these federal requirements could create tension with the EEOC's increasingly aggressive stance. The Consumer Financial Protection Bureau (CFPB), for example, recently issued a final rule to implement amendments to the Truth in Lending Act (TILA) made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). These amendments, which become effective in January 2014, expand the scope of employees in the mortgage loan industry who are subject to criminal background check requirements. 

While the EEOC affirms in its Guidance that background checks conducted in compliance with federal laws or regulations will continue to be a defense to a charge of discrimination, the agency also notes that it will narrowly construe federal requirements and carefully consider whether a particular background check policy exceeds the mandate set forth under federal law. For example, if a financial institution excludes from employment all applicants with a financial- or fraud-related conviction within the past 15 years, the EEOC may scrutinize this practice, given that federal law only addresses employees with access to customer financial information and only requires a 10-year restriction. 

Title VII preempts any state or local law that requires or permits any act that would be an unlawful employment practice under statute. State or local laws, consequently, do not legitimize background check policies that otherwise would violate Title VII. Employer policies involving positions subject to state or local restrictions must ensure that their criminal background check practices are job-related and consistent with business necessity.

Employers should be aware of the EEOC's developing approach to employment screening tools and review their policies and procedures to ensure continued compliance with the law. Employers must tailor existing policies to strictly follow applicable federal law and apply screening mechanisms consistently and in a manner that considers the duties and risks involved with each affected position.

- Brian D. Pedrow 


Planning for Tenant's Changing Needs: Options To Renew, Expand, Cancel, or Reduce

Editor's Note: Mortgage banking companies are often tenants leasing or subleasing office space, usually in multiple locations. This is the fourth in a series of articles by attorneys in Ballard Spahr's Leasing Group that explain the commercial leasing process and explore issues such as how a lease affects ongoing operations, how to plan for changing needs, the impact of foreclosure and bankruptcy, and how to get out of a lease. In this article, A. Eric Levine, an attorney in the firm's Philadelphia office, and Alicia B. Clark, an attorney in the firm's Denver office, discuss how certain rights and options of a tenant in a commercial lease can help the tenant satisfy its changing needs during the term.

As a tenant's business changes, its needs and space requirements also change. If possible, a commercial tenant should anticipate the possibility of changing needs by negotiating certain beneficial options and rights into the lease up front, when the landlord is usually the most interested in attracting a new tenant.

The options and rights a tenant might consider include renewal options to extend the lease term, rights of first refusal or rights of first offer to lease additional space or purchase the leased property, early termination rights, and contraction rights. If these rights are important to the tenant, they should be included in the initial lease negotiations so that the term sheet or letter of intent expressly provides for them. After the landlord agrees to the concepts, the details can be worked out in the lease document.

Renewal Options

Renewal options are commonly included in commercial leases, although there are varying exercise requirements and methods to compute the option rent. Key elements of renewal options to consider are as follows:

  • Condition of no default: Almost every renewal option will require, as a condition preceding the tenant's ability to exercise the option, that the tenant is not in default (or has not done anything that with the giving of notice or the passage of time would be a default) under the lease, at the time the tenant exercises the option or at the time the renewal term is to commence. Such condition is fairly reasonable and customary.
  • Notice period: Most renewal provisions require the tenant to give written notice to the landlord that the tenant is exercising its renewal right within a specified period of time, most often at least six, nine, or 12 months before the expiration of the lease (either the initial term or a renewal term, to the extent the tenant has multiple renewal options). Often a shorter notice period will benefit the tenant, as it gives the tenant additional time to survey the market and determine overall leasing needs before deciding whether to exercise the option.
  • Number and length of options: The lease will set forth how many renewal options the tenant will have and the length of each renewal term. Ordinarily, the terms and provisions concerning each option (i.e., notice period, term, and conditions) will be identical, except for the rental rate. The renewal term, however, does not need to be the same duration as the initial lease term.
  • Rental rate: This is often the most heavily negotiated element of the renewal option. It is generally calculated as either a fixed rate or "fair market value" (FMV). The benefit of agreeing to a fixed rate is that it provides certainty to the parties and eliminates the potentially onerous process of establishing and agreeing to a rate based on FMV. If the leasing market falls during the term, however, the tenant faces the prospect of having to pay an above-market rent under the option; conversely, if the market strengthens for landlords, the tenant could get a below-market fixed rate.

The more common approach is to base the renewal rate on a determination of FMV. It is critical to define how FMV will be calculated since it will not be determined until near the end of the lease term. A tenant will want FMV to include tenant improvement allowances, free rent, and other concessions offered by competitive buildings in the particular market.

