CURRENT MONTH (April 2018)
Banking Law
Increase to Appraisal Threshold for Commercial Real Estate Transactions
By A. Elena Prucyk, Rabobank, N.A.
On April 2, 2018, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency jointly issued a final rule to exempt commercial real estate (CRE) transactions of $500,000 or less from appraisal requirements. Regulated institutions may use an evaluation that is consistent with safe and sound banking practices, rather than an appraisal, for the exempted CRE transactions. The rule is in response, in part, to industry concerns that the threshold level had not kept pace with price appreciation in the CRE market (the prior $250,000 threshold had been in place since 1994). The agencies determined that a $500,000 threshold “will provide regulatory relief for financial institutions by removing the appraisal requirement for a material number of transactions without threatening the safety and soundness of financial institutions.” The rule became effective April 9, 2018, upon publication in the Federal Register.
2nd Circuit Affirms Dismissal of Class Action Alleging AML Misrepresentations by International Bank
By Buckley Sandler LLP
On April 13, 2018, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s dismissal of a proposed class action alleging an international bank misrepresented the effectiveness of internal controls to investors, during a time when Russian traders were laundering more than $10 billion through the bank. In May 2016, investors filed a class-action complaint against the bank alleging securities law violations for touting its compliance efforts while Russian clients were engaging in “mirror trades.” The district court dismissed the complaint for failing to sufficiently allege how the bank misled investors. Specifically, the court noted that general statements about reputation and compliance amount to “puffery” and are regularly held to be non-actionable. In affirming the district court’s decision, the Second Circuit agreed that the plaintiffs failed to adequately allege scienter. The panel rejected the plaintiff’s reliance on, among other things, a consent order between the New York Department of Financial Services and the bank as evidence the bank was aware of Russian wrongdoing during the time it made its alleged misrepresentations, stating, “The consent order thus contradicts the plaintiffs’ argument that the individual defendants were aware of any wrongdoing at the time they made their alleged misrepresentations.”
Banking Agencies’ Technical Revisions to Call Reports
By Michael Flynn, Goodwin Procter LLP
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the Agencies) finalized additional technical revisions to streamline call reports, which will take effect as of the June 30, 2018, report date. The Agencies subsequently released a 45-page slide deck from an April 5, 2018, webinar regarding these call report revisions and other reporting changes. The deck includes slides addressing (1) call report changes for investments in equity securities and other equity investments, (2) the regulatory capital transition rule, (3) call report burden-reduction initiatives and resulting call report revisions, and (4) reporting implications of the new federal tax laws.
Consumer Finance Law
Eighth Circuit Applies “Materiality” Requirement to FDCPA Action, Joining Other Circuits
By Ernest P. Wagner, Maurice Wutscher LLP
In affirming a trial court’s order granting judgment in favor of a debt collector and against a borrower, the U.S. Court of Appeals for the Eighth Circuit recently joined with the Third, Fourth, Sixth, Seventh, and Ninth Circuits in applying a materiality standard to section 1692e of the FDCPA. The borrower alleged that the debt collector’s failure to prove a necessary assignment in an underlying suit violated 15 U.S.C. § 1692e(5) by threatening to “to take any action that cannot legally be taken or that is not intended to be taken.” The Eighth Circuit found that the debt collector’s failure to prove the assignment “did not constitute a materially false representation.” The Eighth Circuit joined other circuits in finding that a representation must be material to violate 15 U.S.C. § 1692e. This is because the FDCPA is designed to help consumers make a decision and is not concerned with a false representation that does not impact a consumer’s ability to make that decision. Thus, when an alleged representation does not affect the least sophisticated consumer’s decision making, it is immaterial and does not violate the statute.
Student Loan Servicer Must Comply with CFPB CID Pending Appeal
By Buckley Sandler LLP
On April 17, 2018, the U.S. District Court for the Western District of Pennsylvania ordered a student loan servicer to comply with a Consumer Financial Protection Bureau (CFPB) Civil Investigative Demand (CID) while the servicer awaits appeal. In February 2018, the court enforced a CFPB CID that was issued against the student loan servicer in June 2017. In granting the CFPB’s petition to enforce the CID, the court found that the CID’s Notification of Purpose met the statutory notice requirements because nothing in the law barred the CFPB “from investigating the totality of a company’s business operations.” The court also found that the investigation was for a “legitimate purpose,” the information requested was relevant and not already known by the CFPB, and the request was not unreasonably broad or burdensome. The servicer filed a motion to stay the court’s order pending appeal to the U.S. Court of Appeals for the Third Circuit. In denying the servicer’s motion, the court held that the servicer would not be irreparably harmed if it responded to the CID should the Third Circuit reverse the court’s decision, because the appeals court could order all documents to be returned and prevent the CFPB from acting upon information learned through the CID. Additionally, the servicer argued that the CFPB would not be injured if the court granted the stay because the agency had not yet brought an enforcement action. The court disagreed with this argument, holding that the CFPB cannot bring an enforcement action without reviewing the relevant documents, and that granting the stay would only “further stall the CFPB’s efforts to obtain documents and information that it requested nine months ago.”
