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  • Mortgage Compliance Magazine - NFIP Reauthorization and Reform: Are More Changes Coming to Lenders' Flood Insurance Requirements
    February 2, 2017
    Melissa Klimkiewicz, Brandy Hood, and Andrew Lim

    The National Flood Insurance Program (NFIP or the Program) will expire on September 17, 2017, unless it is timely reauthorized. Because the Program is $23 billion in debt, there is significant speculation regarding whether and how Congress may restructure the Program this year. Changes to the NFIP may impact lenders’ and servicers’ compliance obligations, borrowers’ surplus income and corresponding ability to repay their loans, and even the overall value of the real estate securing mortgage loans. This article discusses some of the options that various constituencies have suggested for the Program, along with the potential effects these changes could have on mortgage lenders and servicers.

    When Congress established the NFIP in 1968, it intended for the Program to ensure affordable flood insurance coverage and encourage communities to engage in floodplain management to reduce flood risk. Congress has amended the Program over the years, including in 1973, when it created the mandatory purchase requirement that prohibits certain mortgages from being made, increased, renewed, or extended unless the buildings and any personal property securing them are covered by flood insurance. Most recently, in 2012 and 2014, Congress adopted measures to increase the financial solvency of the Program and require lenders to accept certain private flood insurance policies, among other changes.

    Despite repeated efforts to improve the NFIP, the Program is on shaky ground. The NFIP has been in debt since Hurricane Katrina and currently owes $23 billion to the U.S. Treasury, for which FEMA already has spent $2.9 billion on interest alone. Although it is widely acknowledged that additional reform may be necessary, Congress has not agreed on the best path forward. Short-term Program reauthorizations resulting from those disagreements have created instability and uncertainty. Between 2008 and 2012 alone, there were at least 17 short-term extensions of the Program, some as brief as five days. Furthermore, the NFIP expired four times in 2010, which created serious issues because the NFIP is not able to issue new or renewal policies or increase coverage on existing polices during an expiration period, making it impossible for lenders to comply with the mandatory purchase requirement.

    Originally published in Mortgage Compliance Magazine; reprinted with permission.

  • A Quick Guide to Depositions in Japan
    November 17, 2016
    Lauren R. Randell

    You have a case involving a witness in Japan. Maybe the witness is a corporate custodian, or a key executive of a party. For whatever reason — a witness’s inability to travel, discovery rules, or simple agreement of the parties — the witness is going to be deposed in Japan. Now what? Based on our own experience, our team offers the following practical observations and suggestions to make your own experience smoother, whether you are taking or defending a Japanese deposition.

    Unlike, for example, in China, it is at least possible to take a deposition in Japan for later use in U.S. litigation. But the process is nowhere near as simple as holding a deposition in the U.S., or even in many foreign locations. Which brings us to our first suggestion — if you can, secure agreement of the parties and witness to have the deposition in Hong Kong. This is not to say that depositions cannot be taken in Japan with successful results, and there are situations, including our own, where Japan really was the only option. But the savings in effort, time and money, and potentially additional deposition time on the record, warrant at least a closer look at an alternative venue.

    The primary reason depositions in Japan can be more complicated than elsewhere is that depositions for use in U.S. litigation can only be taken in three conference rooms in the entire country. That’s it. The depositions must occur in either (1) the U.S. Embassy in Tokyo, or (2) the U.S. Consulate in Osaka. Tokyo’s lone conference room can hold eight people. Osaka has one larger conference room — although even that will only hold 15 people — and another eight-person room. Depositions cannot be moved, even with agreement of the parties, to a hotel, or law firm, or anywhere other than these three rooms. There are no telephonic depositions, and while we did not try this, video-conference depositions are reported to be only available via special request to the Japanese government and rarely granted.

    Originally published in Law360; reprinted with permission.

  • Behavioral Science for Incentive Compensation Reviews
    November 3, 2016
    Valerie L. Hletko and Walter E. Zalenski

    Recent attention in Congress on retail incentive compensation, goal-setting and cross-selling of consumer financial products and services is remarkable for its ferocity and its direction at banks and regulators alike. During a Sept. 20, 2016, Senate Committee on Banking, Housing and Urban Affairs hearing, Senator Elizabeth Warren, D-Mass., called out for special attention to “the person in charge of compliance ... the person who is supposed to be responsible to make sure that the bank is following the law.”

