Senate Banking Committee Schedules Dec. 5 Markup of Regulatory Reform Bill

Last week, members of the Senate Banking Committee announced that they had reached bipartisan agreement on "legislative proposals to improve our nation’s financial regulatory framework and promote economic growth." Following the announcement, committee members released a draft of a bill (S. 2155), the "Economic Growth, Regulatory Relief, and Consumer Protection Act." A markup of the bill is scheduled for December 5, 2017. Many observers believe that due to its bipartisan support, there is a strong likelihood that the bill will be enacted as part of a regulatory relief package.

Provisions of the bill relevant to providers of consumer financial services include the following:

Small Depository Qualified Mortgage (Section 101). For an insured depository institution or insured credit union, the bill would create a qualified mortgage loan entitled to the safe harbor under the ability to repay rule. In general, the depository institution or credit union would need to hold the loan in portfolio, and the loan could not have an interest-only or negative amortization feature and would need to comply with limits on prepayment penalties. While the creditor would need to consider and document the debt, income and financial resources of the consumer, it would not have to follow Appendix Q to the ability to repay rule.

Appraisal Exemption for Rural Areas (Section 103). The bill would provide an exemption from any appraisal requirement for a federally related transaction involving real property if (1) the property is located in a rural area, (2) the loan is less than $400,000, (3) the originator is subject to oversight by a federal financial institution regulator, and (4) no later than three days after the Closing Disclosure under the TRID rule is given to the consumer, the originator has contacted at least three state certified or licensed appraisers, as applicable, and has documented that no state certified or licensed appraiser, as applicable, is available within a reasonable period of time. The applicable federal financial institution regulator would determine what constitutes a reasonable period of time. The exemption would not apply to high-cost loans under the Truth in Lending Act (TILA), or when the applicable federal financial institution regulator requires the financial institution to obtain an appraisal to address safety and soundness concerns.

Home Mortgage Disclosure Act Triggers (Section 104). The bill would increase the loan volume trigger to be a reporting company under the revised Home Mortgage Disclosure Act (HMDA) rule from 25 closed-end mortgage loan originations in each of the preceding two calendar years to 500 such loans in each of the two preceding calendar years. The 25 closed-end loan trigger went into effect in 2017 for depository institutions, and goes into effect on January 1, 2018 for non-depository institutions.

The bill also would make permanent under the revised HMDA rule a trigger of 500 open-end mortgage loan originations in each of the preceding two calendar years. As reported previously, the revised HMDA rule provided for a trigger effective January 1, 2018 of 100 open-end mortgage loan originators in each of the preceding two calendar years, and in August 2017 the CFPB temporarily raised the trigger for 2018 and 2019 to 500 open-end mortgage loans in each of the preceding two calendar years. The bill includes a requirement for the Comptroller General of the United States to conduct a study after two years to evaluate the impact of the amendments on the amount of data available under HMDA, and submit a report to Congress within three years.

Loan Originator Transition Authority (Section 106). Subject to various conditions, the bill would establish temporary transition authority for an individual loan originator to conduct origination activity for up to 120 days from when the individual submits an application to be licensed in a state in cases in which the individual is (1) registered and then becomes employed by a state-licensed mortgage company or (2) licensed in a state and then seeks to conduct loan origination activity in another state.

TRID Rule Provisions (Section 110). The bill includes a provision that apparently is intended to eliminate the need for a second three business day waiting period under the TILA/Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule in cases in which the annual percentage rate decreases and becomes inaccurate after the initial Closing Disclosure is provided, thus triggering the need for a revised Closing Disclosure. Currently, the TRID rule requires both a revised Closing Disclosure and a new three business day waiting period before consummation may occur. As drafted, however, the bill would amend the TILA timing requirements for high-cost mortgages under the Home Ownership and Equity Protection Act. The TRID rule timing requirements are set forth in Regulation Z and not TILA. Thus, revisions to the bill are necessary to achieve the intended goal.

