Trump’s New FCC Chairman Ajit Pai May Drain the TCPA Swamp

How Will the FCC’s TCPA Declaratory Ruling and Order Affect Your Business?In one of his first official actions, newly elected President Donald Trump tapped Ajit Pai as the new chairman of the Federal Communications Commission (FCC), replacing outgoing chairman Tom Wheeler. Pai is a sharp critic of the Telephone Consumer Protection Act (TCPA) as it is currently being applied, meaning the FCC’s regulatory approach to the TCPA is likely to shift under his leadership.

Pai was initially nominated by President Barack Obama for a Republican Party position on the FCC and was confirmed by the Senate in 2012. Pai previously served as associate general counsel with Verizon Communications Inc. and has also worked as a staffer at the U.S. Senate, the Justice Department, and the FCC.

Currently, Republicans hold a 2-1 majority on the five-member FCC, pending the appointment of two additional members. The President appoints the FCC commissioners with Senate confirmation, though only three commissioners may be members of the same political party. Accordingly, Republicans are likely to maintain a majority on the FCC under the new presidential administration.

Among its other duties, the FCC holds regulatory authority of the TCPA. On July 10, 2015, the FCC issued its TCPA Declaratory Ruling and Order, which we discussed in a previous post. Pai, who was a commissioner on the FCC at that time, voted against the 2015 Declaratory Ruling and Order (the “order”) and strongly criticized the ruling in a dissenting statement.

Pai specifically criticized two of the more controversial aspects of the order in his dissenting statement, both of which—as Pai pointed out—pose regulatory nightmares and increase the potential for abusive litigation.

First, Pai noted that the order “dramatically expands the TCPA’s reach” by expanding the TCPA’s definition of an automatic telephone dialing system (ATDS) to include the equipment’s potential capabilities, rather than its present capabilities. As Pai explained, this expanded definition turns virtually any communication device—save rotary phones—into an ATDS, opening their users to potential liability under the TCPA. Ultimately, Pai suggests in his dissenting statement that the expanded definition of an ATDS is “sure to spark endless litigation, to the detriment of consumers and the legitimate businesses that want to communicate with them.”

Pai also took aim at the order’s application of the TCPA’s strict liability to calls to reassigned phone numbers. Specifically, the FCC found that “the TCPA requires the consent not of the intended recipient of the call, but of the current subscriber,” meaning liability can be imposed under the TCPA for calls to reassigned numbers in certain circumstances. Pai pointed out that this rule “creates a trap for law-abiding companies by giving litigious individuals a reason not to inform callers about a wrong number” and called it a “veritable quagmire of self-contradiction and misplaced incentives.” Instead, Pai supported the “expected-recipient approach,” which would shield good actors from liability so long as they stop calling as soon as they learn that a number is wrong.

“The common thread here is that in practice the TCPA has strayed far from its original purpose,” Pai wrote in his dissenting statement, “[a]nd the FCC has the power to fix that.” With Pai as the new chairman and a Republican majority on the FCC, Pai may just have the opportunity to make those fixes. A decision by the D.C. Circuit Court of Appeals is currently pending in ACA International v. Federal Communications Commission, the consolidated appeal challenging the FCC’s order. Should the D.C. Circuit vacate portions of the order, it would provide Pai a chance to reform the FCC’s interpretation and application of the TCPA.

Additionally, Congress is currently considering reforms to the Federal Communications Act and may consider amending the TCPA in the process. Before joining the FCC, Pai served as chief counsel to the Senate Judiciary Subcommittee on the Constitution, Civil Rights, and Property Rights under Sen. Sam Brownback (R-KS) and as deputy chief counsel to the Senate Judiciary Subcommittee on Administrative Oversight and the Courts under Sen. Jeff Sessions (R-AL). Thus, Pai’s views and voice on the TCPA will be very persuasive in any reform efforts as both the current FCC chairman and a former Capitol Hill staffer.

Ultimately, the future for the TCPA is unclear, but the potential for reform–whether it’s administrative or legislative–is looking much brighter under FCC Chairman Pai.

Appellate Court Reverses Course on Lis Pendens Effect on Post Judgment Liens

House underwater foreclosureUPDATE: On rehearing, the appellate court held that all liens placed on property between a final judgment of foreclosure and judicial sale are discharged by Florida statute. Specifically, the court recognized that the sale discharges all liens, whether recorded before final judgment or after, if the lienor does not intervene in the action within 30 days after the recording of the lis pendens.