    During a Sept. 29, 2016, House Financial Services Committee hearing Congressman Blaine Luetkemeyer, R-Mo., pilloried, “federal regulators who ... failed to stop the ripping off of consumers” and “sat idly by, either oblivious or uncaring,” and then “neglected to fulfill their enforcement obligations after the fact.” He suggested that regulators “ought to be fined, as well” for being “asleep at the switch.”

    Incentive compensation is not a new subject for financial services policymakers. According to a 2009 survey of banking organizations conducted by the Institute of International Finance, 98 percent of respondents cited compensation practices as a contributing cause of the financial crisis that began in 2007. Less than a month before the passage of the Dodd-Frank Act, federal bank regulators published “Guidance on Sound Incentive Compensation Policies.” Section 956 of the Dodd-Frank Act itself addresses incentive compensation and requires, among other things, that federal agencies promulgate rules limiting at certain financial institutions incentive-based compensation that, in the regulators’ view, encourages inappropriate risks.

    A 2011 proposed rule implementing this statutory requirement generated over 10,000 comments. Perhaps due to divergent views on the subject, there was no formal action on the rulemaking for five years, until the agencies issued a revised proposal in June 2016 — not long before the current incentive compensation controversy hit the headlines. It is safe to say that the subject has been quickly graduated to the regulators’ front burner.

    Originally published in Law360; reprinted with permission.

  • Small Banks and Marketplace Lenders: Unions in Waiting
    October 14, 2016
    David Baris

    The community banking model has worked for many years. For many, the model continues to work. But for others, it needs an overhaul given accelerating compliance costs and burdens and tech advancements.

    According to the Independent Community Bankers of America, community banks represent 14% of banking assets in the United States. And yet, they make about 46% of small loans to farms and businesses – a key component to creating jobs and a vibrant economy. Furthermore, community banks hold the majority of banking deposits outside of large cities. For residents of 600 rural or micropolitan counties, community banks are the only banks that serve them.

    But there are also hundreds of community banks – often located in small towns – that are unprofitable or barely profitable. These small banks cannot fully serve their communities because of their difficulty or inability to attract capital coupled with their increasing compliance burdens and limited resources.

    It's time for some small banks to consider merging with marketplace lenders in appropriate circumstances.

    Marketplace lending partnerships could expand a community bank's geographical reach to customers anywhere. The partnerships can also let banks offer customers new financial products and deliver those products in new ways, and potentially put them in a better position to attract capital and better afford escalating compliance costs.

    Click here to read the full article on www.americanbanker.com.

  • Validating the Validation Set
    October 1, 2016
    Elizabeth E McGinn, Adam Miller, & Nadav Ariel

    Predictive coding is becoming increasingly prevalent in fulfilling discovery obligations in litigation and in response to regulatory inquiries. As the process gains acceptance, parties, regulators and courts debate whether producing parties should be required to disclose documents and coding decisions used to “train” the predictive coding software.

    However, the focus on these training materials, known as the “seed set,” has shifted attention away from the more important subset of documents known as the “validation set.” The validation set, which essentially functions as an answer key, ultimately ensures the quality of the predictive coding results and should be the focus of parties, courts and regulators in determining whether a party utilizing predictive coding has satisfied its discovery obligations.


    Predictive coding relies on an algorithm to code documents based on input received from human reviewers. While there are various ways to implement predictive coding, the process generally involves two separate subsets of the document collection. One is the seed set, which can be created randomly from judgmental sampling or from searches designed to capture the most relevant documents. The other, the validation set, should be a statistically significant random sample of the document collection.

    Reviewers manually determine whether the documents in both subsets are relevant. Based on information gleaned from the seed set documents, the software predicts whether each of the remaining documents in the overall population, including the validation set, is relevant. The accuracy of the software’s predictions is then assessed by comparing its results to the manual determinations for each document in the validation set.

    Originally published in Legal Tech News; reprinted with permission. 

