Posts by: Howard S. Altarescu

Case Update: Midland Funding v. Madden – Supplemental Brief

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As we reported in our case update on May 26, the Solicitor General filed its brief expressing the Government’s views on the cert-worthiness of Midland Funding v. Madden. Yesterday, Midland filed a supplemental brief with the Court responding to the Solicitor General’s views. Midland emphasizes the clarity and firmness of the Solicitor General’s assessment that the Second Circuit’s decision is incorrect. Midland further argues that despite the Solicitor General’s ultimate recommendation that the Court decline review, the Court should nevertheless take the case. The brief argues that the case “presents a question that is critical to the functioning of the national banking system and to the availability of consumer credit,” and that the issues need resolution now, not later.

The Supreme Court is now poised to decide whether to grant the petition. A docket entry issued yesterday indicates that the case has been distributed for the Court’s June 23 conference. At that conference, the Court will discuss whether to grant or deny cert. or postpone consideration of the petition until the next conference (set for September 26). Unless at the June 23 conference the Court decides to hold the petition for further consideration, we expect that an order list indicating whether the petition has been granted or denied will be issued the following Monday, June 27.

U.S. Treasury Department Issues White Paper on Online Marketplace Lending Industry

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On May 10, 2016, the Department of the Treasury issued a white paper on online marketplace lending that maps the current market landscape, reviews industry insights and offers policy proposals for the road ahead.  Based on approximately 100 responses from online marketplace lenders, financial institutions, investors and other key industry figures, the Treasury, in consultation with the CFPB, FDIC, Federal Reserve Board, FTC, OCC, SBA and SEC, made several notable recommendations and observations.

The white paper explores policies that would expand regulatory oversight, including standardized representations and warranties in securitizations, pricing methodology standards, the implementation of a registry for tracking data on transactions and the reporting of loan-level performance, among others.  In addition, the Treasury mentions potential cybersecurity threats, anti-money laundering, the uneven protections and regulations in place for small business borrowers and the growth of the mortgage and auto loan markets as some of the emerging trends to monitor.  The Treasury is also considering the role of federal agencies in regulating these areas, including the formation of an interagency working group for online market place lending.  Press Release.  White Paper.

Credit Risk Transfer: Making a Successful Program Even Better

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On February 10, Howard Altarescu participated in the Urban Institute / CoreLogic Sunset Seminar, “Credit Risk Transfer: Making a Successful Program Even Better.” The presentation outlined the importance of credit risk transfers (CRT), especially as risk transfers on newly acquired single-family mortgages continues to expand, and also featured speakers from Andrew Davidson & Co., Two Harbors Investment Corp., Genworth U.S. Mortgage Insurance, Urban Institute and CoreLogic.

Howard focused on the legal considerations surrounding the Investment Company Act of 1940 and relevant Real Estate Investment Trust (REIT) tax legislation, contending that while these rules limit Mortgage REIT (mREIT) investment in CRT securities, existing bipartisan support for mREIT participation could result in propitious legislative amendments.

To view the presentation slides in full, please click here.

The Federal Housing Finance Agency Releases Final Rule on Federal Home Loan Bank Membership

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On January 12, 2016, the Federal Housing Finance Agency (“FHFA”) issued a final rule establishing new requirements for membership in the Federal Home Loan Banks (“FHLBanks”). The FHLBanks are 11 U.S. government-sponsored banks that provide liquidity to their members to support housing finance and community investment.  Membership is governed by the Federal Home Loan Bank Act (the “Act”), which states that insurance companies, among others, are eligible for membership.  12 U.S.C. § 1424(a)(1).  The new rule, issued under that Act, establishes new requirements for becoming a member and maintaining membership of an FHLBank.  Most notably, the final rule excludes captive insurance companies from membership.

In its 2014 proposed rule, FHFA first proposed excluding captive insurance companies from the scope of the definition of “insurance company” in the Act. Captive insurance companies are insurance companies established by a parent specifically to cover risks to which the parent is exposed; they do not insure non-affiliated third parties. Despite receiving 400 comments on this aspect of the rule, almost all of which expressed opposition to the proposal, FHFA’s final rules retains the proposal essentially as it was proposed.

Under the rule, FHLBanks may not accept any captive insurance companies as new members. For captive insurance companies that became members since the rule was proposed in 2014, membership must be terminated within one year, and no additional advances may be made.  Captive insurance companies that were members of a FHLBank prior to the issuance of the proposed rule may remain members of their current FHLBanks for five years, but the amount of advances they can receive are capped, and the FHLBanks may not make new advances or renew existing advances with a maturity date beyond the five-year period.

The rule’s exclusion of captive insurance companies is vulnerable to challenge in court. Chiefly, it is unclear that FHFA has authority to exclude captive insurance companies from the purview of the Act.  Congress directed that “any” insurance company shall be eligible for membership, potentially ousting FHFA’s discretion to pick and choose among insurance companies, especially where the definition of “insurance company” has traditionally been left to the States.  In the same vein, it is unclear that FHFA may add additional statutory criteria (here, that an insurance company must primarily underwrite insurance for nonaffiliated persons or entities) not included by Congress.  In addition, FHFA’s evaluation of its purported reason for excluding captive insurance companies—that such companies may be passing advances through to their parents, who are not eligible for FHLBank membership—is not thoroughly analyzed.  It appears that rather than investigating whether captive insurance companies are actually being used as conduits to ineligible entities, FHFA relies primarily on industry publications encouraging companies to set up captives in order to do so.  Moreover, it is unclear that FHFA’s proffered solution would solve any purported problem given that other entities that remain eligible under FHFA’s new rule can also pass through advances to their ineligible parent companies.

