On April 2, the NCUA announced that a financial institution agreed to settle allegations related to mortgage-backed securities issued to certain corporate credit unions. The NCUA has alleged on behalf of failed corporate credit unions that certain MBS issuers made numerous misrepresentations and omissions in MBS offering documents regarding adherence to the originators’ underwriting guidelines, which supposedly concealed the true risk associated with the securities and routinely overvalued them. When the allegedly risky securities lost value, the NCUA claims, the credit unions were forced into conservatorship and liquidated as a result of the losses sustained. In this settlement, the institution did not admit fault but agreed to pay $165 million to avoid threatened litigation. The settlement adds to the $170.75 million the NCUA already has obtained from four other institutions, and the agency continues to pursue additional institutions in 10 pending lawsuits.
On April 9, the U.S. District Court for the Central District of California dismissed claims brought by the FDIC as receiver for a failed bank against a financial institution related to 10 MBS certificates sold to the bank, holding that the FDIC’s claims were time-barred. Fed. Deposit Ins. Corp. v. Countrywide Secs. Corp., No. 12-6911, slip op. (C.D. Cal. Apr. 9, 2013). The court found that “a reasonably diligent plaintiff had enough information about false statements in the Offering Documents of [the firm’s] securities to file a well-pled complaint before” the statute of limitations expired on August 14, 2008. The court noted that deviations from stated underwriting guidelines and inflated appraisals had come to light prior to the expiration of the statute of limitations through “multiple lawsuits” and “numerous media sources.” The court found that it was irrelevant that the FDIC was named receiver for the bank because “[t]he FDIC [did] not have the power to revive expired claims.” Similarly, on April 8, the U.S. District Court for the District of Kansas granted, in part, a motion to dismiss federal and state claims brought by the NCUA on behalf of three failed credit unions against a financial institution related to certain MBS certificates sold to the credit unions, holding that certain NCUA claims were time-barred. Nat’l Credit Union Admin. Bd. v. Credit Suisse Secs. (USA) LLC, No. 12 Civ. 2648, 2013 WL 1411769 (D. Kan. Apr. 8, 2013). The court found that the applicable federal and state law statutes of limitations required claims to be filed within one or two years of discovery of the alleged misstatement or omission, and within three or five years of sale or violation, respectively. The judge dismissed the federal and state claims for 12 of the MBS certificates as untimely, but preserved federal claims as to eight certificates, determining that the statutes of limitations were tolled on those claims. In addition, the court found that (i) venue was proper because defendant engaged in activity that would constitute the transaction of business in the district for purposes of the applicable venue statute and (ii) plaintiff set forth plausible claims for relief.
On March 29, the Federal Reserve Board, the FDIC, the OCC, the NCUA, and the Farm Credit Administration issued an interagency statement to clarify the effective dates for changes to the Flood Disaster Protection Act enacted last year in the Biggert-Water Flood Insurance Reform Act (the Act). The statement informs financial institutions that the force-placed aspects of the Act became effective upon enactment, which was July, 6, 2012, while provisions related to private flood insurance and escrow of flood insurance payments do not take effect until the agencies issue regulations. The statement reiterates the OCC’s prior statement that the new flood insurance penalty provisions in the Act took effect immediately and apply to violations that occurred on or after July 6, 2012.
On March 19, the NCUA released a letter to credit unions to introduce its new fair lending guide and announce other fair lending tools. The fair lending guide includes (i) an overview of fair lending law and regulations, (ii) credit union operational requirements, (iii) fair lending compliance policy considerations, and (iv) checklists for testing compliance with laws and regulations, or developing a fair lending policy for compliance. The letter also explains that the NCUA’s determinations about which credit unions will be examined for fair lending are based on (i) HMDA outliers, (ii) recent fair lending findings or violations identified in safety and soundness exams, (iii) general risk compliance ratings, and (iv) other factors such as volume, types, and complexity of products and services offered, types of communities served, and customer fair lending complaints. The NCUA also announced its plans to hold a fair lending webinar on April 4, 2013.