For more information on the Florida Appellate Court ruling, please see our Financial Services Perspectives blog post from August 2016: Florida Appellate Court Rules Lis Pendens Does Not Bar Post Judgment Liens.

The Looming Student Debt Crackdown: Compliance and Enforcement Lessons from the Foreclosure Crisis

Compliance chartGiven the parallels between the current student loan debt crisis (including the CFPB, Illinois and Washington’s recent lawsuits against Navient) and the foreclosure crisis of 2010-14, now is a good time to reflect on the lessons learned from past experience. From our experience negotiating comprehensive deals with regulators, advising companies on how to comply in an ever-shifting regulatory landscape, and litigating cases in front of judges and juries suspicious of members of our industry and tired of the ensuing volume of litigation that resulted from the crisis, four lessons stand out:

  1. Technical compliance is not enough. For years, companies operating in highly regulated industries believed that so long as their conduct was not in direct breach of a law or express regulation, they would not be punished by a regulator. That seemed like a pretty safe assumption in an environment operating under the rule of law. However, it quickly proved to be dangerously untrue during the foreclosure crisis. Both courts and enforcement agencies had little patience with large companies that, at least in their minds, were exploiting “loopholes” or engaging in bad (or at least sloppy) business practices to the detriment of their customers and the public, regardless of whether it was in actual violation of an express law. Instead, the industry was urged to adopt a broader culture of compliance – with threats of enforcement actions under amorphous laws like UDAAP or similarly hazy common law causes of action to encourage that compliance. Student lenders would be wise to recognize that historical practices of complying with actual stated laws and policies may not be enough to keep them out of trouble.
  2. Regulators care about borrower complaints. In the mortgage servicing world, servicers long viewed the entities paying them to service or sub-service the loans as their customers. While it might have been a best practice to offer effective responses and solutions for complaints from borrowers, that appeared to be a lower priority than responding to issues arising with the investors, who could make life very difficult with an ill-timed repurchase demand or by insisting that the servicer eat the loss on a non-performing loan. But in the foreclosure crisis, regulators flipped that relationship. Reasoning that borrowers had no choice in who serviced their loans—and thus lacked the free market threat of moving their business elsewhere if they received lousy service from the loan servicer—regulators paid close attention to consumer complaints and even shaped regulatory agendas and priorities around them. Student loan servicers should realize that the perception of working hard to do what’s best for borrowers (and not necessarily lenders) is what regulators are looking for.
  3. Federal regulators believe that disclosure is the best remedy for everything. During the foreclosure crisis, federal regulators such as the CFPB and DOJ appear to have taken to heart the famous quote from Justice Louis Brandeis: Sunshine really is the best disinfectant. Regulators wanted to see mortgage lenders and servicers disclosing everything—every possible fact that could conceivably affect a borrower’s decisions about taking out a loan and repaying it, and especially the facts that might work to bolster a lender or servicer’s bottom line. The common wisdom is that if a mortgage loan servicer is in the slightest doubt about whether a practice is in the borrower’s best interest, then it should be disclosed, and done so in a text and format that is understandable to an unsophisticated borrower. While that requirement may seem aspirational, the same regulators are almost certain to look at student lending practices the same way.
  4. Regulators may follow the crowd, but lenders and servicers should not. Finally, the foreclosure crisis taught us that while regulators may tend to follow the crowd and “piggyback” in their regulatory and enforcement actions, lenders and servicers should resist the natural inclination to reflexively adopt industry-wide practices. As evident from the National Mortgage Settlement, as well as the numerous examinations and lawsuits that preceded and followed it, both state and federal regulators have proven to be more than happy to let another entity take the lead on conducting an investigation, only to swoop in when it’s time to negotiate a settlement. But in those negotiations, it was no excuse for companies to claim that their purportedly bad or sloppy practices were standard in the industry at the time. Indeed, the mere fact that 49 states and the federal government agreed to a national settlement requiring payment of billions of dollars with all of the largest mortgage servicers indicates that following the crowd was more of a liability than a defense. Lenders and servicers of student loans should expect similar coordinated investigations, enforcement actions, and lawsuits, as well as a similar lack of sympathy for claims that the targets were merely employing practices that were standard or typical in the industry at the time.

