The FDIC, Federal Reserve Board and Comptroller of the Currency are proposing a rule to implement a rural property appraisal exemption under the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) and also increase the appraisal exemption based on transaction value from $250,000 to $400,000.

As we reported previously, the Act amends the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) to exclude a loan made by a bank or credit union from the FIRREA requirement to obtain an appraisal if certain conditions are met. The conditions are that the property is located in a rural area; the transaction value is less than $400,000; the institution retains the loan in portfolio, subject to exceptions, and; not later than three days after the Closing Disclosure is given to the consumer, the mortgage originator or its agent has contacted not fewer than three state-licensed or state-certified appraisers, as applicable, and documented that no such appraiser, as applicable, was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments, as documented by the mortgage originator or its agent.

The federal banking agencies propose to implement the exemption under the Act by simply adding to the list of exempted transactions in their respective appraisal regulations a transaction that “is exempted from the appraisal requirement pursuant to the rural residential exemption under 12 U.S.C. 3356.”  In short, the agencies will implement the exemption by simply referencing the statutory provision.

Significantly, the agencies also propose to increase the exemption based on the value of a transaction from $250,000 to $400,000.  The agencies advise that the decision to propose an increase in the transaction value exemption is based on consideration of available information on real estate transactions secured by single 1-to-4 family residential property, supervisory experience, comments received from the public in connection with the Act, and rulemaking to increase the appraisal threshold for commercial real estate appraisals.  If this proposed exemption is adopted, it will significantly reduce the importance of the rural property exemption added by the Act.

With both proposed exemptions, banks still would need to obtain an appropriate evaluation of the real property collateral that is consistent with safe and sound banking practices.

The comment period will run 60 days from the publication of the proposal in the Federal Register.

With the November 30, 2018 expiration date for the National Flood Insurance Program (Program) looming, industry trade groups sent a letter to Congressional leaders urging Congress to extend the Program.

As we reported previously, the Program was set to expire on July 31, 2018 and Congress voted on that date to extend the Program until November 30, 2018.  Basically Congress kicked the can down the road until after the midterm elections.

As noted by the trade groups in their letter “Congress has yet to pass a long-term extension of the NFIP, as debate continues regarding options for reforming the program. This has already resulted in a series of seven stop-gap extensions and two brief lapses in 2017 and 2018. The NFIP is currently the main source of flood insurance in the United States, and Americans deserve certainty and stability in the flood insurance marketplace to be able to protect their homes and loved ones.”

A long-term, sensible reform of the Program is long overdue.  The continued kicking of the can down the road by Congress through temporary extensions of the Program is not good policy for communities at risk or taxpayers.

The CFPB has filed an amicus brief in the U.S. Supreme Court in support of the respondent/law firm defendant in Obduskey v. McCarthy & Holthus LLP, et al., a Tenth Circuit decision that held that a law firm hired to pursue a non-judicial foreclosure under Colorado law was not a debt collector as defined under the Fair Debt Collection Practices Act.  The Supreme Court granted certiorari in June 2018 to review the Tenth Circuit’s decision and resolve a circuit split on whether the FDCPA applies to non-judicial foreclosure proceedings.  Because the Supreme Court’s decision in Obduskey will determine whether the FDCPA’s protections apply in countless non-judicial foreclosure actions, it could have a significant financial impact on the mortgage industry.

The amicus brief represents the second CFPB amicus brief filed under Acting Director Mulvaney’s leadership (the first was filed in the Seventh Circuit) and the first CFPB amicus brief filed in the Supreme Court under his leadership.  Most significantly, the amicus brief appears to be the first amicus brief filed by the CFPB in which it has supported the industry position.

In its amicus brief, the CFPB points to FDCPA Section 1692a(6) which defines the term “debt collector” to include, for purposes of Section 1692f(6), someone whose business is principally the “enforcement of security interests.”  Section 1692f(6) provides that it is an unfair or unconscionable collection practice to take or threaten to take nonjudicial action to effect dispossession of property under specified circumstances.  The CFPB argues that it follows from this ‘limited-purpose definition of debt collector” that, except for purposes of Section 1692f(6), enforcing a security interest, is not, by itself debt collection and to read the provision differently would render the “limited-purpose definition…superfluous.”

