On April 3, the Federal Reserve Board approved a final rule that establishes the requirements for determining when a company is “predominantly engaged in financial activities.” The requirements will be used by the Financial Stability Oversight Council when considering whether to designate a nonbank financial company as systemically important and subject to supervision by the Federal Reserve Board. Pursuant to the rule, a company is considered to be predominantly engaged in financial activities if 85 percent or more of the company’s consolidated revenues or assets are derived from or related to activities that are defined as financial in nature under the Bank Holding Company Act. In addition, the FSOC may issue recommendations for primary financial regulatory agencies to apply new or heightened standards to a financial activity or practice conducted by companies that are predominantly engaged in financial activities. The final rule largely mirrors the rule as proposed, but includes some changes. For example, final rule states that engaging in physically settled derivatives transactions generally will not be considered a financial activity. The final rule also defines the terms “significant nonbank financial company” and “significant bank holding company.” The rule will become effective on May 6, 2013.

The Nationwide Mortgage Licensing System and Registry (NMLS) held its fifth annual NMLS User Conference and Training in San Antonio, Texas from February 26 through March 1, 2013. The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, top law firms, and education providers to learn about the latest developments in mortgage supervision and to discuss pressing issues confronting the industry.

The first day of the Conference included the bi-annual NMLS Ombudsman Meeting, which provided an opportunity for NMLS users to raise issues concerning the NMLS, state and/or federal regulation. NMLS Ombudsman Timothy Siwy, Deputy Secretary of Non-Depository Institutions with the Pennsylvania Department of Banking, presided over the meeting, in which specific questions submitted by industry representatives were addressed. Several of the submitted questions focused on the new Uniform State Mortgage Loan Originator (MLO) Exam or Uniform State Test (the UST) of which 24 agencies have already adopted. Concerns were raised by the regulators as some state statutes require that a state’s specific laws be tested as a pre-requisite of MLO licensure. Others, such as regulators from California and Utah, had concerns that MLOs would not adequately learn state specific laws and regulations prior to licensure.  In light of these concerns, industry representatives indicated that the UST is only the first step in licensure, and continuing education requirements, monitoring, and examinations would also serve as opportunities to ensure MLOs are well-versed in applicable state specific licensing laws and regulations.

Other areas of focus included NMLS’s expansion to include non-mortgage licenses, such as payday lender and pawn broker licenses. Some industry representatives voiced concern that approval of a license via the NMLS now carries with it an image of legitimacy with the public and expanding licensure to non-mortgage, less regulated industries could undermine that image. Regulators responded that the NMLS is a tracking mechanism—a way for regulators to track licensees state-to-state and industry-to-industry—not an independent licensing credential.

Full details regarding the specific issues submitted for comment, as well as accompanying exhibits, will be available on the NMLS Website, Ombudsman Page.  A recording of the Ombudsman Meeting should be posted to the NMLS Resource Center in the near future.

The remaining days of the Conference covered Read more…

On March 14, the CFPB proposed a rule to allow it to supervise “larger participant” nonbank student loan servicers. The CFPB has authority to supervise, regardless of size, nonbanks that originate private education loans, and can define and supervise larger participants in other markets for consumer financial products or services. The CFPB proposes to supervise any nonbank student loan servicer whose volume exceeds one million accounts, which the CFPB expects will cover the seven largest servicers. The CFPB’s test to determine volume would consider the number of accounts serviced, whether for federal or private loans, for which an entity and its affiliated companies were responsible as of December 31 of the prior calendar year. After designation, a servicer would remain a larger participant until two years after the first day of the tax year in which the servicer last met the account volume test. The CFPB would use its existing student loan examination procedures to review larger participants’ “student loan servicing,” which the proposed rule defines as: (i) collecting and processing loan payments on behalf of holders of promissory notes, (ii) maintaining account records and communicating with borrowers on behalf of loan holders during deferment periods, and (iii) interacting with borrowers to facilitate collection and processing of loan payments. An entity notified that the CFPB intends to undertake supervisory activity would have an opportunity to challenge the larger participant determination. The CFPB is accepting comments on the proposal for 60 days following publication in the Federal Register.

