Financial Industry Developments

CFPB Final Rule Amendments to Ability to Repay and QM Rule

On May 29, the CFPB issued a final rule amending its ability-to-repay and qualified mortgage (QM) rule.  The amendments, effective in conjunction with the ability-to-repay rule on January 10, 2014, (i) exempt certain nonprofit and community-based lenders from the rule; (ii) facilitate lending by small creditors, including certain community banks and credit unions, by making changes to qualified mortgage status for loans issued by small creditors; and (iii) establish the calculation method for loan origination compensation.  CFPB ReleaseCFPB Final Rule Amendments

Extension of Loan Modification Programs

On May 30, Treasury and HUD announced an extension of the Making Home Affordable Modification Program (HAMP) through December 31, 2015.  In addition, on May 30, the FHFA announced that it has directed Fannie Mae and Freddie Mac to extend the HAMP modification program and the streamlined modification initiative through year-end 2015.  HAMP eligibility was originally scheduled to sunset in December 2013, and the streamlined modification initiative was originally expected to end in August 2015.  Treasury ReleaseFHFA Release

Freddie Mac $1 Billion Performing Modified Loan Securitization

On May 23, Freddie Mac announced that it has begun securitizing certain performing modified mortgage loans held in its portfolio.  These loans have been current for at least six consecutive months.  Freddie Mac Release

FinCEN Guidance on Virtual Currency Regulation

On March 18, the Financial Crimes Enforcement Network (FinCEN) issued interpretive guidance clarifying the applicability of regulations implementing the Bank Secrecy Act to persons creating, obtaining, distributing, exchanging, accepting or transmitting virtual currenciesFinCEN Guidance.

Rating Agency Developments

On May 31, Moody's released its methodology for rating bond fundsMoody's Report

On May 31, Moody's released its methodology for rating obligations with variable promisesMoody's Report

On May 30, Moody's released its methodology for rating securities issued by U.S. closed-end fundsMoody's Report

On May 28, Moody's released its approach to rating RMBS using the "Moody's Individual Loan Analysis" (MILAN) framework.  Moody's Report

On May 28, Moody's released its approach to originator assessments in RMBS transactions.  Moody's Report

On May 24, Moody's released its methodology for rating variable rate demand bonds or commercial paper supported by conditional liquidity facilities.  Moody's Report

On May 24, Moody's released its approach to rating future receivables transactions.  Moody's Report

On May 24, Fitch released its global structured finance master rating criteria, which is applicable to all structured finance asset classes.  Fitch Report

Note: Free registration is required for rating agency releases and reports.

Distressed Debt and Restructuring Developments

Patriot Coal Authorized to Modify Union Obligations

On May 29, Patriot Coal (Patriot) became the third major debtor in the last year to receive court approval to modify union benefits or reject a CBA under sections 1113 and 1114 of the Bankruptcy Code.  Following similar rulings in the Hostess and AMR Corporation bankruptcies, Judge Kathy Surratt-States granted Patriot authorization to modify certain benefits and reject collective bargaining agreements.  In a 102-page opinion, she held that Patriot had made the requisite showings that: (i) the proposed modifications or rejection are necessary for the company to emerge from bankruptcy successfully; (ii) the balance of the equities favors rejection; and (iii) the union refused to accept the proposed modifications without good cause.  Her decision ultimately hinged largely on whether the modifications were necessary for the company to emerge from bankruptcy.  Judge Surratt-States held "There is no dispute that for the Debtors' survival, concessions are necessary."  She proceeded to analyze the business need for each of the major modifications requested by the debtors and held those changes were necessary for successful emergence. 

The ruling continues a recent trend allowing debtors to reject or modify union agreements, despite the heightened standard under sections 1113 and 1114 of the Bankruptcy Code.  In light of this trend, unions may have less leverage in chapter 11 than previously imagined.  This could pressure unions to consent to modifications before or during bankruptcy and drive debtors and creditors toward more aggressive positions against the unions.  In re Patriot Coal Corp., Bankr. Case No. 12-51502-659 (Bankr. E.D. Mo. May 29, 2013).  Opinion.    

