On December 12, the Board of Governors of the Federal Reserve System (Federal Reserve) released guidance regarding how banking entities may seek an extension to conform their investments in “illiquid funds” to the requirements of Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Federal Reserve expects that the illiquid funds of banking entities will generally qualify for extensions, though extensions may not be granted in certain cases – for example, where the banking entity has not demonstrated meaningful progress to conform or divest its illiquid funds, has a deficient compliance program under the Volcker Rule, or where the Federal Reserve has concerns about evasion. The Dodd-Frank Act permits the Federal Reserve, upon an application by a banking entity, to provide up to an additional five years to conform investments in certain legacy illiquid funds where the banking entity had a contractual commitment to invest in the fund as of May 1, 2010. The five-year extension for certain legacy illiquid funds is the last conformance period extension that the Federal Reserve is authorized to provide banking entities under the statute. Firms seeking an extension should submit information including details about the funds for which an extension is requested, a certification that each fund meets the definition of illiquid fund, a description of the specific efforts made to divest or conform the illiquid funds, and the length of the requested extension and the plan to divest or conform each illiquid fund within the requested extension period.
On December 12, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) issued a final rule relating to the frequency with which certain banks and savings associations are subject to examination. Under the previous set of rules, firms with less than $500 million in total assets were eligible for an extended 18-month examination cycle, versus the typical 12-month cycle. Under the new interagency final rules, the threshold for eligibility for the longer cycle has now been raised to $1 billion in total assets. Intended to reduce regulatory compliance costs for smaller institutions, the new final rules increase the number of institutions that may qualify for an 18-month examination cycle by more than 600 to approximately 4,800 banks and savings associations. U.S. branches and agencies of foreign banks with less than $1 billion in total assets are also eligible for the longer cycle under the final rules, increasing the number of U.S. branches and agencies of foreign banks that may qualify for an 18-month examination cycle by 30 branches and agencies, to a total of 89. As reported in the February 24 edition of the Roundup, interim final rules have been in effect since February 29, 2016, while the agencies solicited comments. The final rules are identical to the interim final rules.
On December 9, the Federal Reserve issued a proposed rule to apply the same supervisory rating system to savings and loan holding companies (SLHCs) as it currently applies to bank holding companies. The proposal furthers the Federal Reserve’s goal of ensuring that holding companies controlling depository institutions are subject to consistent standards and supervisory programs. Since 2011, the Federal Reserve has applied its existing rating system for bank holding companies – the RFI rating system – to SLHCs on an indicative basis as a means to provide feedback to SLHCs regarding supervisory expectations of the Federal Reserve while both the Federal Reserve and SLHCs became familiar with the regulatory framework established by the Dodd-Frank Act. The Federal Reserve is now proposing to formally apply the RFI rating system to most SLHCs on a fully implemented basis. The Federal Reserve will not apply the RFI rating system to SLHCs that derive 50% or more of their total consolidated assets or total revenues from activities that are not financial in nature under Section 4(k) of the Bank Holding Company Act. Similarly, the Federal Reserve will not apply the RFI rating system to SLHCs that are insurance companies or hold 25% or more of their total consolidated assets in subsidiaries that are insurance companies. The Federal Reserve will continue to assign an indicative-only rating under the RFI rating system to such SLHCs. Noncomplex SLHCs under $1 billion in consolidated assets will be assigned an abbreviated version of the RFI rating system consistent with the Federal Reserve’s practice for similar bank holding companies. The Federal Reserve is accepting comments to the proposed rule, which must be received by February 13, 2017.
On December 7, Governor Andrew M. Cuomo made two important announcements relating to foreclosure proceedings and foreclosed property in the state of New York. First, the New York Department of Financial Services (DFS) has published a Consumer Bill of Rights to protect home owners facing foreclosure. Second, DFS has finalized a new regulation protecting neighborhoods from so called “zombie properties” by requiring banks and mortgage servicers to report and maintain vacant and abandoned properties. Both actions follow legislation signed in June designed to expedite foreclosure proceedings, improve the efficiency and integrity of the mandatory settlement conferences, and compel banks and mortgage service providers to secure and maintain vacant and abandoned properties before and during foreclosure proceedings. Under the new law, bank and mortgage service providers must complete an inspection of a property subject to delinquency within 90 days and must secure and maintain the property where the bank or service provider has a reasonable basis to believe that the property is vacant and abandoned. Banks and mortgage service providers are required to report all such vacant and abandoned properties to DFS and submit quarterly reports detailing their efforts to secure and maintain the properties and the status of any foreclosure proceedings. Violations are subject to a civil penalty of $500 per day per property. Current estimates, based on voluntary reporting, are that over 6,000 properties in New York are unoccupied and ill-maintained. Under the new law, reporting by banks and mortgage servicers is now mandatory, and the number of homes reported as abandoned is expected to increase.