Based on these provisions, the CFPB contends that because enforcement of a security interest by itself is generally not debt collection under the FDCPA, a person cannot violate the FDCPA by taking actions that are legally required to enforce a security interest.  According to the CFPB, “[t]hat is dispositive here because the initiation of a Colorado nonjudicial-foreclosure proceeding undisputedly was a required step in enforcing a security interest.”  (The CFPB observes in a footnote that, although not implicated in Obduskey, actions clearly incidental to the enforcement of a security interest, even if not strictly required by state law, also would not constitute debt collection.)  The CFPB asserts that deeming the initiation of a non-judicial foreclosure proceeding to be debt collection “could bring the FDCPA into conflict with state law and effectively preclude compliance with state foreclosure procedures.  No sound basis exists to assume Congress intended that result.”

 

 

Thirteen Republican Senators have sent a letter to FDIC Chairman Jelena McWilliams urging the FDIC to take action to ensure that lawful businesses are no longer at risk of adverse financial consequences as a result of “Operation Choke Point, and its associated culture and Choke Point-like regulatory actions.”

“Operation Choke Point” was a federal enforcement initiative involving various agencies, including the DOJ, OCC, FDIC, and Fed.  Initiated in 2012, Operation Choke Point targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  In June 2014, the national trade association for the payday lending industry and several payday lenders initiated a lawsuit in D.C. federal district court against the FDIC, Fed, and OCC in which they alleged that certain actions taken by the regulators as part of Operation Choke Point violated the Administrative Procedure Act and their due process rights.  In September 2018, pursuant to a joint stipulation of dismissal, the Fed was dismissed from the lawsuit.  Cross-motions for summary judgment are currently pending before the court.

In their letter, the Senators ask the FDIC if it is the agency’s official position “that lawful businesses should not be targeted by the FDIC simply for operating in an industry that a particular administration might disfavor” and “[i]f so, what [the FDIC is] doing to make sure that bank examiners and other FDIC officials are aware of this policy and have communicated it to regulated institutions?”  They also ask whether there were any communications explaining supervisory expectations of “elevated risk” or “high risk” merchants with regulated institutions that would likely qualify as a rule under the Congressional Review Act that were not properly submitted to Congress and what the FDIC is doing to ensure that its staff does not communicate policy in a matter that is inconsistent with the position of the FDIC’s Board of Directors.

The letter does not reference the FDIC’s January 2015 Financial Institution Letter (FIL) entitled “Statement on Providing Banking Services” that attempted to rectify the damage created by Operation Choke Point.  In the Statement, the FDIC “encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk.”  The Statement followed the FDIC’s July 2014 FIL in which the FDIC withdrew the list of “risky” merchant categories (such as payday lenders and money transfer networks) that was included in prior guidance on account relationships with third-party payment processors (TPPPs).  Consistent with the July 2014 FIL and an October 2013 FIL on TPPP relationships, the 2015 FIL advised banks that they were neither prohibited nor discouraged from providing services to customers operating lawfully, provided they could properly manage customer relationships and effectively mitigate risks.  However, unlike the prior FILs, the new FIL expressly acknowledged that “customers within broader customer categories present varying degrees of risk” and should be assessed for risk on a customer-by-customer basis.

 

 

The CFPB recently issued revised versions of the small entity compliance guides for the Loan Originator Rule and the Home Ownership and Equity Protection Act (HOEPA) Rule.