Given the current state of the student loan market and the regulatory framework governing it, student loan lenders and servicers would be well advised to consider the lessons learned during and after the foreclosure crisis. Student loan servicers should not wait for broad servicing standards to be promulgated before considering whether they might need to make compliance adjustments to their business. Considerable efforts should be spent analyzing and responding to consumer complaints, and ensuring that disclosures are clear, conspicuous, and truthful should be a top priority. Finally, student loan lenders and servicers should keep their ear to the ground and track practices that are deemed to be problematic by regulators through supervisory or enforcement actions. Just because everyone does something the same way in no way guarantees that it won’t cause you problems down the road.

The Super-Priority Saga Continues – Nevada Supreme Court Holds That NRS 116’s Notice Provisions Are Constitutional

The Super-Priority Saga Continues – Nevada Supreme Court Holds That NRS 116’s Notice Provisions Are ConstitutionalThe Ninth Circuit sent shockwaves through the mortgage industry when it held that NRS 116—the statute allowing an HOA to impose a nominal super-priority lien that can extinguish a senior deed of trust when foreclosed—was facially unconstitutional under the Due Process Clause in Bourne Valley  Court Trust v. Wells Fargo Bank, N.A. In Bourne Valley (see our previous blog posts on this decision here and here), the Ninth Circuit held that NRS 116’s notice scheme did not mandate that mortgagees receive actual notice of these HOA super-priority lien foreclosures, but instead required that mortgagees request such notice from the HOA in advance of the HOA’s foreclosure sale. The Ninth Circuit determined this “opt-in” notice scheme violated the Due Process Clause’s requirement that statutes authorizing the extinguishment of junior liens mandate that junior lienholders receive actual notice of the foreclosure sales that can extinguish their liens.

Importantly, the Ninth Circuit held that an HOA’s foreclosure under NRS 116 constituted state action, a threshold determination in Due Process Clause challenges, as the Due Process Clause only applies to state actions. Specifically, the Ninth Circuit held that NRS 116 foreclosures constitute state action because HOA liens are purely statutory, rather than contractual, like deeds of trust. Because an HOA could not impose and foreclose on its super-priority lien absent the statutory authority granted to it through NRS 116, an HOA’s super-priority lien foreclosure constitutes state action under Bourne Valley.

Today, the Nevada Supreme Court disagreed with the Ninth Circuit’s interpretation of the United States Constitution’s state-action requirement. In Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortgage, the Nevada Supreme Court held the Due Process Clause does not apply to NRS 116 foreclosures because such foreclosures are not state action. The Nevada Supreme Court analogized NRS 116 foreclosures to deed of trust foreclosures, citing to a Ninth Circuit decision holding that deed of trust foreclosures do not constitute state action, Charmicor, Inc. v. Deaner. The Nevada Supreme Court did not address the distinguishing characteristic between deed of trust and NRS 116 foreclosures—that the former is authorized by private contract, while the latter is authorized solely by a state statute. Bluntly, the Nevada Supreme Court determined the Ninth Circuit misinterpreted Ninth Circuit precedent when it held that NRS 116 foreclosures met the federal constitution’s state-action requirement.

Significantly, the Nevada Supreme Court’s holding in Saticoy Bay is based on federal law. The Ninth Circuit owes no deference to the Nevada Supreme Court on questions of federal law, meaning Bourne Valley will presumably remain binding in Nevada’s federal courts. In state courts bound by Saticoy Bay, however, the quiet-title actions pitting HOA-sale purchasers against senior mortgagees over title to properties purchased at HOA foreclosure sales will likely turn on factual issues like the HOA’s compliance with NRS 116, whether the mortgagee tendered the super-priority amount before the HOA’s foreclosure, and the commercial reasonableness of the foreclosure sale itself.

So, practically speaking, the Saticoy Bay decision indicates there will be an ongoing split between federal and state courts on whether NRS 116.3116 is constitutional. State and federal trial courts will be bound by their respective superior courts. Thus, the forum for each quiet-title action regarding a NRS 116 foreclosure may be outcome determinative—unless the United States Supreme Court resolves the conflict.