Asset Management

Roland Berger SEC No-Action Letter on Broker Dealer Registration

On May 28, the Staff of the Division of Trading and Markets of the SEC issued a no-action letter to Roland Berger Strategy Consultants, a German-based entity that provides certain strategy consultancy services to non-U.S. clients, including buy-side or sell-side merger and acquisition services.  As part of its process of contacting potential target buyers or sellers, the firm would contact U.S. based entities or non-U.S. based entities that have U.S. based parents involved in investment decisions of the non-U.S. entity (each, a U.S. Target).  Relief was granted with respect to the broker-dealer registration requirements of the Exchange Act based, in particular, on the fact that Roland Berger will not represent or advise any U.S. Target and will not receive, acquire or hold funds or securities.  SEC No-Action Letter.  

SEC Amendments to OTC Equity Trade Reporting Rules

On May 23, the SEC approved amendments to FINRA trade reporting Rules 6282, 6380A, 6380B, 6622, 7130, 7230A and 7230B to require member firms to report over-the-counter transactions in equity securities to FINRA as soon as practicable, but no later than 10 seconds following execution.  The amendments also apply to trade cancellations as well as stop stock and prior reference price trades.  The amendments will become effective on November 4.  FINRA NoticeFINRA Amendments.  

CFTC Final Rules on Registration and Operation of SEFs

On May 17, pursuant to Sections 721, 723 and 733 of the Dodd-Frank Act, the CFTC approved final rules governing the registration and operation of swap execution facilities (SEFs).  The final rules implement the Dodd-Frank Act's new statutory framework that, among other requirements, adds a new Section 5h to the CEA regarding the registration of SEFs and adds a new Section 2(h)(8) to the CEA concerning the execution of swaps on SEFs.  The final rules will become effective 60 days following publication in the Federal Register; however, compliance is required with most provisions of the final rules 120 days following publication.  CFTC Fact SheetCFTC Final Rule.

RMBS Litigation

Citi Settles FHFA's $3.5B RMBS Suit

On May 28, the FHFA, acting on behalf of Fannie Mae and Freddie Mac, dismissed its lawsuit against Citigroup Inc. and certain of its affiliates and employees after reaching a settlement with defendants.  The lawsuit related to over $3.5 billion in RMBS that Fannie Mae and Freddie Mac allegedly purchased from Citigroup.  The suit was one of 18 cases filed by the FHFA against a number of investment banks between July and September 2011.  In this case, as in the others, the FHFA asserted a number of state and federal securities claims alleging that Citigroup made material misrepresentations and omissions in the offering documents for the RMBS at issue.  This is the second of the 18 cases, along with the case against General Electric, in which the FHFA has reached a settlement.  Stipulation

Citi Settles Allstate's $200M RMBS Suit

On May 28, Allstate Insurance Co. dismissed its lawsuit against Citigroup Inc. and several of its affiliates after reaching a settlement with defendants.  The suit related to $200 million of RMBS certificates that Allstate allegedly purchased from Citigroup.  Allstate asserted several claims under the federal securities laws and state common law, alleging that Citigroup made material misstatements and omissions concerning the underwriting guidelines used to originate the mortgage loans backing the RMBS at issue, the results of Citigroup's due diligence, and certain statistical characteristics of the loans, including owner-occupancy and loan-to-value.  The settlement came 15 months after the case was remanded to New York state court and 6 months after oral argument on Citigroup's motion to dismiss.  Stipulation

Motion to Dismiss Granted in Part in $1.75B Repurchase Suit Against BofA, Countrywide

