Over the past week, members of Congress from both parties have sent several letters to the Department of Education (DOE or ED) regarding its ongoing rulemaking related to the ways higher education institutions request, maintain, disburse, and otherwise manage federal student aid disbursements. As part of that rulemaking, the DOE is considering changes that would, among other things, clarify permissible disbursement practices and agreements between education institutions and entities that assist in disbursing student aid, and increase consumer protections governing the use of prepaid cards and other financial instruments. In general, the letters from Congress express concern that the draft rule is too broad and will limit student access to financial services. For example, in a July 17 letter from Congressman Luetkemeyer (R-MO), Senator Hoeven (R-ND), and 40 other lawmakers, including six Democrats, the members expressed concern that the DOE proposal could cover any account held by a student or a parent of a student if the financial institution had any arrangement, however informal, with a school and regardless of when or why the account was opened. The members support efforts to protect students from abuses made in disbursing student aid, but ask the DOE to tailor the rule such that it could not be construed so broadly as to restrict students’ access to financial services. Earlier this year, another group of lawmakers called on the DOE to “mandate contract transparency, prohibit aggressive marketing, and ban high fees when colleges partner with banks to sponsor debit cards, prepaid cards, or other financial products used to disburse student aid.”
On July 29, the U.S. House of Representatives passed by voice voteH.R. 5062, a bipartisan bill that would amend the Consumer Financial Protection Act with respect to the supervision of nondepository institutions, to require the CFPB to coordinate its supervisory activities with state regulatory agencies that license, supervise, or examine the offering of consumer financial products or services. The bill declares that the sharing of information with such state entities does not waive any privilege claimed by nondepository institutions under federal or state law regarding such information as to any person or entity other than the CFPB or the state agency. The following day, the House Financial Services Committee approved numerous bills, including two mortgage-related bills. The first, H.R. 4042, would require the Federal Reserve Board, the OCC, and the FDIC to conduct a study to determine the appropriate capital requirements for mortgage servicing assets for any banking institution other than an institution identified by the Financial Stability Board as a global systemically important bank. The bill also would prohibit the implementation of Basel III capital requirements related to mortgage servicing assets for non-systemic banking institutions from taking effect until three months after a report on the study. A second bill, H.R. 5148, would exempt creditors offering mortgages of $250,000 or below from certain property appraisal requirements established by the Dodd-Frank Act.
On June 9, Darrell Issa (R-CA), Chairman of the House Oversight Committee, and Jim Jordan (R-OH), an Oversight subcommittee chairman, sent a letter to FDIC Chairman Martin Gruenberg that seeks information regarding the FDIC’s role in Operation Choke Point and calls into question prior FDIC staff statements about the agency’s role. The letter asserts that documents obtained from the DOJ and recently released by the committee demonstrate that, contrary to testimony provided by a senior FDIC staff member, the FDIC “has been intimately involved in Operation Choke Point since its inception.” The letter also criticizes FDIC guidance that institutions monitor and address risks associated with certain “high-risk merchants,” which, according to the FDIC, includes firearms and ammunition merchants, coin dealers, and payday lenders, among numerous others. The letter seeks information to help the committee better understand the FDIC’s role in Operation Choke Point and its justification for labeling certain businesses as “high-risk.” For example, the letter seeks (i) all documents and communications between the FDIC and the DOJ since January 1, 2011; (ii) all FDIC documents since that time that refer to the FDIC’s 2012 guidance regarding payment processor relationships; and (iii) all documents referring to risks created by financial institutions’ relationships with firearms or ammunition businesses, short-term lenders, and money services businesses.
