Mortgage Banking Update - February 21, 2019
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The new 116th Congress convened on January 3, 2019, with members of Congress sworn into office. Although the first month was consumed by the partial government shutdown, Congressional committee assignments were finalized, and agendas were rolled out.
In the Senate Banking Committee, Chairman Mike Crapo outlined a framework for GSE housing reform based upon bi-partisan proposals from the last Congress. His blueprint would release Fannie Mae and Freddie Mac from conservatorship and provide for gradual privatization of these markets. The Trump administration has also signaled an interest in the issue, so it is possible we will see movement in this area over the next several months. Chairman Crapo and Ranking Member Sherrod Brown also released a joint statement outlining priorities, including their intention to re-visit data collection and protection provisions in the FCRA.
The dynamic between the Senate Banking Committee and House Financial Services Committee has yet to emerge. Chairwoman Maxine Waters is a zealous consumer advocate, so any proposals will be viewed through that prism. We also expect robust oversight and investigative activity of the industry, again in the context of consumer protection.- Timothy W. Jenkins and Sherry Harper Widicus
Last month, after more than three years of urging by the industry to provide written guidance, the Consumer Financial Protection Bureau (CFPB) issued four FAQs on its TILA/RESPA Integrated Disclosure (TRID) Rule. In this week's podcast, we take a close look at the FAQs and what they tell creditors, particularly guidance on when a corrected Closing Disclosure and new three-day waiting period are required (with a caution for those selling to investors) and the safe harbor for using a model form.
Click here to listen to the podcast.- Barbara S. Mishkin
Federal financial institution regulators recently issued a joint final rule to implement provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (the Act) that require regulated financial institutions to accept private flood insurance policies. The regulators are the Farm Credit Administration, Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, and Comptroller of the Currency. The final rule takes effect on July 1, 2019.
To qualify as private flood insurance under the final rule, a policy must be issued by an insurance company that meets certain conditions, and the policy must provide flood insurance coverage that is at least as broad as the coverage provided under a standard flood insurance policy (SFIP) issued under the National Flood Insurance Program (NFIP) for the same type of property, including when considering deductibles, exclusions, and conditions offered by the insurer. The final rule sets forth specific requirements that a policy must meet to be considered to provide coverage at least as broad as an SFIP.
The final rule requires that a regulated financial institution accept a private flood insurance policy that provides coverage at least as broad as an SFIP in satisfaction of the requirement for flood insurance under the applicable regulator's flood insurance rules. The final rule allows a financial institution to determine that a private policy provides the necessary coverage if the following statement is included within the policy or as an endorsement to the policy: "This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation." A financial institution can simply rely on the statement, without independently assessing the policy. However, the final rule does not require insurance companies to include such a statement in a private policy, and a financial institution cannot reject a private policy simply because the statement is not provided.
The final rule also allows a financial institution to accept a private flood insurance policy that does not provide coverage at least as broad as an SFIP, if the private policy meets a more limited set of requirements, and the financial institution documents in writing its determination that the policy provides sufficient protection of the applicable loan, consistent with general safety and soundness principles.
Additionally, the final rule permits a financial institution to accept a plan issued by a mutual aid society in satisfaction of the requirement for flood insurance under the applicable regulator's flood insurance rules, subject to conditions. The conditions are that the applicable regulator has determined that the plan qualifies as flood insurance for purposes of the Act, the plan provides specified coverage for the mortgagor and mortgagee as loss payees, and the financial institution documents in writing its determination that the plan provides sufficient protection of the applicable loan, consistent with general safety and soundness principles.
For purposes of the final rule, a "mutual aid society" is defined as an organization (1) whose members share a common religious, charitable, educational, or fraternal bond; (2) that covers losses caused by damage to members' property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond; and (3) that has a demonstrated history of fulfilling the terms of agreements to cover losses to members' property caused by flooding.- Richard J. Andreano, Jr.
The FCC's creation of a database of disconnected phone numbers is expected to significantly reduce the potential Telephone Consumer Protection Act (TCPA) exposure companies face for unknowingly calling a customer at a reassigned phone number. In this podcast, we review the relevant TCPA legal background, explain how the database will operate and the requirements for obtaining a safe harbor from TCPA liability, and discuss proactive steps companies can take in advance of the database launch.
Click here to listen to the podcast.- Barbara S. Mishkin
Democratic Congressman Bill Foster, who represents the 11th District of Illinois, has sent a letter to Maxine Waters, Democratic Chairwoman of the House Financial Services Committee, to express his "strong interest in serving as the Chair of the Taskforce on Financial Technology and Innovation that will be convened in the coming weeks." Ms. Waters announced her plans to create the task force upon becoming Chairwoman.
In his letter (obtained by Politico), Mr. Foster mentions various credentials he holds, including his "prior career as a scientist and small business owner" and his participation as co-chair in the Blockchain Caucus. He describes the caucus as working "to understand and explore, among other things, how a new and emerging technology can improve government services, curb identity theft, and put consumers in charge of their own identity."