Knowledge + Insights

  • Special Alert - D.C. Circuit Grants Petition For Rehearing in CFPB v. PHH Corp.; Vacates Judgment Based on Bureau’s Unconstitutionality
    February 16, 2017

    On February 16, the U.S. Court of Appeals for the D.C. Circuit granted the CFPB’s petition for rehearing en banc of the October 2015 panel decision in CFPB v. PHH Corporation. Among other things, the panel decision declared the Bureau’s single-Director structure unconstitutional and would have allowed the President to remove the CFPB’s Director at will rather than “for cause” as set forth in the Dodd-Frank Act. As a result of the petition for rehearing being granted, the panel’s judgment is vacated and the full D.C. Circuit will hear PHH’s appeal of the $109 million penalty imposed by the CFPB under the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA). Oral argument is scheduled for May 24, 2017.

    As discussed in detail in our prior alert, the October panel decision unanimously concluded that the CFPB misinterpreted RESPA, violated due process by disregarding prior interpretations of the statute and applying its own interpretation retroactively, and failed to abide by RESPA’s three-year statute of limitations. However, only two of the three judges on the panel concluded that the CFPB’s status as an independent agency headed by a single Director violated the separation of powers under Article II of the U.S. Constitution. The third panel member, Judge Henderson, dissented from this portion of the opinion on the grounds that it was not necessary to reach the constitutional issue because the panel was already reversing the CFPB’s penalty on other grounds.

    Click here to read full special alert

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    If you have questions about the decision or other related issues, visit our Consumer Financial Protection Bureau practice for more information, or contact a BuckleySandler attorney with whom you have worked in the past.

  • Special Alert: President Signs Executive Order Calling For Review of Financial Regulations
    February 6, 2017

    On February 3, President Trump signed an executive order (the Executive Order) directing the Treasury Secretary and the heads of the member agencies of the Financial Stability Oversight Council (FSOC) to review financial laws and regulations—including the Dodd-Frank Act and regulations implementing that law—thereby setting into motion a process by which the 2010 financial law could be significantly scaled back.
    Under the Executive Order, the Secretary of the Treasury – who has yet to be confirmed – has 120 days to review and report to the President which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements promote the “core principles” listed below and those that do not. The core principles include:

    • restoring public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework
    • fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry
    • enabling American companies to be competitive with foreign firms in domestic and foreign markets
    • advancing American interests in international financial regulatory negotiations and meetings
    • preventing taxpayer-funded bailouts, and
    • empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth

    Click here to read full special alert

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    If you have questions about the order or other related issues, visit our Consumer Financial Protection Bureau practice for more information, or contact a BuckleySandler attorney with whom you have worked in the past.

  • Special Alert: CFPB Consent Orders Address Wide Range of Real Estate Referral Practices Under Section 8(a) of RESPA
    February 1, 2017

    On January 31, the CFPB announced consent orders against mortgage lender Prospect Mortgage, LCC (“Prospect”), real estate brokers Willamette Legacy, LLC d/b/a Keller Williams Mid-Willamette, and RGC Services, Inc. d/b/a Re/Max Gold Coast Realtors (together, “the Brokers”), and mortgage servicer Planet Home Lending, LCC (“Planet”), based on allegations that a wide range of business arrangements between the parties violated the prohibition on “kickbacks” in Section 8(a) of RESPA.
    In a press release accompanying the settlements, CFPB Director Richard Cordray stated that the Bureau “will hold both sides of these improper arrangements accountable for breaking the law, which skews the real estate market to the disadvantage of consumers and honest businesses.” The consent orders address a number of practices that have long been the source of uncertainty within the industry. Unfortunately, despite acknowledging in the orders that referrals are an inherent part of real estate transactions, the Bureau provided little constructive guidance as to how lenders, real estate brokers, title agents, servicers, and other industry participants should structure referral arrangements to comply with RESPA.

    RESPA Section 8(a)

    Section 8(a) of RESPA provides that “[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

    Notably, the CFPB’s consent orders make no reference to Section 8(c)(2), which provides that “[n]othing in this section shall be construed as prohibiting … the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” In a much discussed decision, a panel of the U.S. Court of Appeals for the D.C. Circuit reversed the CFPB’s $109 million penalty against PHH Corporation in October 2015 based on, among other things, the CFPB’s failure to establish that payments for the service at issue (reinsurance) exceeded the fair market value of the service. The CFPB is currently seeking rehearing of this decision from the full D.C. Circuit, as discussed in our summaries of the Bureau’s petition for en banc reconsideration, responses from PHH and the Solicitor General, a motion to intervene filed by several State Attorneys General, and, most recently, PHH’s reply to both the Solicitor General and the motions to intervene.

