Mortgage Banking Update - May 27, 2021
In This Issue:
- Ballard Spahr’s Consumer Financial Services Group Again Receives Highest National Ranking from Chambers USA
- Senate Passes CRA Resolution to Override OCC True Lender Rule
- HUD Issues Charge of Discrimination Against Mortgage Modification Companies
- CFPB Issues TRID Rule FAQs on BUILD Act Partial Exemption
- CFPB Office of Servicemember Affairs Issues 2020 Annual Report
- Fintechs Face Heightened Hurdles to Gain and Retain Fed Access
- FDIC Proposed Rule and Information Requests Target False Advertising, Use, and Misuse of FDIC Name and Logo
- CADFPI Announces Hiring of Christina Tetreault to Lead Office of Financial Technology and Innovation
- Four judges Dissent From Ninth Circuit Denial of Rehearing En Banc in Seila Law; Seila Law Asks Ninth Circuit to Stay Mandate Pending Filing of a Cert Petition
- Did You Know?
- Looking Ahead
For the latest updates on the Coronavirus COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
We are pleased to announce that Ballard Spahr’s Consumer Financial Services Group once again has received the highest national ranking from Chambers USA: America’s Leading Lawyers for Business. The Group was ranked in the highest tier nationally in Compliance and Litigation, the two categories previously used by Chambers USA for Financial Services Regulation: Consumer Finance. This year, Chambers USA added Enforcement & Investigations as a new category for Financial Services Regulation: Consumer Finance. We are proud to report that the Group also received the highest national ranking in this new third category.
Our firm is one of only two firms to be ranked in the highest tier nationally in all three categories and the only full-service firm to receive the highest ranking in all three categories. Lawyers in our CFS Group collectively received more individual rankings than lawyers in any other firm that was ranked under Financial Services Regulation: Consumer Finance. These rankings demonstrate the strength of our CFS practice, with more than 80 lawyers across the country. Our CFS Group has been ranked in Band One every year since Chambers USA introduced a national category for consumer finance. The rankings are largely based on client feedback and peer review.
Released May 20, the Chambers USA report praised the Group’s skill in supporting clients at both the state and federal regulatory levels. According to the report, the Group is noted for its work with banks and non-banks on the full range of consumer finance regulatory matters, including credit cards, mortgage, and auto finance issues. Chambers USA also noted the Group’s expertise in the areas of fintech, e-commerce, and prepaid cards and its ability to provide robust representation of clients in in CFPB enforcement actions, arbitrations and litigation.
The 2021 edition quotes our clients who have said that the Group “is without a doubt an industry-leading consumer finance team” and “one of the top firms in the consumer finance space in terms of responsiveness and the practical nature of their advice.”
Seven individual lawyers from our CFS Group were recognized for excellence by Chambers USA. In addition to CFS Group Co-Chairs Chris Willis and Mark Furletti, CFS Group members Alan Kaplinsky, Rich Andreano, John Culhane, Jeremy Rosenblum, and James Kim were also individually ranked.
We are proud of the work we do, and very grateful to our clients for entrusting us to help them develop new products, defend them in private litigation and against enforcement actions, and assist them in navigating the increasingly complex array of federal and state regulations.
On May 11, by a vote of 52-47, the Senate passed the resolution introduced by Democratic Senators under the Congressional Review Act (CRA) to overturn the OCC’s “true lender” final rule. The rule addresses when a national bank or federal savings association should be considered the “true lender” in the context of a partnership with a third party. Three Republican Senators voted in favor of the resolution: Cynthia Lummis, Marco Rubio, and Susan Collins.
According to media reports, the White House issued a statement before the vote supporting the CRA resolution. The resolution will now be voted on by the Democratic-controlled House where it is expected to pass.
Pursuant to the CRA, the enactment of a disapproval measure would preclude the OCC from subsequently reissuing the rule or adopting a new rule that is substantially the same as the disapproved rule unless “the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”
A Congressional override of the rule would render moot the lawsuit filed by a group of state attorneys general in January 2021 seeking to set aside the rule.
Having submitted a comment letter to the OCC in support of the true lender rule when it was proposed, we are obviously disappointed by the Senate vote. In our view, the rule established a clear and logical bright line confirming and clarifying that a bank or savings association is properly regarded as the “true lender” when, as of the date of origination, the bank is named as the lender in a loan agreement or funds the loan. An override of the rule will deprive banks and their partners of the certainty the rule would have provided.