Mr. Foster indicates that as task force Chair, he would work closely with Ms. Waters and the subcommittee chairs to understand and examine developments in the Fintech industry, "including marketplace lending for consumers and small businesses, partnerships with traditional financial institutions, cryptocurrency, blockchain, alternative data utilized in credit underwriting, artificial intelligence, and machine learning."
He references the CFPB's proposal issued earlier this month to rescind the ability-to-repay provisions of its payday loan rule and states that "[i]n the context of this new development, ensuring that the underserved and underbanked communities have options and access to credit beyond predatory lenders will be a concern at the forefront of our inquiry." He also states that "although many financial technology companies are not subject to the same regulatory regime as traditional banks, including compliance with the Community Reinvestment Act, the Taskforce would work to examine how such companies can shoulder their fair share of the obligation to help meet the needs of low- and moderate-income communities, and ensure a fair playing field with community banks and other financial institutions."
Mr. Foster also indicates that the task force would attempt "to better understand the methods by which financial technology companies use complex algorithms to underwrite loans," and also to understand what steps such companies are taking "to ensure that they do not engage in discriminatory practices that violate fair lending laws."- Barbara S. Mishkin
The Practising Law Institute (PLI) 24th Annual Consumer Financial Services Institute will take place on March 25-26, 2019, in New York City (and by live webcast and groupcast in Philadelphia, Pittsburgh, and Mechanicsburg, Pennsylvania, and New Brunswick, New Jersey); on May 20-21, 2019, in Chicago; and on December 9-10, 2019, in San Francisco (and by live webcast).
The Institute is considered the country's premier consumer financial services CLE program, and this year's Institute will once again explore in detail important developments in consumer financial services regulation and litigation. I am again co-chairing the event, as I have for the past 23 years.
The leadership of the CFPB, OCC, FDIC, and FTC is now firmly under Republican control. While this has altered these agencies' priorities, all continue to be very active in enforcing consumer financial laws, and the CFPB's supervisory activities remain substantially unchanged. At the same time, state attorneys general and regulators are increasing their regulatory and enforcement activity to fill any void created at the federal level. In addition, the improved economy, the deregulated federal environment, and the rapid increase in technological innovation has resulted in new entrants into the consumer financial services industry and the offering of new products and services by existing players.
The morning session on the first day will feature a panel discussion titled "Federal Regulators Speak," that will be divided into two segments and focus on federal regulatory, enforcement, and supervisory developments. I will moderate a discussion among CFPB, OCC, FTC, and FDIC representatives.
My partner Chris Willis will participate as a panel member in two panel discussions featured in the afternoon session of the first day. One of those panels is titled "Fair Credit Reporting Act/Debt Collection Issues" and will include a discussion of the CFPB's debt collection rulemaking, FCRA litigation trends, and state activity. The other panel, which I will moderate, is titled "The Rapidly Evolving Landscape for Fintech" and will examine the intersection between new technologies and products and existing regulatory frameworks, such as the use of artificial intelligence (AI) and blockchain (including virtual currency).
The Institute will also focus on a variety of other cutting-edge issues and developments, including:
- Privacy and data security issues
- TCPA developments
- Class action and litigation developments
- State regulatory and enforcement developments
- Consumer advocates'/plaintiff lawyers' perspectives on current regulatory and litigation issues
We hope you can join us for this informative and valuable program. PLI has made a special 25 percent discounted registration fee available to those who register using the link that follows. To register and view a complete description of PLI's 24th Annual Consumer Financial Services Institute, click here.
For assistance with registration, contact PLI Customer Service at 800-260-4PLI.- Alan S. Kaplinsky
A new executive order signed by President Trump on February 11, 2019, is intended to maintain American leadership in artificial intelligence (AI) research and development (R&D). The order directs certain federal agencies to pursue various strategic objectives to promote and protect American advancement in AI. Those agencies are to be identified by the National Science and Technology Council Select Committee on Artificial Intelligence. In addition, any of such agencies that perform R&D are directed to make AI an R&D priority.
Among other things, the executive order also:
- directs the heads of all federal agencies to "review their Federal data and models to identify opportunities to increase access and use by the greater non-Federal AI research community in a manner that benefits that community, while protecting safety, security, privacy, and confidentiality." More specifically, the agencies are directed to "improve data and model inventory documentation to enable discovery and usability, and [to] prioritize improvements to access and quality of AI data and models based on the AI research community's user feedback."
- directs the OMB Director, in coordination with other officials, to issue a memorandum to the heads of all agencies that (1) informs the development of regulatory and non-regulatory approaches by such agencies regarding technologies and industrial sectors that are either empowered or enabled by AI and advance American innovation, and (2) considers ways to reduce barriers to the use of AI. A draft of the memorandum is to be issued for public comment before it is finalized.