On January 22, the FFIEC proposed guidance on the applicability of consumer protection and compliance laws, regulations, and policies to activities conducted via social media by federally supervised financial institutions, as well as nonbanks supervised by the CFPB. With regard to compliance and legal risks, the guidance addresses (i) the applicability of existing federal laws and regulations to the use of social media for marketing and originating new deposit and lending products and the use of social media to facilitate consumer use of payment systems; (ii) the need to apply BSA/AML internal controls to customers engaging in electronic banking through the use of social media, and e-banking products and services offered in the context of social media, as well as BSA/AML risks emerging through the growing use of social media; (iii) CRA monitoring of social media sites run by an institution; and (vi) customer privacy issues associated with social media. The guidance also reviews reputational risks related to social media, including risks related to (i) fraud and brand identity; (ii) social media vendor monitoring; (iii) privacy; (iv) consumer complaints; and (v) employee use of social media. Finally, the guidance addresses the vulnerability of social media to malware and the resultant operational risk. The FFIEC is accepting comments for 60 days after publication in the Federal Register. After the comment period, the agencies will issue supervisory guidance and will urge state regulators to follow. 

On December 20, President Obama signed two bills impacting bank supervision and compliance. These bills were sent to the President after the Senate approved both measures on December 11. The first, H.R.4014, amends the Federal Deposit Insurance Act to protect information submitted to the CFPB as part of its supervisory process. For more information about these issues, please see our recent Special Alert. The second bill, H.R. 4367, amends the Electronic Fund Transfer Act to remove the requirement that ATMs have an attached placard disclosing fees. The amended law requires only that fees be disclosed on the ATM screen.

On December 17, the CFPB released its Student Lending Examination Procedures, which are an extension of the CFPB’s General Supervision and Examination Manual and will be used as a field guide by CFPB examiners to review student lender compliance with federal consumer financial laws. The Student Lending Examination Procedures are organized in seven modules: (i) Advertising, Marketing, and Lead Generation, (ii) Application, Qualification, Loan Origination, and Disbursement, (iii) Loan Repayment, Account Maintenance, Payoff Processing, and Payment Plans, (iv) Customer Inquiries and Complaints, (v) Collections, Accounts in Default, and Credit Reporting, (vi) Information Sharing and Privacy, and (vii) Examination Conclusion and Wrap-up. Under the first module, for example, CFPB examiners will assess whether a lender’s advertising and marketing practices are deceptive, misleading, or discriminatory by sampling all of the lender’s marketing and advertising materials, including print, electronic and other media, such as the Internet, email and text messages, telephone solicitation scripts, agreements and disclosures. With regard to borrower complaints, examiners will assess, among other things, the systems, procedures, and policies used by a lender for tracking, handling, investigating, and resolving consumer inquiries, disputes, and complaints. The CFPB has the authority to supervise large bank and nonbank student lenders, and, as with its other procedures, the CFPB will use the same examination procedures across both types of institutions.

On December 17, the CFPB announced a reorganization of part of its Division of Supervision, Enforcement, and Fair Lending. Effective immediately, CFPB staff members responsible for supervision activities are organized in two offices:  Examinations and Policy. Previously, supervision staff were organized into offices for Nonbank Supervision and Large Bank Supervision.  According to the CFPB’s announcement, the Examinations team will (i) recruit, train, and commission examiners, (ii) ensure policies and procedures are followed, and (iii) plan and execute examinations appropriately in light of resources and priorities. The CFPB’s four regional offices will report to the Examinations team, which is being led, on an acting basis, by Paul Sanford. Mr. Sanford had been Acting Assistant Director for Large Bank Supervision. The CFPB explains that its Policy team will ensure that policy decisions for supervision are consistent with both the law and the CFPB’s mission, and that such decisions are consistent across markets, charters, and regions. The Policy team will be further organized by product or service market, rather than by the type of financial institution. Each market team will be responsible for developing supervision strategy and policy across both bank and nonbank markets. Peggy Twohig, formerly the head of the CFPB’s Nonbank Supervision office, will be the Assistant Director of Supervision Policy.

