Mortgage Banking Update - July 22, 2021
In This Issue:
- Happy 10th Anniversary CFPB: Ballard Spahr to Hold July 26 and August 3 Webinars
- CFPB Issues Final COVID-19 Mortgage Servicing Rules
- FHFA Eliminates Adverse Market Refinance Fee
- Implications of SCOTUS Collins Decision for CFPB Generates Controversy
- FinCEN Identifies AML/CFT “Priorities” for Financial Institutions
- FinCEN Issues Assessment on Possible “No-Action” Letters for Industry
- CFPB Summer 2021 Supervisory Highlights Looks at Auto Servicing, Consumer Reporting, Debt Collection, Deposits, Fair Lending, Mortgage Origination and Servicing, Private Student Loans, Payday Lending, and Student Loan Servicing
- Fannie Mae and Freddie Mac Announce New Uniform Instruments
- CFPB Launches Toolkit for Renters and Mortgage Borrowers Experiencing COVID-19 Financial Hardships
- CFPB Issues Report Addressing Asian American and Pacific Islanders in the Mortgage Market
- President Biden Issues Executive Order Encouraging FTC Rulemaking on Consumer Data Collection, CFPB Rulemaking on Data Portability, and CFPB UDAAP Enforcement
- Federal Banking Agencies Issue Proposed Interagency Guidance on Risk Management in Third-Party Relationships; Ballard Spahr to Hold Aug. 6 Webinar
- Virginia Creates New Protections for Active Service Members, Veterans, and Their Family Members
- Changes in FTC Rulemaking Procedures Create Easier Path for New FTC UDAP Rules
- Did You Know?
For the latest updates on the Coronavirus COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
July 21, 2021, will mark the 10th anniversary of the CFPB opening for business. It will also mark the 10th anniversary of our blog, Consumer Finance Monitor, which we intentionally launched on the CFPB’s first day.
In our two-part webinar, we will review the Bureau’s significant initiatives to date and share our thoughts on the Bureau’s likely direction throughout the Biden administration. In Part I, we will take a close look at the Bureau’s major regulatory initiatives during its first 10 years, how it has responded to the rapid change in technology, and what we expect going forward. Part II will be devoted to supervisory and enforcement activities.
Part I will be held on Monday, July 26, 2021 from 2 to 4 p.m. EDT and will focus on the Bureau’s completed, pending, and potential regulatory actions dealing with:
- Mortgage origination and servicing
- Prepaid cards
- Debt collection
- Small dollar lending
- Small business lending
- Consumer access to financial information
- Technology developments and what we expect going forward
Part II be held on Tuesday, August 3, 2021 from Noon to 1:30 p.m. EDT and will focus on the Bureau’s past, ongoing, and potential supervisory and enforcement activities concerning:
- Supervision of “larger participants,” including the industries that may be future candidates for “larger participant” supervision
- Fair lending
- Unfair, deceptive, or abusive acts or practices
- Credit cards
- Debt collection
- Credit reporting
- Student lending and servicing
- Mortgage origination and servicing
- Debt relief
- Military Lending Act and service member issues
Click here to register.
On June 28, 2021, the CFPB issued its Mortgage Servicing COVID-19 Final Rule (the Final Rule). The Final Rule, which amends Regulation X, is effective August 31, 2021, and comes at the same time as certain related updates from other Federal agencies. We discuss those topics, along with an overview of the Final Rule, below.
Effective Date and Related Updates. The effective date of the Final Rule is August 31, 2021, and as further detailed below (and as anticipated), it includes enhanced foreclosure protections to address the COVID-19 pandemic. According to the preamble, an earlier effective date was not possible as the Congressional Review does not allow a “major rule” (which the Final Rule is deemed to be) to become effective sooner than 60 days after publication in the Federal Register (which occurred on June 30, 2021).
The preamble further notes concern regarding the gap of time between the expiration of federal foreclosure and/or eviction moratoria (which the CDC, FHFA, FHA, and VA extended to July 31, 2021, during the prior week), and the effective date of the Final Rule. On that issue, the CFPB clarifies in the preamble, and highlights in the associated Executive Summary, that early implementation is permitted, including for the new exceptions for streamlined loss mitigation offers under Regulation X. The preamble states, in relevant part:
While servicers will not have to comply with this rule until the effective date, servicers may voluntarily begin engaging in activity required by this final rule before the final rule’s effective date. . . . While the Bureau declines to adopt an earlier effective date, for the reasons discussed above, the Bureau does not intend to use its limited resources to pursue supervisory or enforcement action against any mortgage servicer for offering a borrower a streamlined loan modification that satisfies the criteria in § 1024.41(c)(2)(vi)(A) based on the evaluation of an incomplete loss mitigation application before the effective date of this final rule. 86 Fed. Reg. 34886-34887 (June 30, 2021).
To help clarify expectations regarding this time frame, the Federal Housing Finance Agency (FHFA) quickly announced that Fannie Mae and Freddie Mac servicers must comply with the foreclosure protections in the Final Rule, prior to the effective date, starting on August 1, 2021. Fannie Mae and Freddie Mac then issued, respectively, Lender Letter 2021-02 and Bulletin 2021-24, effectuating this policy.
Scope. We note that the scope of these new provisions, including the temporary foreclosure protections discussed below, can apply more broadly than the CARES Act and certain other borrower protections that were imposed in connection with the pandemic. While the CARES Act applied to “federally backed mortgage loans” (i.e., FHA, VA, USDA, Fannie or Freddie program loans), the provisions in the Final Rule apply to closed-end residential mortgage loans, that are “federally-related mortgage loans” subject to RESPA, and are secured by the borrower’s principal residence. Therefore, the temporary foreclosure hold in the Final Rule, and the other provisions discussed below, can apply to portfolio loans that were not expressly subject to the CARES Act or certain other protections.
We also note that “small servicers” under the Regulation X mortgage servicing rules are generally exempt from these new requirements in the Final Rule.
Temporary COVID-19 Foreclosure Safeguards. The Final Rule includes enhanced foreclosure protections that will be in place from the effective date through December 31, 2021. During that time frame, servicers may not make the first notice or filing required for foreclosure, due to missed payments (and the borrower being more than 120 days delinquent, in accordance with the existing rule), unless one of three safeguards has been met:
- Complete Loss Mitigation Evaluation – The borrower has submitted a complete loss mitigation application, the borrower has remained delinquent at all times since submitting the application, and that evaluation process has been exhausted pursuant to the existing criteria in § 1024.41(f)(2) (i.e., appeal rights have been exhausted, the borrower rejects all loss mitigation options offered, or the borrower fails to perform under a loss mitigation option);
- Abandoned Property – The property securing the loan is abandoned, pursuant to the laws of the state or municipality in which it is located; or
- Unresponsive Borrower – The servicer has not received any communications from the borrower for at least 90 days prior to making the first notice or filing for foreclosure, and all of the following conditions are met:
- The servicer made good faith efforts to establish live contact with the borrower after each payment due date, pursuant to § 1024.39(a), during that 90-day period;
- The servicer sent the written early intervention notice, required by § 1024.39(b), from 10 to 45 days before the servicer makes the first notice or filing for foreclosure;
- The servicer sent all loss mitigation notices required by § 1024.41, as applicable, during the 90-day period before the servicer makes the first notice or filing for foreclosure; and
- The borrower’s forbearance program, if applicable, ended at least 30 days before the servicer makes the first notice or filing for foreclosure.
We also note that the Final Rule adds language to the commentary detailing recordkeeping and other requirements in connection with these foreclosure safeguards. For example, the added commentary details what records must be maintained to adequately show the borrower was unresponsive, in accordance with that safeguard option.
These temporary safeguards are not required, in addition to the existing foreclosure protections, if:
- The foreclosure is commenced on or after Jan. 1, 2022;
- The borrower was more than 120 days delinquent prior to Mar. 1, 2020; or
- The applicable statute of limitations for the foreclosure action will expire before January 1, 2022.