The impending rejection of the OCC true lender rule highlights the risks involved in bank-model lending programs and the need to structure these programs thoughtfully, with a view to the risks. While most of the legal action in this space has been in the context of high-rate programs, with APRs near or in excess of a triple-digit range, authorities in Colorado and Maryland have challenged programs with APRs of 36% or less.
The U.S. Department of Housing and Urban Development (HUD) recently issued a charge of discrimination under the Fair Housing Act (Act) against Louis Liberty & Associates, a PLC dba The House Lawyer, Liberty & Associates, a PLC dba The House Lawyer (THL), and owners, employees and agents of THL (collectively, the “Respondents”), one of which was an attorney. The charge was issued in connection with complaints filed with HUD by specific, unidentified mortgage loan borrowers (the “Complainants”). While HUD asserts that Respondents engaged in illegal and unfair mortgage modification assistance, the basis of the charge alleging violations of the Act is that the Respondents targeted Hispanic mortgage loan borrowers and, thus, violated certain of the Act’s prohibitions against discrimination based on national origin.
Among other prohibitions, the Act prohibits (1) discriminating against a person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, and (2) discriminating against any person in making available a residential real estate-related transaction, or in the terms, or conditions of any such transaction, because of race, color, religion, sex, handicap, familial status, or national origin. The Act defines a “residential real estate-related transaction” as (1) the making or purchase of loans or providing other financial assistance (a) for purchasing, constructing, improving, repairing, or maintaining a dwelling, or (b) secured by residential real estate, or (2) the selling, brokering or appraising of residential real property. The Act also provides that it is unlawful to coerce, intimidate, threaten, or interfere with any person in the exercise or enjoyment of, or on account of the person having aided or encouraged any other person in the exercise or enjoyment of, any right granted or protected by sections of the Act that include the foregoing prohibitions.
HUD asserts that the Respondents violated the Act by:
- Discriminating against the Complainants in the provision of services or facilities in connection with the sale of a dwelling.
- Discriminating against the Complainants in making available residential real-estate related transactions, and in the terms or conditions of such transactions, because of national origin.
- Interfering with the Complainants’ exercise or enjoyment of rights granted or protected by the sections of the Act containing the prohibitions set forth in the first sentence of the prior paragraph.
The charge includes factual allegations of HUD regarding the Complainants, and also includes general factual allegations regarding the conduct of the Respondents. The general factual allegations include the following:
- The Respondents marketed and sold illegal or unfair mortgage modification services to financially distressed California homeowners, targeted Hispanic borrowers for financial assistance, and most of the THL clients were Hispanic.
- Most of THL’s radio, television and online advertisements were in Spanish, and THL radio and television advertising aired on Spanish-language stations.
- THL’s advertisements contained deceptive information regarding THL’s ability to obtain loan modifications and THL’s fee payment structure, and also discouraged borrowers from seeking free loan modification assistance.
- In a particular advertisement, one of the Respondents stated that “no one works for free” and that “if someone states that they will help you for free, please watch out . . .”, and falsely stated that THL “only requires individuals to pay after each step of the process has been completed.”
- THL’s staff made false, inaccurate or misleading representations during in-person consultations with prospective clients regarding the extent of mortgage relief THL would obtain on their behalf, and the prospective clients’ obligation to continue making mortgage payments while seeking a mortgage modification. THL staff also discouraged clients from seeking legitimate loan modification services.
- The Respondent who was an attorney was solely responsible for the legal services offered by THL.
- While California law prohibited attorneys from charging or collecting legal fees for loan modification services prior to the completion of those services, the Respondents charged clients fees of approximately $2,500 for the provision of mortgage modification services under a Modification Package Attorney-Client Fee Agreement, and approximately $750 to $1,000 for services under a Negotiation Package Attorney-Client Fee Agreement, and that some, if not all, of the fees were typically paid before the Respondents completed the full scope of the services that they represented they would perform at the initial appointments with clients.
- The Respondents also charged clients a recurring monthly fee of $50.
- When prospective clients did not appear to qualify for a loan modification because they were current on their mortgage payments, the Respondents routinely advised them to stop paying their mortgages, and the Respondents failed to provide accurate information, or provided inaccurate information, to clients about the risks involved in not paying their mortgages.