While some of the most well-known provisions of the Loan Originator Rule are the provisions addressing loan originator compensation, the rule also defines the concept of a loan originator and addresses qualification and other requirements related to loan originators. Among various changes, the guide for the Loan Originator Rule is revised to reflect (1) the broadening of an exemption from the concept of a loan originator with regard to retailers of manufactured and modular homes and their employees made by the Economic Growth, Regulatory Relief, and Consumer Protection Act (Act), which was adopted earlier this year (2) the process for contacting the CFPB with informal inquiries about the rule, and (3) that the TILA/RESPA Integrated Disclosure (TRID) rule is now in effect (the prior version of the guide was issued in March 2015 and the TRID rule became effective in October 2015).

Among various changes, the guide for the HOEPA Rule is revised to reflect (1) the broadening of the exemption from the concept of a loan originator made by the Act (which is noted above), as this can affect the requirement to include loan originator compensation in points and fees for purposes of the points and fees threshold under the HOEPA rule, and (2) the process for contacting the CFPB with informal inquiries about the rule.

Note that for purposes of the points and fees cap to determine qualified mortgage loan status under the ability to repay rule, the definition of “points and fees” set forth in the HOEPA rule is used. As a result, corresponding changes likely will be made to the provisions of the small entity compliance guide for the ability to repay rule to reflect that the Act’s broadening of the exemption from the concept of a loan originator with regard to retailers of manufactured and modular homes and their employees may affect the calculation of points and fees for qualified mortgage purposes. The current version of such guide was issued in March 2016, and the version of the guide on the CFPB’s website includes a notice that the guide has not been updated to reflect the Act.

The CFPB has issued its Spring 2018 Semi-Annual Report to Congress covering the period October 1, 2017 through March 31, 2018.

At 41 pages, the new report is even shorter than the Bureau’s last semi-annual report (which was 55 pages) and continues what appears to be a goal under Acting Director Mulvaney’s leadership of issuing semi-annual reports that are substantially shorter than those issued under the leadership of former Director Cordray.  Like the prior semi-annual report under Mr. Mulvaney’s leadership, and also in contrast to the reports issued under former Director Cordray’s leadership, the new report does not contain any aggregate numbers for how much consumers obtained in consumer relief and how much was assessed in civil money penalties in supervisory and enforcement actions during the period covered by the report.

Pursuant to Section 1017(a)(1) of the Dodd-Frank Act, subject to the Act’s funding cap, the Fed is required to transfer to the CFPB on a quarterly basis “the amount determined by the [CFPB] Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year.)”  The new report references the January 2018 letter sent by Mr. Mulvaney to former Fed Chair Yellen requesting no funds for the second quarter of Fiscal Year 2018.

Mr. Mulvaney has, however, sent letters to Fed Chair Powell requesting funds transfers for the third and fourth quarters of FY 2018 and for the first quarter of FY 2019.  The amounts requested are, respectively, $98.5 million, $65.7 million, and $172.9 million.  (In contrast, former Director Cordray’s final transfer request, which was for the first quarter of FY 2018, sought a transfer of $217.1 million.)  Two of Mr. Mulvaney’s letters included the following statement:

By design, this funding mechanism [created by Section 1017(a)(1)] denies the American people their rightful control over how the Bureau spends their money, which undermines the Bureau’s legitimacy.  The Bureau should be funded through Congressional appropriations.  However, I am bound to execute the law as written. 

The new report indicates that the Bureau had 1,671 employees as of March 31, 2018, representing a slight increase in the number of employees (1,627) as of March 31, 2017.  The new report does not discuss any ongoing or past developments of significance beyond those we have covered in previous blog posts.

 

 

 

 

The FDIC has published a request for information (RFI) on small-dollar lending, including “steps the FDIC could take to encourage FDIC-supervised institutions to offer responsible, prudently underwritten small-dollar credit products that are economically viable and address the credit needs of bank customers.”  (The FDIC supervises state-chartered banks and savings institutions that are not Federal Reserve members.)  Comments must be received by January 22, 2019.

In May 2018, the OCC issued a bulletin intended to encourage its supervised institutions to offer small-dollar loans.  The FDIC’s issuance of the RFI signals that the FDIC intends to follow suit.