A landlord may want a floor on the minimum rent during the renewal term to protect itself from downturns in the market. Such language, if included, would diminish one of the greatest benefits to the tenant of having a renewal option based on FMV, that being the possibility of having lower rent during the renewal term if the market supports it. Conversely, a tenant may negotiate a ceiling on the maximum rental rate (e.g., setting the renewal rate at 95 percent of FMV), since the landlord benefits by not having to market and re-lease the space and risk having an empty space.

One additional consideration is the mechanics of determining FMV. The landlord may want the unilateral right to determine FMV based on the defined factors in the lease and tell the tenant to essentially take it or leave it. If the tenant has an opportunity to counter with its own determination and the landlord disagrees, the tenant may want the right to rescind the exercise of the option. Often, the parties are bound to come to come to an agreement. The renewal section should contain a mechanism by which the parties can settle on FMV and, consequently, the renewal rental rate. Often this mechanism is some form of arbitration.

It is important to remember that a tenant does not have to exercise the renewal option to renew its lease. Rather, a tenant is free to negotiate a renewal or extension of the lease on terms that may be vastly different. The decision to negotiate or exercise a renewal option depends on the leverage of the parties at the time.

Just having a renewal option in the lease may enable the tenant to negotiate more favorable renewal terms, even if the tenant does not exercise the option. The landlord may place value in having a tenant with a proven track record of performing under its lease as opposed to having to deal with a new, unknown prospect. The tenant also may want to use the renewal negotiation as an opportunity to negotiate other provisions of the lease.

Right of First Refusal and Right of First Offer

Other rights a tenant may consider negotiating into its lease in an effort to anticipate changing needs is a right of first refusal (ROFR) or a right of first offer (ROFO) to lease additional space or, in some cases, buy the leased premises. Often the ROFR or ROFO will apply to space that may not be available at the beginning of the initial lease term but becomes available during the term. In a multitenant building, the ROFR or ROFO may be restricted to the floor where the tenant currently leases space or other contiguous space in the building. A tenant may be most successful in negotiating a ROFR or a ROFO to purchase the premises if it occupies the premises as a single-tenant building.

  • Right of First Refusal: Unlike an option, where a tenant is granted the right, but not the obligation, to lease or buy a specified asset in the future, a ROFR does not enable the tenant to force the landlord to sell or lease the asset. Rather, a ROFR provides the tenant with the right to require the landlord to lease or sell the asset to the tenant on the same price and terms that the landlord is willing to accept from a third party.

    Since a ROFR is triggered by a bona fide offer from a third party to the landlord (or in some cases by an offer from the landlord to a third party), the ROFR provision should specify what qualifies as an offer. For a right to lease, the offer might be in the form of a fully negotiated letter of intent or even a fully negotiated lease. If an existing tenant has a ROFR and agrees to all of the terms of the third-party offer, that tenant has the superior right to lease the space on those terms, and the landlord is bound to lease the space to that tenant.

    If the existing tenant agrees to only some, but not all, of the terms offered by the third party, however, the landlord may decide not to lease the space to that tenant and close the deal with the third party. While a tenant may want a ROFR in its lease to help address changing needs, the tenant should be prepared for resistance from the landlord. After all, a ROFR has a chilling effect on the marketability of the owner's property.

  • Right of First Offer: A ROFO gives a tenant the first right to make an offer to the landlord to lease additional space or buy the premises before the landlord can offer the space or premises to a third party. The lease should give the landlord a specific time period to either accept or reject the tenant's offer. If the landlord rejects the offer, the landlord is free to lease the subject space to one or more third parties, with the only restriction usually being that the landlord cannot accept a rental rate or purchase price that is less than that offered by the tenant under the ROFO.

    Since the tenant is making a new offer to the landlord and not agreeing to the terms of an existing third-party offer as in the case of a ROFR, the tenant should ensure that the lease adequately describes how the tenant's offer will be compared to other offers. For a ROFO to lease, this is usually handled by reference to the net effective rent after all free rent, tenant improvement allowances, and other concessions are deducted from the stated rental rate.

Because of the importance and value of these expansion rights, tenants may want to pay particular attention to expansion rights that the landlord has granted to other tenants, as well as the relative priority of its rights versus the rights of existing and future tenants. To that end, particularly at larger buildings with many tenants, the tenant should require the landlord to include in the lease a list of all preexisting expansion rights of tenants at the building, together with basic facts about each such preexisting right.

