On November 20, 2013, in a broadcast streamed live on the internet, the CFPB unveiled the long awaited final rule that contains the Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (“RESPA”), Regulation X, and the Truth-In-Lending Act (“TILA”), Regulation Z.
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On November 12, 2013, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) published an advance notice of proposed rulemaking (“ANPR”) in the Federal Register seeking information from the public about the operations, disclosures and practices used by debt collectors as well as creditors selling and collecting on their own consumer debts. The ANPR follows the CFPB’s July 2013 issuance of two guidance bulletins (“July 2013 Bulletins”) that address debt collection practices. The CFPB continues to explore ways to uniformly apply federal debt collection requirements to both creditors and debt holders—which are generally exempted from the requirements of the Fair Debt Collection Practices Act (“FDCPA”) when collecting on their own debts—and third- party debt collectors.
The Consumer Financial Protection Bureau (CFPB) recently issued an interim final rule, as well as an explanatory bulletin, to further detail and clarify the requirements of the agency’s mortgage servicing rules that were finalized in January 2013 (the Servicing Rules). The Servicing Rules implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amending the Real Estate Settlement Procedure Act of 1974 (RESPA) and the Truth in Lending Act (TILA) to provide borrowers with more detailed information regarding their loans, ensure that borrowers are not unexpectedly assessed charges or fees, and inform borrowers of alternatives to foreclosures.
Once again, JPMorgan found itself discussing yet another settlement and facing bad publicity linked to excessive risk-taking. Last week, news broke that the bank had agreed to a $920 million settlement in the “London Whale” derivatives trading case; plus, the Consumer Financial Protection Bureau ordered JPMorgan to refund over $300 million to customers based on alleged wrongdoing in its credit card and debt collection procedures.
Another settlement deal surfaced this week—and its numbers are much larger. The U.S. Department of Justice is seeking $11 billion (with a ‘B’) in compensation for JPMorgan’s actions leading up to the Financial Crisis, including selling mortgage backed securities the bank knew were essentially worthless. According to the Washington Post, it would be “the biggest settlement a single company has ever undertaken.” On Thursday, the bank’s visible CEO Jamie Diamond flew to Washington, D.C., to meet with Attorney General Eric Holder for nearly an hour. Instead of lobbying for looser restrictions on Wall Street, Diamond was seeking an end to federal and state probes (which still represent a large liability to the bank) and, perhaps more importantly, attempting to avoid criminal charges.
All of the rhetoric and press releases notwithstanding, the Administration’s handling of numerous JPMorgan investigations has been properly criticized for missing an opportunity to charge top Executives. The S.E.C., D.O.J., and other regulators have thus far failed to press criminal charges, even when financial disclosures have misrepresented the bank’s business or mortgage-backed products. To be sure, the government has charged front-line traders in the London Whale case, but those tasked with overseeing the bank’s actions have escaped indictment—perhaps for the very reason that Mr. Diamond is willing to personally negotiate with the nation’s top law enforcement official on their behalf.
While the financial penalties being discussed are stiff, they represent only a small fraction of the damage done to the global economy, JPMorgan shareholders, and (ultimately) dinner tables across the country. Columbia Law School professor John C. Coffee Jr. provided some insight to the back-and-forth. He told the Post: “If I was in [Holder’s] position, I would be concerned about my legacy. . . . There’s been a lot of criticism of officials in Justice being much too soft, timid.”
[Editor's Note: The following post is authored by Arnold & Porter LLP]
On January 20, 2013, the Consumer Financial Protection Bureau (CFPB) issued its final rule (the Final Rule) regarding mortgage loan originator compensation and qualification requirements1 under the Truth in Lending Act (TILA), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Final Rule modifies existing compensation and qualification requirements under Regulation Z. It prohibits a creditor from compensating a loan originator based on a term of a transaction or a “proxy” for a term of a transaction. It also codifies the existing ban on “dual compensation,” in which a loan originator receives compensation from the consumer and an additional party other than the originator’s organization, but creates an exception allowing a loan originator organization to pay its employees or contractors a commission provided that the commission is not based on a term of a loan. The Final Rule provides a complete exemption from the statutory ban on the consumer payment of upfront points and fees. The Final Rule also includes requirements regarding loan originator qualifications, licensing, and recordkeeping, and implements statutory provisions regarding mandatory dispute resolution and the financing of credit insurance in connection with a residential mortgage loan. Read the rest of this entry »
The Obama Administration has continued its aggressive prosecution of suspect players in the financial meltdown that shaped most of the President’s first term.
Four mortgage insurers, including an AIG subsidiary, have agreed to a $15 million settlement over allegations of improper ‘kickbacks’ paid to lenders for more than a decade. The Consumer Financial Protection Bureau made the announcement today. Its director, Richard Cordray, charged, “We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade.” For more, see the NYTimesand WSJ.
Also today, the U.S. Department of Justice filed a fraud suit against Golden First Mortgage Corp, alleging the company and its CEO “repeatedly lied” to the government. The complaint claims that Golden First rushed paperwork through internally, although the company certified (to HUD and the FHA) that proper due diligence had been conducted. According to the government, Golden First used three employees to process 100-200 loans per month—predictably leading to “extraordinarily high” default rates as high as 60% in 2007. For more, see Thomson Reuters.
