Category Archives:Lending

Consequences of Election

The trade associations and the trade journals have all made their prognostications as to the consequences of a Trump administration with a Republican majority in both the House (solid) and Senate (slim). The following is a review of the potential actions that could result from this new regime.
CFPB. While we would all like to put that genie back into the bottle, unwinding the agency appears unlikely to me. To create it, the Fed, FTC, and HUD all dismantled their consumer compliance rulemaking and interpreting sections. Some experts retired while some moved over to the CFPB. All of the rule-making functions were shifted to the CFPB. I suspect that it is unlikely that this function will be de-centralized with all of those divisions re-created. Also, I am skeptical that the Fed would get back its consumer regulation writing authority given some of the animosity that Trump has expressed toward the Fed! However, there are several other possible scenarios that seem very likely.
First, President Trump could take the DC Court of Appeals at its word and dismiss Director Cordray, with or without cause. The PHH decision “cured” the constitutional defects in the organization by concluding that the president should be able to remove him without cause. Alternatively, perhaps the extremely high-handed approach taken by this director could support a finding of “cause” to remove. The refusal to acknowledge the statutes of limitation applicable to various laws and the punitive use of penalties as well as retroactive changes in the game rules all are highly offensive and might support a “cause” finding.
Second, a Republican majority Congress could finally enact meaningful change to the agency by replacing the single director with a multi-party commission, more accountable to Congress.  In addition, the open pocket book should be slammed shut!
Executive Orders. Trump has promised to rescind Obama’s Executive Orders on “day one.” There are several relating to federal contractors that have been troubling to banks. These include rules relating to minimum wage and diversity rules. Not all applied to banks, however.
Employment Issues. The Obama DOL reversed the Bush DOL on the rules for exemption of mortgage loan officers. I could envision this interpretation swinging back around. In addition, DOL significantly increased the salary test for the exempt categories. I could see those getting cut back at least somewhat. The banking regulators have been asking banks with more than 100 employees for their diversity plans. That was part of the Dodd Frank Act but is not well articulated.  I would like to see that de-emphasized as well.
Arbitration. The CFPB clearly does not like arbitration. Its rule-making would eviscerate this remedy, arguably in contravention of the Federal Arbitration Act. The Dodd Frank Act only prohibits mandatory pre-dispute arbitration in residential mortgages and authorizes a study of other scenarios. This is another area that should be reined in.
Overdraft Programs. The CFPB has this on its agenda but has done very little work on it as of this writing. In a meeting I participated in this spring in Washington, it was painfully clear that Cordray doesn’t understand the difference between an ad hoc program and an automated one. It is also clear that the CFPB wonks don’t grasp the fact that their rules (like the small dollar loan proposal) would actually reduce credit availability and make it more costly. Similarly, strict limits on overdraft privilege would eliminate a cheap source of credit for many.
Residential Mortgage Rules. This area is extremely complex. The CFPB actually put into place rules with more flexibility than the statute. They could do this under their authority to create flexibility where appropriate. And integrating Truth in Lending and RESPA disclosures instead of having two sets of inconsistent documents is not a bad thing. Industry has invested millions of dollars and untold time into making TRID work. Unraveling it at this point would be hugely expensive.
By contrast, implementing more flexibility in the ability to repay rules would make sense. Both the statute and the rules make it hard for self-employed and high net worth customers to qualify for credit!
Basel III. It appears that European banks may thumb their collective noses at the changed and increased capital requirements. Thus, it doesn’t make sense for American banks to be hamstrung by these rules. While many of the pending Fed rules would primarily apply to the largest banks, the existing HVCRE requirements are having a negative impact on interim construction financing, hurting both lenders and the economy.
Taxes. This appears to be the area of greatest potential for meaningful reform. The changes in brackets and rates would be straight-forward, real relief. And, this has the potential to stimulate meaningful economic activity.
Fair Lending. Although the US Supreme Court held that the Fair Housing Act enforcement can use statistical analysis to find “disparate impact,” it has not applied this to the Equal Credit Opportunity Act-which has different statutory language. I believe that there is an opportunity here to rein in arbitrary actions by the banking regulators and the Department of Justice. Again, these have had the perverse effect of restricting credit availability in the pursuit of “cookie cutter” lending standards and terms.
Recent redlining rulings-which have been agreed to without trial-have forced banks to put branches in locations identified by the regulators or DOJ. This is antithetical to the concept that banks must also answer to their shareholders. It effectively converts banking into a kind of utility. All of this is the result of prosecutorial privilege rather than clear rules. This could be dialed back with appropriate appointments, I think.
ADA. Banks are being threatened with lawsuits over accessibility of their websites by the blind and visually impaired. Yet DOJ has stated that it will not provide rules for such websites until sometime in 2018. Right now industry doesn’t know which standards will be imposed, but they are liable for failing to meet them! DOJ has supported these lawsuits with amicus briefs but has not supported business by providing answers. Again, the right appointments could clarify this murky source of liability.
Conclusion. With judicious appointments and repeal of certain executive orders, Trump can significantly reduce some of the regulatory burden that is a headwind, slowing economic growth. For more information contact: Karen Neeley.