The bill also includes a sense of Congress provision with regard to the TRID rule, which provides that the CFPB should endeavor to provide clearer, authoritative guidance on (1) the applicability of the rule to mortgage assumptions, (2) the applicability of the rule to construction-to-permanent home loans, and the conditions under which such loans can be properly originated, and (3) the extent to which lenders can, without liability, rely on the model disclosures published by the CFPB under the rule if recent changes to the rule are not reflected in sample TRID rule forms published by the CFPB.

Credit Report Alerts (Section 301). The bill would amend the Fair Credit Reporting Act (FCRA) to require consumer reporting agencies to keep a fraud alert requested by a consumer in the consumer’s file for at least one year and allow a consumer to have one free freeze alert placed on his or her file every year and remove that alert free of charge. Consumer reporting agencies would also have to provide free freeze alerts requested on behalf of a minor and remove such alerts free of charge.

Credit Reports of Military Veterans (Section 302). The bill would amend the FCRA to require consumer reporting agencies to exclude from credit reports certain information relating to medical debts of veterans and would establish a dispute process for veterans seeking to dispute medical debt information with a consumer reporting agency.

Protection of Seniors (Section 303). The bill would, subject to certain conditions, provide immunity from civil or administrative liability to individuals and financial institutions for disclosing the suspected exploitation of a senior citizen to various government agencies, including state or federal financial regulators, the SEC, or a law enforcement agency.

Cyber Threats (Section 501). The bill would require the Secretary of the Treasury to submit a report to Congress on the risks of cyber threats to financial institutions and U.S. capital markets that includes an analysis of how the appropriate federal banking agencies and the SEC are addressing such risks. The report must also include Treasury’s recommendation on whether any federal banking agency or the SEC "needs additional legal authorities or resources to adequately assess and address material risks of cyber threats." (We note that for several years, the FTC has been calling for such additional authority, specifically in the form of rulemaking authority. Due to the limitations of the Banking Committee’s jurisdiction, the bill's provision focuses exclusively on the federal banking agencies, and gives no recognition to the important role of the FTC—which is under the Senate Commerce Committee’s jurisdiction—in addressing cyber threats.

- Richard J. Andreano, Jr. and Barbara S. Mishkin


House Financial Services Committee Approves "Madden fix" Bill

A bill to provide a "Madden fix" and three other bills relevant to mortgage lenders were included among the more than 20 bills approved by the House Financial Services Committee on November 15, 2017. With the exception of H.R. 3221, "Securing Access to Affordable Mortgages Act," the bills received strong bipartisan support.

The "Madden fix" bill is H.R. 3299, "Protecting Consumers' Access to Credit Act of 2017." In Madden, the U.S. Court of Appeals for the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge. The bill would add the following language to Section 85 of the National Bank Act: "A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary."

The bill would add the same language (with the word "section" changed to "subsection" when appropriate) to the provisions in the Home Owners' Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal and state savings associations, federal credit unions, and state-chartered banks. The bill was approved by a vote of 42-17. (A bill with identical language was introduced in July 2017 by Democratic Senator Mark Warner.)

Adoption of a "Madden fix" would eliminate the uncertainties created by the Second Circuit's Madden decision. However, it would not address a second source of uncertainty for banks that lend with assistance from third parties—the argument that the bank is not the "true lender" and, accordingly, cannot exercise the usury authority provided to banks by federal law. As we have previously urged, the OCC and its sister agencies should adopt rules providing that loans funded by their supervised financial institutions using its own name as creditor are fully subject to federal banking laws (and not state usury laws). The OCC and FDIC have previously emphasized that their supervised entities must manage and supervise the lending process in accordance with regulatory guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.

The other approved bills relevant to mortgage lenders are:

  • H.R. 3221, "Securing Access to Affordable Mortgages Act." The bill would amend the Truth in Lending Act (TILA) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to exempt a mortgage loan of $250,000 or less from the higher-priced mortgage loan and general property appraisal requirements if the loan appears on the creditor’s balance sheet for at least three years. The bill would also exempt mortgage lenders and others involved in real estate transactions from incurring penalties for failing to report appraiser misconduct. The bill was approved by a vote of 32-26.