On a related note, district court Judge Victor Marrero (S.D.N.Y.) indicated that he may not accept a “neither admit nor deny” provision in SAC Capital Advisor’s insider trading settlement. At a hearing last week, he made a point unlikely to encounter much resistance: “There is something counterintuitive and incongruous in a party agreeing to settle a case for $600 million that might cost $1 million to defend and litigate if it truly did nothing wrong.” Judge Marrero is not the first to question these clauses – commonly demanded by corporate litigants – but his remarks demonstrate a growing judicial skepticism with the practice. For more, see Businessweek, Reuters, and The New Yorker.
The Consumer Financial Protection Bureau has announced a new rule (the “Ability-to-Repay rule”) requiring mortgage lenders to ensure that potential borrowers will be able to repay their mortgages. The CFPB is charged with amending Regulation Z, which carries out the Truth in Lending Act. The CFPB also implements the ability-to-repay requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Under Dodd-Frank, creditors must make a reasonable and good faith determination that borrowers have a reasonable ability to repay the loan.
The Ability-to-Repay rule is aimed at protecting American consumers. According to the CFPB Director, the “Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”
Under the new rule:
- 1. Lenders are required to obtain and verify financial information from potential borrowers,
- 2. Lenders must evaluate and conclude that potential borrowers have sufficient assets or income to repay the loan, and
- 3. Lenders cannot use lower, introductory “teaser” interest rates (which cause monthly payments to jump to unaffordable levels) to base their evaluation of a potential borrower’s ability to repay the loan.
In assessing whether a borrower will be able to repay their loan, lenders must generally consider the following underwriting factors: 1) current or reasonable expected income or assets, 2) current employment status, 3) the monthly payment, 4) monthly payment on any simultaneous loan, 5) the monthly payment for mortgage-related obligations, 6) current debt obligations, 7) monthly debt-to-income ratio, and 8 ) credit history.
The director of the U.S. Consumer Financial Protection Bureau may be facing a challenge the constitutionality of his “recess appointment,” following a January 25 ruling by the D.C. Circuit Court of Appeals. In that case, the court held three of President Obama’s appointments to the NLRB were unconstitutional. The party challenging director Richard Cordray’s status would likely argue that the opinion applies to him as well, as he was appointed via the same process. For more, see Bloomberg.
The Justice Department has sued Anheuser-Busch InBev in Washington D.C. district court, attempting to block the company’s proposed $20.1 billion merger with Modelo. The head of the DOJ’s antitrust division, William J. Baer, said the deal would reduce competition in the American beer industry, as InBev would control 46 percent of the country’s annual sales. “Even small price increases could lead to significant harm,” Baer said. For more, see the NYTimes.
The Commodity Futures Trading Commission is drafting rules for “swaps,” under the directive of the Dodd-Frank financial markets overhaul. The stakes are high, as the complex instruments account for eight-ninths of the derivatives market—and Wall Street banks have been jockeying to frame the proposals as too burdensome for their respective industries. For more, see Reuters.
Capitol Hill may again take up a system of voluntary cybersecurity standards. According to a new Senate Commerce Committee report, there is strong support among Fortune 500 companies. U.S. Senator Jay Rockefeller (D., W.Va.) has spearheaded the effort, and his data suggests differing perspectives from industry leaders and the U.S. Chamber of Commerce. Sen. Rockefeller hopes to pass a bill this year. For more, see the Wall Street Journal.
In an ongoing effort to protect homeowners facing foreclosure, the Consumer Financial Protection Bureau has issued new rules for mortgage servicers. The rules, which won’t take effect until January 2014, include provisions requiring banks to consider and respond to loan modification applications submitted at least 37 days before a schedule foreclosure. Similarly, servicers must inform borrows of alternatives to foreclosure and will not be able to begin foreclosure proceedings while homeowners are seeking a loan modification. The rules also severely limit some of the lending practices (e.g. inflated up-front fees, interest-only payments, and high debt-to-income ratios) considered predatory by consumer groups. For more detail, see articles by WashPo and CNN.
Citigroup’s Q4 earnings report underperformed this morning – in large part due to its $1.29 billion in legal costs – and the company’s stock dropped 3.4% in early trading. While most banks are still purging their balance sheets, there is worry that we may not have seen the end of these mortgage-crisis-era liabilities. Citigroup’s CFO, John Gerspach, hinted on a Thursday conference call: “I think that the entire industry is still looking at some additional settlements that are still yet to appear.” For more, see NYTimes and Reuters. [Bank of America’s Q4 was hit by settlements as well: WSJ]
In August 2012, six federal financial regulatory agencies issued a proposed rule to implement Section 1471 of the Dodd-Frank Act which sets forth appraisal requirements for “higher-risk” mortgage loans.
The intended purpose of the proposed rule is to tighten valuation standards for homes in order to reduce the risk of appraisal fraud, a move meant to reassure creditors, borrowers, and investors alike. Section 1471 was created as part of Congress’ intention to prevent the use of false or inflated appraisals in obtaining mortgages. If the proposed rule is finalized without amendment, lenders seeking to issue high-risk mortgage loans will be “unable to value properties on the basis of broker-price opinions, automated valuations, or drive-by appraisals”. The proposed rule would affect mortgages with annual percentage rates (APRs) at designated levels above the Average Prime Offering Rate (APOR). First-lien loans (such as standard mortgages) with an APR 1.5 percentage points above the APOR would be classified as a higher risk mortgage under the proposed rule, while first-lien jumbo loans with APRs 2.5 percentage points above, and subordinate-lien loans with an APR 3.5 percentage points above the APOR would similarly be considered higher-risk.