- The Respondents’ mortgage modification activities were conducted almost exclusively by non-attorneys, even though the Respondents’ advertisements and agreements misleadingly stated that mortgage modification clients would be receiving the services of an attorney.
- The Respondents routinely interfered with clients’ relationships with their lenders by instructing clients to stop communicating with their lenders. The Respondents provided clients with a document titled How To Handle The Bank During The Loan Modification Process that advised clients that if their bank threatened foreclosure, they should not interfere with THL’s lender negotiations, and instead should forward all lender communications to THL. Nevertheless, the Respondents regularly failed to answer or return clients’ phone calls and failed to provide updates regarding the status of clients’ loan modification applications.
- After convincing clients to stop paying their mortgages, collecting fees for loan modification services, and making promises that they would obtain loan modifications for clients, THL abruptly sent disengagement letters to clients and closed its office.
The alleged conduct regarding the Complainants began nearly 10 years ago, and the complaints were filed in December 2012 and July 2013. HUD states that in July 2013, the State Bar of California found that the practices of the Respondent who was an attorney violated California law by (1) collecting an advance fee for loan modification, and (2) taking a lien on real estate, personal property or other security to secure payment of this fee for mortgage loan modification work. HUD also states that in August 2015 the California Bureau of Real Estate revoked the same individual’s real estate license.
HUD seeks an order that:
- Declares that the Respondents’ practices violated the Act.
- Enjoins the Respondents from discriminating against any person because of national origin in any aspect of the sale or rental of a dwelling, including services in connection therewith, and/or in any residential real estate-related transaction.
- Awards such damages as will fully compensate the Complainants for any and all damages caused by the Respondents’ conduct.
- Assesses a civil penalty against each Respondent for each separate and distinct discriminatory housing practice that the Respondent is found to have committed.
- Awards additional relief as may be appropriate.
Based on the number of mortgage borrowers facing financial hardship as a result of the COVID-19 pandemic, it will be interesting to see if HUD, or other regulators, will challenge companies providing loan modification services or similar services, or mortgage loan servicers, under fair housing or fair lending laws if the services provided by the entities are considered to be illegal, unfair, deceptive or abusive and are targeted to certain protected groups, or the services vary based on whether a borrower is or is not a member of a protected group. Please see our recent blog post addressing an article that advocates that regulators and private individuals should consider challenging discrimination as an “unfair” practice covered by federal and state laws prohibiting unfair, deceptive, or abusive acts and practices.
The CFPB recently issued an update to its Truth in Lending Act (TILA)/Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure (TRID) rule FAQs to address a partial exemption added by the Building Up Independent Lives and Dreams Act (BUILD Act) that became law in January 2021.
Before the adoption of the BUILD Act, Regulation Z under TILA already included a partial exemption from the Loan Estimate and Closing Disclosure requirements of the TRID rule for subordinate housing assistance loans that met certain conditions. The BUILD Act added a partial statutory exemption from such requirements for similar transactions. The FAQs provide that to qualify for the BUILD Act partial exemption, a transaction must meet all of the following criteria:
- The loan must be a residential mortgage loan.
- The loan must be offered at a 0 percent interest rate.
- The loan must only have bona fide and reasonable fees.
- The loan must be primarily for charitable purposes and made by an organization described in Internal Revenue Code section 501(c)(3) and exempt from taxation under section 501(a) of that Code.
For a transaction that qualifies for the partial exemption under the BUILD Act, a creditor may elect not to provide the applicant with a Loan Estimate or Closing Disclosure. If a creditor elects not to provide such disclosures for a qualifying transaction, the creditor must provide the applicant with a Good Faith Estimate and HUD-1 Settlement Statement under RESPA and a traditional disclosure statement under TILA. Creditors relying on the BUILD Act partial exemption also must provide applicants with the Special Information Booklet under RESPA.
On May 6, 2021, the CFPB’s Office of Servicemember Affairs issued its eighth annual report summarizing its activities from January 1 through December 31, 2020. The report discussed the Office’s consumer outreach and educational efforts, servicemember complaint trends, and priorities for 2021.
The Office’s educational outreach focused on specific economic challenges and resources related to the COVID-19 pandemic, including forbearance programs and emergency grants. The Office also enhanced its flagship interactive financial educational program, titled “Misadventures in Money Management,” to add a specific military family learning module. The program is free and available for use by all military personnel, including National Guard and Reserve members.