On February 11, the NCUA announced that Joy Lee assumed the duties of Ombudsman, effective immediately. The NCUA also explained that it has elevated the position so the Ombudsman will now be supervised by the Executive Director’s office and report directly to the Board. Prior to this position, Ms. Lee served as Senior Federal Financial Institutions Examination Council Advisor to the NCUA Chairman, and before that served in several senior staff positions at NCUA since joining the agency as an examiner in 1987.
NCUA Eases Regulatory Requirements for Certain Small Credit Unions; Finalizes Rule Regarding Troubled State Credit Unions
On January 18, the NCUA published a final rule to amend the definition of “small entities” from those with less than $10 million in assets to those with less than $50 million in assets. The change will allow more credit unions to be considered for relief from NCUA rules. The Regulatory Flexibility Act requires federal agencies to consider the impact of their rules on small entities and allows federal agencies to determine what constitutes a small entity. The NCUA proposed a $30 million threshold, which it adjusted upward following review of comments received on the proposal. The NCUA declined to adopt the $175 million threshold sought by some commenters and used by the Small Business Association and the CFPB. In addition to requiring the NCUA to assess the impact of future proposed and final rules on more small credit unions, the new threshold has the immediate effect of excluding more credit unions from certain requirements under NCUA’s Prompt Corrective Action rule and the requirement to implement interest rate risk policies. The rule requires the NCUA to review the threshold in two years, and every three years thereafter. The new threshold takes effect on February 19, 2013.
On the same day, the NCUA published a final rule to allow the agency to determine whether a state-chartered credit union is in “troubled condition.” Under current law, only a state supervisory authority is permitted to declare a federally insured, state-chartered credit union to be in troubled condition. The NCUA believes that the change will help protect the National Credit Union Share Insurance Fund by leveraging the federal regulator’s resources to increase the likelihood that problems at covered credit unions are addressed. The rule goes into effect on February 19, 2013.
On January 4, the NCUA announced another major mortgage-backed securities lawsuit. Similar to prior suits, the NCUA alleges on behalf of three insolvent corporate credit unions that a mortgage securitizer violated federal and state securities laws in the sale of $2.2 billion in mortgage-backed securities to the credit unions. In this case, the NCUA is suing a securities firm for alleged wrongdoing by companies the defendant later acquired. The NCUA complaint alleges the acquired firms made numerous misrepresentations and omissions of material facts in the offering of the securities sold to the failed corporate credit unions, and that underwriting guidelines in the offering documents were “systematically abandoned.” The NCUA argues that these actions caused the credit unions to believe the risk of loss was low, when, in fact, the opposite was true. When the securities lost value, the NCUA claims, the credit unions were harmed and forced into insolvency.
On December 17, the National Credit Union Administration (NCUA) announced a lawsuit on behalf of four insolvent credit unions against a mortgage securitizer in which the agency alleges violations of federal and state securities laws in the sale of $3.6 billion in mortgage-backed securities. The complaint, which the NCUA filed in the U.S. District Court for the District of Kansas, claims that the securitizer made numerous misrepresentations and omissions in the offering documents regarding adherence to the originators’ underwriting guidelines, which concealed the true risk associated with the securities and routinely overvalued them. When the allegedly risky securities lost value, the NCUA claims, the credit unions were forced into conservatorship and liquidated as a result of the losses sustained. The NCUA has eight similar suits pending, and it has previously settled similar claims for more than $170 million with three other mortgage securities firms.
Federal Banking Regulators Issue Supplemental Statement Regarding Borrower and Institution Relief Following Hurricane Sandy
On November 14, the Federal Reserve Board, the OCC, the National Credit Union Administration, and the FDIC supplemented a prior statement on the impact of Hurricane Sandy on customers and the operations of financial institutions. The supplemental guidance identifies activities that could be considered “reasonable and prudent” steps to assist affected customers, including, for example (i) waiving certain fees and penalties, including ATM and overdraft fees, (ii) easing credit limits and terms for new loans, and (iii) offering payment accommodations. The regulators also provide post-storm guidance regarding loan modifications, the Community Reinvestment Act, and customer identification. The guidance largely mirrors guidance issued by the FDIC on November 9, 2012 in Financial Institution Letter FIL-47-2012.