Additional State Agencies Jump on the ESB Bandwagon

Additional State Agencies Jump on the ESB BandwagonNMLS recently announced that twelve additional state agencies (with 44 license types) would jump on the Electronic Surety Bond (ESB) bandwagon as of January 23, 2017. These additions bring the total number of agencies using ESB within NMLS to 21 (with 81 license types.) Jurisdictions that will begin using ESB for licensing in NMLS include Alaska, Georgia, Illinois, Indiana Secretary of State, Louisiana, Minnesota, Mississippi, Montana, North Carolina, North Dakota, Rhode Island and South Dakota. Licenses transitioning to ESB include not only traditional mortgage type licenses, but also other non-depository consumer finance-related licenses such as money transmitter, collection agency, consumer loan company, loan broker, payment instrument seller, check casher, pawnbroker, currency exchange provider, escrow provider and deferred deposit lender. To view the full list of adopting agencies and affected license types, visit the NMLS Resource center.

The majority of newly adopting agencies have announced that the ESB requirement will be mandatory for any new applications submitted as of the release date on January 23, 2017. Companies holding existing licenses generally will have until the end of the calendar year to coordinate the transition of their currently held paper bonds to ESBs with their surety providers. However, be sure to note the deadlines for specific license types as they apply to your company as there are some outliers.

While both industry and regulators are still fine tuning the ESB process, once a conversion is made for a jurisdiction from paper bonds to ESB there are benefits to be had. For example, as company name and address information is housed within NMLS, individual bond riders are no longer needed to correct typographical errors. Instead, any necessary updates are tied to amendments made directly within the NMLS record. In addition, any necessary bond signatures are processed electronically through NMLS, reducing delays with obtaining signatures on hard copies routed between the surety, the company and the regulatory agency. Finally, the ESB, with any revisions and all appropriate contact information, is historically available within the company’s NMLS record, reducing the likelihood that an interim bond rider is lost. Note that ESB conversion does not currently apply at the branch or individual level, unless the jurisdiction allows a blanket bond to be held at the corporate level that also covers branch locations and/or individual licensees.

NMLS has provided several training opportunities with respect to ESB for both surety producers and industry, several of which are available in a recorded format with links available on the NMLS Resource Center here. In addition, in-person training as well as break-out sessions regarding current ESB experiences will be available at the NMLS Annual Conference this February in Austin, Texas.

With the benefits of ESB, and as jurisdictions become more familiar with the process, look for additional jurisdictions to join the existing 21 on the ESB Bandwagon in the coming months.

Western Union to Pay $586 Million in Restitution and Civil Penalties for AML Compliance Failure

Western Union to Pay $586 Million in Restitution and Civil Penalties for AML Compliance Failure On January 19, 2017, Western Union Financial Services, Inc. agreed to pay civil penalties and restitution to victims of fraud totaling $586 million to resolve actions brought by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), Department of Justice (DOJ), and Federal Trade Commission (FTC) for violations of the Bank Secrecy Act’s (BSA) anti-money laundering (AML) requirements. The actions arose from allegations that Western Union violated the BSA by failing to (1) implement and maintain an effective, risk-based AML program to properly vet and monitor third-party agents, and (2) file timely suspicious activity reports (SARs). Significantly, regulators determined that Western Union, which is classified as a money services business for purposes of the BSA, failed to properly monitor third-party agents to ensure that these agents were not utilizing Western Union to facilitate money laundering and other illicit, fraudulent transactions.

In addition to the monetary sanctions, regulators also required that Western Union implement procedures and training aimed at increasing scrutiny and periodic reporting regarding SAR reporting and disclose corrective actions taken against third-party agents who fail to comply with AML requirements. In addition, Western Union agreed to the appointment of an independent compliance auditor who will monitor whether Western Union is conducting thorough and ongoing due diligence on all prospective and existing Western Union agents. In making the enhanced monitoring part of the consent order, regulators are clearly signaling their expectation that financial institutions in the money services business (MSBs) implement AML programs which effectively account for and mitigate the risks of illicit activity posed by money transfers facilitated by third-party agents. Financial institutions that offer money services products, such as domestic and international money transfers, should review their AML compliance program to ensure proper monitoring of any third-party agents used to facilitate these transactions.

What is an AML compliance program?

The BSA, among other things, requires certain regulated entities, including financial institutions, to develop and implement AML compliance programs reasonably designed to assure and monitor compliance with the BSA and its implementing regulations. In recent years, regulators have also made it clear that the AML compliance programs must be tailored to the products offered, customer demographics, and the transaction history. Due to the unique regulatory risks faced by each financial institution, there are no shortcuts for developing a proper AML program. That said, at a minimum, a financial institution’s AML compliance program must include:

  • A system of internal controls to ensure ongoing compliance;
  • Independent testing of AML compliance;
  • Designation of an individual or individuals responsible for managing BSA compliance;
  • A comprehensive training program for appropriate personnel; and
  • A customer identification program.