The Report also offered an analysis of complaints received from servicemembers. In 2020, the CFPB received over 40,800 complaints from servicemembers, a 14% increase over 2019. The most common complaint categories concerned credit reporting, debt collection and mortgages. Credit reporting was the top concern for servicemembers, with 16,600 complaints. The vast majority of complaints related to inaccurate reporting or inadequate investigation of a dispute. The CFPB opined that the volume of complaints may be partially due to the fact that security clearances require routine credit checks.
The CFPB received 8,900 complaints related to debt collection, over half of which concerned claims of identity theft. The Bureau noted that servicemembers submit debt collection complaints at a higher rate than non-servicemembers. Another debt collection issue concerned leased telecommunications equipment, such as internet, phone and cable equipment. This is an issue that uniquely impacts servicemembers due to deployment and frequent relocations.
Of the 4,300 mortgage complaints received, the most common issue was difficulty with the payment process. Additionally, the CFPB noted that it continued to receive complaints from borrowers who received mailers about refinancing their VA loans, some of which were designed to look like official government communications. The CFPB brought nine enforcement actions in 2020 against lenders allegedly engaged in similar activity in violation of the Mortgage Acts and Practices – Advertising Rule (MAP Rule), and Regulation Z (see our blog posts here, here, here, and here).
Looking ahead to 2021, the Report outlines the CFPB’s priorities, none of which are a surprise, as they are similar to the broader policy initiatives outlined by the CFPB’s new leadership. First, the Office intends to continue to closely monitor MLA complaints. This is consistent with the Bureau’s change in position regarding its authority to supervise creditors for MLA compliance and Acting Director Uejio’s blog post announcing that MLA compliance would be a significant focus going forward. Second, COVID-19 relief will also be a key area of focus. Finally, the Office will also work to address economic and racial inequality. While this is a broader focus for the CFPB, it is a particular concern for servicemembers and their families, given that 31% of active duty servicemembers identify as a racial minority.
The Board of Governors of the Federal Reserve System recently issued and invited public comment on proposed guidelines to be used by Federal Reserve Banks to evaluate requests for master accounts and/or access to Federal Reserve Bank (Fed) financial services, in order to support a more “transparent and consistent” approach to such requests.
Access to Fed services is sought by fintechs and other non-traditional financial services companies because a Fed account, and direct access to Fed financial services, would dispense with the need for the non-bank to use a traditional bank as an intermediary with the Fed. A Fed account and/or Fed access enables more efficient provision of services to customers and participation in the Fed’s nationwide network, including settlement services, electronic transfers of funds through a variety of channels, electronic and paper check processing, and the ability to borrow from the Fed’s discount window, among other benefits.
The proposed guidelines would apply to access requests from all legally eligible institutions, but the issuance was triggered by the Fed’s recognition that a growing number of fintechs, and other non-traditional and/or non-insured financial services companies, are seeking Fed access:
“The payments landscape is evolving rapidly as technological progress and other factors are leading to both the introduction of new financial products and services and to different ways of providing traditional banking services (i.e., payments, deposit-taking, and lending). Relatedly, there has been a recent uptick in novel charter types being authorized or considered across the country and, as a result, the Reserve Banks are receiving an increasing number of inquiries and requests for access to accounts and services from novel institutions.
Although the Reserve Banks have received such inquiries on an exceptional basis in the past, the Board now believes, given the increase in the number and novelty of such inquiries, that a more transparent and consistent approach to such requests should be adopted by the Reserve Banks. Given that access decisions made by individual Reserve Banks can have implications for a wide array of Federal Reserve System (Federal Reserve) policies and objectives, a structured, transparent, and detailed framework for evaluating access requests would benefit the financial system broadly.”
The Supplementary Information provided with the proposal indicated a desire to ensure uniform decision-making on granting Fed access by the various Federal Reserve Banks:
“Such a framework would also help foster consistent evaluation of access requests, from both risk and policy perspectives, across all twelve Reserve Banks…Accordingly, the proposed guidelines would reduce the potential for forum shopping across Reserve Banks and mitigate the risk that individual decisions by Reserve Banks could create de facto System policy for a particular business model or risk profile.”
