A bipartisan group of five House members introduced a bill (H.R. 4439) last month that is intended to address the so-called “true lender” issue, which creates risk with respect to some loans made by banks with substantial marketing and servicing assistance from nonbank third parties, and then sold shortly after origination. These loans have been challenged by regulators and others on the theory that the nonbank marketing and servicing agent is the “true lender,” and therefore the loan is subject to state licensing and usury laws.

This bill is a welcome accompaniment to the “Madden fix” bills that have been introduced in the House and Senate to eliminate the uncertainties created by the Second Circuit’s decision in Madden v, Midland Funding.  (The House bill was passed by the House Financial Services Committee last month.)  In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.

Both “Madden fix” bills would amend Section 85, as well as the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks, to provide that a loan that is made at a valid interest rate remains valid with respect to such rate when the loan is subsequently transferred to a third party and can be enforced by such third party even if the rate would not be permitted under state law.  (The same “Madden fix” provision is in the Appropriations Bill (H.R. 3354) passed by the House in September 2017.)

As we have previously observed, the enactment of legislation reaffirming the valid-when-made doctrine, like the adoption of the OCC’s proposal to create a fintech charter, would help some companies avoid Madden’s negative impact.  However, it would not help nonbank companies deal with the risk of a court or enforcement authority concluding that the nonbank company, rather than its bank partner, is the “true lender.”  Treating a nonbank as the “true lender” would subject the nonbank to usury, licensing, and other limits to which its bank partner would not otherwise be subject.

The “true lender” bill would amend the Bank Service Company Act to add language providing that the geographic location of a service provider for an insured depository institution “or the existence of an economic relationship between an insured depository institution and another person shall not affect the determination of the location of such institution under other applicable law.”  The bill would amend the Home Owners’ Loan Act to add similar language regarding service providers to and persons having economic relationships with federal savings associations.

It would also amend Section 85 of the National Bank Act to add language providing that a loan or other debt is made by a national bank and subject to the bank’s rate exportation authority where the national bank “is the party to which the debt is owed according to the terms of the [loan or other debt], regardless of any later assignment.  The existence of a service or economic relationship between a [national bank] and another person shall not affect the application of [the national bank’s rate exportation authority] to the rate of interest rate upon the [loan, note or other evidence of debt] or the identity of the [national bank] as the lender under the agreement.”  The bill would add similar language to the provisions in the Home Owners’ Loan Act and Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations and state-chartered banks.

While we might have preferred to see additional language in the bill’s findings that makes it even clearer how the bill is intended to apply (such as citations to cases that are examples of the analysis the bill seeks to correct or a direct statement that the lender’s identity should not be determined by who holds the predominant economic interest), the bill is certainly a very positive development as drafted.

On November 28, 2017, the Federal Reserve Board announced a Consent Order with Peoples Bank (Peoples) in Lawrence, Kansas.  The Order charges Peoples with violating Section 5 of the Federal Trade Commission Act (FTCA) by engaging in deceptive mortgage origination practices between January 2011 and March 2015.  According to the Order, Peoples “often” gave prospective borrowers the option of paying discount points (an amount calculated as a percentage of the loan amount) at the time of closing, in order to obtain a lower interest rate.  According to the Fed, this “regularly” led borrowers to pay thousands of dollars for discount points, but did not always result in a lower interest rate.  Peoples denies the charges, but has agreed to pay $2.8 million to a settlement fund for the purpose of making restitution to the affected borrowers.  Also, while not a part of the Order, Peoples has ceased taking new mortgage applications, and is in the process of winding down its mortgage lending operation.

Section 5 of the FTCA proscribes “unfair or deceptive acts or practices in or affecting commerce.”  Here, the Federal Reserve found that Peoples’ misrepresentations were deceptive because they were likely to mislead borrowers to reasonably conclude that they obtained a lower interest rate through the payment of discount points, when in fact, many did not receive a reduced interest rate, or received a rate that was not reduced commensurate with the price they paid for the discount points.  This was found to be material because it “relate[s] to the cost of the loan paid by the borrowers.