Additional COVID-19 Streamlined Loan Modification Options. The Final Rule includes new exceptions to the general prohibition on offering a loss mitigation option, based on an incomplete loss mitigation application, without evaluating a complete loss mitigation application for all other available loss mitigation options. Now, in addition to short-term forbearances or repayment plans, or the COVID-related options provided for in the CFPB’s Interim Final Rule from June, 2020, servicers may offer certain additional COVID-19-related loan modification options, based on an incomplete application, if the following criteria are met:
- The modification may not extend the loan term more than 40 years from the date the modification is effective;
- The modification may not increase the borrower’s monthly principal and interest payment beyond what was required prior to the modification;
- If the modification provides for a deferral of amounts owed (i.e., until the property is sold, or the loan is refinanced, or if applicable, FHA mortgage insurance terminates), interest cannot accrue on those deferred amounts;
- The modification is available to borrowers experiencing COVID-19-related hardships;
- The modification must end any pre-existing delinquency upon acceptance, or upon final acceptance after completion of any applicable trial modification period; and
- The servicer may not charge fees in connection with the loan modification, and must promptly waive certain existing fees the borrower owes, that were incurred on or after March 1, 2020, such as late fees, penalties, or stop-payment fees.
The Final Rule also clarifies that if the borrower fails to perform under a trial modification plan per the new exception, or requests further loss mitigation assistance, the servicer must immediately resume reasonable diligence efforts to help complete the loss mitigation application, and provide the borrower with an updated notice, as needed, conveying the information required to complete the application.
COVID-Related Early Intervention Live Contact. The Final Rule includes temporary COVID-19-related live contact requirements under the early intervention rule. Until Oct. 1, 2022, when complying with the existing early intervention live contact requirement in § 1024.39(a), servicers must convey the following information during that live contact:
- For borrowers not in a forbearance plan at the time of live contact, the servicer must:
- Inform the borrower that forbearance programs are available for borrowers experiencing a COVID-19-related hardship;
- List and briefly describe to the borrower any such forbearance programs made available at that time and the actions the borrower must take to be evaluated for such forbearance programs, unless the borrower states that they are not interested in receiving information about such programs; and
- Inform the borrower of at least one way the borrower can find contact information for homeownership counseling services, such as referencing the borrower’s periodic statement.
- For borrowers in a forbearance plan at the time of live contact, the servicer must:
- Inform the borrower of the date the borrower’s current forbearance plan is scheduled to end;
- List and briefly describe each of the types of forbearance extension, repayment options, and other loss mitigation options available to the borrower by the owner or assignee of the borrower’s mortgage loan at the time of the live contact, and the actions the borrower must take to be evaluated for such loss mitigation options; and
- Inform the borrower of at least one way that the borrower can find contact information for homeownership counseling services, such as referencing the borrower’s periodic statement.
“Reasonable Diligence” for Borrowers in a COVID-19 Forbearance. The Final Rule adds language to the commentary of the regulation clarifying what “reasonable diligence” efforts are needed to help the borrower complete a loss mitigation application, if the borrower is in a COVID-19 forbearance program. In that scenario, the added commentary provides that the servicer has to contact the borrower, no later than 30 days prior to the scheduled end of the forbearance plan, to determine if the borrower wishes to complete the loss mitigation application and receive a full loss mitigation evaluation. If the borrower requests further assistance, the servicer has to exercise reasonable diligence to complete the application before the end of the forbearance period.
The Federal Housing Financing Agency (FHFA) announced on July 16, 2021, that effective August 1, 2021, it is eliminating the 50 basis point Adverse Market Refinance Fee for refinance mortgage loans. The FHFA notes that the fee imposed on lenders originally was designed to cover losses projected as a result of the COVID-19 pandemic. However, the FHFA states that “[t]he success of FHFA and [Fannie Mae and Freddie Mac] COVID-19 policies reduced the impact of the pandemic and were effective enough to warrant an early conclusion of the Adverse Market Refinance Fee.” The FHFA expects that lenders who passed on the cost of the fee to borrowers will now eliminate any borrower charges based on the fee.
The FHFA also advises that the “vast majority” of Fannie Mae and Freddie Mac borrowers have successfully exited COVID-19 forbearance, and that in April 2021 approximately two percent of single-family mortgages guaranteed by Fannie Mae and Freddie Mac remained in forbearance, which is down from a high of approximately five percent in May 2020.
Following the U.S. Supreme Court’s decision last month in Collins v. Yellin (previously captioned Collins v. Mnuchin), controversy quickly erupted over the decision’s implications for the CFPB in three pending cases: All American Check Cashing and the two cases involving the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (2017 Rule).
In Collins, relying on its decision in Seila Law, the Supreme Court held that the Federal Housing Finance Agency’s structure is unconstitutional because the Housing and Economic Recovery Act of 2008 only allows the President to remove the FHFA’s Director “for cause.” Despite ruling that the FHFA’s structure was unconstitutional, the Supreme Court also held that the proper remedy for the constitutional violation was not to invalidate the FHFA actions challenged by the plaintiffs.
All American Check Cashing. The underlying case is an enforcement action filed by the CFPB against All American in 2016 in a Mississippi federal district court for alleged violations of the CFPA’s UDAAP prohibition. In March 2018, the district court rejected All American’s constitutional challenge and denied its motion for judgment on the pleadings. All American then sought an interlocutory appeal which the CFPB opposed, arguing that a notice of ratification of the lawsuit by former Acting Director Mulvaney cured any constitutional defect and mooted the constitutional issue. The district court did not rule on the CFPB’s ratification argument and in March 2018 granted All American’s motion for interlocutory appeal which the Fifth Circuit agreed to hear.
After a Fifth Circuit panel ruled that the CFPB’s structure was constitutional, the Fifth Circuit, on its own motion (at a time when Seila Law was still awaiting decision by the Supreme Court), entered an order vacating the panel’s ruling and granting rehearing en banc. In July 2020, following the Supreme Court’s Seila Law decision, the CFPB filed a declaration with the Fifth Circuit in which Director Kraninger stated that she had ratified the Bureau’s enforcement action against All American. After calendaring the case for en banc oral argument in September 2020 and ordering the parties to file supplemental briefs, the Fifth Circuit issued a directive putting the case on hold until the Supreme Court issued its decision in Collins. After Collins was decided, the Fifth Circuit issued an order directing the parties to submit letter briefs addressing how the case should proceed in light of Collins.
In its letter brief, All American argues that dismissal of the CFPB enforcement action is consistent with Collins. Although it held in Collins that the proper remedy for the constitutional violation was not to invalidate the FHFA actions challenged by the plaintiffs, the Supreme Court stated that the plaintiffs might nevertheless be entitled to retrospective relief if they could show that the unconstitutional removal provision caused them harm and remanded the case to the lower courts to resolve in the first instance whether the provision caused harm. One example the court gave of when an unconstitutional provision could inflict compensable harm was when “the President had made a public statement expressing displeasure with actions taken by a Director and had asserted that he would remove the Director if the statute did not stand in the way.”
According to All American, “the public record shows that for a substantial period of time in which this enforcement action was pending in the district court, President Trump’s desire and inclination was to replace Cordray—the CFPB’s Director at the time this case was filed…but was restricted by the removal provision. All American also argues that in any event, Collins did not limit remedies for defendants in CFPB enforcement actions. According to All American, “[c]ompensable harm has no relevance here because, unlike plaintiff shareholders [in Collins seeking to recover millions of dollars from the Treasury Department], All American is a defendant seeking to dismiss an enforcement action.” (emphasis included). Accordingly, All American urges the Fifth Circuit to declare the CFPB unconstitutionally structured and grant All American judgment on the pleadings.
The CFPB argues in its letter brief that Collins squarely rejects All American’s argument that dismissal is appropriate. According to the CFPB, the Supreme Court found no reason to regard actions taken by a properly appointed official as void merely because the agency’s enabling statute contained an invalid for-cause removal provision and the CFPB was headed by a properly appointed Director when it filed the enforcement action against All American. In addition, the CFPB argues that All American cannot show that the invalid removal provision affected the decision to file the action because the action was ratified by directors not subject to the removal restriction. The CFPB argues further that Collins undercuts All American’s argument that neither former Acting Director Mulvaney nor former Director Kraninger validly ratified the action because the Bureau lacked authority to file the complaint in the first instance. According to the CFPB, the complaint was valid when filed because the Bureau’s Director at the time had been properly appointed and confirmed. Accordingly, the CFPB urges the Fifth Circuit to deny All American’s motion for judgment on the pleadings and allow the case to go forward.
