Weekly RoundUp August 19, 2020

Financial Services Weekly Roundup: The CFPB Digs Into “Seasoned” Qualified Mortgages

Editor's Note

In the News. The Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rulemaking to create a new category of “seasoned” qualified mortgages; the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a risk alert regarding its observations pertaining to COVID-19-related issues, risks and practices, including market volatility and higher risks of misconduct, relevant to SEC-registered investment advisers and broker-dealers; the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) released an interim final rule requiring administrators of defined contribution retirement plans, such as 401(k) plans, to include two lifetime income illustrations on periodic pension benefits statements; federal banking regulators issued a joint statement updating their existing enforcement guidance regarding how they evaluate enforcement actions that are required by statute when financial institutions fail to meet their Bank Secrecy Act/anti-money laundering obligations; and Fannie Mae and Freddie Mac announced new, and heavily criticized, adverse market refinance fees of 50 basis points on all cash-out and no cash-out refinance mortgages, except certain types of construction financing. These and other developments are discussed in more detail below. 

We also invite you to visit Goodwin’s Coronavirus Knowledge Center and Consumer Financial Services Industry COVID-19 Hub, which are updated regularly, to learn how cross-industry teams at Goodwin are helping clients to fully understand and assess the ramifications of COVID-19,  navigate the potential effects of the outbreak on their businesses and evaluate whether and how to safely reopen. 

Editor's Note
Editor's Note
Editor's Note

Regulatory Developments 

CFPB Proposes New Category of Qualified Mortgages

On August 18, the CFPB issued a notice of proposed rulemaking (NPRM) to create a new category of seasoned qualified mortgages (Seasoned QMs). A Seasoned QM would be defined by the following characteristics: (1) fixed-rate covered transaction; (2) secured by a first-lien; (3) loan term of no more than 30 years; (4) fully amortizing payments; (5) no balloon payment; (6) total point and fees cannot exceed specified limits; (7) consideration and verification by the creditor at origination of the borrower’s debt-to-income ratio or residual income, with no DTI limit or requirement to use Regulation Z’s Appendix Q to calculate and verify debt and income; and (8) held in the originating creditor’s portfolio during the 36-month seasoning period, during which time the loan can have no more than two 30-day delinquencies and no delinquencies of 60 days or more. However, temporary payment accommodations made for a disaster or pandemic-related national emergency would not disqualify the loan from Seasoned QM status. 

This NPRM follows two prior NPRMs issued by the CFPB in June, which propose to amend the General QM definition in Regulation Z to replace the DTI limit with a price-based approach and to extend the Government-Sponsored Enterprise Patch until the effective date of the final rule amending the General QM definition. This Seasoned QM rule would also take effect on that same date. The CFPB is seeking comments on these proposals, especially in regard to possible standards to help the CFPB identify verification safe harbors for inclusion in the final rules, due 30 days after publication of the NPRM in the Federal Register

SEC’s OCIE Issues Risk Alert Regarding Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers

On August 12, the SEC’s OCIE issued a risk alert regarding its observations pertaining to COVID-19-related issues, risks and practices, including market volatility and higher risks of misconduct, relevant to SEC-registered investment advisers and broker-dealers (collectively, Firms). OCIE’s observations and recommendations fall broadly into the following six categories: (1) protection of investors’ assets; (2) supervision of personnel; (3) practices relating to fees, expenses, and financial transactions; (4) investment fraud; (5) business continuity; and (6) the protection of investor and other sensitive information. OCIE noted that it is actively engaged in ongoing outreach and other efforts with SEC registrants to assess the impacts of COVID-19 and to discuss, among many other things, operational resiliency challenges. 

DOL Floats Rule for 401(k) Lifetime-Income Illustrations

Administrators of defined contribution retirement plans, such as 401(k) plans, are required under ERISA to provide participants with periodic pension benefits statement. On August 18, EBSA released an interim final rule (IFR) that requires such administrators to include two lifetime income illustrations on such statements – one as a single life annuity (SLA) and another as a qualified joint and survivor annuity (QJSA) – at least annually. The IFR contains assumptions that plan administrators must use to calculate the monthly payment illustrations (including on assumed commencement date, age, spousal and survivor benefits, interest rate and mortality). The plan administrators must provide various explanations about the estimated lifetime income payments to participants, and the IFR provides model language to meet these requirements.  

The IFR provides that no plan fiduciary, plan sponsor or other person will be liable under ERISA for providing lifetime income illustrations if the actual monthly payments in retirement fall short, provided the calculations were made using assumptions set forth in the IFR and the statements used the model language (or substantially similar language). Comments on the IFR are due no later than 60 days after its publication in the Federal Register, and the IFR will be effective one year after the publication. The EBSA intends to issue a final rule in advance of that IFR effective date. 

Federal Banking Agencies Issue Joint Statement on Enforcement of Bank Secrecy Act/Anti-Money Laundering Requirements

On August 13, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and National Credit Union Administration  issued a joint statement updating their existing enforcement guidance regarding how they evaluate enforcement actions that are required by statute when financial institutions fail to meet their Bank Secrecy Act/anti-money laundering (BSA/AML) obligations. The statement clarifies that isolated or technical violations or deficiencies are generally not considered the kinds of problems that would result in an enforcement action. The statement also addresses how the agencies evaluate violations of individual components (known as pillars) of the BSA/AML compliance program. It also describes how the agencies incorporate the customer due diligence regulations and recordkeeping requirements issued by the U.S. Department of the Treasury as part of the internal controls pillar of the financial institution’s BSA/AML compliance program. The statement updates and supersedes the Interagency Statement on Enforcement of BSA/AML Requirements issued on July 19, 2007, to promote a consistent approach to the application of Section 8(s) of the Federal Deposit Insurance Act and Section 206(q) of the Federal Credit Union Act. On August 18, the Financial Crimes Enforcement Network issued a “Statement on Enforcement of the Bank Secrecy Act” that sets forth its approach to enforcement in circumstances of non-compliance with the BSA. 

COVID-19 Sparks New Fannie Mae and Freddie Mac Fees

On August 12, Fannie Mae and Freddie Mac announced new adverse market refinance fees (a.k.a. market condition credit fees) of 50 basis points on all cash-out and no cash-out refinance mortgages, except certain types of construction financing. According to Freddie Mac, the fees are a result of “risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty.” Fannie Mae similarly justified the fees “in light of market and economic uncertainty resulting in higher risk and costs.” The fees, which will be effective on transactions settling on or after September 1, 2020, were met with immediate and vociferous criticism from a group of 20 trade organizations and public interest groups, as well as several members of Congress.

Gold is the New Bitcoin

The recent increased demand for gold has been compared to the “Bitcoin bubble” based on the rapid price increases, retail investor speculation and the Commodity Futures Trading Commission (CFTC) focus. Does this make gold the new Bitcoin? Read the Digital Currency + Blockchain Perspectives blog for our comparison between the two currency booms, and how gold has become more attractive in 2020 from investor speculation and being perceived as a safe harbor from uncertainties in traditional asset classes caused by the COVID-19 pandemic.

Goodwin News 

What’s Next? A Path Forward in Uncertain Times

In light of the recent global pandemic, Goodwin’s interdisciplinary team of lawyers presents various types of financings and investment structures applicable in current market conditions in a new webinar series, “What’s Next? A Path Forward in Uncertain Times.” This multi-part series explores the financing transactions and topics that are most relevant for companies and investors at a time where valuations are uncertain and companies across industries need capital. Visit the website to learn more, register for upcoming webinars and access previous events. 

This week’s Roundup contributors: Alex Callen, Kristina Jacobs and Bibek Pandey