The Consent Order notes that Peoples’ loan disclosures “gave an accurate quantitative picture of the loans’ costs.”  But according to the Fed, Peoples (which had no written policy regarding discount points) misrepresented and/or omitted the nature of the discount points, which led many reasonable consumers to incorrectly assume they were receiving a rate based on the discount points they paid, when they actually received no benefit (or not the full benefit) from their payment.  This illustrates the need for mortgage lenders to ensure they are painting an accurate picture of their mortgage products at all stages of the origination process – including advertising, loan disclosures, and communications with prospective borrowers.

The FCC has issued a Report and Order and Further Notice of Proposed Rulemaking (Order) adopting new rules to allow voice service providers to proactively block calls from certain numbers that are suspected to be fraudulent. The November 16 Order seeks to prevent fraud or identity theft that often accompanies calls which “spoof” or manipulate Caller ID information. The new rules expressly authorize voice service providers to block robocalls that appear to be from telephone numbers that do not or cannot make outgoing calls, without running afoul of the FCC’s call completion rules.

The new rules apply to four types of calls: invalid numbers (such as those with fictional area codes); unassigned numbers; numbers assigned to a provider but not in use; and valid numbers that the subscriber has placed on a Do-Not-Originate (DNO) list. The DNO list prevents spoofing by blocking calls purporting to be from the legitimate numbers. Commissioner Rosenworcel, providing the lone point of dissent, noted that the new rules do not prohibit carriers from charging consumers for the call blocking services.

The FCC  “strongly encourage[s]” providers to cooperatively share information about numbers that subscribers have requested to be blocked; however the FCC declined to prescribe a sharing mechanism and has not mandated that providers proactively block calls. The FCC made clear that a provider that blocks calls that do not fall within one of the four specific types of calls will be liable for violating Section 201(b) of the Communications Act and associated regulations, which generally prohibit call blocking as an unjust and unreasonable practice. The FCC’s new rules do not extend to text messages and prohibit the blocking of emergency calls.

The Notice of Proposed Rulemaking requests input in two specific areas. First, the FCC seeks comment on the optimal methods to rectify erroneously blocked calls, such as a formal “challenge” process with dedicated timeframes for correction. The Order only encourages companies to adopt procedures to easily identify and fix blocking errors—it does not mandate compliance with a particular mechanism. Second, the FCC seeks comment on ways to measure the effectiveness of its efforts to regulate robocalling. In particular, the FCC is interested to know whether it should institute reporting requirements and, if so, whether that reporting should include a measure of false positives blocked under the new rules. The FCC also invites comment on the benefits and costs of such requirements. Public comments may be submitted through January 23, 2018.

Richard Moseley Sr., the operator of a group of interrelated payday lenders, was convicted by a federal jury on all criminal counts in an indictment filed by the Department of Justice, including violating the Racketeer Influenced and Corrupt Organizations Act (RICO) and the Truth in Lending Act (TILA).  The criminal case is reported to have resulted from a referral to the DOJ by the CFPB. The conviction is part of an aggressive attack by the DOJ, CFPB, and FTC on high-rate loan programs.

In 2014, the CFPB and FTC sued Mr. Mosley, together with various companies and other individuals.  The companies sued by the CFPB and FTC included entities that were directly involved in making payday loans to consumers and entities that provided loan servicing and processing for such loans.  The CFPB alleged that the defendants had engaged in deceptive and unfair acts or practices in violation of the Consumer Financial Protection Act (CFPA) as well as violations of TILA and the Electronic Fund Transfer Act (EFTA).  According to the CFPB’s complaint, the defendants’ unlawful actions included providing TILA disclosures that did not reflect the loans’ automatic renewal feature and conditioning the loans on the consumer’s repayment through preauthorized electronic funds transfers.

In its complaint, the FTC also alleged that the defendants’ conduct violated the TILA and EFTA.  However, instead of alleging that such conduct violated the CFPA, the FTC alleged that it constituted deceptive or unfair acts or practices in violation of Section 5 of the FTC Act.  A receiver was subsequently appointed for the companies.

