Weekly RoundUp
February 10, 2016

Financial Services Weekly News

In this issue. It was an active week for FINRA. The agency proposed a new rule that would govern its interactions with the Municipal Securities Rulemaking Board (MSRB) and it issued guidance to broker-dealers that participate in public and private offerings that are subject to a contingency. In other news, the CFPB took steps to introduce underserved consumers to banking by expanding checking account access to unbanked households, Fannie and Freddie implemented a new dispute resolution process for unresolved loan repurchase disputes, President Obama signed an executive order establishing the new Federal Privacy Council and two banks reached settlements – one to resolve claims involving residential mortgage-backed securities, the other to resolve claims of abusive mortgage practices.

Regulatory Developments

CFPB Announces Steps to Improve Checking Account Access

On Feb. 3, the CFPB announced that it was taking three steps to expand checking account access to the approximately 10 million “unbanked” households that have no checking or savings accounts. The CFPB’s first step was to encourage banks and credit unions to offer checking account options designed to help consumers manage their spending and avoid overdrafts. In a letter to the nation’s top 25 retail banking companies, the CFPB urged banks and credit unions to provide consumers with a viable choice of a lower-risk account that promise no authorized overdrafts. In addition to offering such accounts CFPB urged these institutions to make such accounts part of their standard account offerings and to increase the marketing of these accounts. CFPB’s second step was to remind banks and credit unions of their responsibility to accurately report information about consumer use of checking accounts. In a Compliance Bulletin, the CFPB reminded these institutions of their obligations under the Fair Credit Reporting Act and Regulation V “to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of information relating to consumers that they furnish to consumer reporting agencies.” As a result of its supervisory experience, the CFPB believes that a number of large banks lack the systems and procedures to provide accurate information for millions of accounts. Lastly, CFPB’s third step was to release a number of consumer advisories providing resources to inform consumers of the existence of lower-risk accounts, assist consumers in selecting, managing, and re-opening checking accounts, and provide consumers with sample letters to contest the accuracy of their credit information with credit reporting agencies and financial institution providers.

Fannie and Freddie Announce Dispute Resolution Process for Loan Repurchases

On Feb. 2, government-sponsored entities (GSEs) Fannie Mae and Freddie Mac implemented an independent dispute resolution (IDR) process for resolving repurchase disputes. Although the GSEs have an appeals and escalation process in place designed to resolve repurchase disputes, some disputes remain unresolved after going through the current process. The new IDR process is specifically designed to address unresolved alleged loan-level breaches of selling representations or warranties.The process will allow lenders or a GSE to elect to submit unresolved disputes to a neutral and independent arbitrator. All active lenders may take advantage of the IDR option unless they have not met the terms of their contract, have failed to timely comply with or challenge a demand, or are in default of a prior IDR award or have any outstanding amount past due to the IDR administrator. The arbitrator’s decision will be final and binding on all parties. In addition, the non-prevailing party must pay 10% of the unpaid principal balance of the related mortgage loan at the time the loan was acquired as a “Cost and Fee Award.”

President Obama Signs Executive Order Establishing Federal Privacy Council

On Feb. 9, President Obama signed an executive order establishing the Federal Privacy Council (the Council), which will be the principal interagency forum to improve how privacy is addressed at agencies across the Federal Government. The Council will help Chief Privacy Officers across the Federal Government better coordinate and collaborate, educate the Federal workforce, and exchange best practices. The President also directed the OMB Director, Shaun Donovan, to issue a memorandum clarifying the responsibilities of Chief Privacy Officers in the Government. Finally, the President directed the head of each agency to designate a Chief Privacy Officer consistent with the Director's guidance "with the experience and skills necessary to manage an agency-wide privacy program."

Client Alert: European Commission and United States Agree to New Framework for Transatlantic Data Flows

The European Commission and the United States reached an agreement on a new framework for transatlantic data flows. The new EU-US Privacy Shield will replace the Safe Harbor framework that was invalidated by the European Court of Justice in October. While the agreement has yet to be drafted, the framework is a positive step toward clarifying the legal requirements for data transfers between the United States and the European Union. For more information, please see the client alert recently issued by Goodwin Procter’s Privacy & Cybersecurity practice.