    Click here to read full special alert
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    If you have questions about the order or other related issues, visit our Consumer Financial Protection Bureau practice for more information, or contact a BuckleySandler attorney with whom you have worked in the past.

  • Special Alert: Trump Administration Initiates “Regulatory Freeze”
    January 24, 2017

    On January 20, Reince Priebus, Chief of Staff to President Trump, issued a memorandum to the heads of executive departments and agencies initiating a regulatory review to be headed by the Director of the Office of Management and Budget (“OMB”). Congressman Mick Mulvaney (R-SC) has been nominated to fill that position.

    On behalf of the President, the memorandum asks the following of the agency and department heads:

    • No new regulations: “[S]end no regulation to the Office of the Federal Register (the ‘OFR’) until a department or agency head appointed or designated by the President after noon on January 20, 2017, reviews and approves the regulation.”
    • Withdraw final but unpublished regulations: “With respect to regulations that have been sent to the OFR but not published in the Federal Register, immediately withdraw them from the OFR for review and approval.”
    • Delay the effective date of published but not yet effective regulations: “With respect to regulations that have been published in the OFR but have not taken effect, as permitted by applicable law, temporarily postpone their effective date for 60 days from the date of this memorandum” and consider notice and comment to further delay the effective date or to address “questions of fact, law, or policy.” Following the delay, regulations that “raise no substantial questions of law or policy” would be allowed to take effect. For those regulations that do raise such questions, the agency or department “should notify the OMB Director and take further appropriate action in consultation with the OMB Director.”

    Rulemakings subject to statutory or judicial deadlines are exempt, and the OMB Director has the authority to grant further exemptions for “emergency situations or other urgent circumstances relating to health, safety, financial, or national security matters, or otherwise.”

    Click here to read full special alert

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    If you have questions about the “freeze” or other related issues, visit our Consumer Financial Protection Bureau practice for more information, or contact a BuckleySandler attorney with whom you have worked in the past.

  • Special Alert: Revised NYDFS Cybersecurity Rule
    January 4, 2017

    On December 28, 2016, the New York Department of Financial Services (DFS) issued a revised version (Revised Proposed Rule) of its cybersecurity rule for financial institutions issued on September 13, 2016 (Proposed Rule). The revision came after DFS received more than 150 comments in response to the Proposed Rule, as well as a hearing before New York State lawmakers. The Revised Proposed Rule retains the spirit of the original Proposed Rule, but offers covered entities somewhat more flexibility in implementing the requirements.


    The Proposed Rule marked the next step in a period of increased focus on cybersecurity by the agency. Between May 2014 and April 2015, DFS issued three reports relating to cybersecurity in the financial and insurance industries. In November 2015, DFS issued a letter to federal financial services regulatory agencies, which alerted the federal regulators to DFS’s proposed regulatory framework and invited comment from the regulators.

    In the September release, DFS explained that the Proposed Rule is a response to the “ever-growing threat posed to information and financial systems by nation-states, terrorist organizations, and independent criminal actors.” As originally written, the Proposed Rule covered financial institutions operating under a charter or license issued by DFS, and set cybersecurity program, policy, training, and reporting requirements that are more stringent than the current federal requirements. The Proposed Rule gave a January 1, 2017 effective date, with a 180-day transitional period. Taking into consideration these concerns, on December 19, 2016, the New York State Assembly’s Standing Committee on Banks held a public hearing regarding cybersecurity and the Proposed Rule. Among the chief concerns expressed at the hearing and in the comment letters was the cost of compliance, especially for smaller banks, and that the Proposed Rule’s “one-size-fits-all” requirements do not consider the varying operational structures, business models, and risk profiles of financial institutions. There was also concern that the Proposed Rule was too different from the current federal requirements.

    Click here to read full special alert

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    We will continue to monitor the DFS rulemaking process. If you have questions about the Revised Rule or other cybersecurity issues, visit our Privacy, Cyber Risk & Data Security practice for more information, or contact a BuckleySandler attorney with whom you have worked in the past.