On December 13, the CFPB issued a white paper on its review of 2011 data to determine how the three largest consumer reporting agencies (CRAs) manage consumer data and complaints. According to the CFPB press release, its review of the data revealed that more than half of the trade lines (the accounts in a consumer’s name reported by creditors) in the CRAs databases are supplied by the credit card industry, with 40 percent related to bank cards, such as general credit cards, and 18 percent from retail credit cards. Only seven percent comes from mortgage lenders or servicers, and only four percent comes from auto lenders. The CFPB also reported that (i) almost 40 percent of disputes have to do with collections, and debt in collection is five times more likely to be disputed than mortgage information, (ii) fewer than one in five people obtain copies of their credit report each year, (iii) most information contained in credit reports comes from a few large companies, and (iv) most complaints are forwarded to the furnishers that provided the original information, while the CRAs resolve an average of 15 percent of consumer disputed items internally. The report adds that certain documentation provided by consumers to support their cases may not be getting passed on to the data furnishers for them to properly investigate and report back to the CRA, but the report does not offer any policy prescriptions.

Yesterday, the Senate passed H.R. 4014, an important bill that clarifies that privileged materials produced to the Consumer Financial Protection Bureau (CFPB) retain their privileged character as to third parties. Because the House passed the same bill in March, the measure will now go to President Obama, who is expected to sign it.

The bill amends 12 U.S.C. § 1828(x) to place the Bureau on equal footing with the banking agencies—a so-called “legislative fix” that many observers have called for to address concerns that the Dodd-Frank Act did not provide clear guidance with respect to the status of privileged material provided to the CFPB. The amended statutory provision would read:

The submission by any person of any information to the Bureau of Consumer Financial Protection, any Federal banking agency, State bank supervisor, or foreign banking authority for any purpose in the course of any supervisory or regulatory process of such Bureau, agency, supervisor, or authority shall not be construed as waiving, destroying, or otherwise affecting any privilege such person may claim with respect to such information under Federal or State law as to any person or entity other than such Bureau, agency, supervisor, or authority.

The language “any person” makes clear that the bill applies to submissions by banks, non-banks, and individuals. The bill also amends 12 U.S.C. § 1821(t)(2)(A) to allow the Bureau to share information with other federal agencies without waiving “any privilege applicable” to that information.

Once it receives the President’s signature, Read more…

On November 30, the CFPB Ombudsman’s Office submitted its first annual report to the Director of the CFPB. It describes the establishment of the office and highlights the office’s activities from July 2011 through September 30, 2012. The report also identifies two “systemic issues” that the Ombudsman reviewed: (i) consumer understanding of the CFPB complaint process and (ii) the presence of enforcement attorneys at supervisory examinations. Almost 40 percent of the questions the Ombudsman received from consumers related to the CFPB complaint process, so the Ombudsman recommended that the CFPB provide more information to the public about the complaint process using multiple methods to communicate that information. The Ombudsman also heard concerns regarding the CFPB’s policy that enforcement attorneys participate in supervisory examinations. After conducting her own review, the Ombudsman recommended that the CFPB review its implementation of the policy, and until that review is complete, establish ways to clarify the enforcement attorney role at the supervisory examination.

The CFPB today released its first periodic Supervisory Highlights publication, along with an updated examination manual and a bulletin about the Bureau’s examination appeals process.

The Supervisory Highlights report describes the CFPB’s supervisory activity from July 2011 through September 2012, including with regard to credit cards, credit reporting, and mortgages, and “signal[s] to all institutions the kinds of activities that should be carefully scrutinized.” During its first year of conducting exams, the CFPB states that it has found compliance management system deficiencies, including with regard to fair lending compliance programs and oversight of affiliate and third-party service providers.  The report also reviews nonpublic actions taken to enforce compliance with the CARD Act and FCRA,  and identifies several areas of concern for mortgage originators.