  • H.R. 1153, "Mortgage Choice Act of 2017." The bill would amend TILA by revising the definition of "points and fees" to exclude escrowed insurance and fees or premiums for title examination, title insurance, or similar purposes, whether or not the title-related charges are paid to an affiliate of the creditor. The bill would direct the CFPB to issue implementing regulations within 90 days of the bill's enactment. The bill was approved by a vote of 46-13.

  • H.R. 3978, "TRID Improvement Act of 2017." The bill would amend RESPA to require that the amount of title insurance premiums reflect discounts required by state law or title company rate filings. The amendment would override the TRID rule approach to the disclosure of the lender's and the owner’s title insurance premiums if there is a discount offered on the lender’s policy when issued simultaneously with an owner's policy. In such cases, instead of requiring the disclosure of the actual owner's policy premium and the actual discounted lender's policy premium, the TRID rule currently requires the disclosure of the full, non-discounted amount of the premium for the lender's policy, and an amount for the owner's policy equal to the full amount of the owner's policy premium, plus the amount for the discounted lender's policy premium, less the full amount of the lender’s policy premium. The bill was approved by a vote of 53-5.

- Jeremy T. Rosenblum and Richard J. Andreano, Jr.


FRB Hosts 2017 Interagency Fair Lending Panel

The FRB recently hosted a fair lending "hot topics" webinar in conjunction the DOJ, HUD, CFPB, FDIC, OCC, and NCUA. The seven agencies discussed fair lending developments, including the revised HMDA reporting requirements, compliance management for consumer loans, and various issues related to fair lending complaints, investigations, and enforcement.

HMDA and Revised Regulation C:

Eric Wang, Deputy Fair Lending Director of the CFPB's Office of Fair Lending and Equal Opportunity, emphasized that the CFPB is currently updating its HMDA exam procedures and that the industry should be “on the lookout” for the revised "Getting it Right" guide. He noted that the new HMDA requirements expand reporting to include 48 data elements (from 23, of which 14 have been modified), and 110 data fields (from 39). Addressing industry outcry, Wang confirmed that file resubmission will not be required based upon overall error rates. Instead, resubmission will be required where the error rates of individual fields exceed applicable thresholds. The new data resubmission guidelines also include error tolerances for certain data fields.

Wang stated that the Bureau's 2018 examinations will prioritize whether entities have made "good faith efforts" to comply with revised Regulation C. Good faith may be shown by the creation of an implementation plan or updates to policies and procedures. Wang reiterated that after the revised rule takes effect, the Bureau's role will be "diagnostic and corrective, not punitive;" however, he refused to confirm whether the CFPB will use all HMDA data fields in its examinations. He stated that the CFPB has not prioritized "key fields" because it "would like to maintain the flexibility to examine all HMDA data fields [for] accuracy." Vonda Eanes, Director for CRA and Fair Lending Policy at the OCC, confirmed that all agencies will have access to all HMDA data and, despite the OCC, FDIC and FRB joint guidance prioritizing 37 "key fields," the OCC "expects to leverage all the additional HMDA data fields" in its fair lending risk analysis.

Notably, the panel failed to clarify the impact of Regulation C's changes upon lenders' CRA obligations. Although cautioning that no final decision has been made, Eanes confirmed that the OCC, FRB, and FDIC are considering the issuance of interagency guidance that recognizes the expanded mandatory reporting in revised Regulation C. In particular, for lenders with a sufficient number of originations, the reporting of open end lines of credit is no longer optional. Additionally, the definitions of dwelling, reverse mortgage, and manufactured home have changed. Reporting under the new HMDA data elements is required for applications on which final action is taken on or after January 1, 2018, except that for applicant demographic data the institution has the option to report under the requirements in effect at the time of application or under the 2018 rule requirements regardless of when the application was taken.