On May 29, Justice Eileen Bransten in the Supreme Court of the State of New York partially granted a motion to dismiss in a case by U.S Bank against Bank of America and Countrywide seeking the repurchase of 4,484 mortgages securitized in a $1.75 billion RMBS trust.  Justice Bransten held that U.S. Bank could not, under the relevant contracts, seek repurchase of all loans in the trust on the basis of alleged "pervasive breaches" of representations and warranties related to mortgage loans, and therefore dismissed the portion of U.S. Bank's complaint seeking complete repurchase of all loans.  Justice Bransten, however, held that U.S. Bank's claim for repurchase of 495 individual loans for which U.S. Bank had provided notice of breach to Countrywide, and that Countrywide had not yet repurchased, was adequately pled and thus could proceed.  Order.   

U.S. Bank Sued Over Management of 28 RMBS Trusts

On May 24, several banks and asset management companies sued U.S. Bank in a Missouri state court over U.S. Bank's alleged mismanagement of 28 RMBS trusts.  Plaintiffs allege that U.S. Bank disregarded its duties as trustee by, among other things, ignoring master servicer Wells Fargo's alleged misconduct related to its foreclosure practices in connection with loans owned by the trusts.  Plaintiffs further allege that U.S. Bank's inaction made it difficult and costly to pursue foreclosures on mortgages in the trusts, thus causing them substantial damage.  Plaintiffs seek unspecified monetary and injunctive relief against U.S. Bank under claims for breach of contract, breach of the duty to avoid conflict of interest, breach of fiduciary duty, negligence and breach of express contract.  Complaint.

European Financial Industry Developments

ECB Publishes May 2013 Financial Stability Review

On May 29, the European Central Bank (ECB) published its financial stability review with an accompanying press release. The ECB believes the financial stability conditions in the Euro area remain fragile, and that there is still vulnerability in the interaction between sovereigns, banks and the macroeconomy.  The ECB highlighted the following four key risks to the Euro area in the review:  (i) Further decline in bank profitability.  This is linked to credit losses and a weak macroeconomic environment.  (ii) Renewed tensions in sovereign debt markets due to low growth and slow reform implementation.  Continued momentum is needed towards completing a genuine Economic and Monetary Union (EMU), including a full banking union.  (iii) Bank funding challenges in stressed countries.  Continued steps at both national and EU levels are needed to tackle the remaining fragmentation in bank funding.  (iv) Reassessment of risk premia in global markets. Stable and predictable policies are key to the prevention of such a risk reversal.

The ECB stated that it published the review to promote awareness in the financial industry, and among the public, of issues that are relevant for safeguarding the stability of the Euro area financial system.   Financial Stability ReviewPress Release.  

EBA Provides Information on Single Banking Rulebook Q&As

On May 31, the European Banking Authority (EBA) updated its single banking rulebook questions and answers (Q&As) webpage and also published a paper that provides background and guidance on the Q&A process.

The EBA has stated that it believes that the Q&As will be a key feature in contributing to the single rulebook on banking regulation.  The Q&As will provide supervisory guidance and ensure a consistent and effective application of the banking regulatory framework.  The process envisages an ongoing dialogue between the EBA and the European Commission to ensure that responses to the questions submitted remain fully consistent with the EU legislative texts.  The EBA will only start processing questions on implementation of CRD IV or the related technical standards once the final legislative texts are published in the Official Journal of the European Union (OJ).  WebpagePaper

ESMA Approves Global Supervisory Cooperation Agreements Relating to AIFM Directive

On May 30, the European Securities and Markets Authority (ESMA) published a press release relating to global supervisory cooperation on alternative funds.

At its May 22, 2013 meeting, ESMA's Board of Supervisors approved cooperation agreements (also known as memorandum of understanding (MoUs)) between EU securities regulators with responsibility for supervising alternative investment funds (AIFs) from all 27 member states and 34 of their global counterparts (including those in the USA, India, Australia and Hong Kong).  ESMA has negotiated the agreements on behalf of all member states' securities regulators, as well as the authorities from Croatia, Iceland, Liechtenstein and Norway.  Press Release.