The Fed’s proposed guidelines contain six principles that the Fed stated “would support consistency in approach and decision-making across Reserve Banks while maintaining Reserve Bank discretionary authority to grant or deny requests.” The guidelines aim to manage and mitigate the risks that may arise when an institution gains access to Fed accounts and services, which, as explained in the Supplementary Information, “…include, among others, risks to the Reserve Banks, to the payment system, to the financial system, and to the effective implementation of monetary policy.”
The first principle specifies that only institutions legally eligible for Fed accounts and services should have Fed access. The Fed indicates that it is “considering whether it may in the future be useful to clarify the interpretation of legal eligibility under the Federal Reserve Act for a Federal Reserve account and services.”
However, fintechs and other firms seeking Fed access by virtue of having obtained a “novel” charter should take note of the Fed’s statement that “The Board believes it is important to make clear that legal eligibility does not bestow a right to obtain an account and services.”
The rest of the principles each begin with broad initial statements, including that a Reserve Bank’s decision to permit access should not create undue credit, operational, settlement, cyber or other risks to the Reserve Bank or the overall payment system; create undue risk to the stability of the U.S. financial system; create undue risk to the overall economy by facilitating money laundering, fraud, or other illicit activities; or adversely affect the Fed’s ability to implement monetary policy.
Each principle is followed by detailed subsections that use familiar terminology, substantially similar to that used by financial regulators to establish expectations for the conduct of financial institutions. Requirements include “an effective risk management framework and governance arrangements to ensure that the institution operates in a safe and sound manner”, that the applicant be “in sound financial condition, including maintaining adequate capital…and sufficient liquid resources”, and that the applicant have “a business continuity plan” to “ensure the institution can resume services in a reasonable timeframe.”
The principles indicate Reserve Banks are expected to assess the consistency of the applicant’s activities and services with applicable laws and regulations, such as the EFTA, BSA/AML/OFAC requirements and consumer protection laws, and confirm that the applicant has sufficient compliance programs in place.
The proposed guidelines indicate Reserve Banks remain responsible to evaluate each applicant and each request on a case-by-case basis, and retain discretion to impose additional risk management controls on accounts and services for a particular institution.
It is clear that under these guidelines, if finalized, fintechs and other non-bank companies wishing to pursue and maintain Fed access will be held to standards substantially similar to those imposed by supervisory authorities on traditional financial institutions in numerous respects. As acknowledged in the proposal, “The identified factors are commonly used in the regulation and supervision of federally-insured institutions. As a result, the Board anticipates the application of the account access guidelines to access requests by federally-insured institutions will be fairly straightforward in most cases. However, Reserve Bank assessments of access requests from non-federally insured institutions may require more extensive due diligence.”
Fintechs and other companies with “novel” charters that already have Fed access must take note of the proposal as well. As set forth in the Supplementary Information, “…while the guidelines are designed primarily for new access requests, Reserve Banks should also apply the guidelines to existing account and services relationships when a Reserve Bank becomes aware of a significant change in the risks that the account holder presents due to changes in the nature of its principal business activities, condition, etc.”
As of this writing, this proposal has not been published in the Federal Register. Comments will be due 60 days after the date of publication in the Federal Register.
The Federal Deposit Insurance Corporation (FDIC) recently issued a notice of proposed rulemaking (NPR) and request for information (RFI) addressing “False Advertising, Misrepresentation of Insured Status and Misuse of the FDIC’s Name or Logo.”
Under this NPR, the title of 12 CFR Part 328, currently “Advertisement of Membership” would be changed to “Advertisement of Membership, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo.” The current official sign and advertising rules set forth in 12 CFR §§ 328.0 through 328.4 would be redesignated as subpart A, to be entitled “Advertisement of Membership”. Proposed 12 CFR §§ 328.100 through 328.108 (the “Proposed Rule”) would be added as a new subpart B to 12 CFR Part 328 to implement Section 18(a)(4) of the Federal Deposit Insurance Act, 12 U.S.C. §1828(a)(4), entitled “False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo.”
