CFPB Finally Adopts Amendments To Its Mortgage Servicing Rules

On August 4, the Bureau of Consumer Financial Protection (“CFPB”) finally adopted amendments (the “Amendments”) to its 2013 mortgage servicing rules (the “Servicing Rules”). The Servicing Rules implemented provisions in the Dodd-Frank Act to regulate in great detail the residential mortgage servicing business.  The Amendments have been under consideration by the CFPB for more than 20 months and represent the CFPB’s response to numerous issues and concerns raised by industry and consumer groups alike about the Servicing Rules.  The Amendments (which take up more than 900 pages) are significant. They cover the following nine major topics (as well as a few minor ones):

  1. Successors in interest. How to define them, what procedures must be followed to “confirm” them, and how the Servicing Rules will apply to them once they are so confirmed? In adopting these provisions, the CFPB was responding to reports by housing counselors and consumer advocacy groups about a variety of challenges that successors in interest face, including difficulties in establishing their successor status, obtaining information about the status of mortgage loans on their homes or the monthly payment amount, getting servicers to accept their payments, and finding out their options to avoid foreclosure.
  2. Delinquency. When does it begin, and when does it end? This is important for various timing requirements in the Servicing Rules.
  3. Requests for information. How to accurately respond to consumer requests for ownership information about loans in trust where Fannie or Freddie owns the loan or is the trustee of the securitization trust in which it is held?
  4. Force-placed insurance. How do the rules apply in cases where the borrower has insurance but in an insufficient amount? How should the model notices be modified to deal with this? Can loan numbers be included on these notices?
  5. Early intervention. How often must servicers attempt to make live contact and/or send early intervention notices to borrowers whose delinquency lasts several months? How is this affected by a servicing transfer? What about borrowers in bankruptcy or who have invoked their cease communication rights under the FDCPA?
  6. Loss mitigation. Whether and under what circumstances servicers must allow borrowers whose applications were rejected to reapply? May servicers join foreclosure actions instituted by a subordinate lienholder before the borrower is at least 120 days delinquent? How much time should borrowers be given to complete an application?  What actions must servicers take or not take if they receive a complete application after having made the first foreclosure notice or filing? Whether and how servicers must notify borrowers that their applications are complete?  What are servicers’ responsibilities concerning incomplete applications that lack only information in the possession of third parties?  May servicers offer short-term repayment plans based upon an evaluation of an incomplete application?  May servicers stop collecting information from borrowers for a particular loss mitigation option (a) upon learning that the borrower is ineligible for that option, (b) based solely upon the borrower’s stated preference for a different option, or (c) based on the borrower’s stated preference in conjunction with other information?  How do loss mitigation procedures and timelines apply to transferee servicers when there is a pending application at time of transfer?
  7. Prompt payment crediting. How servicers must treat payments made by consumers who are performing under either temporary loss mitigation programs or permanent loan modifications?
  8. Periodic statements. How should servicers disclose the payment amount that is due for loans that have been accelerated, are in temporary loss mitigation programs, or have been permanently modified? Must servicers continue to send periodic statements to consumers who have filed for bankruptcy or consumers whose loans have been charged-off and, if so, with what modifications?
  9. Small servicer. What loans will not count toward the 5,000 limit to qualify as a small servicer?

With certain exceptions, the Amendments will become effective 12 months following their publication in the Federal Register, which may not occur until September. The exceptions are the Amendments that relate to successors in interest and consumers in bankruptcy and the Amendments that address when servicers may stop collecting information from borrowers for a particular loss mitigation option.  These Amendments will not become effective until 18 months after publication in the Federal Register.

We are in the process of developing a webinar to explain the Amendments in more detail and expect shortly to announce in our Financial Services blog the date when this webinar will be presented. Stay tuned.


CFPB Moves Forward With Proposal To Ban Class Action Waivers In Arbitration

The Consumer Financial Protection Bureau has published its long anticipated 377-page proposed rule to bar banks and regulated financial institutions from including class action waivers in mandatory arbitration provisions in consumer contracts.

Mandatory arbitration clauses, and class action waivers, are pervasive in financial contracts. According to a study by the CFPB in 2015 arbitration clauses are used by 53% of credit card contracts, 44% of checking account agreements, 92% of prepaid card agreements, and 84% of storefront payday loan agreements.

The proposed rule would prohibit covered institutions from “using a pre-dispute arbitration agreement to block consumer class actions in court and would require providers to insert language into their arbitration agreements reflecting this limitation.” The rule would apply to a range of financial products, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto and title loans, payday and installment loans, and student loans. Under the proposal, institutions would also be required to submit records of arbitral proceedings to the CFPB. According to the Bureau, it “intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action.”

The proposed rule does not go so far as to outright ban mandatory arbitration clauses in full. But if implemented, the rule would likely have the practical effect of ending most consumer arbitrations because financial institutions will be reluctant to incur costs defending class actions while paying for arbitration.

The proposed rule will be open to public comment for ninety days, and a final rule is anticipated possibly by mid-2017. The CFPB has stated that the rule would have an effective date 30 days after publication of the final rule.

The CFPB’s proposal is consistent with regulators general pushback against arbitration. The CFPB already prohibits mandatory arbitration of disputes related to most mortgage loans and home equity agreements. Mandatory arbitration provisions are also barred from payday loans, vehicle-title loans and similar transactions involving members of the military. In the brokerage industry, the Financial Industry Regulatory Authority bars firms from prohibiting participation in class actions. The Labor Department’s newly published fiduciary-duty rule for financial advisers will permit only arbitration clauses that do not include a class waiver. The Department of Education and The Centers for Medicare and Medicaid Services are likewise considering restrictions on arbitration.

