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CFPB Regulations on Providing Applicants With Appraisals Go Into Effect

Prior to Dodd-Frank, Section 701(e) of the Equal Credit Opportunity Act provided that a loan applicant had the right to request copies of any appraisals used in connection with his or her application for mortgage credit.  Section 1474 of Dodd-Frank amended Section 701(e) to require that lenders affirmatively provide copies of appraisals and valuations to loan applicants at no additional cost and without requiring applicants to affirmatively request such copies.

The appraisal documentation must be provided to the loan applicant in a timely manner and no later than three days prior to the loan closing unless the applicant waives the timing requirement.  The lender must provide a copy of each written appraisal or valuation at no additional cost to the applicant, though the creditor may impose a reasonable fee on the applicant to reimburse the creditor for the cost of the appraisal.

In September of 2013 the Consumer Financial Protection Bureau adopted final regulations amending Regulation B to implement the statutory changes. The amendments to Regulation B went into effect on January 18, 2014. Among other things, the revised Regulation requires lenders to provide a notice to a loan applicant not later than the third business day after the creditor receives an application for credit that is to be secured by a first lien on a dwelling, a notice in writing of the applicant’s right to receive a copy of all written appraisals developed in connection with the application.

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John ReVeal and Barry Hester Continue 2013 BAI Webinar Series on CFPB Mortgage Rules on March 19

On Tuesday, March 19 (3-4 pm Eastern), Bryan Cave attorneys John ReVeal and Barry Hester continue their 2013 webinar partnership with compliance training leader BAI Learning & Development.  This free event will build on their January 22 overview of the new CFPB mortgage regulations and will specifically explore important exemptions and ambiguities within the final Ability-to-Repay and Qualified Mortgage rules. 

Event and registration details are available here:  http://www.bai.org/bai-events/EventDetails.aspx?ec=0767 .

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Losing Good Loans to Larger Banks? Try an Interest Rate Swap

Many community banks are reluctant to consider interest rate swaps due to perceived complexity as well as accounting and regulatory burdens. But, in a record low interest rate environment, the most desirable customers almost universally demand something that is hard for community banks to deliver: a long-term, fixed interest rate. Large banks are eager to accommodate this demand and usually do so by offering such a borrower an interest rate swap that, together with the loan facility, delivers the borrower a net long-term, fixed rate obligation and the lending bank a loan with an effective variable rate.

The alternatives to using swaps are not appealing. A community bank can limit its product offerings to only variable rate loans or short-term, fixed rate loans and thereby lose many good customers to larger competitors. The bank can offer a long-term fixed rate on the loan and then (a) sell the loan and lose ongoing earnings and the customer relationship, or (b) borrow long-term funds from the Federal Home Loan Bank to match that asset with appropriate liabilities, a choice that significantly erodes profit on the loan and uses up precious wholesale liquidity.

If a community bank wants to compete using interest rate swaps, then there are three general methods for packaging an interest rate swap with a typical loan offered by a community bank. There are several regulations that apply to swaps, including changes to the Commodities Exchange Act enacted by the Dodd-Frank Act and the numerous related rules and regulations promulgated by the U.S. Commodity Futures Trading Commission (the “CFTC”). If the community bank is under $10 billion in assets, then all three swap methods described below should qualify for an exemption from regulatory requirements that interest rate swaps be cleared through a derivatives exchange. Avoiding clearing requirements saves considerable costs and operational effort.

The first is a one-way swap in which a community bank simply makes a long term, fixed-rate loan to its borrower and then executes an interest rate swap with a swap dealer (such as a broker-dealer affiliate of a larger commercial bank) to hedge against rising interest rates. In a one-way swap, the community bank is subject to fair value hedge accounting, which requires the bank to mark the swap to market on its balance sheet and run changes in fair value through its income statement.

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New ECOA and Higher-Risk Mortgage Appraisal Rules Issued

As part of its recent wave of rulemaking, the CFPB issued its final rule implementing a Dodd-Frank amendment to the Equal Credit Opportunity Act (ECOA) on January 18, 2013. Under the new rule, lenders must automatically provide copies of any written appraisal reports and valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. The current version of this rule only requires this disclosure upon an applicant’s request, although it applies to junior lien credit applications, as well. The new rule takes effect January 18, 2014. As it does now, and as the ECOA does generally, the rule will be equally applicable to business and consumer credit applications.