In sum, financial institutions must take a hard look at their individual characteristics and develop an AML program that is reasonably designed to prevent parties from using financial systems for illicit purposes.

What additional measures are required for MSBs partnering with third-party agents to facilitate transactions?

The BSA requires all MSBs, both principals and their agents, to establish and maintain an effective written AML program reasonably designed to prevent the MSB from being used to facilitate illicit financial activities. Although responsibility for developing AML policies, procedures, and internal controls can be allocated between a principal and agent, both parties remain liable for failing to implement an appropriate AML program. Moreover, each MSB remains independently liable and wholly responsible for implementing an adequate AML program. Accordingly, MSBs that do business through foreign and domestic third-party agents must implement risk-based policies, procedures, and controls that are reasonably designed to identify and minimize money laundering and other illicit financing risks associated with money transfers.

Regulators also expect MSBs to tailor their AML programs to reflect the risks associated with their particular business services, clients, size, locations, and circumstances. The risk factors that should be considered in monitoring third-party agents include, but are not limited to:

  • Whether the owners are known or suspected to be associated with criminal conduct or terrorism;
  • Whether the agent has an established and adhered to AML program;
  • The nature of the markets the agent serves and the extent to which the market presents an increased risk for money laundering or terrorist financing;
  • The services an agent is expected to provide and the agent’s anticipated level of activity; and
  • The nature and duration of the relationship.

Furthermore, FinCEN has made it clear that AML programs for MSBs involving foreign third-party agents must include:

  • Procedures for conducting reasonable, risk-based due diligence on potential and existing foreign agents and counterparties to help ensure that these entities and individuals are not complicit in illegal activity involving the financial institutions’ services, including reasonable procedures to evaluate, on an ongoing basis, the operations of those foreign agents and counterparties;
  • Procedures for risk-based monitoring and review of transactions from, to, or through the United States that are conducted through foreign agents and counterparties sufficient to enable the financial institutions to identify and properly report suspicious activities; and
  • Procedures for responding to foreign agents or counterparties that present unreasonable risks of money laundering or the financing of terrorism, including procedures that provide for the implementation of corrective action by the foreign agent or counterparty or termination of the relationship where corrective action will not adequately address the unacceptable risk of money laundering.

In sum, an effective AML program must comprehensively evaluate the risks posed by third-party agents, after thorough consideration of the location, background, and circumstances of each agent.

Lessons from the Western Union Enforcement Action

The latest set of government enforcement actions against Western Union is a continuation of regulators’ focus on institution-specific, comprehensive AML compliance programs, and highlights the importance of implementing policies and procedures that effectively monitor third-party agents and mitigate the risk of illicit activity. Financial institutions must have policies and procedures in place that reflect the reality of the risks posed by certain transactions or third-party venders. In light of the deficiencies regulators identified in Western Union’s AML program, financial institutions offering money services products must carefully scrutinize their relationships with third-party agents and other parties involved in all financial transactions and implement procedures tailored to their business environment. To be sure, the Western Union enforcement action should serve as a potent cautionary tale for financial institutions to continually evaluate their AML programs to account for the risks posed by both foreign and domestic third-party agents.

Finally, these actions follow a trend in enforcement actions by federal and state regulators that all regulated entities should understand. Regulators continue to bring enforcement actions against financial services providers that do not have adequate third-party risk management policies in place because these regulators, including FinCEN, the DOJ, FTC, and Consumer Financial Protection Bureau, continue to rely on the principles behind Operation Chokepoint to protect consumers and businesses from financial harm. Given this significant regulatory trend, any time a financial institution considers contracting with a third party, service provider, or agent to perform a service related to its core business functions, it should conduct due diligence on that provider and if that provider is hired, continue to monitor whether that business is complying with applicable laws in carrying out its services.

CFPB and Two States File Suit Against Student Loan Company Navient

Loans and handsThe CFPB announced on Wednesday that it had filed a lawsuit against Navient Corporation, formerly part of Sallie Mae, and two of its subsidiaries for alleged “systematic” failures in student loan servicing. The complaint alleges claims under the Consumer Financial Protection Act of 2010, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act. The States of Washington and Illinois also announced lawsuits of their own, asserting parallel state law claims. The lawsuits followed a lengthy internal investigation at Navient that culminated in predictions that the company would be facing litigation from federal regulators. Nonetheless, they represent a significant and groundbreaking step in the world of student lending regulation and enforcement.