On November 2, the NCUA released a public version of its new National Supervision Policy Manual, which describes the agency’s internal operations and procedures for supervisory staff. Certain sensitive portions of the Manual remain confidential. The release completes a two-year process to create uniform national procedures for NCUA’s supervisory staff that are expected to improve examination consistency.
On October 26, the leaders of the Federal Reserve Board, the OCC, the FDIC, the CFPB, the NCUA, and the SEC sent a letter to Senators Lieberman (I-CT) and Collins (R-ME) opposing S. 3468, which would authorize the President to require that regulations promulgated by the independent regulatory agencies be subject to regulatory review in the same manner as other federal agencies, including central review of certain rules by the Office of Information and Regulatory Affairs. The regulators note that the bill, which was introduced by Senator Portman (R-OH) with the support of Senator Warner (D-VA) in August 2012, may be considered soon for markup by the Committee on Homeland Security and Governmental Affairs led by Mr. Lieberman and Ms. Collins. The letter argues that by giving the President unprecedented authority to influence policy and rulemaking functions of independent regulatory agencies through review of regulations, the bill would undermine congressional intent to create certain agencies that could exercise policymaking functions independent of any Administration.
On October 26, NCUA announced the selection of Gail Laster as Director of the Office of Consumer Protection. Ms. Laster most recently served as Deputy Chief Counsel for the House Financial Services Committee where she participated in drafting the Dodd-Frank Act. Prior to her work in the House, Ms. Laster served as General Counsel to HUD, as Director of Government Relations for the Legal Services Corporation, and as Counsel to two Senate committees. Ms. Laster succeeds Ken Buckham, who will retire at year-end 2012.
On October 18, the NCUA announced Mark A. Treichel as its new Executive Director, the agency’s most senior career position. Mr. Treichel joined the NCUA as an examiner in 1986 and has served in numerous positions. He most recently served as the Regional Director of NCUA’s Region I office in Albany, NY.
On July 25, the U.S. District Court for the District of Kansas denied a motion to dismiss that sought to dispose of allegations that the defendant financial institutions misled investors in connection with the sale of certain mortgage-backed securities (MBS). Nat. Credit Union Admin. Bd. v. RBS Secs., Inc., No. 11-2340, 2012 WL 3028803 (D. Kan. Jul. 25, 2012). The NCUA brought the suit against several MBS-issuers on behalf of a failed credit union for which it had been appointed conservator, arguing that the MBS issuers’ documents used in offering the MBS contained material misstatements and omissions that led to substantial losses to the investor credit union and the NCUA Stabilization Fund. The facts and arguments are similar to those NCUA has presented in several cases around the country in an effort to recover MBS-related losses for failed institutions. Here, the MBS issuers argued that the NCUA complaint exceeded the statute of limitations, having been filed more than three years from the issuance of the securities. The issuers maintained that the failed institution should have been able to identify the issues within the statutory limit. The court disagreed and held that the federal extender statute applied, allowing NCUA to bring the case beyond the three year limit. Because the government could not have known the details of the offerings until after it became conservator, and given that ambiguous statutes of limitations should be construed in favor of the government, the court determined the NCUA claims were timely. The court also held that the NCUA presented evidence sufficient to maintain a plausible claim of misrepresentation, except with regard to certain credit enhancement language that the NCUA charged was untrue and material.
On July 31, the NCUA proposed a rule that would give it a role in determining whether a state-chartered credit union is in “troubled condition.” Under current law, only a state supervisory authority is permitted to declare a federally insured, state-chartered credit union to be in troubled condition. The NCUA believes that the change would help protect the National Credit Union Share Insurance Fund by leveraging the federal regulator’s resources to increase the likelihood that problems at covered credit unions are identified. The NCUA is accepting comments on the proposal through October 1, 2012.