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 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 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.
Democratic Lawmakers Urge Federal Reserve Board To Increase Direct Role In Supervision And Enforcement
On February 11, Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) sent a letter to newly appointed Federal Reserve Board Chairman Janet Yellen, asking that she reconsider the Board’s policy of delegating supervisory and enforcement powers to staff. The lawmakers cite a recent letter from former Federal Reserve Chairman Ben Bernanke, in which he explained that in the last 10 years, the Board of Governors voted on only 11 of nearly 1,000 enforcement actions, and that under current application of the Federal Reserve’s enforcement delegation policy, the Federal Reserve can enter into consent orders without ever receiving formal approval of senior staff. The letter asks for a change in policy that would require the Board to retain greater authority over the Federal Reserve’s enforcement and supervisory activities. Specifically, the lawmakers recommend that (i) the Board vote on any consent order that involves $1 million or more or that requires a bank officer to be removed and/or new management installed; (ii) staff formally notify the Board before entering into a consent order under delegated authority; (iii) each Board member be provided with the necessary staffing capacity to review and analyze pending enforcement actions; and (iv) all Board members receive a copy of all letters sent to the Chairman or another Board member by a committee or member of Congress.
On February 5, the House Homeland Security Committee unanimously approved H.R. 3696, the National Cybersecurity and Critical Infrastructure Protection Act of 2013 (the NCCIP). The NCCIP builds on many of the ideas set forth in the February 2013 Presidential Executive Order on cybersecurity. The bill seeks to enhance cybersecurity readiness in governmental and private institutions, in part, by facilitating information sharing and a “public-private collaboration” between government agencies and “critical infrastructure owners” and by promoting “cross-sector coordination and sharing of threat information” through NIST. The bill directs NIST to develop voluntary best practices that include individual privacy and civil liberty protections. The NCCIP also amends the Support Anti-Terrorism by Fostering Effective Technologies Act of 2002 (SAFETY Act) to provide liability protections for those selling or providing agency-approved cybersecurity technology to customers.
This week, several congressional committees held hearings to review recent data security breaches and related consumer privacy issues, particularly those related to consumer financial data and payment systems. Generally, the hearings covered (i) potential enhancements to federal enforcement capabilities, (ii) card and payment system technologies and potential data security standards, and (iii) consumer protection enhancements. The hearings included two by the Senate Banking Committee—the first by a Subcommittee and a second held by the full Committee—as well as hearings held by the Senate Judiciary Committee and a Subcommittee of the House Energy and Commerce Committee. With regard to federal enforcement capabilities, the FTC reiterated its support for federal legislation that establishes a national breach notification requirement and a federal data security standard the FTC can enforce with civil penalties. The FTC also would like (i) its jurisdiction for data security enforcement to include nonprofit organizations, and (ii) APA rulemaking authority to address evolving risks. In support of the FTC’s request for additional authority, several members highlighted their view of the FTC’s limited ability to enforce data security under section 5 of the FTC Act. In particular, Senator Elizabeth Warren (D-MA) asserted that the FTC Act’s demanding standard and lack of strict liability unnecessarily limits the FTC’s authority to protect the public in data security matters. The FTC believes federal legislation should not preempt stronger state laws, and that state attorneys general should have concurrent enforcement authority. Significant debate centered on the possible benefits of implementing “Chip and PIN” technology in payment cards, with several legislators questioning why such technology is in widespread use in other major economies but has not yet been deployed in the U.S. Witnesses representing retailers repeatedly called on banks and payment network companies to move immediately to that technology, claiming that the outdated cards still being issued in the U.S. create unnecessary security risk. Banks outlined their plans to move to chip-based cards by October 2015 and stressed the role retailers must play in helping secure consumer data. As a corollary to technological solutions, committee members debated the role of government in setting data security standards, including for payments. Several members of Congress were critical of non-governmental standards bodies and called for a technologically neutral federal standard. Finally, Senator Mark Warner (D-VA) expressed an interest in amending federal law to extend zero-liability protections currently applicable to credit card transactions to debit card transactions.
On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.
The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.
Mortgage Rule Implementation / Impact
Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.