2017 Rule Cases. Two cases are currently pending. One is the Texas lawsuit filed by the Consumer Financial Services Association (CFSA) and another industry trade group seeking to invalidate the 2017 Rule’s payments provisions. Briefing on the parties’ cross-motions for summary judgment closed in December 2020 and no date has been set for oral argument on the motions.
Following Collins, the CFPB filed a Notice of Supplemental Authority in which it argues that Collins supports rejection of the trade groups’ argument that the payments provisions were void ab initio and therefore incapable of ratification. The CFPB also argues the trade groups cannot show that the unconstitutional removal restriction caused them compensable harm that would entitle them to invalidation of the payments provisions. Because a Director appointed by and removable at will by the President ratified the payments provisions, the restriction made no difference for the trade groups or for their members’ future obligation to comply with the payments provisions when they become effective.
In their response, the trade groups argue that Collins did not address whether a rule promulgated by an unaccountable agency head is void ab initio because Collins involved a contractual agreement entered into by an Acting FHFA Director who was removable at will. According to the trade groups, the only remedies question in Collins was whether to undo the implementation of the agreement by FHFA Directors who were insulated from removal. They argue that Collins only limited retrospective remedies and not the prospective relief against future regulatory enforcement they seek. Finally, the trade groups argue they are entitled to relief even if Collins requires them to show that the removal restriction made a concrete difference because “the public record is full of evidence that President Trump wanted to fire Cordray, but was deterred from doing so by the statutory removal restriction.” (emphasis included). (In its reply, the CFPB asserts that “[r]egardless of whether President Trump would have fired Director Cordray, President Trump’s own appointee expressly ratified [the payments provisions] after the removal provision was held invalid.” (emphasis included).)
The other pending case involving the 2017 Rule was filed in D.C. federal district court by the National Association for Latino Community Asset Builders (NALCAB) challenging the CFPB’s rescission of the “ability-to-repay” (ATR) or “mandatory underwriting provisions” in the rule. The lawsuit seeks to overturn the CFPB’s July 2020 final rule that eliminated the ATR provisions but left in place the 2017 Rule’s payments provisions. The CFSA intervened in the lawsuit. Motions to dismiss filed by the CFPB and the CFSA are pending.
Following Collins, the NALCAB filed a Notice of Supplemental Authority in which it argues that Collins rejects the CFSA’s premise that actions taken by officials subject to an unconstitutional removal provision are void ab initio. According to the NALCAB, Collins therefore supports its position that the ATR provisions were not void ab initio and, if the 2020 final rule repealing the ATR provisions is set aside, the ATR provisions would be reinstated.
CFSA’s response repeats the arguments made in its response to the CFPB’s Notice of Supplemental Authority in the Texas case.
The U.S. Supreme Court could soon have an opportunity to decide for itself what the implications of Collins are for the CFPB. RD Legal Funding has filed a petition for a writ of certiorari that asks the Supreme Court to decide whether the CFPB can ratify actions taken when it was unconstitutionally structured and Seila Law is expected to file a cert petition also asking the Supreme Court to decide this question.
As required by the Anti-Money Laundering Act (AML Act), the Financial Crimes Enforcement Network (FinCEN) issued on June 30, 2021, the first government-wide list of priorities for anti-money laundering and countering the financing of terrorism (AML/CFT) (the Priorities). The Priorities purport to identify and describe the most significant AML/CFT threats facing the United States. The Priorities have been much-anticipated because, under the AML Act, regulators will review and examine financial institutions in part according to how their AML/CFT compliance programs incorporate and further the Priorities, “as appropriate.”
Unfortunately, and as we will discuss, there is a strong argument that FinCEN has prioritized almost everything, and therefore nothing.
The Priorities and Their Utility. The Priorities, listed according to FinCEN “[i]n no particular order,” are as follows:
- Domestic and international terrorist financing;
- Transnational criminal organizations;
- Drug trafficking organizations;
- Human trafficking and human smuggling; and
- Proliferation financing.
In its press release, FinCEN hailed the Priorities as “a significant milestone in FinCEN’s efforts to improve the efficiency and effectiveness of the nation’s AML/CFT regime and to foster greater public-private partnerships[.]” Indeed, the regulated industry has been pushing for years for greater feedback and guidance from regulators and law enforcement on the usefulness of BSA filings. According to FinCEN, “coupled with the Department of the Treasury’s 2020 Illicit Finance Strategy and 2018 National Risk Assessment, the Priorities aim to help covered institutions assess their risks, tailor their AML programs, and prioritize their resources.”
However, the collective Priorities are so broad and so numerous that it is difficult to imagine a crime or suspicious activity that is not somehow captured by one or more of the eight Priorities, or at least arguably so (and financial institutions often will be in the position of having to guess and make inferences which generally lean towards cautiously assuming that a given set of circumstances falls into one of the Priorities). Accordingly, they provide little guidance to financial institutions attempting to figure out how to focus their limited compliance resources. Although the purpose of the Priorities was to enable financial institutions to allocate existing compliance resources more appropriately, the Priorities, as announced, implicitly suggest that financial institutions really need to invest more overall compliance resources, to cover everything.
A prime example of this problem is the inclusion of “fraud” as a Priority. This Priority is not specific, like “securities fraud,” or “e-mail compromise scheme fraud” – it’s just “fraud,” with no qualification. As prosecutors employing the federal mail fraud and wire fraud statutes can tell you, just about any illicit activity can be characterized as a fraud. Indeed, the Priorities state that:
. . . . fraud – such as bank, consumer, health care, securities and investment, and tax fraud – is believed to generate the largest share of illicit proceeds in the United States. Health care fraud alone is estimated to generate proceeds of approximately $100 billion annually. Increasingly, fraud schemes are internet-enabled, such as romance scams, synthetic identity fraud, and other forms of identity theft. Proceeds from fraudulent activities may be laundered through a variety of methods, including transfers through accounts of offshore legal entities, accounts controlled by cyber actors, and money mules.
The fraud section goes on to discuss the dangers of cyber- and COVID-19-related fraud schemes, as well as foreign actors using the U.S. financial system to influence political campaigns and gain illicit access to U.S. technology and trade secrets. None of this is wrong, of course. It’s just that it is not really a “priority,” particularly when considered in the context of the other seven, unranked Priorities, because a priority by definition involves selection and sometimes painful choices. But it seems like, to date, FinCEN just could not bring itself to exclude any illicit activity from the Priorities, perhaps because it was concerned that doing so would suggest that the excluded criminal behavior wasn’t bad or important, or perhaps because every government agency consulted by FinCEN when compiling the Priorities lobbied for the importance of their particular focus.
FinCEN will propose implementing regulations in the coming months (and is required to do so by the AML Act within 180 days of having issued the Priorities), so it is possible that the regulations will provide better and more specific guidance to financial institutions. Given the already-existing breadth of the eight Priorities, that goal looks challenging. One possible approach to providing guidance by making choices would be to rank the Priorities, rather than give them all equal status.
The Priorities do recognize that “not every Priority will be relevant to every covered institution, but each covered institution should, upon the effective date of future regulations to be promulgated [within 180 days] in connection with these Priorities, review and incorporate, as appropriate, each Priority based on the institution’s broader risk-based program.” The practical result here appears to be that financial institutions are still mainly on their own when pursuing their already-ongoing AML/CFT programs, and the importance of financial institutions performing prescient risk assessments and fine-tuning AML transaction monitoring, based on the typical factors such as the relevant customers, geographies, business lines, etc., has become even greater. The risk posed by the Priorities for financial institutions is that regulators who find a problem during an examination will decide that the problem – whatever it is – invariably is captured by a Priority and will punish the financial institution more. The purpose of the Priorities was to help financial institutions, and enhance the quality of their BSA monitoring and filings, not expose them to more regulatory risk.
When publishing the Priorities, FinCEN also issued related statements to both banks and non-bank financial institutions, noting that covered institutions are not required to make any immediate changes to their AML programs to respond to the Priorities, and that regulators will not examine any covered institution for the incorporation of the Priorities into AML programs until regulations have been promulgated. “Nevertheless, in preparation for any new requirements when those final rules are published, covered institutions may wish to start considering how they will incorporate the AML/CFT Priorities into their risk-based AML programs.” FinCEN will update these Priorities at least once every four years, again as required by the AML Act.