Enforcement & Litigation
On December 7, the Consumer Financial Protection Bureau (CFPB) took action against three reverse mortgage companies for deceptive advertising, in violation of the Mortgage Acts and Practices Advertising Rule (Regulation N), and the Dodd-Frank Act. In its consent order against American Advisors Group (AAG), the CFPB claimed that AAG misrepresented that a borrower could stay in his home for the rest of his life, make no monthly payments, and eliminate his debts, when in fact, a borrower can default on a reverse mortgage and lose the home, the loan terms require payment of property taxes, insurance and maintenance, and a borrower cannot eliminate debt by incurring another debt. In its consent order against Reverse Mortgage Solutions (RMS), the CFPB claimed that RMS misrepresented that a borrower will “always retain ownership” and “can’t be forced to leave,” which is not true if the borrower defaults. RMS also deceptively advertised that heirs can inherit the home, without disclosing any conditions of the inheritance, such as the requirement to repay the reverse mortgage or pay 95% of the assessed value of the home. In its consent order against Aegean Financial (AF), the CFPB claimed that AF misrepresented that borrowers could not lose their homes, and advertised that borrowers would not incur costs associated with the reverse mortgage, when in fact, borrowers paid flood insurance premiums, credit report fees, and closing costs. The CFPB further alleged that AF falsely affiliated itself with the government. The CFPB ordered AAG, RMS and AF to implement systems to ensure compliance with laws, and assessed civil penalties in the amount of $400,000, $325,000 and $65,000, respectively.
On December 1, the United States Attorney’s Office for the Southern District of New York, the New York Field Division of the Federal Bureau of Investigation, and the Department of Housing and Urban Development (HUD) announced the unsealing of indictments against five individuals for allegedly participating in a debt-elimination scheme that defrauded banks and homeowners. For additional information, view the Enforcement Watch blog post.
On November 23, the Second Circuit issued its opinion in Strubel v. Comenity Bank, a putative Truth in Lending Act (TILA) class action with both standing and substantive TILA implications. In Strubel, the plaintiff challenged the disclosures Comenity provided in connection with a retail store credit card. The opinion summarizes the plaintiff’s central arguments as being: 1) that Comenity failed to disclose to consumers that they had a limited time to stop payment if they selected an automatic payment plan; 2) that Comenity failed to disclose that it was required to acknowledge a claimed billing error within 30 days and report if any correction had been made; 3) that Comenity inadequately disclosed that certain rights pertaining to purchases for which full payment had not been made did not apply to cash advances or checks; and 4) that Comenity failed to disclose that consumers who were dissatisfied with purchases were required to inform it in writing. For additional information, view the LenderLaw Watch blog post.
On November 23, Advance America, Inc., a payday lender, and Community Financial Services Association of America, Ltd., a trade organization which represents the interests of payday lenders (Plaintiffs), filed a Motion for Preliminary Injunction (Motion) against the FDIC, OCC and the Federal Reserve (Regulators) to try to stop the Regulators from pressuring national banks into cutting off payday lenders’ access to the financial services banks offer. For additional information, view the LenderLaw Watch blog post.
Businesses in financial distress are not an unusual sight these days, and as a result, it is essential for attorneys of all levels and in all practice areas to become familiar with the fundamental tenets of bankruptcy law. Whether you are just starting out in your career, thinking about broadening your practice area to include this field, or want to be able to spot the issues when advising your clients, this program will provide you with an essential foundation. Hear from a premier faculty of experts who will arm you with the practice tips and basic concepts every bankruptcy attorney needs. Learn how to guide your clients through this complicated process, and find out what questions to ask your clients. Learn when it is time for a distressed company to consider bankruptcy and discover when reorganization is an option. This course is perfect for attorneys who want to learn or re-learn how to counsel their clients on bankruptcy issues in the most effective manner. Goodwin partner Michael Goldstein is speaking at the event. For additional information, please visit the event website.
The 2017 Consumer Financial Services Committee Meeting of the ABA Business Law Section will consist of nearly 250 practice-area professionals. Goodwin is a sponsor. For more information, please visit the event website.