In November 2016, the receiver filed a lawsuit against the law firm that assisted in drafting the loan documents used by the companies.  The lawsuit alleges that although the payday lending was initially done through entities incorporated in Nevis and subsequently done through entities incorporated in New Zealand, the law firm committed malpractice and breached its fiduciary obligations to the companies by failing to advise them that because of the U.S. locations of the servicing and processing entities, the lenders’ documents had to comply with the TILA and EFTA.  A motion to dismiss the lawsuit filed by the law firm was denied.

In its indictment of Mr. Moseley, the DOJ claimed that the loans made by the lenders controlled by Mr. Moseley violated the usury laws of various states that effectively prohibit payday lending and also violated the usury laws of other states that permit payday lending by licensed (but not unlicensed) lenders.  The indictment charged that Mr. Moseley was part of a criminal organization under RICO engaged in crimes that included the collection of unlawful debts.

In addition to aggravated identity theft, the indictment charged Mr. Moseley with wire fraud and conspiracy to commit wire fraud by making loans to consumers who had not authorized such loans and thereafter withdrawing payments from the consumers’ accounts without their authorization.  Mr. Moseley was also charged with committing a criminal violation of TILA by “willfully and knowingly” giving false and inaccurate information and failing to provide information required to be disclosed under TILA.  The DOJ’s TILA count is particularly noteworthy because criminal prosecutions for alleged TILA violations are very rare.

This is not the only recent prosecution of payday lenders and their principals. The DOJ has launched at least three other criminal payday lending prosecutions since June 2015, including one against the same individual operator of several payday lenders against whom the FTC obtained a $1.3 billion judgment.   It remains to be seen whether the DOJ will limit prosecutions to cases where it perceives fraud and not just a good-faith disclosure violation or disagreement on the legality of the lending model.  Certainly, the offenses charged by the DOJ were not limited to fraud.

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

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

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

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

The other approved bills relevant to mortgage lenders are:

  • H.R. 3221, “Securing Access to Affordable Mortgages Act.” The bill would amend the Truth in Lending Act (TILA) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to exempt a mortgage loan of $250,000 or less from the higher-priced mortgage loan and general property appraisal requirements if the loan appears on the creditor’s balance sheet for at least three years.  The bill would also exempt mortgage lenders and others involved in real estate transactions from incurring penalties for failing to report appraiser misconduct.  The bill was approved by a vote of 32-26.
  • H.R. 1153, “Mortgage Choice Act of 2017.” The bill would amend TILA by revising the definition of “points and fees” to exclude escrowed insurance and fees or premiums for title examination, title insurance, or similar purposes, whether or not the title-related charges are paid to an affiliate of the creditor.  The bill would direct the CFPB to issue implementing regulations within 90 days of the bill’s enactment. The bill was approved by a vote of 46-13.
  • H.R. 3978, “TRID Improvement Act of 2017.”  The bill would amend RESPA to require that the amount of title insurance premiums reflect discounts required by state law or title company rate filings. The amendment would override the TRID rule approach to the disclosure of the lender’s and the owner’s title insurance premiums if there is a discount offered on the lender’s policy when issued simultaneously with an owner’s policy.  In such cases, instead of requiring the disclosure of the actual owner’s policy premium and the actual discounted lender’s policy premium, the TRID rule currently requires the disclosure of the full, non-discounted amount of the premium for the lender’s policy, and an amount for the owner’s policy equal to the full amount of the owner’s policy premium, plus the amount for the discounted lender’s policy premium, less the full amount of the lender’s policy premium.  The bill was approved by a vote of 53-5.

By a vote of 54-43, Joseph Otting has been confirmed by the Senate as Comptroller of the Currency. Mr. Otting is a former president and CEO of California-based OneWest Bank, where he worked with Steven Mnuchin, who now serves as Secretary of the Treasury.

According to Politico, Acting Comptroller Keith Noreika has submitted his resignation, to be effective one business day after Mr. Otting takes office.  Politico also reported that because Mr. Noreika has been working at the OCC as a “special government employee,” he can return to the private sector without any mandated waiting period.