Navient is the largest servicer of student loans in the United States, servicing approximately 12 million federal and private student loans totaling more than $300 million. Navient Corporation operates through its operations subsidiary Navient Solutions, Inc. and its collection subsidiary Pioneer Credit Recovery, Inc. Both subsidiaries have a history with the CFPB. In November 2014, the CFPB served Pioneer Credit Recovery, Inc. with a Civil Investigative Demand (“CID”). Navient Solutions, Inc. received a “Notice and Opportunity to Respond and Advise” (“NORA”) from the CFPB in August 2015, indicating the agency’s intent to investigate the company’s practices related to disclosures and assessments of late fees. Soon after, Navient Solutions disclosed that it had received the NORA and indicated that could not “provide any assurance that the CFPB will not ultimately take legal action against NSI or that the outcome of any such action, if brought, will not have a material adverse effect on the Company.” Navient Corporation Form 8-K (Aug. 19, 2015).

Navient’s statement proved to be prescient. On January 18, the CFPB filed its complaint in the United States District Court for the Middle District of Pennsylvania, where it has been assigned to Judge Robert D. Mariani, a 2011 Obama appointee. On the same day, the Attorney General for the State of Washington brought claims in the King County Superior Court (Washington), and Illinois’s Attorney General filed a complaint against Navient Corporation, Navient Solutions, Inc., Pioneer Credit Recovery Inc., General Revenue Corporation, and Sallie Mae Bank in Cook County Circuit Court (Illinois). The complaints allege that Navient failed to properly apply loan payments, caused borrowers to face greater interest charges than necessary by steering borrowers into forbearance rather than alternative payment plans, obscured information necessary for borrowers to remain in alternative payment plans, denied co-signer releases based on deceptive practices related to consecutive payments and prepayments, and misreported information to credit reporting companies for borrowers whose loans were forgiven under a federal program for severely and permanently disabled borrowers.

Navient released a statement on Wednesday, calling the CFPB’s allegations unfounded and politically motivated. According to Navient’s statement, the CFPB gave the company an ultimatum to settle by inauguration day or face a lawsuit. The statement criticizes the CFPB for singling out Navient and seeking to retroactively apply new servicing standards that are inconsistent with Department of Education regulations. Navient also released a fact sheet defending its servicing practices and addressing some of the allegations in the complaints.

The CFPB’s decision to sue Navient resembles the regulatory and enforcement crackdown on mortgage servicers at the beginning of the foreclosure crisis. As early as 2011, States and the nascent CFPB began making public announcements regarding the (allegedly) sloppy foreclosure processes and bad loan modification processing procedures in place at many of the country’s largest banks and non-bank mortgage servicers. Those complaints eventually turned into the National Mortgage Settlement, under which the five largest mortgage servicers (and eventually several other smaller servicers) settled with the federal government and 49 States by promising to provide some $26 billion in relief for distressed homeowners and to abide by a review and oversight process overseen by an independent monitor.[1] The regulatory fallout from the foreclosure crisis continued in the form of several rounds of CFPB rulemaking, including the announcement of the final mortgage servicing rules in February 2013. Many in the industry would claim that the effects are still being felt in the form of CFPB targeted examinations and enforcement actions against mortgage servicers. Only time will tell whether yesterday’s lawsuit marks a new era of regulatory and enforcement actions against student loan servicers.

[1] Bradley Arant Boult Cummings LLP represented the ResCap Parties, Ocwen Financial Corporation and Ocwen Loan Servicing, LLC, HSBC Mortgage, Inc., and Suntrust Mortgage, Inc. in negotiating the National Mortgage Settlement.

Student Loans: Departments of Treasury and Education Move to Simplify Income Driven Repayment Plans

graduation cap  on a pile of money Much of the regulatory focus for student lending has been directed toward Income Driven Repayment (IDR) plans in recent months. The first student loan related move in 2017 by the Departments of Education and Treasury is no exception. On Tuesday, the Departments announced a joint effort to simplify borrower participation in IDR plans.