Other observations. A few specific comments regarding the Priorities still are in order. The Priorities list corruption – with an emphasis on foreign corruption – as the first Priority, in its list of seeming equals. This placement appears to be a nod to President Biden’s June 3, 2021, National Security Study Memorandum entitled Memorandum on Establishing the Fight Against Corruption as a Core United States National Security Interest. It reveals—as the title might suggest—that the administration views “countering corruption as a core United States national security interest.” Certainly, financial transactions promoting corruption by foreign kleptocrats and human rights abusers are terrible – but not a significant real-world AML risk, relatively speaking, for the vast majority of “financial institutions” covered by the BSA that do not represent major international institutions. Rather, the most pernicious real-world threat with almost universal application appears to be the second Priority – cybercrime, in all of its innumerable variations. But after describing the ills posed by “traditional” cybercrimes, such as business email compromise schemes and the growing threat of ransomware attacks, the Priorities then pivot and discuss cryptocurrency and how it can be used to facilitate the funding of a broad variety of illicit conduct (including financial crime in general). Regardless, the Priorities here serve a reminder – hopefully unnecessary at this point – of the critical need for any institution’s AML compliance department and cyber- and privacy-security personnel to communicate and work together. Finally, the Priorities also include domestic terrorism, which certainly is a serious problem. However, because there is literally no list of identified domestic terrorist (contra lists published by OFAC regarding sanctioned foreign actors), and because associated financial transactions can be mundane, detecting such illicit financial activity generally will be difficult if not impossible for financial institutions.
As required by the Anti-Money Laundering Act (AML Act), the Financial Crimes Enforcement Network (FinCEN) issued on June 30, 2021 its 14-page assessment regarding the feasibility of FinCEN issuing so-called “no-action” letters to financial institutions (the Assessment). FinCEN issued this Assessment on the same day that it issued the first government-wide list of national priorities for anti-money laundering (AML) and countering the financing of terrorism (CFT), as we have blogged. In arguable contrast to the AML priorities, FinCEN’s Assessment is full of specific, concrete details and offers interesting insights into how no-action letters may (or may not) work in practice.
Ultimately, the Assessment posits that no-action letters are a desirable step, but that practical challenges remain–including sufficient funding for FinCEN. According to the Assessment, no-action letters will be the subject of future regulations promulgated by FinCEN. Although the details of a no-action letter process will be a debated topic, the Assessment gives reassurance that FinCEN takes the issue seriously and that no-action letters likely will occur in some form.
The Assessment defines a “no-action” letter as “a form of an exercise of enforcement discretion wherein an agency issues a letter indicating its intention not to take enforcement action against the submitting part for the specific conduct presented to the agency.” Further, “such letters [generally] address only prospective activity not yet undertaken by the submitting party.” Not surprisingly, industry has desired “no-action” letters from FinCEN for many years because they could help provide regulatory clarity, reduce risk, and enhance communication and transparency, in an efficient manner, between FinCEN and industry.
Industry finally may get its wish, although any actual “no action” letter process may be slow and cumbersome. The first paragraph of the Assessment nicely summarizes its findings and caveats:
This Report concludes that FinCEN should undertake a rulemaking in order to establish a no-action letter process to supplement the existing forms of regulatory guidance and relief that may currently be requested from FinCEN. FinCEN believes that a no-action letter process would likely be most effective and workable if it is limited to FinCEN’s exercise of its own enforcement authority, as opposed to also addressing other regulators’ exercise of their distinct enforcement authorities. FinCEN anticipates, however, that for such a process to be effective, FinCEN would likely need to incorporate into its process an opportunity for consultation among FinCEN and other relevant regulators, departments, and agencies, as appropriate.
A footnote placed in the above paragraph also makes a point that is a recurring theme in the Assessment–FinCEN needs a bigger budget and more staff for a no-action letter process to work.
The Assessment explains that FinCEN consulted with numerous regulators, including the Office of the Comptroller of the Currency, the SEC, the CFPB, the IRS, the Attorney General, the Commodity Futures Trading Commission (CFTC), and state bank and credit union supervisors. Of the parties that responded to FinCEN’s invitation to consult on the Assessment, only the SEC, CFPB, CFTC and Idaho Department of Finance currently issue no-action letters. Ultimately, most of the consulted agencies agreed that FinCEN should issue no-action letters because such a process would promote a productive dialogue with the public, spur innovation by financial institutions, and enhance the culture of compliance in regards to the application and enforcement of the Bank Secrecy Act (BSA).
The agencies opposed to FinCEN no-action letters–and one likely can infer which agencies those were–“expressed concerns about FinCEN’s ability to fully appreciate the facts and circumstances underlying a request for a no-action letter as compared to, for example, Federal functional regulators, due to their supervision and examination responsibilities[.]” Some agencies also raised concerns–perhaps not very realistic–that a no-action letter process could undermine enforcement and criminal prosecution if financial institutions obtain no-action letters through misrepresentations. And, some “expressed concerns that FinCEN will struggle to implement an effective program due to the lack of adequate funding for FinCEN by Congress”–a concern that FinCEN, as noted, echoes throughout the Assessment (FinCEN’s 2021 budget request is here).
Cross-Regulator No-Action Letters
The Assessment first considers the prospect of “cross-regulator no-action letters.” After observing that such a system would have the benefit of enabling applicants to obtain certainty on AML/CFT enforcement from a single agency, rather than from several different agencies, the Assessment concludes that cross-regulator no-action letters are not feasible for the government because
- Even though FinCEN is the administrator of the BSA, it still lacks the authority to administer or enforce all AML/CFT laws that are administered or enforced by other government agencies. FinCEN therefore would not have the ability to prevent another agency from bringing an enforcement action under that agency’s own authority regarding the topic of a FinCEN no-action letter. Indeed, and foreshadowing the practical limits of any future no-action letter process and the comfort that it may bring to the recipient of a letter, the Assessment notes that “[s]everal of the Consulting Parties were opposed to and raised concerns with any process that involved FinCEN issuing statements of no-action on their behalf without their own consideration of the request and express concurrence.” The Assessment frequently notes the fact that different agencies can have overlapping, parallel or distinct authorities when it comes to administering and enforcing the BSA, which can create logistical challenges (and, the reader infers, inter-agency turf squabbles).
- Cross-regulator no-action letters would raise significant logistical challenges, including the need to establish complex processes for coordination and final approval.
- Cross-regulator no-action letters would result in an especially slow process, particularly because regulators which already issue no-action letters “explained that they sometimes find an initial submission to be incomplete or otherwise deficient on its face, potentially requiring multiple rounds of communication with the submitting party in order to obtain additional information and arrive at a submission that can be evaluated.”
Nonetheless, the Assessment goes on to conclude that FinCEN should consult with other regulators, “as needed and appropriate,” when issuing no-action letters with respect to its own enforcement authority. The Assessment notes the competing values of efficiency–a laborious consultation process could be extremely slow and cumbersome–and coordination. As to the latter value, all of the agencies consulted by FinCEN wanted to be consulted or at least notified in some capacity regarding FinCEN no-action letters, which could have practical consequences for the enforcement efforts of other agencies. Some agencies expressed a fear that an applicant “that is engaging in criminal activity may seek to obtain a no-action letter (on misrepresented facts or otherwise) to use as a defense in a criminal investigation or to criminal charges.” Finally, consultation could help industry by reducing the degree of conflicting regulatory requirements.
Timeline for No-Action Letters
As required by the AML Act, the Assessment sets forth an anticipated timeline for responding to no-action letters; the timeline involves seven general steps. Under any scenario, the timeline won’t be short: “the timeline could be as short as 90 to 120 days for cases that do not present novel, complex or sensitive issues,” but other requests could take several months to over a year to process. The Assessment describes factors that might impact timing:
- Whether FinCEN and other agencies disagree on whether FinCEN should issue a no-action letter, the scope of any such letter, or both;
- Whether the applicant fails to provide sufficient facts upon which to make a determination, or the request fails to conform to the rules and regulations that will surround such requests; and
- Whether FinCEN receives more resources to process no-action letter requests. “Absent additional resources, FinCEN would not be able to process no-action letter requests within a reasonable timeframe without redirecting resources away from important enforcement, compliance or other FinCEN mission-related work.”