Mr. Otting has not yet taken a public position on the OCC’s special purpose national bank (SPNB) charter proposal.  However, we would expect Mr. Otting to pursue the same policy objectives as those pursued by Mr. Noreika.  While serving as Acting Comptroller, Mr. Noreika stated several times that the OCC is continuing to consider the proposal and intends to defend its authority to grant an SPNB charter to a nondepository company in the lawsuits filed by the NY Department of Financial Services and the Conference of State Bank Supervisors.  He also has been dismissive of the argument made by opponents of the SPNB charter that it may lead to an inappropriate mixing of banking and commerce and questioned the continuing need for the current barriers between banking and commerce in recent comments.

In a new Policies and Procedures Manual (PPM) issuance (PPM 6300-2), the OCC establishes its framework for evaluating certain types of licensing applications when the applicant bank has an overall Community Reinvestment Act (CRA) rating of “Needs to Improve” or “Substantial Noncompliance.”  Both ratings are referred to in the PPM as a “less than satisfactory CRA rating.”  The PPM applies to all national banks, federal savings associations, federal branches of foreign banks subject to the CRA, and state-chartered institutions subject to the CRA seeking to convert to a federal charter.

By way of background, the PPM states that OCC regulations implementing the CRA provide that the OCC must consider a bank’s CRA rating when reviewing the bank’s application for any of the following (Covered Applications): branch establishment, branch relocation, main or home office relocation, a Bank Merger Act filing involving two insured depository institutions, conversion from a state to a federal charter, and conversion between federal charters.  The PPM also states that it provides clarity and guidance on the OCC’s longstanding practice of subjecting Covered Applications from banks with significant CRA issues to enhanced scrutiny.

The OCC’s framework set forth in the PPM applies to applicant banks filing Covered Applications in two situations: where the bank has an overall satisfactory or better CRA rating but has one or more geographic rating areas rated less than satisfactory and where the bank has an overall less than satisfactory CRA rating.

For a bank with an overall satisfactory or better CRA rating but a less than satisfactory rating in one or more geographic rating areas, the general presumption is that the CRA consideration is consistent with approval of the Covered ApplicationHowever, the specific facts of a particular transaction may, on balance, result in a determination that the CRA consideration is not consistent with approval.

If a bank has an overall less than satisfactory CRA rating, the OCC will give enhanced scrutiny to the bank’s Covered Application.  As part of such scrutiny, the applicant bank will be required to submit with its application a description, and appropriate supporting information, of how it would meet CRA objectives in connection with the proposed transaction.  The bank must also describe in detail how approval of the Covered Application would allow the bank to improve its CRA performance.  The OCC would generally find that the CRA consideration is consistent with approval of a Covered Application if the bank demonstrates that approval, subject to conditions or otherwise, would help the bank to achieve its CRA objectives and would further the CRA’s public policy goals by encouraging the bank to help meet the credit needs of the communities it serves.

The PPM discusses four factors that the OCC will consider in assessing whether or not the CRA consideration is consistent with approval of a Covered Application by a bank with an overall less than satisfactory CRA rating.  The factors are:

  • whether the overall less than satisfactory CRA rating was issued recently, the severity of the less than satisfactory CRA performance rating, and the progress made by the applicant bank to address the issues underlying the less than satisfactory rating.
  • whether approval of the Covered Application would result in a material increase in the applicant bank’s size or the scope of its activities, and how such increase would affect the bank’s ability to help meet the credit needs of the communities to be served.
  • whether the proposed transaction would benefit the communities to be served, as well as the nature and extent of such benefits.
  • whether approving the Covered Application with conditions would (a) be sufficient to ensure that the pro forma organization will be able to achieve its CRA objectives, (b) clearly further the specific goals of CRA, or (c) significantly further fair access to banking services.

