On December 18, President Obama signed into law H.R. 5859, the “Ukraine Freedom Support Act of 2014.” First introduced in the House on December 11, the bill gives the President the authority to impose sanctions against countries, entities, and individual persons that pose potential threats to financial stability through excessive risk-taking with the Russian market. The bill provides authority for sanctions against foreign persons, including executive officers of an entity, relating to (i) banking transactions; (ii) investing in or purchasing equity or debt instruments; (iii) U.S. property transactions; and (iv) Export-Import Bank of the United States assistance. Finally, the bill directs the President to “use U.S. influence to encourage the World Bank Group, the European Bank for Reconstruction and Development, and other international financial institutions to invest in and stimulate private investment in such projects.”
On December 18, after passing unanimously in both houses of Congress, President Obama signed into law S.3008, the Foreclosure Relief and Extension for Servicemembers Act of 2014. Previously, the SCRA’s protection for servicemembers against foreclosure for one year after the end of active duty was set to expire at the end of 2014. The Act extends this protection until the end of 2015, at which point the foreclosure protection is scheduled to revert to the period of active duty plus 90 days that was in effect in 2008.
On December 2, the U.S. Senate confirmed Nani Coloretti to be appointed as the new Deputy Secretary of HUD. Nominated in March, Coloretti currently serves as the Assistant Secretary for Management at the Department of Treasury where she advises on the development and execution of Treasury’s budget, strategic plans, and the internal management of the Department and its bureaus. Following the passage of the Dodd-Frank Act, she also helped stand-up the CFPB by serving as its Acting COO.
Senator Warren And Congressman Cummings Urge GAO To Study Economic Vulnerability Of Non-Bank Mortgage Servicers, Risks To Consumers
On October 20, Senator Warren and Congressman Cummings co-authored a letter to the GAO requesting that the agency investigate possible effects on the non-bank servicing industry in the event of an economic downturn. In addition, the duo urged the GAO to study the potential risks to consumers should a major non-bank servicer fail. The letter stems from a report recently issued by the FHFA-OIG. The report cites that the rise in non-bank mortgage servicers “has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers’ workload outstrips their processing capacity.”
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.”
Supreme Court Holds President May Make Recess Appointments During Intra-Session Recesses Of Sufficient Length
On June 26, the Supreme Court rejected the federal government’s challenge to a January 2013 decision by the D.C. Circuit that appointments to the National Labor Relations Board (NLRB) made by President Obama in January 2012 during a purported Senate recess were unconstitutional. NLRB V. Noel Canning, No. 12-1281, 2014 WL 2882090 (U.S. Jun. 26, 2014). A five-member majority of the Court held that Presidents are permitted to exercise authority under the Recess Appointments Clause to fill a vacancy during both intra-session and inter-session recesses of sufficient length, and that such appointments may fill vacancies that arose prior to or during the recess.
The Court determined that the phrase “recess of the Senate” is ambiguous, and that based on the functional definition derived from the historical practice of past presidents and the Senate, it is meant to cover both types of recesses. Further, the court held that although the Clause does not indicate how long a recess must be before a president may act, historical practice suggests that a recess less than 10 days is presumptively too short. The Court did not foreclose the possibility, however, that appointments during recesses of less than 10 days may be permissible in unusual circumstances. The Court also validated the Senate’s practice of using pro forma sessions to avoid recess appointments, holding the Senate is in session when it says it is, provided it retains capacity to conduct business. Because the Senate was in session during its periodic pro forma sessions, and because the recess appointments at issue were made during a three-day recess between such sessions, the appointments were invalid.
A minority of the Court concurred in the judgment, but endorsed a narrower reading of the President’s authority to make recess appointments and the Senate’s ability to avoid triggering the President’s recess-appointment power. Writing for that minority, Justice Scalia explained that the plain constitutional text limits the President’s recess appointment power to filling vacancies that first arise during the recess. The minority reading of the Clause also limits the President’s recess appointment power to recesses between legislative sessions, and not intra-session ones. CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members whose appointments were at issue in this case, but was subsequently re-nominated and confirmed for the position. He later ratified CFPB actions taken during the period he served as a recess appointee.
On May 19, the Senate Banking Committee’s chairman and ranking member, Senators Tim Johnson (D-SD) and Mike Crapo (R-ID), sent a letter to the leaders of the Treasury Department, the SEC, the CFTC, the OCC, the FDIC, and the Federal Reserve Board regarding recent developments in the use of virtual currencies and their interaction with the global payment system. The Senators ask the regulators a series of questions related to the role of virtual currencies in the U.S. banking system, payment system, and trading markets, and the current role of federal regulators in developing local, national, and international enforcement policies related to virtual currencies. The Senators also seek the agencies’ expectations on virtual currency firms’ BSA compliance, and ask whether an enhanced regulatory framework for virtual currencies is needed.
On May 15, the Senate Banking Committee voted 13-9 to approve S. 1217, the Housing Finance Reform and Taxpayer Protection Act. A draft version of the bill, which generally would end the government’s conservatorship of Fannie Mae and Freddie Mac and reform the housing finance system, was first released in March. That draft built off of legislation introduced last year by several committee members. The draft was subsequently amended in advance of the committee vote, and during the committee’s session, a package of additional amendments was approved. Committee members indicated they will engage in further efforts to build support for the bill and a potential vote by the full Senate, though at this time such a vote is unlikely.