Extended Comment Period on Third-Party Lending Guidance

The Federal Deposit Insurance Corporation (FDIC) is extending the comment period for proposed guidance on third-party lending. Comments on the proposed guidance, which was published on July 29, now must be received on or before October 27. The 45-day extension was made in response to requests from interested parties who asked for additional time to consider the proposal.

The proposed third-party lending guidance outlines the risks that may be associated with third-party lending as well as the expectations for a risk-management program, supervisory considerations, and examination procedures related to third-party lending.

Comments should be sent to thirdpartylending@fdic.gov and will be posted on the FDIC’s website at https://www.fdic.gov/regulations/laws/publiccomments/.

Examination Guidance for Third Party Lending

Update on Fair Lending

The upcoming Heart of Texas Compliance Officers (HOTCO) meeting will feature Kennedy Sutherland attorney, Karen Neeley, as she provides an update on fair lending. During the meeting, Neeley will review the current status of fair lending following the U.S. Supreme Court decision on fair lending and the Equal Credit Opportunity Act (ECOA.) In addition, she will look at the recent CFPB redlining cases and discuss what they mean for banks.

HOTCO is an association for compliance officers at banks and credit unions in Travis County and surrounding areas. The meeting will take place on May 24, 2016 at 6 pm. at Morelia Mexican Grill in Pflugerville. Additional information regarding the meeting can be found on the Independent Bankers Association of Texas (IBAT) website.

Congress Passes Bill to Continue SBA Lending

On Thursday, July 23, the Small Business Administration (SBA) announced it had reached its annual lending limit for its biggest loan program, the 7(a) loan, two months before the government’s current fiscal year ended. Consequently, applications for small business loans filed by over 1,100 potential borrowers had to be put on hold. The SBA’s lending limit for the 7(a) loan program was capped at $18.75 billion a year.

Congress moved quickly and the Senate quickly passed a bill that would raise the SBA’s annual lending cap for the 7(a) loan program to $23.5 billion. The House approved the bill on Monday, July 27, sending it to President Obama’s desk. The president is expected to sign the bill, which should then restart the application review process for those 1,100 borrowers currently in limbo by the end of the week.

Risks & Opportunities Facing Financial Services

Comptroller of the Currency Thomas J. Curry recently discussed risks and opportunities facing financial services during remarks before the New England Council in Boston, MA. During his speech, the Comptroller commented on interest rate risk, compliance risk, cybersecurity, and the role collaboration can play in mitigating these risks. He also discussed opportunities to improve business operations as well as service to customers.

More specifically, Curry emphasized that the inevitable rise in interest rates could greatly affect loan quality, particularly loans that were not carefully underwritten to begin with, and that ”loans that are typically refinanced, such as leveraged loans,” would be particularly severely affected. The final and “perhaps the foremost risk facing banks today,” according to Curry, is cyber threats. Curry outlined the agency’s efforts to curtail cyber intrusion in the banking industry, highlighting the June 30 release of its Semiannual Risk Assessment . Curry noted lastly that information-sharing is just as important as self-assessment and supervisory oversight and he strongly recommend that financial institutions of all sizes participate in the Financial Services Information Sharing and Analysis Center, a non-profit information-sharing forum established by financial services industry participants to facilitate the sharing of physical and cyber threat and vulnerability information. Collaboration among banks of all sizes and non-bank providers, Curry stated, can be a “game-changer” in more ways than one.”

Read Curry’s remarks

Credit Through Online Marketplace Lending

On July 20, the Federal Register published the Department of the Treasury’s Request For Information on Expanding Access to Credit Through Online Marketplace Lending (RFI). The RFI seeks public comment on the three specific areas relating to the online marketplace lending industry: (i) business models of and products offered to consumers and small businesses; (ii) potential expansion of access to credit to the historically underserved; and (iii) the ways in which the financial regulatory framework can develop to support safe growth within the industry. According to the RFI, online marketplace lending delivers lower costs and faster decision times than traditional lenders, but, so far, the loans are usually only originated to prime or near-prime consumers. However, some online marketplace lenders are developing product structures and underwriting models that may allow for originating loans to non-prime borrowers at lower interest rates. With the rapid growth occurring in the online lending industry, the RFI aims to assist the Treasury Department in examining online lenders’ potential “to expand access to credit, and how the financial regulatory framework can develop to ensure the industry grows safely.” Comments are due August 31, 2015.

Senators Ask CFPB for Small Business Loan Data

On July 10th U.S. Sen. Cory Booker (D-NJ) with fellow senators issued a letter urging the Consumer Financial Protection Bureau (CFPB) to expedite the agency’s rulemaking (Regulation B) around publicly available small business loan data, pursuant to Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The request was made due to the lack of public data which makes it difficult for lenders to identify, control and increase lending across all communities.