Currently, borrowers must submit income information every year to continue in their IDR plan. If a borrower fails to timely submit the information, the borrower’s payments are reset to the standard 10-year repayment plan amount, which can be significantly higher. Under the new Memorandum of Understanding, the Departments of Treasury and Education have established a framework for allowing tax data to be shared over multiple years. The Memorandum of Understanding will lead to the development of a new digital system at the Department of Education. Through that system, borrowers will be able to consent to sharing financial data with their servicers. Servicers will then have access to multiple years of financial data and will be able to evaluate a borrower’s financial eligibility to continue on an IDR plan without direct contact with the borrower.

While this development should help streamline the IDR qualification process, servicers should be aware of potential issues. Student loan related efforts at the CFPB have shown the bureau is paying close attention to both IDR plans and borrower communications. Servicers should take care to keep borrowers informed of pertinent information regarding payments and payment plans both now and once the new system is underway.

Implementing a Compliant Successor in Interest Confirmation Process Will Pose Significant Challenges for Mortgage Servicers

Implementing a Compliant Successor in Interest Confirmation Process Will Pose Significant Challenges for Mortgage ServicersArguably the most significant element of the recent amendments to the existing mortgage servicing regulatory framework by the Consumer Financial Protection Bureau (CFPB) is the new structure that has been laid out for dealing with potential and confirmed successors in interest. Quite simply, fully complying with the new rule will require significant efforts, regardless of a servicer’s size. One of the more time-intensive—and therefore costly—aspects of the rule is the burden that is placed on each servicer to determine what documents it can reasonably require to confirm a potential successor in interest’s status. The CFPB has been very clear that it will expect servicers to send individualized document requests, which will require intimate knowledge of the many ways in which a transfer of real property can be evidenced in all 50 states. Not only must a servicer be able to quickly determine the documents it reasonably requires, but the rule also requires that, if a servicer cannot determine what documents are appropriate in a particular circumstance due to a lack of information, it must be able to communicate the additional information that it needs in order to then make an individualized document request.

Needless to say, this will be a substantial undertaking for each servicer, regardless of its size. Upon the request of many servicers, and so as to lessen the burden each entity faces if it were to undertake these efforts on its own, we have begun compiling the necessary research that will form the basis of an entity’s successor-in-interest process.


The framework laid out by the CFPB for the successor-in-interest confirmation process is contained both in the general policies and procedures and requests for information sections of Regulation X. Across its entire business, a servicer will have to be able to identify the existence of a potential successor in interest, facilitate communication with the potential successor, and communicate the documents that it reasonably requires to confirm that individual’s identity and ownership interest in property. While it will undoubtedly be challenging in the long term to ensure employees receive adequate training that will enable them to identify and recognize a potential successor-in-interest scenario, the more challenging aspect in the short term is the documentation that may be requested of a potential successor. It is worth noting that, while the policy and procedure requirements do not apply to an entity that qualifies as a small servicer, the request for information provisions do apply regardless of an entity’s size. Documentation requirements for the confirmation process will therefore apply to all mortgage servicing entities.

Documentation Requirements

As mentioned above, the rule requires a servicer to notify a potential successor in interest of the documents it reasonably requires to confirm that person’s identity and ownership interest in property. The CFPB is adding official commentary to Regulation X that will clarify that documents are “reasonably required” only if they are “reasonable in light of the laws of the relevant jurisdiction, the specific situation of the potential successor in interest, and the documents already in the servicer’s possession.” This means that each time a potential successor-in-interest scenario arises, the servicer will have to take into account all three of those factors before requesting documents for the individual to get through the confirmation process. For example, in a divorce scenario, the commentary suggests that it would not be reasonable to only request a deed if the laws of the relevant jurisdiction allow individuals to effectuate a transfer of title through a final divorce decree and accompanying separation agreement executed by both spouses. Similar guidance exists for states that accept affidavits of heirship and other state-specific documents in the death context.

Many servicers have inquired as to whether they can comply with the above-described requirements by utilizing generic lists or descriptions of documents when communicating with potential successors in interest about what is required to get through the confirmation process. The short answer is that there may be a place for more generic correspondence, but the CFPB has limited the instances in which this practice will be permissible. First, the CFPB’s above-referenced commentary suggests that a servicer cannot only request a deed if there are other alternatives in the applicable jurisdiction, and also suggests that a servicer should not request either a deed or a final divorce decree and accompanying separation agreement if the relevant jurisdiction does not permit the latter to transfer title.