Bulletin 2012-07 details the CFPB supervisory appeals process, and addresses confidentiality and the role of the CFPB Ombudsman.  Finally, the updated Supervision and Examination Manual incorporates the various procedures issued since the manual first was published in October 2011, e.g. the payday lending and consumer reporting exam procedures.  The updated manual also includes new references to the Code of Federal Regulations to reflect the republishing of federal consumer finance law regulations under the CFPB’s authority.

On October 24, the CFPB issued a final rule that will allow the Bureau to supervise certain debt collectors. Under this rule, debt collectors will be required to provide certain disclosures, provide accurate information, maintain a consumer complaint and dispute-resolution process, and communicate civilly and honestly with consumers. Beginning January 2, 2013, the CFPB will be able to examine and take enforcement actions against any entity that has more than $10 million in annual receipts from consumer debt collection activities. The CFPB anticipates that the rule will cover approximately 175 third-party debt collectors, debt buyers, and collection attorneys. The final rule retains the proposed annual receipts threshold used to identify “larger participants” but excludes from the definition of annual receipts those receipts that result from collecting debts originally owed to a medical provider. The final rule also limits covered consumer debt collection activities to those conducted by “debt collectors,” which are defined as persons whose principal business activity is debt collection or that “regularly” engage in debt collection. The CFPB declined to provide a blanket exemption to attorneys, as some commenters argued was required by the Dodd-Frank Act. Concurrent with the release of the final rule, the CFPB published procedures for use in examining covered debt collectors. This rule is the second “larger participant” rule, and it follows the July 2012 consumer reporting rule. The Dodd-Frank Act requires the CFPB to promulgate a rule to define “larger participant” nonbanks in certain consumer financial services markets.

On October 9, the OCC and the FDIC each finalized a rule to implement the company-run stress test requirements of the Dodd-Frank Act. The stress tests are exercises designed to gauge the losses that covered institutions might experience under hypothetical scenarios established by the regulators. The OCC and FDIC rules apply to covered institutions with average total consolidated assets greater than $10 billion. Covered institutions with assets over $50 billion are subject to the stress test requirements immediately. They will be required to submit results in January 2013 of stress tests based on data as of September 30, 2012 and scenarios that the FDIC and the OCC plan to publish next month. Implementation of the stress test requirements for institutions with assets of $10 billion to $50 billion will not begin until October 2013. Also on October 9, the Federal Reserve Board (FRB) finalized two stress test-related rules. The first rule establishes the stress test requirements for bank holding companies, state member banks, and savings and loan companies with more than $10 billion in total consolidated assets. As with the OCC and FDIC rules, the FRB rule delays implementation of stress test requirements for covered institutions with $50 billion or less in assets until the fall of 2013. Additionally, the results of that first test will not have to be publicly disclosed. The second FRB rule establishes the company-run stress test requirements for bank holding companies with $50 billion or more in total consolidated assets, and nonbank financial companies designated as systemically important by the Financial Stability Oversight Council. These institutions are required to conduct two internal stress tests each year, in addition to a stress test performed by the FRB. Like the OCC and the FDIC, the FRB expects to release its stress test scenarios in November.

On September 20, the Consumer Financial Protection Bureau issued its first Decision and Order on a petition to modify or set aside a civil investigative demand (CID).  The petition challenged a CID issued to a non-bank mortgage servicer (the Company) seeking responses to 21 interrogatories and 33 document requests.  CFPB Director Richard Cordray denied the petition in its entirety and ordered the Company to comply with the CID within 21 days.  In addition to ruling on the substantive issues relevant to the petition, the Decision and Order demonstrates the importance of including detailed and specific objections in any petition to modify or set aside a CID and the crucial role of the meet-and-confer sessions.

The CID, served on May 22, was issued in connection with the Bureau’s investigation regarding whether ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders violates section 8 of the Real Estate Settlement Procedures Act (RESPA).  In the petition filed on June 12, the Company argued among other things that the CID (i) did not state the nature of the conduct under the investigation; (ii) was overly broad, unduly burdensome, and irrelevant; and (iii) requested materials going back more than 11 years when RESPA’s statute of limitations was 3 years and the CFPB’s enforcement power cannot be predicated on acts prior to July 21, 2010.

In denying the petition, Read more…