Current Processes and Potential Improvements
The Assessment explains that FinCEN already provides regulatory guidance or relief in two forms: (i) administrative rulings, which can be either public (and therefore binding on FinCEN) or non-public (and therefore non-precedential), and (ii) exceptive or exemptive relief. The Assessment identifies four potential improvements to these current processes that could be incorporated into the development of a no-action letter process:
- “[A]longside the implementation of a new no-action letter process, FinCEN could publicly and more clearly define the mechanisms available to parties for obtaining regulatory guidance and relief and explain the difference between the no-action letter process and existing processes[,]” including through new regulations and publication of comprehensive guidance.
- “[C]urrent processes for existing relief could include more meaningful and involved consultations with other relevant regulators that would also be incorporated prior to FinCEN’s final determination on a request for a no-action letter.”
- “[F]uture issuance of no-action letters and the other forms of regulatory relief could be expedited, but only with additional resources.”
- “[M]any Consulting Parties noted that a no-action letter process would aid in a dialogue with parties. For example, financial institutions looking to innovate may be reluctant to embrace new business models and engage with FinCEN on these issues if they lack sufficient certainty about how FinCEN would apply the law to novel or unique scenarios. Changes in current processes, to include the implementation of a new, well-resourced no-action letter option, could encourage parties to engage with FinCEN, and thus may improve this dialogue.”
Whether No-Action Letters Would Mitigate or Accentuate “Illicit Finance Risk”
Finally, and as required by the AML Act, the Assessment analyzes whether no-action letters would “help to mitigate or accentuate illicit finance risks in the United States[.]” FinCEN wisely concludes that because a no-action letter process generally spurs dialogue between a regulator and the party it regulations, and because it is faster than issuing administrative rulings and exceptive relief, such a process generally would mitigate illicit finance risks. FinCEN rejected fears from some other agencies that no-action letters (already issued by several other agencies) could accentuate illicit finance risk by creating a defense for violators of the BSA in a criminal or regulatory action, if applicants misrepresent facts to FinCEN or obtain letters based on accurate information but then use the letters as shields against regulatory scrutiny of additional conduct not contemplated initially by FinCEN. The Assessment dryly observes that “FinCEN does not typically see requests for regulatory guidance or relief in which the submitting party seeks permission to violate core requirements of the BSA, such as requests for permission not to file suspicious activity reports (SARs) for a customer or class of customers.” Moreover, any actual criminal investigation will uncover and focus on any misrepresentations by an applicant. FinCEN also notes that risks that the process could be abused can be reduced through procedural safeguards, such as making a no-action letter revocable; requiring the applicant to attest under penalties of perjury that the information in a submission is accurate and complete; clearly documenting the information relied upon for a no-action letter; and predicating any no-action letter upon the precise facts represented by the applicant.
CFPB Summer 2021 Supervisory Highlights Looks at Auto Servicing, Consumer Reporting, Debt Collection, Deposits, Fair Lending, Mortgage Origination and Servicing, Private Student Loans, Payday Lending, and Student Loan Servicing
The CFPB has released the Summer 2021 edition of its Supervisory Highlights. The report, which contains 48 pages of supervisory observations, discusses the Bureau’s examinations in the areas of auto servicing, consumer reporting, debt collection, deposits, fair lending, mortgage origination and servicing, private student loans, payday lending, and student loan servicing that were completed between Jan. 1, 2020, and Dec. 31, 2020 (which was the last full year of Kathleen Kraninger’s tenure as CFPB Director).
Key findings by CFPB examiners are described below.
Servicers were found to have engaged in unfair practices in violation of the CFPA UDAAP prohibition by:
- Adding and maintaining charges for collateral protection insurance (CPI) premiums as a result of deficient processes when consumers had adequate insurance in place, with some servicers causing additional injury by applying refunds of CPI charges to principal instead of returning the amounts directly to consumers.
- Collecting or attempting to collect CPI premiums after repossession, even though no actual insurance protection was provided for those periods.
- Posting payments to the wrong account or posting certain payments as principal-only payments instead of periodic installment payments, resulting in late fees and additional interest.
- Accepting loan payoff amounts that included overcharges for optional products (as a result of the method used to calculate refunds), after telling consumers that they owed the larger amount.
Servicers were found to have engaged in deceptive practices in violation of the CFPA UDAAP prohibition by representing on their websites that payments would be applied in a specified order (as between principal, interest and fees) and subsequently applying payments in a different order.
Consumer reporting companies (CRCs) were found to have violated the FCRA by:
- Not complying with the FCRA requirement to follow reasonable procedures to assure maximum accuracy of information in consumer report as a result of continuing to include information that was provided by unreliable furnishers (i.e. furnishers who had responded to disputes in ways that suggested they were no longer sources of reliable, verifiable information about consumers). In particular, the CFPB stated that the furnishers’ failure to respond to disputes, or deleting all disputed tradelines, or validating all disputes, should have alerted the CRCs that the furnishers’ information was unreliable.
- Not complying with the FCRA 3-business day requirement for placing a security freeze on a consumer’s credit report after receiving the consumer’s freeze request.
- Not complying with the FCRA 4-business day requirement to block the reporting of information that the consumer identifies as information resulting from an alleged identity theft.
Auto loan furnishers were found to have violated the FCRA requirement to promptly notify CRCs of furnished information determined to be inaccurate or incomplete by failing to send updated or corrected information to CRCs after making a determination that furnished information was no longer accurate.
Mortgage furnishers were found to have violated the Regulation V requirement to conduct reasonable investigations of direct disputes as a result of maintaining procedures that instructed employees to (1) verify that consumers’ signatures matched the signature on file and, (2) if they did not match, to send a letter to the borrower stating that the information provided in the dispute did not match the furnishers’ records and take no further steps to investigate the dispute. Interestingly, however, the discussion of how the furnishers resolved this issue included the statement that the furnishers adopted policies and procedures to reasonably identify disputes that were “frivolous or irrelevant” because they originated from a credit repair organization.
Debt collection. Debt collectors were found to have violated the FDCPA by:
- Communicating with consumers at their places of employment during work hours when the collector knew or should have known that calls during work hours were inconvenient to the consumers.
- Communicating with third parties other than those permitted by the FDCPA and, when communicating with third parties for the purpose of acquiring location information, disclosing the name of the debt collector to third parties who had not expressly requested the collector’s name.
- Continuing to attempt to collect a debt from the consumer after receiving a written request from the consumer to cease further communications.
- Harassing consumers by emphasizing multiple times to consumers who had stated they were unable to make or complete payment arrangements that the collector would place a note in the account system stating that the consumer was refusing to make a payment.
- Threatening to report to CRCs that consumers owed debts that the collectors knew or should have known were disputed, resulted from identity theft, and were not owed by the consumers and reporting such debts to CRCs without reporting that the debts were disputed.
- Falsely representing to consumers the impact on their credit files of paying off their debts, such as telling the consumer the debt would no longer impact their credit profile once paid.
- Entering inaccurate information regarding state interest rate caps in an automated system, resulting in overcharges to consumers.
- Sending wage garnishment orders to consumers’ employers by mistake, despite having received completed applications from the consumers to consolidate their debts which should have stopped the garnishment process based on standard procedures.
- Sending validation notices that did not include required information.
Financial institutions were found to have violated Regulation E by:
- Failing to comply with provisional credit requirements for disputed transactions.
- Failing to complete investigations of disputes and make a determination within the applicable time periods.
- Failing to conduct reasonable investigations of disputes by denying claims solely because the consumers had previously conducted business with the merchant.
- Failing to refund associated fees and credit interest when resolving disputes in the consumer’s favor.
- Failing to comply with overdraft opt-in requirements, including by failing to advise consumers of their right to revoke an opt-in to overdraft services as part of their opt-in confirmation and failing to retain evidence of having obtained affirmative consent to opt into overdraft services.
Financial institutions were found to have violated Regulation DD by disclosing to consumers, through automated systems available account balance amount that included potential discretionary overdraft credit and by failing to correctly disclose on periodic statements the amount of overdraft fees incurred by the consumer during the statement cycle.