On the same day, the CFPB and five other financial regulatory agencies jointly issued a separate appraisal rule for “higher-risk mortgages”. The interagency rule, which implements an amendment to the Truth in Lending Act also contained in Dodd-Frank, applies to mortgages with an APR exceeding the APOR by certain statutory thresholds – what the relevant Dodd-Frank provision calls higher-risk mortgages but the rule calls “higher-priced mortgage loans” to avoid the introduction of a seemingly new class of Regulation Z mortgages. For these loans, lenders must obtain a written appraisal performed by a licensed or certified appraiser who conducts an interior site visit of the subject property and then share this appraisal with the applicant. Taking aim at fraudulent flipping, the interagency rule also requires a second, more detailed appraisal on homes that were sold in the last 6 months for less than the current purchase price. This new rule is also effective on January 18, 2014.

Qualified mortgages under the CFPB’s final Ability to Repay rule; transactions secured by new manufactured homes, mobile homes, boats or trailers; loans on construction of new homes; and bridge loans will be exempt from the interagency rule. The agencies also announced their intent to publish a supplemental proposed rule to also exempt “streamlined” refinance programs and small dollar loans.

In addition, the agencies noted that they may consider tying the definition of “higher-priced mortgage loans” to the “transaction coverage rate” or TCR, a term which would exclude all prepaid finance charges not retained by the lender, instead of the APR. This change will likely depend on the CFPB’s final TILA-RESPA disclosure integration rule.

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The CFPB’s New Mortgage Rules: Themes and Responses

One can’t fault the CFPB’s production level in the past two weeks.  Since January 10, the Bureau has issued seven distinct final rules – the lion’s share of what it considers “a single, comprehensive undertaking” to implement Dodd-Frank mortgage reforms.  By our count, this work includes over 3,100 pages of rulemaking text not to mention the press releases and the various summary materials and social media campaigns.  Final rules were issued on the following:

As a reminder, we’ll provide an overview of these rules and a focused analysis of the Ability to Repay and Qualified Mortgage Rules during a free webinar on Tuesday, January 22, at 3 pm Eastern, and future webinars will unpack the rest of these new requirements.  Still to come in 2013 are the Bureau’s final rules on TILA-RESPA disclosure integration. 

A couple of themes dominate this wave of rules.  First, it’s an understatement to say that Dodd-Frank and these Bureau regulations institutionalize the GSEs and tight prevailing credit standards.  Is anyone surprised that these rules effectively kill no-doc and NINJA loans?  The rules effectively draw a box around the only mortgage loans most creditors are willing to make now anyway.  This convergence may limit the Fair Lending and CRA implications of the rules themselves, as there is less room than ever for discretion and exception.  Other themes include the Bureau’s efforts to accommodate the realities of rural markets and smaller creditors and servicers as well as its sensible preference for loans held in portfolio (i.e., skin in the game). 

On the other hand, the new Servicing standards are going to demand a high level of customer service and multi-party coordination.  We attended both the Baltimore and Atlanta release parties (a.k.a. Field Hearings) for the biggest of these new rules (including Servicing).  One take-home could not be missed:  in the wake of the financial crisis, the Bureau continues to emerge as a sounding board for the distressed mortgage borrower and an advocate for consumer rights both real and imagined.  Its public relations efforts this year on the mortgage front are undoubtedly going to lead to more complaints and more lawsuits against lenders. 

The good news is that the Bureau can’t compete with your own relationship with your customer base.  And the easiest complaints to resolve are those that are never filed.  So to avoid paying for the sins of crisis-era lenders and practices that are now long gone, take a lesson from the CFPB and stay ahead this year on customer service and your institution’s brand.  Reinforce the distinction between your organization and the abuses that gave rise to the Bureau, and you may actually benefit from its rules.