- directs the Secretary of Commerce, through the Director of the National Institute of Standards and Technology, to issue a plan for federal engagement in the development of technical standard and related tools in support of reliable, robust, and trustworthy systems that use AI technologies.
Last summer, the U.S. Treasury Department issued a report that recommended sweeping regulatory changes intended to promote innovation in the consumer financial services market, reduce regulatory burdens on consumer financial services providers, and update regulations applicable to various types of consumer lending and related consumer financial products and services. That report included a section focused on big data, machine learning, and AI in which Treasury stated that it recognized the significant benefits that the increased application of AI and machine learning technologies can provide. It urged regulators not to impose unnecessary burdens or obstacles to the use of AI and to provide greater regulatory clarity that would enable further testing and responsible deployment of such technology.
Members of Ballard Spahr's Consumer Financial Services Group have counseled clients on issues arising from applications of AI in the consumer finance space. In July 2018, the Group conducted a webinar, Artificial Intelligence in the Consumer Financial Services Industry, in which the topics included (1) applications of AI to marketing, underwriting, servicing, and collections, and (2) compliance issues arising from the use of AI, including managing fair lending and discrimination risks, delivering adverse action notices, handling of data sharing and data security risks.- Christopher D. Ford and Judy Mok
"Disclosure Sandbox." In September 2018, the Bureau proposed significant revisions to its "Policy to Encourage Trial Disclosure Programs," which sets forth the Bureau's standards and procedures for exempting individual companies, on a case-by-case basis, from applicable federal disclosure requirements to allow those companies to test trial disclosures.
Last week, the CFPB added the following update to its blog post about the proposal:
The original headline [which referred to "companies"] suggested that the proposed Disclosure Sandbox would be open only to "Fintech companies." In fact, as the body of the post indicates, any covered entity, regardless of its categorization as Fintech, "bank," "credit union," or otherwise, could apply to test a trial disclosure with the Sandbox.
Among the issues raised by the proposal that we noted was whether waivers would only be granted in connection with financial products or services that involve technological or other innovations and will not be granted in connection with conventional products or services. While the CFPB's update indicates that non-Fintech companies would be eligible for a waiver, it continues to be uncertain whether waivers would be granted in connection with conventional products or services.
NAL Policy and New "Product Sandbox." In December 2018, the CFPB issued proposed revisions to its 2016 final policy on issuing "no-action" letters (NAL), together with a proposal to create a new "product sandbox." The comment period on the proposals ended earlier this month. As might be expected, like its "disclosure sandbox" proposal, the CFPB's proposed revisions to the NAL policy and proposal to create a new "product sandbox" has drawn criticism from consumer and public interest groups.
Among the arguments made in a comment letter from 77 "consumer, civil rights, legal services, labor and community groups" are claims that the proposals could violate the Administrative Procedure Act, exceed the Bureau's authority, and would expose consumers to risk of harm. The objections to the proposals set forth in another comment letter filed by nine consumer and public interest groups that include the Center for Responsible Lending and the National Consumer Law Center also include claims that the creation of a "product sandbox" exceeds the CFPB's authority and the proposals violate rulemaking requirements. In addition, the letter includes suggestions for how the proposals might be modified.- Alan S. Kaplinsky
The CFPB has published its 2019 final lists of "rural" and "rural or underserved" counties on its website. The CFPB has previously posted lists of such counties for calendar years 2011-2018. The CFPB has also updated the rural and underserved areas website tool for 2019.
The lists and tool are relevant to exemptions from certain regulatory requirements of the Truth in Lending Act, including the following CFPB mortgage rules:
- Escrows Rule, which requires a creditor to establish an escrow account for certain first-lien higher-priced mortgage loans (HPMLs), but exempts HPMLs consummated during a calendar year (or next-to-last calendar year for loans where the application was received before April 1 of the current calendar year) if the creditor extended a first-lien covered transaction in the preceding calendar year secured by a property located in a rural-or-underserved area, and meets certain additional conditions;
- Ability to Repay and Qualified Mortgage Standards Rule, which treats certain balloon-payment mortgages as qualified mortgages if they are originated and held in portfolio by small creditors that meet the rural-or-underserved test above and certain additional conditions;
- Home Ownership and Equity Protections Act of 1994 (HOEPA) rule, which generally bans balloon payments for mortgages that fall within HOEPA's high-cost mortgage coverage test, unless they meet the rural-or-underserved test and certain additional conditions; and
- Appraisals for HPMLs rule, which exempts HPMLs made in "rural" counties from its additional appraisal requirement.
Note that if a creditor makes a first-lien mortgage loan secured by a property located in a rural or underserved area during 2019, the creditor will satisfy the rural and underserved test for the rules noted above during all of 2020 and for loan applications received before April 1, 2021.- Pavitra Bacon
Did you Know?
NMLS Publishes 2018 Annual Report "Transforming Supervision"
The 11th annual report on NMLS operations, performance and new development efforts has been released by the NMLS. It is available here 2018 annual report.- John D. Socknat
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