On May 14, six Senate Democrats, including Senate Banking Committee Members Jeff Merkley (D-OR) and Elizabeth Warren (D-MA), sent a letter to CFPB Director Richard Cordray asking that the CFPB consider the proposals included in Senator Merkley’s SAFE Lending Act, S. 172, in developing the forthcoming payday lending proposed regulations. That legislation primarily attempts to address perceived gaps in the regulation of Internet and offshore small dollar lenders—including those lenders affiliated with Native American tribes—and lead generators. The letter also petitions the CFPB to adopt “strong” reforms—such as minimum loan terms, fee and renewal limitations, and a waiting period between loans—that cover all types of small dollar lending. The CFPB highlighted many of these potential reforms in a March 2014 report and field hearing.
Senator Durbin Presses Student Loan Servicers On SCRA; Consumer Group Wants More Student Borrower Information
On May 14, Senator Dick Durbin (D-IL) sent a letter to student loan servicers calling on them to voluntarily establish a liaison for servicemembers with student loan accounts to assist those servicemember with obtaining SCRA protections. On May 12, the National Consumer Law Center sent a letter to Education Secretary Arne Duncan complaining about the Department of Education’s alleged inadequate responses to NCLC inquiries seeking (i) information and data about why borrowers default and incidence of re-default; (ii) information about the Department’s commission and compensation system for servicers and collectors and performance evaluation metrics; (iii) copies of guidance to servicers and collectors; (iv) information about servicer performance broken down by percentage of loans in various stages of delinquency, percentage of borrowers enrolled in income-driven repayment (IDR), retention rates for those enrolled in IDR, re-default rates, and percentage of borrowers in deferments and forbearances; (v) information about collection and servicer complaint systems; and (vi) breakdown of accounts sent to the Department of Treasury for offset, including by type of benefit program and by demographic information including age. The letter also outlines NCLC’s operational concerns, including with regard to loan rehabilitation and affordable repayment, collection agency oversight, and servicing performance metrics.
HUD To Insure Reverse Mortgages Protecting Non-Borrowing Spouses; Senators Seek Protections For Surviving Heirs
On April 25, HUD issued Mortgagee Letter 2014-07, which states that effective August 4, 2014, HUD will apply an alternative interpretation of Subsection 255(j) of the National Housing Act, which HUD has interpreted to limit its reverse mortgage program (HECM) to insuring only those that contain a safeguard to defer repayment of the loan until the homeowner’s death and certain other circumstances. Going forward, HUD also will insure HECMs that contain a provision deferring the due and payable status in the event of the death of the last surviving mortgagor or the death of the last surviving non-borrowing spouse (including common law), if the spouse was identified at the time of closing. HUD states the change will obviate the need for non-borrowing spouses to refinance the loan upon the mortgagor’s death. HUD intends to publish a rule on this issue, but decided to take initial action through a mortgagee letter, as allowed under the Reverse Mortgage Stabilization Act of 2013.
On April 30, Senators Schumer (D-NY) and Boxer (D-CA) sent a letter to HUD Secretary Donovan following reported allegations that reverse mortgage companies are threatening heirs with foreclosure instead of following HUD’s rules and allowing them to satisfy the loan at 95% of current appraised value. The Senators’ letter asks HUD to: (i) issue a mortgagee letter making clear that a matured reverse mortgage loan can be extinguished by the mortgagor, the mortgagor’s estate, or personal representative by paying 95% of the home’s market value; (ii) develop a letter that servicers can send to a borrower’s family members and heirs that outlines options for satisfying the loan; and (iii) enforce existing rules and require that any servicer that fails to offer this option within the required time allow a family member or heir to pay the lower of 95% of the home’s value at the time the loan became due or 95% of the home’s value at the time the error was corrected.
On March 16, Senate Banking Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) released long-awaited draft legislation to end the government’s conservatorship of Fannie Mae and Freddie Mac and reform the housing finance system. The Senators also released a summary of the proposal and a section-by-section analysis. The bill adopts many of the principles originally outlined in bipartisan legislation introduced last year by Senators Mark Warner (D-VA) and Bob Corker (R-TN). Like the Warner-Corker bill, the leadership proposal would create a Federal Mortgage Insurance Corporation (FMIC), modeled in part after the FDIC and intended to provide an explicit government backstop for certain MBS. The government backstop would sit behind private investors required to hold at least 10% capital on FMIC-issued securities. FMIC losses in turn would be backed by a reinsurance fund. The FMIC also would (i) oversee a new mortgage securitization platform; (ii) supervise guarantors, aggregators, servicers, and private mortgage insurers; and (iii) collect fees dedicated to support affordable housing and allocated among the Housing Trust Fund, the Capital Magnet Fund, and a new Market Access Fund. Under the bill servicers, aggregators, and others would be subject to capital requirements now only applicable to banks. The bill would establish a 5% down payment requirement for borrowers, 3.5% for first time borrowers. The bill also would create a jointly owned small lender mutual intended to provide small lenders access to the secondary market. The leadership’s small lender mutual would be open to more banks—any depository institution with up to $500 billion in assets—than the Warner-Corker plan would allow. The Committee is expected to markup the legislation in the coming weeks.
State Banking Associations Object To Senators’ Request For Increased Bank Payment System Security Oversight
On March 5, 53 state bankers associations sent a letter to Federal Reserve Board Chair Janet Yellen defending banks’ efforts to secure consumer financial data and highlighting the responsibilities of other parties, in particular merchants, to do the same. The banking associations, representing bankers in every state and Puerto Rico, took issue with a letter Democratic Senators Dick Durbin (D-IL) and Al Franken (D-MN) sent last month to the Federal Reserve Board Chair seeking information about the Board’s oversight of card issuers’ fraud prevention policies and recommending that the Board do more to verify the effectiveness of such policies. The banking associations contend that the Senators’ letter is a “thinly veiled effort to once again advance the regulation of interchange under the guise of current concerns over data security,” and criticize the Senators for converting a discussion about security responsibilities into one about interchange fees.
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.