The PPM also states that, in certain circumstances, evidence of discriminatory or other illegal credit practices related to CRA lending activities can cause a bank to receive an overall less than satisfactory CRA rating, and that in such instances the same general framework and considerations apply.  Other topics discussed in the PPM are the timing of when the framework and considerations in the PPM will go into effect or no longer apply to a Covered Application, how the OCC handles a Covered Application when a bank has appealed a less than satisfactory CRA rating (either overall or in a particular rating area), and the content of OCC communications when the OCC notifies a bank that it has received such a rating.

 

The CFPB, Fed, and OCC have published notices in the Federal Register announcing that they are increasing three exemption thresholds that are subject to annual inflation adjustments.  Effective January 1, 2018 through December 31, 2018, these exemption thresholds are increased as follows:

The Federal Reserve Board announced that it had issued a Consent Order against Mid America Bank and Trust Company (Bank) for alleged deceptive marketing practices in violation of section 5 of the FTC Act related to balance transfer credit cards issued by the Bank to consumers through independent service organizations (ISO).  The Consent Order requires the Bank to pay approximately $5 million in restitution to nearly 21,000 consumers.

The Bank had acquired portfolios of balance transfer credit cards from other financial institutions.  It had also entered into agreements with ISOs to issue new credit cards in the Bank’s name that consumers could use to pay charged-off or past-due debts purchased by the ISOs.  The new cards were marketed and issued under the same programs used for the cards in two of the portfolios acquired by the Bank.  According to the Consent Order, the Bank engaged in the following deceptive practices in connection with the new cards by failing to do the following in solicitation or welcome letters:

  • Explain that the assessment of finance charges and fees would limit the amount of available new credit even if the consumer made payments on the account.  As a result, consumers could have reasonably believed that by continuing to make timely payments, they would receive credit equal to the amount paid when, in fact, they did not due to the assessment of finance charges and fees.
  • Accurately disclose that participating in the card program would restart the statute of limitations for out-of-statute debt.

The Fed also claimed that in connection with one of the portfolios, the Bank had engaged in deceptive practices because it had stopped reporting cardholder payments to consumer reporting agencies but did not disclose to consumers that it would not report.  It appears the Fed found this to be deceptive because when the cards were issued, the issuing bank had told consumers that reporting to CRAs would be a way for the consumer to build positive payment records.

The restitution payments required by the Consent Order are different for each card program.  For example, for the program involving the statute of limitations disclosure issue, the Bank must refund all payments made by consumers with closed accounts and cancel or waive certain charged off amounts and forgive certain amounts owed by consumers with active accounts.  For the other programs, the Bank must refund or credit certain fees and interest.

It is noteworthy that the Fed did not allege that the Bank failed to provide any required disclosures in connection with the new cards it issued, such as those required by the Truth in Lending Act.  The Consent Order thus illustrates the need for banks to not only review marketing disclosures for compliance with applicable requirements but to also consider whether additional disclosure is needed to address UDAP risk.

For example, in addition to making the restitution payments, the Consent Order requires the Bank to take certain remedial actions, such as disclosing clearly and prominently in any balance transfer credit card solicitation, and on the same page, any representation about credit limits or available credit and the effect of any fees and finance charges on the amount of available credit.  Other federal and state regulators have raised similar UDAP concerns in connection with the marketing of other high fee credit card programs.

 

 

 

The Conference of State Bank Supervisors has released a list of 33 companies that will serve as members of its Fintech Industry Advisory Panel.

According to the CSBS, the Advisory Panel’s purpose is “to support state regulators’ increased efforts to engage with financial services companies involved in fintech.”  More specifically, over the next twelve months, Advisory Panel members will participate in at least two in-person meetings with members of the CSBS Emerging Payments and Innovation Task Force and other state banking commissioners “to identify actionable steps for improving state licensing, regulation, and non-depository supervision and for supporting innovation in financial services.”  The Task Force consists of regulators from ten states, including the Superintendent of the New York Department of Financial Services.

The CSBS and the NY DFS have filed separate lawsuits challenging the OCC’s authority to grant special purpose national bank charters to nondepository fintech companies.  The OCC has filed motions to dismiss both lawsuits.