Indirect Auto Finance:

Matthew Nixon, Program Director of the NCUA's Office of Consumer Financial Protection and Access, refused to state whether the NCUA will focus on any "hot topic" fair lending issues in 2018, but noted that it anticipates examinations will reflect the agency’s current focal points—45% related to specific concerns noted by district examiners or regional offices, 20% related to pricing disparities, 30% related to HMDA data integrity, and 5% related to follow-on work from the previous year. When prompted during the question and answer segment, NCUA noted that examinations are risk focused and indirect auto lending programs are reviewed on a case-by-case basis according to the entity's risk profile (which includes compensation structure, complaints received, input from the district examiner, and oversight and monitoring practices). The NCUA noted that virtually all exams included cursory review of indirect auto lending programs, but only about 10% resulted in more intensive review.

Compliance Management for Consumer Loans:

Katrina Blodgett, Counsel in the FRB's Fair Lending Enforcement Section of the Division of Consumer and Community Affairs, noted that the FRB engages in risk-focused supervision and expects that an entity's CMS provide oversight commensurate with the level of pricing discretion provided by each consumer loan program. The FRB expects that an entity clearly communicate the basis for any exceptions offered to its loan officers, including waiving, reducing, or increasing fees. Blodgett encouraged the use of rate sheets to track all exception variables and advised that rate sheets should be reviewed as part of monthly compliance meetings. Moreover, loan officer training should include the proper use of rate sheets. Tara Oxley, Chief of Fair Lending and CRA Examinations at the FDIC, emphasized that fair lending monitoring programs should be conducted portfolio-wide and only limited to a branch-specific analysis where policies and procedures differ across branches. According to Oxley, an entity's review must include an analysis of its lending data and its pricing exceptions and overrides, regardless of entity size or complexity.

Investigations and Enforcement:

Jacy Gaige, HUD's Director of the Office of Systemic Investigations, reviewed the agency's roughly 1,000 fair lending complaints in 2016. Gaige noted that the most common policy-related complaints involved requiring cosigners or unnecessary documentation for applicants with disability income, such as a doctor’s note that a disability is likely to continue. Gaige emphasized that lenders may face FHA liability where unclear policies and procedures create confusion or delay regarding application requirements or where extra help (friendlier service and quicker callback times) are provided for some individuals as compared with protected classes.

With parental leave, HUD has found that lenders have been impermissibly requiring a parent to return to work before income may be counted or impermissibly requiring a letter that an employer expects the employee to return to work. Lenders have also made statements that applicants may change their mind about returning to work or that many people do not return to work after having a baby. Gaige noted that in these situations, elevated damages may be available on account of the emotional distress associated with an early return to work.

Common complaints also included allegations that lender policies allow investor loans for small rental properties but not for group homes (which often include persons with disabilities), prohibit lending on Native American reservations, prohibit lending to those persons with less than $500,000 or more in collateral, or prohibit lending in a specific community based on the false perception of the prevalence of fraud. Novel complaints include lenders' use of social media to target specific geographic areas or individuals (including use of a network’s parent/non-parent designation).

Marta Campos of the DOJ Civil Rights Division provided no indication of what new direction, if any, the DOJ will take in 2018. Her comments were limited to the BancorpSouth Bank joint investigation with the CFPB, which settled in June 2016. In response to a public question highlighting the dated settlement, Campos stated that there "may be" similar cases coming down the pike. She noted that lenders' CMS programs should be able to detect similar redlining and underwriting red flags identified in Bancorp.

- Brian Slagle


DID YOU KNOW?

Michigan Publishes Annual Licensing Fees

The Michigan Department of Insurance and Financial Services published its annual licensing fees under the Mortgage Loan Originator Licensing Act as follows:

  • Loan Originator License Fee: $250
  • Change in Employer/Sponsor Fee: $100
  • Loan Originator Name and Business Address Amendment Fee: $15

The fees are the same as in 2017 and are effective from January 1, 2018 through December 31, 2018.

Ohio Adds Money Transmitter License to NMLS

On January 1, 2018, the Ohio Division of Financial Institutions will start accepting new application and transition fillings for the Money Transmitter License on NMLS. Current licensees should submit a license transition request through NMLS by February 1, 2018.

More information can be found here.

- Wendy T. Novotne


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