On March 15, the Federal Housing Administration (FHA) announced changes to its loan-level certification form. The changes resulted from concerns voiced by the Mortgage Bankers Association and other industry groups that the original language created uncertainty over liability and a lack of clarity that could prevent lenders from originating FHA-insured loans without undue risk. These concerns have been heightened by recent enforcement activity against FHA lenders under the False Claims Act, which has been based in part on the content of the loan-level certification. According to the FHA’s press release announcing the revisions, the changes are intended to clarify that “the lender is certifying to what they know to be true to the best of their knowledge” and that the “certification is not intended to hold responsible for mistakes or fraud committed by a third party that the lender did not or could not have had reason to know of.” The revised form amends the mortgagee certification provision in several respects but also adds language addressing the mortgagee’s due diligence responsibility in processing the mortgage and reviewing file documents. The agency explained that the new form has also been revised to be consistent with the policies of the SF Handbook, and removes references to handbooks no longer in use by Single Family Housing. The FHA also announced changes in the application and annual recertification processes, similarly designed to address concerns about uncertainty regarding the effect of the certification on program participants.
Agencies Release Guidance to Issuing Banks on Applying Customer Identification Program Requirements to Holders of Prepaid Cards
On March 21, federal financial institution regulatory agencies issued interagency guidance clarifying the applicability of the Customer Identification Program (CIP) rule to prepaid cards issued by banks. The guidance applies to banks, savings associations, credit unions, and U.S. branches and agencies of foreign banks. The CIP rule requires a bank to obtain information that will be sufficient to form a reasonable belief regarding the identity of each customer that is opening a new account. The guidance clarifies that a bank should apply its CIP to both the holders of certain prepaid cards issued by the bank as well as holders of prepaid cards purchased under arrangements with third-party program managers that sell, distribute, promote, or market the prepaid cards on the bank’s behalf. In accordance with the CIP rule, the guidance further describes that to reasonably verify the cardholder’s identity, the bank should, at a minimum, obtain the name, date of birth, address, and identification number of the cardholder. The guidance will be specifically applicable to prepaid cards that give a cardholder the ability to reload funds or access credit or overdraft features.
On March 15, the Office of Inspector General of the Federal Deposit Insurance Corporation (FDIC) released an Executive Summary of the Report, which alleges that the FDIC engaged in abusive behavior to stop three banks from offering loans based on consumers’ anticipated tax refund checks. The alleged abusive behavior, which was first identified by the Office of Inspector General in its review of the FDIC’s role in Operation Choke Point, included falsifying examination results, threatening bank personnel, leaking information to the banks’ competitors, and hindering a bank’s planned entity acquisitions. In a letter response to the Executive Summary, FDIC staff members asserted that the regulatory pressure was legitimate based on the risks involved with the loans. The FDIC considers refund anticipation loans to be risky because they generally target low-income borrowers, have high interest rates and fees, and are offered by tax preparers at storefronts, rather than by banks. The Office of Inspector General requested that the FDIC report on steps it will take to address the allegations within 60 days.
In remarks at the 2016 Mutual Funds and Investment Management Conference, David Grim, the Director of the Division of Investment Management at the Securities and Exchange Commission (SEC), commented on the division’s rule-making initiatives, noting recent proposals designed to promote effective liquidity-risk management throughout the mutual fund industry, modernize reporting and disclosure by registered investment companies, and update and enhance the regulation of funds’ use of derivatives. Mr. Grim noted that a number of commenters were supportive of the liquidity-risk management and swing pricing proposal, but acknowledged concerns and issues raised by some commenters who queried whether the proposal’s goals could be better achieved through alternative approaches, particularly with respect to the proposal’s liquidity classification framework and the three-day minimum liquidity requirement. He next discussed the staff’s proposal to modernize and enhance the reporting framework for investment companies and investment advisers, noting that, while commenters acknowledged the potential benefits of the proposed approach, others questioned whether, in collecting portfolio information from funds, the SEC could become a target for cyber criminals looking to exploit the cache of information. With respect to the staff’s derivatives proposal, he noted that the staff is interested in receiving data regarding the use of derivatives and how the proposal could affect funds and investors.
Mr. Grim encouraged industry participants to weigh in on the rule proposals and urged commenters to provide data or analysis that could provide a “unique empirical perspective.”
On March 8, the SEC announced the establishment of the Office of Risk and Strategy within the Office of Compliance Inspections and Examinations (OCIE). The new office, which will be headed by Peter B. Driscoll as the first Chief Risk and Strategy Officer, will consolidate and streamline OCIE’s risk assessment, surveillance, and quantitative analysis teams and provide operational risk management and organizational strategy for OCIE.
House Financial Services Committee Chair Jeb Hensarling heavily criticized The Dodd-Frank Act and discussed the committee’s regulatory relief agenda in a speech at the American Bankers Association Government Relations Summit. Among other proposals, the committee intends to pass legislation subjecting every financial regulation to a “rigorous cost-benefit test” and “provide vast regulatory relief for financial institutions in exchange for meeting high, but simple, capital requirements.”