Additionally, the rule specifies that, if a servicer receives a request from a potential successor in interest but it does not have enough information about the particular circumstances to make a determination as to the specific documents that are reasonably required, Regulation X will permit the servicer to instead provide the borrower with examples of documents that it may require. However, the servicer will also be required to state that the potential successor in interest can obtain a more individualized list of document requirements by providing additional information and describe what additional information it needs from the potential successor. To further complicate things, a response in that scenario will also have to include a telephone number for the potential successor in interest to receive further assistance, and the servicer will then have to act upon any information that it needs and subsequently receives verbally over the telephone.

Given all of this, one thing that is clear is that servicers will need significant research on the laws of the jurisdictions in which they service loans to be fully compliant with the CFPB’s new directive. This includes, but certainly is not limited to, research on transfers of real property in connection with a divorce, inter vivos trust, and death. Once that research is compiled, servicers will then have to figure out a way to make it workable and incorporated into its confirmation process.

SEC Examination Priorities for 2017 – What do Robots, Senior Investors, and Payment for Order Flow Have in Common?

This week, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its Examination Priorities for 2017  that reflects certain practices, products, and services that OCIE perceives to present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.

The Examination Priorities for 2017 are organized into the following general categories:

  • SEC Examination Priorities for 2017 – What do Robots, Senior Investors, and Payment for Order Flow Have in Common?Protecting Retail Investors. OCIE is pursuing a variety of examination initiatives to assess potential risks to retail investors that arise in the increasingly complex investment landscape.
  • Senior Investors and Retirement Investments. OCIE is continuing to devote attention to issues affecting senior investors and those investing in retirement.
  • Assessing Market-wide Risks. OCIE anticipates allocating resources to examine perceived structural risks and trends in the securities industry.
  • Other Initiatives. Examination priorities that OCIE doesn’t think are cool enough to fit in the above categories.  

Here are a couple of notable items from the extensive list of priorities that OCIE identified:

  • Robo-Advisors. OCIE will examine investment advisers and broker-dealers that are using automation as a component of their services. They will review compliance programs, client disclosures, data protections, marketing and algorithms used for generation of investment advice.
  • Recidivist Representatives and Their Employers. OCIE will employ their risk-based approach and examine industry professionals that have a track record of misconduct and assess the compliance oversight and controls of their employers.
  • Investment Advisors. OCIE will continue their initiative to examine those investment advisors that have never been examined. Note that if you are a newly registered investment advisor in part of the market that is identified as a higher risk, you may be examined before a long-standing investment advisor that has never been examined.
  • Senior Investors. Senior investor issues continue to be a focus of OCIE and FINRA. OCIE will examine supervisory programs and controls of investment advisors and broker-dealers to assess how they are managing conflicts of interest, fulfilling fiduciary duty or best execution obligations, and managing their interactions with senior investors.
  • Payment for Order Flow. Something of an unknown topic for many investors and non-industry professionals, OCIE states that it will examine select broker-dealers and market-makers to assess how they are complying with their duty of best execution when routing customer orders for execution.
  • Reg SCI. OCIE will examine SCI entities to evaluate whether they have established, maintained, and enforced written policies and procedures reasonably designed to ensure their systems comply with industry best practices and what OCIE has determined to be appropriate levels of capacity, integrity, resiliency, availability, and security that are adequate enough to maintain operational capacity and promote maintenance of fair and orderly markets, as well as operate in a manner compliant with the Exchange Act.
  • Anti-Money Laundering. AML continues to be an area of focus of OCIE and FINRA (as well as other regulators and government enforcement agencies). OCIE will examine broker-dealers to assess whether AML programs are compliant with requirements and are tailored to the risks of the firm; whether AML programs are properly supervised, monitored and tested; and whether SARs are filed according to requirements.
  • Private Fund Advisers. After a year that brought a number of large enforcement actions and settlements in the private fund space, OCIE will continue to examine private fund advisors with a focus on conflicts of interest, disclosures of those conflicts, and compensation/fee arrangements and calculations.

Similar to FINRA’s Regulatory and Examinations Priorities Letter published last week, the OCIE’s enumerated priorities is not comprehensive or all inclusive. OCIE intends to operate their examination program in a primarily risk-based manner that allocates limited examination resources on the risks, issues, and policy matters that are driven from existing information and data from tips, complaints, referrals, and enforcement actions, as well as those that may arise from changes in market conditions or the regulatory environment. To find out more about how the SEC Examination Priorities for 2017 impacts your regulatory compliance program or business initiatives for the year, do not hesitate to contact us and we will be more than happy to assist you.