LPMI Disclosure Not Required Unless LPMI a Condition of Obtaining Loan
By Mickey Lee, Maurice Wutscher LLP
The U.S. Court of Appeals for the Fourth Circuit recently concluded that lender-paid mortgage insurance (LPMI) disclosures under the federal Homeowners Protection Act (HPA) are required only if LPMI is a condition of the borrower obtaining the loan. In affirming the trial court’s dismissal of the borrower’s claims, the Fourth Circuit dissected the specific language of the provision in the HPA addressing disclosures related to mortgage insurance. Specifically, the Fourth Circuit determined that the disclosures are required only if LPMI is a condition of the loan at the time of closing. In this case, the lender did not condition the loans on the borrowers’ obtaining LPMI at the time of closing. Instead, the lender began purchasing LPMI weeks to several months after the loans closed in order to make the loans more marketable on the secondary market. Because LPMI was not, at the time of closing, a condition of borrowers obtaining the loans, the Fourth Circuit affirmed that the notice requirements under the HPA were not triggered.
Senate Votes to Block CFPB’s Auto Guidance
By Buckley Sandler LLP
On April 18, 2018, the U.S. Senate took action under the Congressional Review Act (CRA) to strike down the Consumer Financial Protection Bureau’s Bulletin 2013-02 (Bulletin) on indirect auto lending and compliance with the Equal Credit Opportunity Act (ECOA). The vote followed a Government Accountability Office (GAO) letter from December 2017 to Senator Pat Toomey (R-Pa) concluding that the Bulletin was a “general statement of policy and a rule” subject to the CRA. GAO reasoned that the CRA’s definition of a “rule” includes both traditional rules, which typically require notice to the public and an opportunity to comment, and general statements of policy, which do not. The GAO said the Bulletin met this definition, “since it applies to all indirect auto lenders; it has future effect; and it is designed to prescribe the Bureau’s policy in enforcing fair lending laws.” The House is expected to vote on the measure soon. On April 17, the White House issued a Statement of Administrative Policy supporting Senate nullification of the guidance, stating that if the resolution were to be presented to the President, his advisers would recommend he sign it. If the measure is successful, this would be the first time that Congress has used the CRA to repeal a regulatory issuance outside the statute’s general 60-day period.
CFPB Continues to Issue Requests for Information
By Michael Flynn, Goodwin Procter LLP
At the time last reported here, the Consumer Financial Protection Bureau (CFPB) had issued six Requests for Information (RFIs) concerning various aspects of its procedures and operations. Since that time, the CFPB has continued to issue RFIs, adding seven new RFIs to the previously issued total. The new RFIs include handling of consumer complaints and inquiries; the CFPB’s financial education programs, guidance materials, and activities (including implementation support); the CFPB’s inherited regulations and inherited rulemaking authorities and its adopted regulations and new rulemaking authorities; its rulemaking processes; and its public reporting prices regarding consumer complaint information. These RFIs have comment periods that end on various dates in June and July. To date, the series of RFIs have drawn significant comment activity from trade associations and other interested parties.
FHFA Announces 2019 Launch of New Common Mortgage-Backed Security
By Michael Flynn, Goodwin Procter LLP
On March 28, 2018, the Federal Housing Finance Agency (FHFA) announced that, on June 3, 2019, Fannie Mae and Freddie Mac (GSEs) will begin to issue a new, common security, the Uniform Mortgage-Backed Security (UMBS), in place of their current offerings of TBA-eligible mortgage-backed securities. The UMBS will be issued through the GSEs’ joint venture, Common Securitization Solutions (CSS), using the Common Securitization Platform. Upon the launch of UMBS, Fannie Mae will join Freddie Mac in using CSS for data acceptance, issuance support, and bond administration activities related to current single-class, fixed-rate, mortgage-backed securities. CSS will be expanded to include the administration of multi-class securities and commingled-enterprise UMBS and the production of UMBS disclosures.