The RFI requests input on 21 questions dealing with the following topics:

  • Consumer demand
  • Challenges
  • Product features
  • Innovation
  • Alternatives
  • Other considerations

The questions dealing with “Challenges” include one that asks whether there are “any legal, regulatory, or supervisory factors that prevent, restrict, discourage, or disincentivize banks from offering small-dollar credit products.”  A glaring regulatory impediment to small-dollar lending by FDIC-supervised institutions is the FDIC’ s November 2013 guidance on deposit advance products, which effectively precludes FDIC-supervised institutions from offering deposit advance products.  (In October 2017, just hours after the CFPB released its final rule on payday, vehicle title, and certain high-cost installment loans, the OCC rescinded substantially identical guidance on deposit advance products, applicable to national banks and federal savings associations.)

While the OCC’s encouragement of small-dollar lending was in one sense a welcome development, the OCC bulletin raised several concerns.  As discussed more fully in our blog post about the bulletin, those concerns were the bulletin’s failure to confirm that the National Bank Act authorizes national banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state, as well as the bulletin’s unfavorable view of bank-nonbank partnerships.

Unlike the FDIC, the OCC did not issue an RFI in advance of issuing its bulletin.  The FDIC’s RFI thus serves as an opportunity for commenters to provide input that could result in the FDIC’s issuance of guidance that addresses the shortcomings in the OCC bulletin.  For example, the RFI asks: “What are the potential benefits and risks related to banks partnering with third parties to offer small-dollar credit?”  In addition, it invites comment on the structure of small-dollar credit products offered by FDIC-supervised institutions.  Thus, commenters can ask the FDIC to consider structures other than the structure suggested by the OCC bulletin–even-payment amortizing loans with terms of at least two months.

Additionally, and perhaps most significantly, this RFI could serve as a vehicle for the FDIC to confirm that, in a properly structured loan program between a bank and a nonbank marketing and servicing agent, the Federal Deposit Insurance Act authorizes state-chartered banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state, despite “true lender” and Madden arguments to the contrary.

In this week’s episode, we discuss recent enforcement activity under the Military Lending Act and the Servicemembers Civil Relief Act, as well as takeaways about compliance.  We also review the CFPB’s controversial decision to no longer conduct exams for MLA compliance, look at the legal basis for the decision, and analyze the arguments made by critics.

To listen and subscribe to the podcast, click here.

 

A number of housing and financial industry trade groups, including the Mortgage Bankers Association and Real Estate Services Providers Council, Inc. (RESPRO®), recently sent a letter to Senators Mitch McConnell (R-KY) and Charles E. Schumer (D-NY) supporting the confirmation of Kathleen Kraninger as CFPB Director.

The trade groups state that Ms. Kraninger “has the ability to lead and manage a large government agency, like the Bureau, which is tasked to ensure consumers’ financial interests are protected,” and “also fulfill the equally important role of ensuring businesses have the necessary compliance support to further those interests.”

Addressing concerns regarding the CFPB, the trade groups state “Our members believe the Bureau must improve its examination, enforcement, rulemaking and guidance processes to assist with regulatory compliance and bring certainty in the marketplace. As evidenced during the Senate Banking Committee confirmation hearing, Ms. Kraninger’s testimony conveyed a commitment to such actions along with a thoughtful review of the law for corresponding administrative actions.”

As we reported previously, the Senate Banking Committee voted to approve Ms. Kraninger’s nomination as CFPB Director, but the full Senate has not acted on the nomination. If the Senate does not act on Ms. Kraninger’s nomination during the lame-duck session, the nomination will be returned to President Trump. Once the new Congress convenes next year, the President could re-nominate Ms. Kraninger or nominate another individual for CFPB Director. As we reported previously, under the Federal Vacancies Reform Act Mick Mulvaney can continue to serve as Acting CFPB Director for a 210-day period if Ms. Kraninger’s nomination is returned or rejected, and once another nomination is made he could serve as Acting Director during the Senate’s consideration of the second nomination.