On May 29, the House Oversight Committee released a staff report on Operation Choke Point, DOJ’s investigation of banks and payment processors purportedly designed to address perceived consumer fraud by blocking fraudsters’ access to the payment systems. The report provides the following “key findings”: (i) the operation was created by DOJ to “choke out” companies it considers to be “high risk” or otherwise objectionable, despite the fact that those companies are legal businesses; (ii) the operation has forced banks to terminate relationships with a wide variety of lawful and legitimate merchants; (iii) DOJ is aware of these impacts and has dismissed them; (iv) DOJ lacks adequate legal authority for the initiative; and (v) contrary to DOJ’s public statements, Operation Choke Point is primarily focused on the payday lending industry, particularly online lenders. The findings are based on documents provided to the committee by DOJ, including internal memoranda and other documents that, among other things, “acknowledge the program’s impact on legitimate merchants” and show that DOJ “has radically and unjustifiably expanded its [FIRREA] Section 951 authority.” The committee released the nearly 1,000 pages of supporting documents, which are available in two parts, here and here.
On May 22, the House Financial Services Committee resumed activity on a series of bills—several of which are mortgage-related—that it considered earlier this month but for which it had postponed recorded votes. The committee approved all bills previously considered, including (i) H.R. 1779, which would amend TILA’s definition of a “mortgage originator” to exclude manufactured housing retailers unless they received compensation from a lender, mortgage broker, or loan originator, and definition of a “high cost mortgage” for loans under $75,000 to include a higher HOEPA APR trigger and a minimum HOEPA points and fees trigger of the greater of 5% of the transaction amount or $3,000; (ii) H.R. 2673, which would provide that loans retained on an institution’s balance sheet automatically qualify for qualified mortgage treatment under the Ability-to-Repay rule; and (iii) H.R. 4521, which would exempt from mandatory escrow requirements loans secured by a first lien on a consumer’s principal dwelling that are held in portfolio by creditors with assets of $10 billion or less, and would instruct the CFPB to provide regulatory relief for mortgage servicers that annually service 20,000 or fewer mortgage loans.
On May 22, House Financial Services Committee Chairman Jeb Hensarling (R-TX) sent letters to the Federal Reserve Board, the OCC, the FDIC, and the NCUA asking the regulators to explain their use of “reputational risk,” and citing Operation Choke Point as an example of the potential for “reputation risk” to become “a pretext for the advancement of political objectives, which can potentially subvert both safety and soundness and the rule of law.” Congressman Hensarling asked each regulator to explain (i) whether it consider reputation risk in its supervision of depositories, and, if so, to explain the legal basis for such consideration and why it is appropriate; (ii) what data are used to analyze reputational risk and why such data are not already accounted for under CAMELS; and (iii) whether a poor reputation risk rating could be sufficient to warrant recommending a change in a depository’s business practices notwithstanding strong ratings under CAMELS.
On May 7, the House Financial Services Committee passed by voice vote H.R. 3211, which would remove additional items from TILA’s definition of “points and fees” for purposes of the CFPB’s “Ability to Repay” and HOEPA rules. The legislation would exclude from the definition insurance as well as taxes (which are excluded under current law) held in impound accounts and would also exclude amounts received by affiliated companies as a result of their participation in an affiliated business arrangement. The committee agreed to hold recorded votes on numerous other bills the week of May 19, 2014, including (i) H.R. 1779, which would amend TILA’s definition of a “mortgage originator” to exclude manufactured housing sales representatives, set higher HOEPA APR triggers and a minimum HOEPA points and fees trigger of the greater of 5% of the transaction amount or $3,000 for loans under $75,000 secured by personal property; (ii) H.R. 2673, which would provide that loans retained on an institution’s balance sheet automatically qualify for qualified mortgage (QM) treatment under the Ability-to-Repay rule; and (iii) H.R. 4521, which would exempt loans secured by a first lien on a consumer’s principal dwelling that are held in portfolio by creditors with assets of $10 billion or less from mandatory escrow requirements, and would instruct the CFPB to provide regulatory relief for mortgage servicers that annually service 20,000 or fewer mortgage loans. The Committee did not hold a planned vote on the issuance of document subpoenas to Treasury and the DOJ regarding prosecution of financial institutions, agreeing instead to first work to obtain the requested information through other means.