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Bryan Cave Attorneys To Present January 22 Webinar on New CFPB Mortgage Rules through BAI Learning & Development

The CFPB continues to finalize a high volume of new mortgage rules required by Dodd-Frank.  Join compliance training leader BAI Learning & Development and Bryan Cave attorneys John ReVeal and Barry Hester as they provide an overview of final Qualified Mortgage and Ability-to-Repay rules and other new and proposed requirements.  This informative webinar will be offered on Tuesday, January 22, from 3-4 pm Eastern.

Here’s also a recent bulletin John and Barry developed on some of these new rules.

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Board Oversight of the Compliance Function: Coaching Fundamentals

Despite all that has been made of Dodd-Frank, the new Consumer Financial Protection Bureau, and the increased focus on consumer compliance throughout the banking industry, we think that the fundamental formula for effective board oversight of the compliance function has not materially changed. We encourage directors to take stock to make sure their bank’s program is adequate. In this season of great contests on the gridiron, we would emphasize that blocking and tackling—and defense generally—remain the keys to success in this area. Be a good coach and make sure that these fundamentals are practiced at your bank.

Bank Regulatory Expectations

We start with the black-letter guidance and then read between the lines based on our experience and judgment. Each of the prudential bank regulators has outlined its expectations for board oversight of the compliance function. Although it’s stated in various ways, the basic recipe for the “compliance management system” is this:

  1. Compliance program documents and reporting
  2. Compliance audit
  3. Board and management oversight

Think of board oversight as “coaching” and the rest as blocking and tackling.

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Financial Services Update – September 16, 2011

Geithner Meets with Eurozone Finance Ministers

On Friday, Treasury Secretary Timothy Geithner met with seventeen European finance ministers in Poland to discuss the eurozone’s debt crisis. Jean-Claude Juncker, president of the Eurogroup, announced the group decided to delay till October a decision on whether to pay out the next tranche of a multi-billion euro loan to Greece. The two-day meeting of Europe’s Economic and Financial Affairs (ECOFIN) Council — hosted by Polish Finance Minister Jacek Rostowski and the president of the National Bank of Poland — comes ahead of G20 and IMF meetings later this month. The European Central Bank, along with the Fed, the Bank of England, the Bank of Japan and the Swiss National Bank, also announced that three U.S. dollar auctions would be held between October and December.

Senate Committee Passes Increased Funding for SEC and CFTC

On Thursday, the Senate Appropriations Financial Services Subcommittee passed its FY 2012 funding bill giving banking and commodities regulators large budget increases to help them implement sweeping new financial regulations. The bill, which will now go to the full U.S. Senate for a vote, gives the Securities and Exchange Commission a fiscal 2012 budget of $1.407 billion, an increase of roughly 19 percent from its current fiscal 2011 budget of $1.185 billion and the Commodity Futures Trading Commission an estimated 19 percent increase in its funding, jumping from $202 million to $240 million for fiscal 2012. That bill would also split oversight of the nearly $600 trillion over-the-counter derivatives market between the two regulators and give the SEC greater authority to regulate hedge funds, credit-rating agencies and municipal advisers. However, the fate of the bill remains uncertain because House Republicans oppose many of the Dodd-Frank provisions which increase the need for expanded SEC and CFTC budgets. Earlier this year, the House Appropriations Financial Services Subcommittee passed a bill that would reduce the CFTC’s budget to $171.9 million but maintain the SEC’s funding at its FY 2011 level. With the end of the year approaching, House and Senate leaders are bracing themselves for another omnibus bill that combines all the unpassed appropriations bills into one major bill. The House and Senate will most likely fail to pass similar Financial Services Appropriations bills which will cause the bill to be wrapped into the omnibus thereby reducing the chance of large increases for the SEC or CFTC.

Fitzpayne Nominated for Treasury Legislative Affairs Chief

On Wednesday, the White House announced that President Obama intends to nominate Alastair Fitzpayne as the next assistant secretary of Treasury for legislative affairs. Fitzpayne has been Treasury’s deputy chief of staff since January 2009. He was a legislative assistant to former Sen. Evan Bayh (D-Ind.) from 2001 to 2006. From 2007 to 2009, he served as a senior policy adviser to Rep. Rahm Emanuel (D-Ill.).