The letter states, ““There are nearly 28 million small businesses in the United States. While entrepreneurship can open the door to achieve the American Dream, it can be difficult for entrepreneurs to get their businesses started. Access to capital is often limited in underserved and underrepresented communities—the same communities that disproportionately endure financial hardship and lack broader access to opportunities….Current data collection efforts are fragmentary and provide an incomplete picture of lending in the small business marketplace. Regulation B will facilitate the enforcement of fair lending laws and help identify the credit needs of women-owned, minority-owned, and all small businesses.”

Read the Letter

CFPB Proposes Two-Month Extension of Know Before You Owe Mortgage Rule

The Consumer Financial Protection Bureau (CFPB)has issued a proposed amendment to the Know Before You Owe mortgage disclosure rule, which proposes to move the rule’s effective date from August 1st to October 3, 2015. The rule, also called the TILA-RESPA Integrated Disclosure rule, requires easier-to-use mortgage disclosure forms that clearly lay out the terms of a mortgage for a homebuyer. The Bureau is issuing the proposal to correct an administrative error that would have delayed the effective date of the rule by at least two weeks, until August 15 at the earliest. The Bureau believes that moving the effective date may benefit both industry and consumers with a smoother transition to the new rules. The Bureau further believes that scheduling the effective date on a Saturday may facilitate implementation by giving industry time over the weekend to launch new systems configurations and to test systems. A Saturday launch is also consistent with existing industry plans tied to the original effective date of Saturday, August 1.

The FDIC has revised its interagency examination procedures to reflect the requirements of the TILA/RESPA integrated disclosures (TRID) rule. The revised procedures also reflect the following amendments to other provisions of TILA Regulation Z and RESPA Regulation X:

  1. The alternative definition of the term “small servicer” for certain nonprofit entities in the mortgage servicing rules
  2. The provisions in the ability-to-repay/qualified mortgage rule that give creditors or assignees meeting certain requirements a limited period of time in which to review a transaction and “cure” excess points and fees for purposes of maintaining QM status
  3. Additional exempt transactions under the appraisal rule for higher-priced mortgage loans

The proposal is open for public comment until July 7.

 

Third Annual Fair Lending Report Released

On April 28, the CFPB published its third annual report to Congress on its fair lending activities. The Bureau’s mission includes ensuring fair, equitable, and nondiscriminatory access to credit for all consumers, and that markets for consumer financial products and services are fair, transparent, and competitive. The Report provides an overview of the work performed by the CFPB and accomplishments made during the past year.

According to the  Report, mortgage lending remains a “key priority” for the Office of Fair Lending in terms of both supervision and enforcement, with the focus being largely on Home Mortgage Disclosure Act (HMDA) data integrity and potential fair lending risks in connection with redlining, underwriting, and pricing. In addition, the indirect auto lending industry is also another critical area of concern and focus identified in the Report and, more particularly, the use of discretionary pricing policies within this industry that have resulted in discrimination against certain minorities in violation of the Equal Credit Opportunity Act (ECOA).  For instance, during the past two years, multiple supervisory reviews by the CFPB have revealed discretionary dealer markup and compensation policies which may discriminate against certain minorities. The report also monitored the credit card market, including enforcement actions against a company for its alleged failure to provide certain consumers who had a Puerto Rico mailing address or preferred to communicate in Spanish with debt relief offers. Lastly, the report noted outlined the rights of a consumer whose income is derived, in part or in whole, from a public assistance program. According to the report, the Bureau’s efforts in 2014 to protect consumers from credit discrimination lead to financial institutions providing approximately $224 million in monetary relief to over 300,000 consumers.

In closing the CFPB noted that they look forward to maintaining a sharp focus on discrimination and ensuring that markets operate fairly and effectively for all market participants in 2015.

 

Final Rule Issued for Appraisal Management Companies

Six federal financial regulatory agencies issued a final rule on April 30th that implements minimum requirements for state registration and supervision of appraisal management companies (AMCs). An AMC is an entity that provides appraisal management services to lenders or underwriters or other principals in the secondary mortgage markets. These appraisal management services include contracting with licensed and certified appraisers to perform appraisal assignments.

Under the rule, states may elect to register and supervise AMCs. The AMC minimum requirements in the final rule apply to states that elect to register and supervise AMCs, as AMCs are defined in the rule. The final rule does not compel a state to establish an AMC registration and supervision program, and no penalty is imposed on a state that does not establish a regulatory structure for AMCs. However, in states that have not established a regulatory structure after 36 months from the effective date of this final rule, any non-federally regulated AMC is barred by section 1124 of Title XI from providing appraisal management services for federally related transactions. A state may adopt a regulatory structure for AMCs after this 36-month period, which would lift this restriction.

Under the final rule, participating states must apply certain minimum requirements in the registration and supervision of appraisal management companies. An AMC that is a subsidiary of an insured depository institution and is regulated by a federal financial institution regulatory agency (a federally regulated AMC) must meet the same minimum requirements as state-regulated AMCs except for the requirement to register with a state.

This final rule will become effective 60 days after publication in the Federal Register. The compliance date for federally regulated AMCs is no later than 12 months from the effective date of this rule. A participating state will specify the compliance deadline for state-regulated AMCs.