Under the 2014 proposal, FHFA also proposed imposing ongoing minimum investment requirements on FHLBank members in order to maintain membership. Specifically, FHFA proposed that institutions would have had to maintain a certain percentage of residential mortgage assets.  The threshold for small banks and credit unions with assets less than $1 billion was at least 1%.  In its final rule, FHFA removed these requirements from the final regulations, concluding that the burdens of imposing such standards would outweigh the benefits.

The new regulation will go into effect 30 days after publication in the Federal Register. The rule has been strongly opposed by industry participants, who view it as a detriment to the liquidity of the residential housing market, and is expected to garner further discussion and likely a court challenge. Press Release. Final Rule.

Please feel free to contact any of the authors of this Client Alert or other Orrick attorneys with whom you work to discuss any questions you may have with regard to the foregoing.

Madden Case Timeline

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Note:  These are the outcomes we think are most likely based on our experience and study of this matter.  The Supreme Court can, of course, resolve cases in a number of other ways (including summary disposition, vacating and remanding in light of another decision, etc.) that we do not anticipate here, but remain possible.  Finally, the Court can always act in accord with its own preferred timeline.

If you have any questions about or wish to discuss further the Madden v. Midland Funding  case, please contact Robert Loeb (+1 202-339-8475) or Howard Altarescu (+1 212-506-5315) or feel free to reach out to any of your other Orrick contacts.

Case Update: Madden v. Midland Funding

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​On May 22, 2015, the U.S. Court of Appeals for the Second Circuit held in Madden v. Midland Funding that the federal preemption provision of the National Bank Act, 12 U.S.C. § 85, could not be invoked by a non-national bank assignee.  Consequently, even though the debt in that case was procured from a national bank, the interest rate the non-bank assignee could charge was subject to state usury law scrutiny.

The Court’s decision was informed by the policies underlying the National Bank Act.  The Act was designed to create uniform rules that limit the liability of national banks and prescribe exclusive remedies for their overcharges so as to protect them from unfriendly state legislation.  The Court explained that these purposes are not served in the case of a non-national bank assignee because invocation of state usury laws in that context would not interfere with the business of national banks.   The Court further explained that the national bank would still be able to sell the debt—it’s just that the debt’s exposure to state usury law could affect its market price.

We expect that Midland Funding will file a certiorari petition in the United States Supreme Court on November 10.  When filed, we will send a follow up.  For now, there are three quick points worth highlighting: READ MORE →

Mel Watt of FHFA Discusses the Common Securitization Platform and Credit Risk Transfers

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In a recent speech, Federal Housing Finance Agency (FHFA) director Melvin Watt discussed key FHFA initiatives for 2016. Watt stated that the common Securitization Platform (CSP) and Single Security efforts will be launched in two stages. Watt stated, “In the first stage, which we are calling Release 1, the CSP will begin issuing and administering only Freddie Mac’s securities. In the second phase, Release 2, the CSP will begin issuing and administering securities for both Enterprises and will do so using the new Single Security for the first time.”

Regarding credit risk transfers, Watt stated that Fannie Mae and Freddie Mac are on pace to exceed the 2015 Conservatorship Scorecard objectives. In terms of next steps, Watt stated, “we want to refine and further standardize the Enterprises’ debt, reinsurance and upfront offerings. This will help broaden liquidity. We will continue to work with the Enterprises on other innovative transaction types, such as credit-linked notes. We will also aggressively continue our work to analyze, assess, and define upfront credit risk transfers. We are committed to engaging stakeholders as part of this process.”  Speech.

Treasury Request for Public Input on Expanding Access to Credit through Online Marketplace Lending

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“Online marketplace lending refers to the segment of the financial services industry that uses investment capital and data-driven online platforms to lend to small businesses and consumers.”[1]

On July 20, the Department of the Treasury published a Notice and Request for Information (“RFI”) seeking comment on various aspects of online marketplace lending, including –

  • the business models and products offered to small businesses and consumers
  • the potential to expand access to credit to underserved market segments
  • how the financial regulatory framework should evolve to support the growth of the industry
  • Treasury asks for comment on 14 categories of questions, some of which include multiple specific questions, which we summarize and, with respect to some, offer initial thoughts on below.

To view the full article, please click here.

[1] 80 Fed. Reg. 42866 (July 20, 2015)

Madden v. Midland Funding, LLC

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On May 22, the Second Circuit Court of Appeals ruled that when a nonbank entity purchases loans from a national bank, the interest rate the nonbank entity may charge is limited to the rate of interest of the state of residence of the obligor (See Madden v. Midland Funding, LLC 2015 U.S. App. LEXIS 8483 (May 22, 2015).  The court stated that because the entity is not a national bank or its agent, or otherwise acting on behalf of a national bank, and because applying state law would not significantly interfere with the national bank’s ability to sell loans to third parties, the National Bank Act did not preempt the obligor’s claim that the rate charged on the loan exceeded state rate ceilings.

Simplifying GSE Reform – A Roundtable Discussion

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On April 8, 2015 Andrew Davidson & Co, held a roundtable discussion in Washington D.C., “Simplifying GSE Reform – A Roundtable Discussion”. The discussion was focused on whether to replace or reform the GSEs, alternative methods of risk share, the Ginnie Mae model, and related issues. GSE Reform roundtable discussion summary and proposal here.