The SEC’s Division of Corporation Finance recently released a second series of no-action letters that further clarifies the circumstances in which a company may exclude shareholder proposals involving proxy access bylaws provisions from the company’s proxy statement. Taken together with an earlier series of no-action letters released in February 2016 and Staff Legal Bulletin No. 14H, published in October 2015, companies considering the adoption of a proxy access bylaws provision now have a clearer understanding of when the Staff of the Division of Corporation Finance is likely to conclude that a company may appropriately exclude a proxy access shareholder proposal in favor of a proxy access provision adopted or proposed by a company. Please see the client alert prepared by Goodwin’s Capital Markets practice for more information.
Enforcement & Litigation
On March 21, the Supreme Court of the United States issued an order inviting the Solicitor General “to file a brief in this case expressing the views of the United States” in the Midland Funding, et al. v. Madden case. This case relates to the extent to which an assignee of a loan from a national bank may enforce the interest rate provisions in the loan documents and was previously covered in the June 10, 2015, Roundup. The order likely defers any decision by the Supreme Court whether to hear the case until its next term beginning in October.
On March 9, in Edwards v. Macy’s Inc., the United States District Court for the Southern District of New York dismissed a consumer’s lawsuit against a retailer, Macy’s, Inc. (Macy’s), and a national bank, Department Stores National Bank, a subsidiary of Citibank, N.A. (DSNB), on the ground that the federal National Bank Act and the OCC’s regulations promulgated thereunder (NBA) preempted state law claims of deceptive and unfair business practices related to various payment protection programs connected to a Macy’s-branded credit card issued by DSNB. Significantly, the court determined that NBA preemption protects Macy’s, as well as DSNB. The opinion distinguished the Second Circuit’s decision in Madden v. Midland Funding, LLC, which held that NBA preemption does not protect entities that are neither banks nor acting on behalf of one from state usury claims. In Edwards, however, the court observed that Macy’s was compensated for providing marketing, credit processing, collections, and other customer services, and accordingly was acting on behalf of a bank in carrying out the bank’s business.
On March 18, the CFPB obtained a final judgment against Morgan Drexen, Inc., a debt relief company, for collecting illegal upfront fees and deceiving customers. The final order resolves the lawsuit filed by the CFPB against Morgan Drexen in 2013 in the United States District Court for the Central District of California alleging that the company violated the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). The March 2016 final order follows an April 2015 order by the district court entering a default judgment against Morgan Drexen for falsifying documents, a June 2015 order issuing a permanent injunction against the company for violating the TSR and the CFPA, and an October 2015 stipulated final judgment against Morgan Drexen’s president, Walter Ledda. The March 2016 judgment orders Morgan Drexen to pay more than $132 million in restitution and $40 million in civil money penalties. Because Morgan Drexen filed for bankruptcy shortly after the June 2015 order, any payment of these amounts will be determined through the bankruptcy process.
On March 16, Massachusetts Attorney General Maura Healey announced that two national auto lenders have agreed to pay $7.4 million to address allegations that subprime loans they purchased included usurious interest rates. The AG’s office alleged that the purchased loans violated state usury laws by charging an effective interest rate of 21 percent. Excessive GAP coverage fees were identified as the culprit. GAP coverage is a form of insurance that is intended to cover the potential “gap” between the amount of an auto insurance payment and the amount remaining on an auto loan after the automobile has been “totaled” in an accident. In addition to the $7.4 million payment (as well as $250,000 to cover the cost of implementing the settlement), the terms of the settlement require additional auditing to identify if other loan products purchased by the lenders also violated state usury laws. As a result of the settlement, approximately 2,000 affected consumers will receive approximately $3,000 each.
Goodwin Procter News
Fintech Sandbox Upcoming Events and Two Year Anniversary Celebration
Goodwin Procter is among the proud sponsors of Fintech Sandbox, a Boston-based nonprofit that helps Fintech startups around the world build great products and applications. It was started by a group of Fintech entrepreneurs and investors and is backed by some of the world’s leading financial institutions, data providers and venture capitalists. The Fintech Sandbox will mark its two year anniversary by hosting a Demo Day in Boston on March 24 to showcase innovative solutions developed by participating residents, and on March 25, the Fintech Sandbox will host a VC panel discussion for Fintech venture capitalists and startups to share insights on how to successfully raise funds.
Financial Institutions partners and Roundup contributors Bill Stern and Peter LaVigne were named as top authors by JD Supra’s inaugural Readers’ Choice Awards, which recognizes authors who achieved the highest visibility for their written analysis and commentary during 2015. From among 34,000 authors who contribute to JD Supra, only 200 top authors were recognized. Bill Stern is among the Top 10 authors for the Banking/Financial Services Industry category, and Peter LaVigne is among the Top 10 authors recognized on the topic of Dodd-Frank. Additionally, both Bill and Peter were recognized for having two of the most popular articles in 2015, which were published through the Roundup.