The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members. Read more…
On January 9, Representatives Ed Royce (R-CA), Jim Himes (D-CT), Spencer Bachus (R-AL), and Carolyn Maloney (D-NY) petitioned FHFA Director Mel Watt to expeditiously direct Fannie Mae and Freddie Mac to revise their seller/servicer guidelines to permit the use of credit scores from alternative credit score providers, so long as the scores are “empirically derived and demonstrably and statistically sound.” The lawmakers argue that a move to permit the use of scores other than those offered by FICO would “remove an unfair barrier to entry in the mortgage market” and “encourage the development of more predictive credit scores.”
On January 8, House Financial Services Committee chairman Jeb Hensarling (R-TX) and committee member Shelly Moore Capito (R-WV) introduced a bill, H.R. 3819, that would clarify that the Volcker Rule will not require banking institutions to divest their ownership in Trust Preferred Securities (TruPS) collateralized debt obligations (CDOs) that were issued before the date of the final Volcker Rule, December 10, 2013. A group of Republican Senators also announced a bill, the text of which was not immediately available. As recently reported, federal regulators are reviewing whether it is appropriate and consistent with the Dodd-Frank Act to fully exempt TruPS CDOs from the Volcker Rule prohibitions on ownership of covered funds. On January 7, a group of House Democrats sent a letter to the regulators urging them to exempt banks with less than $15 billion in assets from the Volcker TruPS CDO divestiture requirement.
On December 30, the CFPB released an annual report reviewing consumer financial protection activities undertaken by the Bureau during the last fiscal year. The report was presented to the Committees on Appropriations of the U.S. Senate and House of Representatives pursuant to section 1017(e)(4) of the Dodd-Frank Act and covers August 1, 2012 through September 30, 2013. While it does not identify any planned activities, the report reviews the Bureau’s enforcement and fair lending activities to date, and explains the Bureau’s risk-based prioritization process for addressing lending discrimination and allocating enforcement resources. The report also describes the Bureau’s supervisory process, including procedures for conducting examinations and investigations, as well as its complaint process. Finally, the report reviews the proposed and final rules issued to date and provides, as well as administrative issues such as the agency’s spending and organization.
On December 18, a group of House Democrats sent a letter urging the FTC to focus on the online marketing of products and services by consumer reporting agencies (CRAs). The lawmakers assert that CRAs “often require consumers to jump through hurdles, presumably in an effort to generate additional revenue.” The lawmakers suggest that certain CRAs’ websites mislead and confuse consumers, particularly with regard to the marketing of “free” consumer products and services that are conditioned upon consumers signing up for “costly add-on services such as ongoing credit monitoring.” The letter identifies the following specific practices for FTC scrutiny: (i) marketing “free” products or services that automatically convert to a monthly subscription if the consumer does not cancel within a trial period; (ii) “prominent” advertising of discount packages without disclosing that the initial small dollar enrollment fee converts into a subscription service; and (iii) requiring consumers to set up accounts before being granted access to their credit score or reports, while “barrag[ing]” consumers with add-on product offerings during the account registration process.
Governor Yellen Addresses Bank Director Removal Over Foreclosure Practices; Lawmakers Press Regulators On Independent Foreclosure Review Details
On November 18, Federal Reserve Chair nominee Janet Yellen responded to a recent inquiry by Senator Elizabeth Warren (D-MA) seeking more details about the Federal Reserve Board’s process for determining whether bank officers or directors should be removed because they directly or indirectly participated in the alleged violations that have resulted in various mortgage servicer settlements. Governor Yellen stated that the Federal Reserve Board “has not, to date, taken any actions removing or prohibiting insiders of the mortgage servicing organizations that were subject to the 2011 and 2012 mortgage servicing enforcement actions for their conduct in connection with servicing or foreclosure activities”, but “[the Federal Reserve Board is], however, continuing to investigate whether such removal or prohibition actions are appropriate.” In addition, on November 15, Senator Warren, joined by Representatives Elijah Cummings (D-MD) and Maxine Waters (D-CA), again pressed the Federal Reserve Board and the OCC to release a public report on the Independent Foreclosure Review process. This latest request follows other similar requests made earlier this year.