- HMDA. CFPB examiners found widespread errors within 2018 HMDA loan application registers of several financial institutions. In several examinations that identified such errors, the root causes were deficiencies in the institutions’ compliance management systems.
- Redlining. CFPB examiners found that a lender violated the ECOA and Regulation B by engaging in acts or practices directed at prospective applicants that would have discouraged reasonable people in minority neighborhoods in Metropolitan Statistical Areas (MSAs) from applying for credit. The lender was prioritized for a redlining examination because an initial analysis of HMDA and U.S. census data showed that the lender received significantly fewer applications from majority-minority and high-minority neighborhoods relative to other peer lenders in the MSA. These differences relative to the lender’s peer lenders were confirmed by examiners in subsequent, in-depth analyses. Evidence of communications that would have discouraged reasonable people on a prohibited basis from applying to the lender for a mortgage loan included: (1) direct marketing materials that only featured models appearing to be non-Hispanic white, (2) open house marketing materials that only included headshots of mortgage professionals appearing to be non-Hispanic white, and (3) locating nearly all offices in majority non-Hispanic white areas.
Lenders were found to have violated Regulation Z by:
- Compensating loan originators differently based on product type, specifically lower compensation for bond program loans subject to state Housing Finance Agency requirements, and higher compensation for construction loans.
- For a simultaneous purchase of lender and owner title insurance policies, disclosing the lender’s title insurance premium at the discounted rate and the owner’s title insurance at the full premium on the Loan Estimate.
Lenders were found to have engaged in deceptive practices in violation of the CFPA UDAAP prohibition by using:
- A waiver provision in a rider to a security deed that provided that borrowers who signed the agreement waived all of their rights to notice or judicial hearing before the lender exercised its right to nonjudicially foreclose on the property. This practice was deemed deceptive because a reasonable consumer could understand the provision to waive the consumer’s right under Regulation X to sue over a loss mitigation notice violation in the nonjudicial foreclosure context.
- A security agreement for cooperative units that required borrowers to agree to a waiver, in the event of default, of any equity or right of redemption. This practice was deemed deceptive in light of the Regulation Z provision prohibiting the interpretation of dwelling-secured contracts to bar federal claims because the waiver language would likely mislead a consumer into believing that by signing the agreement they waived their right to bring any claim in court, including federal claims.
Servicers were found to have violated Regulation X by:
- Failing to apply foreclosure protections on the date that outstanding loss mitigation application information was received, which rendered the application “facially-complete.” Instead of applying the foreclosure hold on the date the information was received, the servicer only did so after an internal analysis of that information, which caused a delay of more than a day, during which a foreclosure filing occurred.
- Making the first notice or filing for foreclosure before fully evaluating borrowers’ appeals.
- Having a process in place for directing foreclosure counsel to stop all legal filings only after the servicer had sent borrowers the notice acknowledging receipt of a complete loss mitigation application. Such a process violates Regulation X because the notice of complete application can be sent up to five days after receipt of the application, whereas the foreclosure protections apply on the date that a complete loss mitigation application is received.
- Including in the estimated disbursements for an annual escrow analysis a full year of private mortgage insurance (PMI) disbursements despite knowing that PMI would be charged for only part of the year.
Servicers were found to have engaged in a deceptive practice in violation of the CFPA UDAAP prohibition by representing to borrowers, who had submitted a repeat loss mitigation application, that they would not initiate a foreclosure until a specified date. However, because repeat loss mitigation applications are excluded from coverage under the loss mitigation procedures and foreclosure protections of Regulation X, foreclosures were initiated prior to the date provided in the communications
Payday lending. Lenders were found to have engaged in deceptive practices in violation of the CFPA UDAAP prohibition by:
- Sending collection letters to delinquent borrowers stating an intent to sue if the consumer did not repay the loan when the lenders, in fact, had not decided prior to sending the letters that they would sue if borrowers did not pay, and in most cases did not sue borrowers who did not pay.
- Falsely representing on storefronts and in photos on proprietary websites that they would not check a consumer’s credit history when, in fact, the lenders used consumer reports in determining whether to extend credit.
- Presenting fee-based refinance options to struggling borrowers while withholding information about contractually available no-cost repayment plan options.
Private student loan origination. Entities were found to have engaged in deceptive practices in violation of the CFPA UDAAP prohibition as a result of the net impression created by marketing materials that advertised rates “as low as” X%, disclosed certain conditions to obtain that rate, and omitted that a borrower’s rate would depend on credit worthiness.
Student loan servicing. Servicers were found to have engaged in deceptive practices in violation of the CFPA UDAAP prohibition by providing Federal Family Education Loan Program (FFELP) borrowers inaccurate information about eligibility for the Public Service Loan Forgiveness (PSLF) program. Such practices included:
- Representing to FFELE borrowers that they could submit their employer certification forms (ECF) to receive a determination on whether their employers are eligible for PSLF when under PSLF program guidelines, FFELP borrowers who submit an ECF before consolidating into a Direct Loan will be rejected without any determination about employer eligibility.
- Advising FFELP borrowers that their loans could not become eligible for PSLF.
- Informing borrowers interested in the PSLF program that they were only eligible if their employer was a non-profit.
- For consumers whose accounts were automatically placed into a natural disaster forbearance, failing to unenroll consumers from forbearances upon their request and failing to re-enroll consumers in auto-debit programs when forbearances ended.
- Failing to waive or refund overcharges assessed following loan transfers that resulted in income-based repayment plans not being honored.
- Failing to follow borrowers’ explicit standing instructions on payment allocation.
On July 7, 2021, Fannie Mae and Freddie Mac announced new uniform notes, security instruments and riders. Lenders may begin using the new instruments immediately (Fannie Mae) or for loans originated on or after July 8, 2021, (Freddie Mac), and the new instruments must be used for loans with note dates on or after Jan. 1, 2023. If lenders use the new instruments for loans with note dates before Jan. 1, 2023, they may not be used in combination with the earlier versions of the instruments (e.g., if a new uniform note is used a new uniform security instrument must be used). The new uniform instruments have a footer date of July 2021.
On July 7, 2021, the Consumer Financial Protection Bureau (CFPB) launched a digital toolkit for media, intermediaries, and other stakeholders interested in providing information and resources to renters and mortgage borrowers who continue to struggle financially from the coronavirus pandemic. The toolkit has sample communications that can be used to inform consumers about their protections and relief options. The sample communications include:
- Housing and rental relief emails.
- Social media posts.
- Videos in both English and Spanish.
- Printed handouts in both English and Spanish.
For parties who use the sample communications, the CFPB requests they indicate that the content, originated with the CFPB.
The CFPB recently issued a report entitled Data Point: Asian American and Pacific Islanders in the Mortgage Market. The report briefly examines differences among subgroups of Asian American and Pacific Islanders (AAPI) based on the 2020 Home Mortgage Disclosure Act (HMDA) data. In issuing the report the CFPB stated that “[e]xisting studies often portray AAPI borrowers as similar in characteristics to non-Hispanic White borrowers and thus imply that the group fares well. However, such characterization disregards some AAPI subgroups whose characteristics may be similar to Black or Hispanic White borrowers and therefore may find difficulty in accessing lower-priced credit.” The CFPB also advises that the information in the report “is not intended to be an in-depth and comprehensive analysis, but offers an initial look at heterogeneity in mortgage characteristics that exists within the AAPI community.”
Prior to 2018, the HMDA data collection form for applicant demographic data provided for the designation of “Asian” and “Native Hawaiian or Other Pacific Islander.” Starting in 2018, the form was expanded to provide for the designation of (1) “Asian” as well as the subgroups “Asian Indian, Chinese, Filipino, Japanese, Korean, Vietnamese and Other Asian” and (2) “Native Hawaiian or Other Pacific Islander” as well as the subgroups “Native Hawaiian, Guamanian or Chamorro, Samoan and Other Pacific Islander.” An applicant may designate one or more subgroups. For both the “Other Asian” and “Other Pacific Islander” subgroup there is a free form field in which the applicant can fill in the specific subgroup. Overall, the report addresses (1) the variation in mortgage characteristics by race and ethnicity and across the AAPI subgroups, (2) the characteristics of borrowers by race and ethnicity and across AAPI subgroups, and (3) the distribution of mortgage lender types by race and ethnicity and across AAPI subgroups.