Termination and Contraction Rights

Commercial tenants may want the flexibility to downsize or terminate their leases. For various business reasons, a tenant may want the right to terminate the entire lease on one or more fixed early termination dates, or even on a rolling basis (perhaps after some minimum number of months or years), in each case with advance written notice to the landlord. Similarly, tenants may also want to negotiate contraction rights, which allow the tenant to give back space to the landlord to reduce the square footage of its leased premises at certain times or on a rolling basis.

Early termination and contraction rights often require the tenant to pay a fee to the landlord. This fee may factor in a penalty of a certain number of months' rent, together with repayment of landlord's unamortized leasing costs (i.e., broker commissions, rent abatement and other concessions, costs of tenant improvements, and/or legal fees) for the space being terminated. The feasibility of obtaining these rights often depends on current market conditions.

A tenant, however, should expect resistance from the landlord because of the uncertainty these rights create in the leasing prospects of the property and their potential to negatively affect the value of the landlord's property in a sale or financing. A landlord may be more willing to give early termination or contraction rights when the premises is being delivered "as is" or with only generic tenant improvements. In such cases, the landlord is less invested in a particular tenant with unique tenant improvements and may be less concerned about finding a new tenant for the space after early termination or contraction.

- A. Eric Levine and Alicia B. Clark

Navigating the MSR Opportunity
Part II in a Two-Part Series from Steadfast Capital, LLC

In Part I of this series, we reviewed some of the fundamental considerations inherent to retaining mortgage servicing rights (MSR), including updating capital plans with sophisticated pro forma analysis, "retain versus release" considerations, and determining the appropriate amount to be capitalized. A number of other decisions must be made.

Will the company hire a subservicer, or handle this function internally? In most cases, outsourcing to a subservicer makes sense, but there are some pitfalls to avoid. First, know that subservicing is not high-touch, and in any case the agencies will hold the owner of the MSR responsible for all aspects of proper loan administration and customer service. In fact, Fannie Mae requires that at least one employee possess meaningful servicing credentials. In our opinion, carefully monitoring the subservicer and augmenting its services with employees of the MSR owner is critically important. Second, recognize that the current subservicing demand is very high, and some of these shops are likely already operating beyond maximum effective capacity. Third, outsourcing regulatory risk sounds great, but only if a creditworthy counterparty can stand behind the services being provided. The implications of these potential pitfalls are obvious, so select carefully!

There are other considerations to keep in mind about accumulating a servicing portfolio as the MSR becomes more material to the balance sheet. For example, what financial covenants are being imposed by the company's warehouse lenders? Some banks are playing catch-up on this issue and may have unreasonable/arbitrary caps on MSR as a percentage of net worth. Don't be reluctant to challenge them on this or find another funding source! Also, should companies consider hedging to protect run-off risk? This is worthy of careful consideration, but adds to working capital demands and curtails upside in return for downside protection.

Should companies not affiliated with depository institutions consider raising capital or seeking structured term financing, permitting them to retain a greater amount of MSR? While it is accurate to say that there has been a funding gap in terms of availability of such capital/financing, we believe this is rapidly evolving. Adding new capital does not necessarily mean selling a piece of the company, and we believe the required yields inherent to certain types of term debt or preferred stock can result in effective leverage of the MSR investment and can be highly accretive. The cost of this new capital will be commensurate with the strength of the mortgage bank's balance sheet, earnings history, quality of management team, and duration of the instrument. Although such capital is harder to obtain and certainly more expensive, we believe in most instances companies will be better served by adding capital with duration closer to that of the MSR being accumulated.

Once upon a time in the mortgage industry, virtually all mortgage companies retained the MSR on the loans they originated. Attention to loan quality and subsequent performance was paramount, and investor relationships were cherished and carefully nurtured. A strong argument can be made that it is time to go "back to the future." Opportunities are tremendous, but the industry is rapidly evolving, and the regulatory environment requires serious attention, not just on the origination side, but on the servicing side as well. Successful companies will hire good counsel to ensure regulatory risk is properly assessed, and bring in outside experts to assist with MSR analytics, refining capital plans, and potentially raising new capital.  

- David Fleig

About the author: David Fleig is President and CEO of Steadfast Capital, LLC, a boutique investment firm primarily focused on providing capital and strategic solutions to the mortgage banking industry. Steadfast's analytics division provides independent MSR valuations and related analytics to its bank and mortgage company clients.

Another Agency Adopts the Uniform State Test

Another state agency has announced that it will be adopting the new national MLO test with the Uniform State Content. The District of Columbia Department of Insurance, Securities, and Banking will adopt the test effective October 1, 2013. With this announcement, a total of 36 state agencies have adopted the new test and will, therefore, no longer require a separate state-specific test component as a prerequisite for MLO licensure.

- Matthew Saunig

Copyright © 2013 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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