FINRA Issues Notice on Escrow Account and Other Compliance Requirements in Contingency Offerings

On Feb. 9, FINRA announced that it had issued Regulatory Notice 16-08, providing guidance regarding the requirements of Exchange Act Rules 10b-9 and 15c2-4 for broker-dealers in public and private offerings that are subject to a contingency and reminding broker-dealers of their responsibility to have procedures reasonably designed to achieve compliance with those rules. FINRA noted that broker-dealers that participate in a best efforts public offering or private securities offering that has a condition or qualification, such as achievement of a minimum offering amount, that must be satisfied prior to the issuer taking possession of the offering proceeds must safeguard investors’ funds they receive until the contingency is satisfied. If the contingency is not met, broker-dealers must ensure that investors’ funds are promptly refunded. The Notice provides an overview and explanation of best efforts contingency offerings, discusses a broker-dealer’s responsibilities in those offerings, and describes the requirements for handling investor funds until the contingency is met.

FINRA Proposes Rule on Coordination with MSRB

On Feb. 5, FINRA announced that it has filed a proposed new FINRA Rule 0151 regarding coordination between FINRA and the MSRB as required by the Securities Exchange Act of 1934. According to the rule filing, new Rule 0151 would state that FINRA will request guidance from the MSRB in interpretation of the MSRB rules and will provide information to the MSRB about the enforcement actions and examinations pertaining to municipal securities brokers that FINRA performs on behalf of the MSRB. According to the filing, FINRA believes that proposed Rule 0151 reflects FINRA’s current close coordination with the MSRB. FINRA also proposes to amend Rule 0150 to reflect the intent of Congress in Section 15A(f) that “[n]othing in subsection (b)(6) or (b)(11) of [Section 15A] shall be construed to permit a registered securities association [such as FINRA] to make rules concerning any transaction by a registered broker or dealer in a municipal security.” Comments are due 21 days after publication in the Federal Register.

Enforcement & Litigation

FDIC Settles RMBS Claims Against Morgan Stanley for $63 Million

On Feb. 2, the Federal Deposit Insurance Corporation (FDIC), as receiver for three failed regional banks, announced a $62.95 million settlement of residential mortgage-backed securities (RMBS) claims against Morgan Stanley & Company LLC. The claims asserted federal and state securities law violations from alleged misrepresentations in the offering documents of 14 RMBS. The FDIC said it brings suits as receiver in order to maximize recoveries for failed financial institutions, and that as of Dec. 31, 2015, the FDIC had filed 19 RMBS suits on behalf of eight failed institutions.

HSBC Reaches $601 Million Settlement with Four Federal Agencies and 49 States to Resolve Claims of Abusive Mortgage Practices

On Feb. 5, the Department of Justice (DOJ) and the Federal Reserve Board (FRB) announced settlements with HSBC Bank USA NA and affiliates (HSBC) totaling $601 million to resolve alleged mortgage origination, servicing, and foreclosure abuses. Under HSBC’s settlement with the FRB, HSBC must pay a $131 million maximum penalty by providing borrower assistance or funding nonprofit housing counseling organizations, with any remaining amount after two years going to the U.S. Treasury Department. Under HSBC’s settlement with the DOJ, CFPB, HUD, 49 states, and the District of Columbia; HSBC must pay $470 million to consumers and the federal and state parties, and comply with mortgage servicing standards under oversight from Joseph Smith, who is the monitor for the National Mortgage Settlement (NMS). The servicing standards imposed require HSBC to evaluate homeowners for loss mitigation options before resorting to foreclosure; prohibit HSBC from foreclosing while a homeowner is being considered for a loan modification; and are designed to prevent robo-signing, improper documentation and lost paperwork, and a lack of proper vendor management. The DOJ said that this settlement parallels previous settlements with other large servicers, and is part of the DOJ’s “ongoing effort to address root causes of the financial crisis.”