The report includes the following observations:
- “Using the detailed race and ethnicity information in the 2020 HMDA data, the [CFPB] finds that certain AAPI subgroups fared better than others in the mortgage market. For example, Chinese and Asian Indian borrowers paid lower interest rates, on average, than non-Hispanic White borrowers. On the other hand, even though they had higher average credit scores and incomes, and lower combined-loan-to-value (CLTV) ratios, their denial rates were higher than that for non-Hispanic White borrowers.”
- “Hawaiian or Pacific Islander (HoPI) borrowers had lower income and credit scores, higher CLTVs, debt-to-income ratios (DTI), and denial rates than the other AAPI subgroups. Furthermore, although Vietnamese, Native Hawaiian, and Other Pacific Islander borrowers had higher average credit scores and incomes, and lower median DTIs and CLTVs than Black and Hispanic White borrowers, their denial rates were similar to those for Black and Hispanic White borrowers.”
The CFPB notes caveats to the findings, including that there may be differences among AAPI applicants in the decision of whether or not to designate a subgroup, and that a more extensive statistical analysis of all applicant credit characteristics, which affect underwriting decisions, was beyond the scope of the report.
The report indicates that:
- Of the total 1.6 million closed- and open-end applications submitted by AAPIs, Asian and HoPI consumers constituted 96% and 4% of these applications, respectively.
- AAPI borrowers were much less likely to take out loans for home purchases than any other racial group, although there are variations among AAPI subgroups.
- AAPI borrowers were more likely to take out conventional loans than any other racial group, although there are variations between Asian and HoPI borrowers and among AAPI subgroups.
- The pattern for average AAPI home purchase loan characteristics, some of which are noted below, is largely driven by Asian rather than HoPI borrowers.
- AAPI borrowers had the highest average loan amount and their properties were less likely to be located in minority or low-to-moderate income (LMI) neighborhoods compared to those of Black and Hispanic White borrowers. However, the properties of HoPI borrowers were slightly more likely to be located in LMI neighborhoods, but less likely to be located in metro areas compared to those of Asian borrowers
- AAPI borrowers paid lower interest rates on average than any other racial group, even though a larger share of their loans were jumbo loans. However, HoPI borrowers took out mortgage loans with higher interest rates compared to Asian borrowers.
- On average, the denial rate of AAPI borrowers was higher than that of non-Hispanic White borrowers and lower than that of Black or Hispanic White borrowers, although the denial rates varied greatly across AAPI subgroups.
- AAPI borrowers were more likely to use depository institution mortgage lenders than Black and Hispanic White borrowers but were less likely to use such lenders than non-Hispanic White borrowers. However, HoPI borrowers were less likely to use depository institution mortgage lenders than Asian borrowers overall.
The report concludes with the following:
“Policy debates and academic research surrounding inequalities in home ownership rates and the resulting racial wealth divide have garnered attention recently. However, much of the discussion has focused on the Black-White divide, often overlooking issues within Hispanic or AAPI communities. A better understanding of the differences in AAPI mortgage characteristics can potentially shed light on why a wealth divide exists within these communities. This report only presents descriptive evidence on the differences among AAPI mortgage borrowers. We leave it to future research for an investigation of why such differences exist.”
Last Friday, President Biden issued an Executive Order on Promoting Competition in the American Economy. Much of the Order is directed at increasing competition in the labor market, transportation, agriculture, healthcare, and technology. It calls on the FTC, the DOJ, and other agencies to pursue vigorous enforcement of the antitrust laws. The Order also includes directives to the FTC and CFPB concerning data collection, data portability, and UDAAP enforcement.
First, as a way of addressing practices that inhibit competition, the Order encourages the FTC to consider rulemaking dealing with “unfair data collection and surveillance of practices that may damage consumer competition, consumer advocacy, and consumer privacy.” The Order is consistent with newly-confirmed FTC Chair Lina Khan’s swift actions to strengthen the FTC’s authority at her first FTC meeting (two weeks ago), during which she moved, and the Commission approved (by a narrow 3-2 vote), changes to streamline the FTC’s UDAP rulemaking process. The rulemaking changes include shifting oversight of the rulemaking process from an administrative law judge to the FTC Chair, eliminating the requirement to issue a staff report analyzing any rulemaking proceedings, and scaling back some of the previously required public comment periods. We expect President Biden’s choice to head the FTC to be aligned with the White House’s goals and to take steps to aggressively pursue its mandates for the FTC in the Executive Order.
Second, the Order encourages the CFPB “consistent with the pro-competition objectives stated in section 1021 of the Dodd-Frank Act” to consider:
- Rulemaking under Dodd-Frank Section 1033 “to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products,” and
- Enforcing the Dodd-Frank UDAAP prohibition “so as to ensure that actors engaged in unlawful activities do not distort the proper functioning of the competitive process or obtain an unfair advantage over competitors who follow the law.”
Section 1021 of Dodd-Frank directs the CFPB “to seek to implement, and where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.”
While it will not be surprising to see the CFPB reference the Executive Order in future press releases about enforcement actions, the Order is unlikely to materially impact the CFPB’s use of its enforcement authority. However, the Order’s inclusion of UDAAP serves to confirm our expectations that the CFPB will pursue an aggressive UDAAP enforcement agenda under the Biden Administration and Director Chopra once confirmed.
With regard to Section 1033, the Executive Order could cause the CFPB to prioritize its rulemaking activities. Section 1033 of Dodd-Frank addresses consumers’ rights to access information about their own financial accounts, and permits the CFPB to prescribe rules concerning how a provider of consumer financial products or services must make a consumer’s account information available to him or her, “including information related to any transaction, or series of transactions, to the account including costs, charges, and usage data.” In November 2020, the Bureau issued an Advance Notice of Proposed Rulemaking in connection with its Section 1033 rulemaking. In it Spring 2021 rulemaking agenda, the Bureau gave an estimated April 2022 date for its next pre-rule steps.
- Kim Phan
The Federal Reserve, FDIC, and OCC have released proposed interagency guidance for banking organizations on managing risks associated with third-party relationships, including relationships with financial technology-focused entities such as bank/fintech sponsorship arrangements. The proposal is the first time that the three agencies have proposed third-party risk management guidance on an interagency basis. Comments on the proposal are due by Sept. 17, 2021.
On Aug. 6, 2021, from Noon. to 1:00 p.m. EDT, Ballard Spahr will hold a webinar, “Risk Management in Third-Party Relationships: What Banks and Service Providers Need to Know.” Click here to register.
The proposed guidance is based on the OCC’s existing 2013 third-party risk management guidance and includes changes to reflect that the guidance’s applicability would be extended to banking organizations supervised by all three federal banking agencies. In March 2020, the OCC issued a revised set of FAQs to supplement its 2013 guidance that was intended to clarify the existing guidance and reflect evolving industry trends. The proposed guidance includes the revised FAQs as an exhibit and the agencies seek comment on the extent to which the concepts discussed in the FAQs should be incorporated into the final guidance and whether there are additional concepts that would be helpful to include.
The proposed guidance states:
A third-party relationship is any business arrangement between a banking organization and another entity, by contract or otherwise. A third-party relationship may exist despite a lack of contract or remuneration. Third-party relationships can include relationships with entities such as vendors, financial technology (fintech) companies, affiliates, and the banking organization’s holding company. While a determination of whether a banking organization’s relationship constitutes a business arrangement may vary depending on the facts and circumstances, third-party business arrangements generally exclude a bank’s customer relationships.
The proposed guidance sets forth principles for managing risk in each stage of a third-party relationship life cycle consisting of:
- Planning for a relationship
- Due diligence and third-party selection
- Contract negotiation
- Oversight and accountability
- Ongoing monitoring
The proposed guidance also discusses the process that examiners will typically follow when reviewing a banking organization’s third-party risk management.