On May 6, the U.S. House of Representatives passed by voice vote three financial services bills: (i) H.R. 2672, which would require the CFPB to allow individuals and businesses to apply to have an area designated as “rural” for purposes of exemptions to the CFPB mortgage rules; (ii) H.R. 3329, which would require the Federal Reserve Board to allow bank holding companies and savings and loan holding companies with assets of less than $1 billion to incur higher amounts of debt when acquiring other banks than are allowed for larger holding companies—the current asset ceiling for that special allowance is $500 million and applies only to bank holding companies; and (iii) H.R. 4386, which would permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs that provide international remittance transfer services and other non-bank financial institutions such as gaming establishments and jewel merchants.
On April 29, the U.S. House of Representatives passed by voice vote HR 4167, a bill that would exclude certain debt securities of collateralized loan obligations (CLOs) from the so-called Volcker Rule’s prohibition against holding an ownership interest in a hedge fund or private equity fund. Section 619 of the Dodd-Frank Act—the Volcker Rule—generally prohibits insured depository institutions and their affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. As implemented, that prohibition would cover CLOs, which banks and numerous lawmakers assert Congress never intended for the Volcker Rule to cover. Earlier in April, the Federal Reserve Board issued a statement that it intends to exercise its authority to give banking entities two additional one-year extensions, which would extend until July 21, 2017, to conform their ownership interests in, and sponsorship of, covered CLOs. HR 4167 instead would provide a statutory solution by exempting CLOs issued before January 31, 2014 from divestiture before July 21, 2017.
On April 8 the House Financial Services Committee held a hearing with the general counsels of the federal banking agencies regarding, among other things, Operation Choke Point, the federal enforcement operation reportedly intended to cut off from the banking system certain lenders and merchants allegedly engaged in unlawful activities. Numerous committee members from both sides of the aisle raised concerns about Operation Choke Point, as well as the federal government’s broader pressure on banks over their relationships with nonbank financial service providers, including money service businesses, nonbank lenders, and check cashers. Committee members asserted that the operation is impacting lawful nonbank financial service providers, who are losing access to the banking system and, in turn, are unable to offer needed services to the members’ constituents. The FDIC’s Richard Osterman repeatedly stated that Operation Choke Point is a DOJ operation and the FDIC’s participation is limited to providing certain information and resources upon request. Mr. Osterman also asserted that the FDIC is not attempting to, and does not intend to, prohibit banks from offering products or services to nonbank financial service providers operating within the law, and that the FDIC’s guidance is clear that banks are neither prohibited from nor encouraged to provide services to certain businesses, provided they properly manage their risk. Similarly, the OCC’s Amy Friend stated that the OCC wants to ensure that banks conduct due diligence and implement appropriate controls, but that the OCC is not prohibiting banks from offering services to lawful businesses. She stated the OCC has found that some banks have made a business decision to terminate relationships with some nonbank providers rather than implement additional controls.
On March 27, Congresswoman Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee, released draft legislation to reform the housing finance market. Congresswoman Waters also released a summary of the proposal and a section-by-section analysis of the bill. The proposed bill, titled the Housing Opportunities Move the Economy (HOME) Forward Act of 2014, offers a counter to a bill already approved by the committee—without any Democratic votes—that would replace Fannie Mae and Freddie Mac with a secondary market funded only by private capital. In certain ways, the HOME Forward Act parallels legislation recently unveiled by the leaders of the Senate Banking Committee. Like its Senate counterpart, Ms. Waters’s bill would establish an insurance fund to provide an explicit government guarantee for certain mortgage-backed securities. Also, similar to the Senate bill, Congresswoman Waters’s proposal would require private backers to take the first 5 percent of any loss (the Senate bill requires private backers to take the first 10 percent of any loss) before the government guarantee is activated. But unlike the Senate bill, which would allow for a variety of issuers to access the mortgage backed security market, the HOME Forward Act would create a co-op of lenders with exclusive authority to issue government-backed MBS. In further contrast to the Senate bill, the HOME Forward Act includes a “waterfall” plan for distribution of Fannie Mae’s and Freddie Mac’s earnings in conservatorship to (i) Treasury Senior Preferred shares; (ii) any reserve funds needed in connection with wind-down of Fannie Mae and Freddie Mac; (iii) outstanding Affordable Housing Fund payments; and (iv) existing preferred and common shareholders, including Treasury as holder of warrants. The HOME Forward Act also would eliminate rigid affordable housing goals and replace them with a broad based duty to serve requirement.