House Republicans Introduce Disaster Funding Bill

On Wednesday, House Republican leaders introduced a stopgap spending bill to keep the government operating though mid-November and provide $3.65 billion in short-term federal assistance to replenish strained disaster reserves. The funding resolution would impose a 1.4 percent cut on most agencies and Cabinet departments, including Defense, to stay within 2012 spending caps set in August. FEMA and the Corps of Engineers would immediately benefit from a first installment of $1 billion in emergency funds to avoid any disruption in aid for these last weeks of the 2011 fiscal year ending September 30. The second $2.65 billion represents a down payment toward FEMA’s 2012 budget. With two weeks left in fiscal 2011, FEMA’s disaster reserve fund has dwindled to $377 million and the agency has been operating since late August on an “immediate needs” basis, forcing delays in longer-term recovery projects around the nation. Senate Democrats, who have been pursuing their own much larger $6.9 billion disaster aid package, said they did not support the current House approach, but left open the possibility of agreement if House Republicans consider more disaster aid. The House is schedule to vote on its bill next week.

FDIC Approves New Systematic Risk Rules

On Tuesday, the FDIC approved new sets of rules that the largest banks will have to follow in drafting plans in the event of their own collapse. The panel also approved contingency planning guidelines for insured banks. The new rules, which were authorized in the Dodd-Frank Act, are designed to eliminate the need for bailouts by giving the FDIC power to liquidate large firms whose failure could threaten the financial system. Banks with at least $50 billion in assets will have to file such plans, as will any firm designated as systemically important by the Financial Stability Oversight Council. The final rule changes the filing timeline from an April draft proposal released by the FDIC and Fed, moving toward a tiered phase-in based on the total of non-bank assets held by firms. Companies with more than $250 billion in non-bank assets are required to file the plans by July 1, 2012. Firms with non-bank assets between $100 billion and $250 billion would be required to file by July 1, 2013, and all other firms would be required to submit plans by December 2013. The agency also approved unanimously a separate rule dictating resolution plans for FDIC-insured banks with more than $50 billion in assets. The rule, which the agency began drafting before the completion of the Dodd-Frank Act, would apply to 37 banks and thrifts. Thirty four of those firms would be required to file resolution plans with the Fed because of the size of their parent company. The rule takes effect January 1, 2012, and would be subject to a 60-day public comment period.

 More Information

If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463

 

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Financial Services Update – July 22, 2011

Debt Limit Negotiations Continue

On Tuesday, the House passed its “Cut, Cap and Balance” legislation which would cut government spending now, cap it in the future and approve a constitutional amendment to balance the federal budget. On Friday, the Senate voted to table a motion to consider the measure. However, after another tense week of negotiations between the Senate Republicans, Senate Democrats, House Republicans, House Democrats, and the President Obama, the outline of a purported deal seemed to emerge late Thursday. Congressional Democrats reported that President Obama discussed with them a deal he had reached with Speaker John Boehner to raise the debt ceiling by $2.4 trillion, enough to get through the 2012 elections, with at least as much in immediate spending cuts and a promise of  “tax reform”  in 2012. On Friday, in response to the news of a “deal,” Speaker Boehner told the House Republican Conference there was “no deal,”  but that he will continue to negotiate with the White House over the weekend. The most important questions remaining are how many House Republicans will vote for a deal that does not include immediate tax increases but does include the promise of broader “tax reform” next year and how many House Democrats will vote for a deal with no tax increases.

Greece Gets Another Bailout

On Thursday, European finance ministers agreed to a new $157 billion financial aid package for Greece in exchange for forcing Greece’s bond holders to accept a bond exchange that gives them less than originally promised. The new plan for Greece will provide for the euro zone’s bailout fund and the International Monetary Fund to lend Greece $157 billion over the next three years at 3.5% interest. Private creditors who hold Greek debt that matures in the coming years will “voluntarily” turn in their bonds and accept new ones that mature far in the future.

The EU also agreed Thursday to an expansion of its bailout fund. That vehicle, once restricted to lending to countries near the brink of collapse, will now be able to buy euro-zone bonds on secondary markets to move prices and lend directly to countries even before they lose access to private funding and could even include lending to finance bank recapitalizations. The leaders also agreed to cut the once-lofty interest rates that the bailout fund charges and extend to as much as 30 years the maturities of the loans it provides. Ireland and Portugal, both currently receiving European aid, will get breaks on their interest rates to 3.5%. Ireland was paying around 6% on the EU portion of its euro 67.5 billion bailout.