The principles provided by the proposed guidance are generalized in nature and there is no discussion in the guidance of how such principles should be applied to specific types of third-party relationships. The OCC’s 2020 revised FAQs did address specific types of third-party relationships, such as relationships with data aggregators that collect customer-permissioned data from banks (including where aggregators engage in screen scraping activities), cloud computing providers, and relationships involving the use of alternative data. As noted above, the agencies ask for comment on the extent to which the concepts discussed in the FAQs should be incorporated into the final guidance and whether there are additional concepts that would be helpful to include. In addition, the series of questions on which the agencies request comment include:
- Whether there is a need for greater detail in any areas
- How the proposed description of third-party relationships could be clearer
- The extent to which the discussion of “business arrangement” in the proposed guidance provides sufficient clarity to permit banking organizations to identify those arrangements for which the guidance is appropriate
- What additional information the guidance could provide on managing the risks associated with third-party platforms that directly engage with end customers
- How the guidance could further assist banking organizations in appropriately managing the compliance risks of business arrangements in which a third party engages in activities for which there are regulatory compliance requirements
- What additional information the proposed guidance could provide for banking organizations to consider when managing risks related to different types of relationships with third parties (e.g. partnerships, joint ventures), including technology companies
- What revisions would better assist banking organizations in assessing’s third-party risk as technologies evolve
CFPB-supervised banks and CFPB supervised non-banks to which the banking agencies’ guidance would not apply should take note that in 2016, the CFPB began to examine service providers to institutions it supervises on a regular, systematic basis, particularly those supporting the mortgage industry. In 2016, the CFPB issued a revised bulletin titled “Compliance Bulletin and Policy Guidance 2016-02, Service Providers” setting forth its expectations for managing the risks of service provider relationships.
On July 1, Virginia Governor Northam signed Senate Bill 1410 which amended several Virginia anti-discrimination statutes to prohibit discrimination based on “military status.” For purposes of the various amendments, the term “military status” is defined as:
(i) an active military service member who performs full-time duty in the Armed Forces of the United States, or a reserve component thereof, including the United States National Guard and the Virginia National Guard, (ii) a veteran who was an active military service member discharged or released therefrom under conditions other than dishonorable, or (iii) a spouse or child of an active military service member or veteran, or an individual of any relationship to an active service member or veteran where the active service member or veteran provided more than one-half of the individual’s support for at least 180 days immediately preceding an alleged action that if proven would constitute unlawful discrimination under this chapter.
The amended statutes previously prohibited discrimination based on an individual’s “status as veteran.” The new law became effective immediately upon signing.
The amended laws include the Virginia Human Rights Act which prohibits discrimination in places of public accommodation and employment. The new law also amended the Virginia Fair Housing Law which prohibits discrimination in the sale or rental of dwellings by any person. It also prohibits discrimination by “any person or other entity, including any lending institution, whose business includes engaging in residential real estate-related transactions.” The term “residential real estate-related transaction” includes “the making or purchasing of loans or providing other financial assistance (i) for purchasing, constructing, improving, repairing, or maintaining a dwelling” or (ii) secured by residential real estate.”
The new law did not amend Section 6.2-501 of the Virginia Code which makes it unlawful for “any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, sexual orientation, gender identity, pregnancy, childbirth or related medical conditions, age, disability, or status as a veteran provided that the applicant has the capacity to contract.”
At her first FTC meeting earlier this month, FTC Chair Lina Khan moved, and the Commission approved (by a 3-2 vote), changes to the FTC’s rulemaking process. The changes could assist the efforts of Democratic FTC Commissioners to further White House policy goals and lead to new UDAP rules.
Pursuant to the 1975 Magnuson-Moss Warranty Act, instead of using the Administrative Procedure Act rulemaking process, the FTC must follow specific procedures for the promulgation of trade regulation rules under Section 18 of the FTC Act. Section 18 authorizes the FTC to prescribe “rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce.” Further procedural requirements were imposed on the FTC’s Section 18 rulemaking by the Federal Trade Commission Improvement Act of 1980 and Rules of Practice adopted by the FTC.
Pursuant to Section 19 of the FTC Act, violations of Section 18 rules can result in civil penalties and equitable remedies that the FTC can seek by filing a suit in federal district court. Section 19 authorizes district courts to grant “such relief as the court finds necessary to redress injury to consumers,” including through the “refund of money or property.” Section 19 limits the availability of consumer redress to cases in which a person has “engage[d] in any unfair or deceptive act or practice…with respect to which the Commission has issued a final cease and desist order which is applicable to such person.”
The FTC’s action earlier this month revises the Rules of Practice. According to the Commission’s statement regarding the revisions, “the imposition of requirements [in the Rules of Practice] beyond what Congress provided in the statute has led to the widespread belief among some commentators and policymakers that Section 18 rulemaking is too difficult to address many of the unfair and deceptive practices prevalent in the economy today.”
The revisions include the following changes:
- The rules previously provided that the Chief Administrative Law Judge serves as the Chief Presiding Officer and is empowered to pick the Presiding Officer who would oversee the rulemaking hearing process. Under the revised rules, the FTC Chair will either serve as or designate the Presiding Officer.
- Under the revised rules, the Presiding Officer will have less control over the hearing process. They allow the Commission, rather than the Presiding Officer, to set the hearing agenda, choose the issues to be discussed, and select who will be permitted to testify, conduct cross-examination, and offer rebuttal evidence.
- Pursuant to Section 18, interested parties have the right to participate in a hearing by cross-examining witnesses and to present rebuttal evidence if “the Commission determines that there are disputed issues of material fact it is necessary to resolve.” The rules previously provided for the Presiding Officer to finalize the disputed issues of material fact after an opportunity for public comments. The revised rules allow the Commission to designate disputed issues of material fact earlier in the rulemaking process with the issuance of the Notice of Proposed Rulemaking.
- Under the revised rules, a staff report analyzing the rulemaking record and making recommendations as to a final rule is no longer required.
The statement issued by the Commission’s Democratic majority and the dissenting statement issued by the two Republican Commissioners describe the revisions in radically different terms.
According to the Democratic majority :
Revitalizing the Commission’s ability to issue timely Trade Regulation Rules under Section 18 will provide much needed clarity about how our century-old statute applies to contemporary economic realities and will allow the FTC to define with specificity what acts or practices are unfair or deceptive under Section 5 of the FTC Act….While rulemaking is no substitute for a permanent fix to our Section 13(b) authority to obtain monetary relief, trade rules can help insure that businesses will no longer be able to take advantage of consumers and cement their market position by engaging in practices that do people real harm until we catch them and take them to court for the first time….With the adoption of these streamlined procedures we wish to signal a change in Commission practice and ambition: that we intend to fulfill our mission to protect against unfair and deceptive practices in commerce and provide consumers and business with due process, clarity, and transparency while crafting the rules to do so.
The majority’s statement is consistent with expectations that the FTC will rely more heavily on Section 19 for monetary redress after the recent U.S. Supreme Court ruling in AMG Capital Management finding that the FTC did not have the ability to obtain such relief under Section 13(b).
According to the dissenting Republican Commissioners:
- The revisions regarding the Presiding Officer “enable the Chair to hand pick the presiding officer, opening the door for a fact-finding process gerrymandered to fit the agenda of a majority of commissioners,” and give a majority of the Commission “a greater ability to control which facts make it into the record, laying the groundwork for skewed rulemakings designed not to benefit the consumer but instead to satisfy the Commission majority.”
- The revisions regarding the designation of disputed issues of material fact allow “a majority of the Commission [to] more easily ignore contradictory views by omitting disputed issues from the NPRM and the initial hearing notice. Replacing independent and objective analysis of controversial issues in the agency’s rulemaking proceedings with a ‘majority rules’ regime not only makes it less likely that the resulting regulations will benefit consumers, but also less likely that trade regulation rules will survive legal scrutiny.”
- Overall, the revisions “adopted by the majority…without public input, undermine the goals of participation and transparency that Congress sought to advance when it enacted and amended Section 18. The changes will facilitate more rules, but not better ones.”
- Kim Phan
Colorado to Require Mortgage Servicers to Make Annual Notification Filing Beginning 2022
The Colorado legislature recently passed the Colorado Nonbank Mortgage Servicers Act which will require mortgage servicers to file an annual notification with the Colorado Attorney General’s Office on or before Jan. 31 of each year, beginning in 2022.
Among those exempt are supervised financial organizations, small servicers that service fewer than 5,000 residential mortgage loans in a calendar year, servicers that utilize a subservicer to perform administrative functions unless the subservicer is acting at the direction of the servicer, and persons that service loans held for sale.
The Act will take effect on Jan. 1, 2022.