Federal Regulator Issues Proposed Rule Aimed at Incentive Compensation Policies of Banking Organizations

On April 21, 2016, the National Credit Union Administration (collectively, with the Office of the Comptroller of the Currency, Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, and U.S. Securities and Exchange Commission, the “Regulators”), issued a proposed rule (the “Proposed Rule”) designed to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations under Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Read more about the impact of the proposed rule.

Recent changes to the German regulatory situation for debt funds

Pursuant to recent legislative changes, certain investment funds are now entitled under certain conditions to originate or restructure loans in Germany without the need to obtain a banking licence for lending. Due to the legislative changes, it is now easier to originate or restructure third party loans for certain types of German alternative investment funds (AIFs), and various types of German funds now have broad possibilities to grant shareholder loans or to acquire loans. For EU AIFs, it is now generally easier to originate or restructure loans in Germany. Even foreign (i.e. non-EU) funds may now grant or restructure loans in Germany, but subject to much stricter requirements than those for EU AIFs. This Reed Smith alert sets out an overview of the changes and the updated situation.

To read the entire Reed Smith Client Alert, please click here.

New decision on bank’s duties regarding interest rate swaps

The 11th senate of the German Federal Supreme Court again had to deal with the duties of a bank recommending interest rate swap agreements. In this context, the German Federal Supreme Court re-affirmed on 22 March 2016 – XI ZR 425/14 – its position that a bank dealing with a customer interested in the conclusion of an interest rate swap has a core duty to advise this customer. In this context, the bank also has to disclose to its customer a negative market value of the interest rate swap at the time of the conclusion of such swap.

To continue reading about this decision, please click here.

2015 FinCEN Enforcement Trends

To read a review of FinCEN’s enforcement efforts in 2015 and 2014 , which reveal a marked trend away from its longstanding focus on depository institutions and toward otherwise unregulated financial institutions, as well as an increased focus on pursuing penalties against individuals, view the Reed Smith client alert here.

Fourth Circuit Rules FDCPA Does Not Apply to Consumer Finance Company Collecting Debt on Its Own Behalf, Even if It Acquired the Debt After Default

Reed Smith secured a precedential victory in the Fourth Circuit for client Santander Consumer USA Inc., holding that the Fair Debt Collection Practices Act (“FDCPA”) does not apply to a consumer finance company trying to collect debts owed to itself. In Henson v. Santander Consumer USA Inc., No. 15-01187, the court held that such a company is not a “debt collector” subject to the FDCPA when the company purchased the debts in a portfolio of consumer debts—even if some of the debts were in default when acquired.

Because the FDCPA imposes numerous restrictions and requirements on debt-collection activities, it is crucial for consumer finance companies to know when it applies to them. But whether the FDCPA applies to particular debt-collection efforts depends on whether the company is a “debt collector” or a “creditor” under the Act’s notoriously complex definitional provisions.

In Henson, the plaintiffs alleged that they and a class of other borrowers obtained loans from CitiFinancial Auto, and that Santander violated the FDCPA by attempting to collect on those loans after they had defaulted on them. The plaintiffs argued that Santander is a debt collector under the FDCPA, not a creditor, because the loans were in default when Santander acquired them.  On appeal, plaintiffs were supported by amicus briefs filed jointly by the AARP, the National Consumer Law Center; the National Association of Consumer Advocates; Civil Justice, Inc.; Public Justice Center, Inc.; Maryland Consumer Rights Coalition, Inc.; and the Maryland attorney general.

Santander, represented by Travis Sabalewski and Robert Luck of Reed Smith’s Financial Industries Group, first persuaded the Maryland District Court to dismiss the claim. On appeal, Kim Watterson and Richard Heppner of the Appellate Group persuaded the Fourth Circuit three-judge panel to affirm in a precedential opinion by Judge Paul V. Niemeyer. The Fourth Circuit adopted Santander’s view that, despite the FDCPA’s “somewhat complex and technical regulation of debt collector practices,” the statute’s plain language and purpose showed that “it generally does not regulate creditors when they collect debt on their own account and that, on the facts alleged by the plaintiffs, Santander became a creditor when it purchased the loans before engaging in the challenged practices.” The court also rejected the plaintiffs’ and their amici’s reliance on various definitional exceptions to subject Santander to FDCPA regulation.

The Fourth Circuit’s ruling—on a question of first impression in the Circuit—provides consumer finance companies needed clarity on the scope of FDCPA liability.

German Banking Market is on the Move

The German banking market is on the move. This presents opportunities for foreign investors who would like to enter the German financial market. However, in order to acquire an interest in a German financial institution, i.e. credit or financial services institution, an investor has to comply with a couple of specific regulatory requirements.

To continue reading, please click here to view the entire Reed Smith Client Alert.

OCC Announces Shift in Enforcement Policy: Increased Focus on Internal Risk Management and Personal Liability of Bankers

The Office of the Comptroller of the Currency (“OCC”), the primary federal regulator for most large banks, recently issued a new policy on agency enforcement actions seeking civil money penalties (“CMPs”) against institutions and individuals.  There are several key developments that will directly affect institutions and the directors, officers, employees, major shareholders, and vendors associated with them.  These developments include a shift in the weight that the OCC will accord certain aggravating and mitigating factors when determining whether to bring a CMP action and how much of a penalty the OCC will seek, increased expectations for maintaining a robust internal compliance program, and a possible increase in CMP actions brought against specific insiders associated with an institution.

Read the full alert.