Treasury Sells Off Remaining Stake of Chrysler

On Thursday, the Treasury Department sold its remaining stake in Chrysler losing a total of $1.3 billion. Italian automaker Fiat purchased the U.S. government’s remaining 6% stake in Chrysler for $560 million, formally concluding the $12.5-billion bailout.

Suit Against Goldman Dismissed

On Thursday, former Australian hedge fund Basis Yield Alpha’s legal challenge to Goldman Sachs’ infamous Timberwolf 2007-1 collateralized debt obligation was dismissed by Judge Barbara Jones of the U.S. District Court for the Southern District of New York. Jones cited a Supreme Court decision that held that U.S. securities-fraud laws apply only to domestic transactions.

Senate Banking Hearing on One Year Anniversary of Dodd-Frank

On Thursday, in a hearing before the Senate Banking Committee, federal banking regulators testified on the implementation of the Dodd-Frank Wall Street Reform Act. Regulators said they are moving fast enough to give markets certainty, but slow enough to get hundreds of new rules right. A handful of regulatory agencies are writing hundreds of new rules to police the swaps market, reduce risk at the biggest financial firms, and bring the so-called shadow banking system — which includes hedge funds and non-traditional lenders — into the traditional regulatory framework. The SEC and CFTC have struggled to keep pace with the swift rule-writing timeline laid out in Dodd-Frank, and are months behind schedule on many key rules. However, in a surprising move, Federal Reserve Chairman Ben Bernanke said federal bank regulators may rethink their crackdown on derivatives if a global agreement cannot be reached on margin requirements thereby acknowledging that U.S. banks would be at a significant competitive disadvantage if their foreign rivals do not have to demand margin, or collateral, for derivatives trades.

More Information:

If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463

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Financial Services Update – April 8, 2011

European Central Bank Announces Interest Rate Hike; Portugal Bailout Next

On Thursday, Jean-Claude Trichet, European Central Bank president, announced a 25 basis point rise in eurozone borrowing costs, to 1.25 percent. This will be the first of such an increase since the 2008 financial crisis. In response to the news, the euro initially dipped against the dollar but later appreciated to trade above $1.43. In his remarks, Trichet also said the ECB had encouraged Portugal to request an international bailout, which is estimated at 80 billion euros, roughly the same amount as Ireland but less than the 110 billion euro package offered to Greece. EU, European Central Bank and International Monetary Fund officials will meet in Lisbon next week to negotiate the cuts that are deeper than those that were rejected by Portuguese opposition politicians last month.

SEC Reviews Private Company Share Rules

On Wednesday, SEC Chairman Mary Schapiro sent a letter to House Government Reform Committee Chairman Darrell Issa (R-CA) saying that she had ordered a review of all the rules that affect share issues by privately held companies. According to the letter, the likely changes would include raising from 499 the number of shareholders private companies can have without being required to open their books, and also making it easier for such companies to publicize share offerings. The SEC review also will examine issues raised by the growing use of “special purpose vehicles” that allow a pool of investors to buy a stake in a company, while counting as only one shareholder for the purposes of the SEC rules. Shapiro’s letter also indicated that the SEC is considering relaxing a strict ban on private companies publicizing share issues, known as the “general solicitation” ban.

FDIC Introduces New Fed Borrowing Fee

Last Friday, the Federal Deposit Insurance Corp. (FDIC) issued a new rule that increases the fees on banks that borrow overnight funds from the Federal Reserve. The FDIC introduced the higher fees as called for in last year’s Dodd-Frank financial reform law. The higher fee has led some companies to step out of the short-term lending markets, exacerbating an already low supply of Treasury bills used to back borrowing. On Tuesday, the FDIC issued a response to criticism of the rule saying that the notice of proposed rulemaking was announced in November giving banks sufficient time to make adjustments and that the Congressionally-mandated change better reflect risks to the industry-funded Deposit Insurance Fund.

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