On March 5, a group of 16 Democratic U.S. House members sent letters to the leaders of the Federal Reserve Board, the OCC, the FDIC, and the NCUA requesting that the agencies issue guidance that would provide legitimate marijuana businesses access to the federal banking system. Last November, those agencies declined to provide such guidance, stating that the DOJ and FinCEN first needed to agree on a framework to apply BSA/AML provisions to banks seeking to serve marijuana businesses. With FinCEN and DOJ having recently issued such guidance, the lawmakers renewed their push for legitimate marijuana businesses—now operating in 20 states and the District of Columbia—to have “equal access to banking services as other licensed businesses.”
On February 27, the U.S. House of Representatives passed H.R. 3193, a bill that would convert the CFPB into an independent Financial Product Safety Commission led by a five-member board and subject to annual appropriations. The bill aggregates five bills the House Financial Services Committee approved last November. The bill also would, among other things, establish new rulemaking procedures for the Commission and amend its data collection authority and processes. Rep. Gary Peters (D-MI) led the effort on behalf of the House Financial Services Committee minority to unify Democrats in opposition to the bill. His “dear colleague” letter urged fellow Democrats to “stand with consumers and oppose this flawed, unnecessary legislation to undo progress we’ve made since reforming Wall Street.” Ten Democrats joined 222 Republicans in the 232-182 vote that advanced the legislation. The Democratic-controlled Senate is unlikely to take up the measure, however.
On February 26, Senators Jeff Merkley (D-OR), Elizabeth Warren (D-MA), and other Democratic Senators, together with Representatives Elijah Cummings (D-MD), Maxine Waters (D-CA), and other Democratic House members, sent a letter to Attorney General Eric Holder encouraging the DOJ to “continue a vigorous review of potential payment fraud, anti-money-laundering violations, and other illegal conduct involving payments by banks and third-party payment processors.” The lawmakers highlighted a number of specific issues on which the DOJ should focus: (i) know-your-customer obligations, which they believe should include a review of whether a lender holds all required state licenses and follows state lending laws; (ii) use of lead generators, including those that auction consumer data; (iii) high rates of returned, contested, or otherwise failed debits or the regular use of remotely created checks, which they state may indicate payment fraud; and (iv) lenders’ failure to incorporate or maintain a business presence in the U.S., which they assert can be indicative of fraud and other payment system violations, including money-laundering.
On February 19, House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent a letter asking Comptroller of the Currency Thomas Curry and National Mortgage Settlement Monitor Joseph Smith to “carefully scrutinize the sale of mortgage servicing rights from banks to nonbanks” to ensure nonbank servicers have the capacity to handle increased loan volume and that borrowers are not harmed. Representative Waters explained that consumer advocates are concerned that when a bank subject to the National Mortgage Settlement transfers MSRs to a nonbank not subject to the National Mortgage Settlement, the transferred loans are not afforded the same protections as they would be under that agreement. Ms. Waters is concerned that the CFPB rules that would apply to such transferred loans offer fewer protections than those in the National Mortgage Settlement. She also requested that the Comptroller and/or the Monitor examine the extent to which servicing transfers are potentially being used to “evade the modification of loans for borrowers who would benefit most from the terms of the Settlement.” Ms. Waters joins other policymakers, including the CFPB’s Deputy Director and New York’s banking regulator, who recently raised concerns about the impact on borrowers from the transfer of mortgage servicing rights.