The policy objectives to be served by the Proposed Rule are set forth in the Supplementary Information provided in the NPR:
“Section 18(a)(4) of the Federal Deposit Insurance Act, 12 U.S.C. 1828(a)(4),(Section 18(a)(4)) prohibits any person from misusing the name or logo of the Federal Deposit Insurance Corporation (FDIC) or from engaging in false advertising or making knowing misrepresentations about deposit insurance. The FDIC has observed an increasing number of instances where financial services providers or other entities or individuals have misused the FDIC’s name or logo or have made false or misleading representations that would suggest to the public that these providers’ products are FDIC-insured…, the FDIC is proposing to adopt regulations to further clarify its procedures for identifying, investigating, and where necessary taking formal and informal action to address potential violations of Section 18(a)(4)…. Although the FDIC is not required to promulgate regulations to implement section 18(a)(4), the FDIC nonetheless believes that the proposed rule, if adopted, would establish a more transparent process that will benefit all parties and would promote stability and confidence in FDIC deposit insurance and the nation’s financial system.”
The Supplementary Information also notes that “Under Federal law, it is a criminal offense to misuse the FDIC name or make false representations regarding deposit insurance, citing 18 U.S.C. §709.
Proposed 12 CFR §328.102 states its prohibitions in broad terms, mandating that no person may represent or imply that any “Uninsured Financial Product” is insured or guaranteed by the FDIC by using “FDIC-Associated Terms” as part of a business name, or by using FDIC-Associated Terms or “FDIC Associated Images” in an advertisement, solicitation, or other publication or dissemination, and that no person may knowingly make false or misleading representations about deposit insurance. A statement is deemed to be a statement regarding deposit insurance if it includes any FDIC-Associated Images or FDIC-Associated Terms, or meets other conditions. The Proposed Rule adopts the test established under Section 5 of the Federal Trade Commission Act to determine whether a statement regarding deposit insurance violates the regulation. As the FDIC explains in the Supplementary Information:
“While Section 18(a)(4) is separate from Section 5, it prohibits similar conduct— deception in connection with commerce. The standards governing deception under Section 5 have been consistently accepted by courts, and used by the FTC and other agencies, including the FDIC, which enforces prohibitions of Section 5 against the institutions it supervises…the FDIC believes it is appropriate to use similar standards to determine if a representation about deposit insurance violates Section 18(a)(4).”
The Proposed Rule provides examples of offending conduct, but the FDIC warns in the Supplementary Information that “These examples are not meant to be an exhaustive list…”, a caveat borne out in the language of the Proposed Rule.
Foreshadowing the Proposed Rule, over the past several months the FDIC has expressed heightened concerns about potential consumer confusion as to FDIC insurance coverage, particularly in connection with some activities of fintechs and other non-FDIC insured entities, and indicated its intention to issue rules to address misrepresentations in this area.
In February 2020, the agency issued a Request for Information on FDIC Sign and Advertising Requirements and Potential Technological Solutions. In that issuance, the agency pointed out that “It is illegal to misuse the FDIC name or make false representations regarding deposit insurance, and expressed concern about “nonbanks (such as fintechs…)” displaying the FDIC name or logo on a website to “convey legitimacy.” The agency noted that in 2019, the FDIC requested that internet service providers take down over 65 such websites. The FDIC sought input in that RFI on how to address potential misrepresentations by nonbanks about deposit insurance: “The FDIC has not issued specific regulations regarding false representations related to FDIC insurance. The FDIC seeks information regarding misrepresentations in this area, including the following specific questions…What changes can be made to the FDIC sign and advertising statement requirements that could deal with preventing misrepresentations regarding FDIC deposit insurance?”
The comment period for the 2020 RFI was extended, and in April 2020, the FDIC announced that it was temporarily postponing its efforts to modify its official sign and advertising requirements, but noted “the agency remains committed to modernizing these rules at a future date….”
On April 9, 2021, the FDIC issued an RFI entitled “Request for Information on FDIC Official Sign and Advertising Requirements and Potential Technological Solutions”. This RFI was “substantially similar” to the RFI published in February 2020, except that it did not deal with the issue of misrepresentations about deposit insurance, which the agency said would be dealt with in a separate NPR:
“On an ongoing basis, pursuant to its statutory authority, the FDIC actively seeks to protect depositors by ensuring the FDIC’s name, seal and logo are appropriately used and limited to being associated with insured depository institutions. In light of an increasing number of instances where people or entities have misused the FDIC’s name or logo or have made misrepresentations that would falsely suggest to the public that their products are FDIC-insured, the FDIC expects to issue a notice of proposed rulemaking seeking comment on a proposed rule regarding misrepresentations about deposit insurance and misuse of the FDIC’s name or logo. The FDIC intends to engage in its efforts to modernize the FDIC official sign and advertising requirements and its rulemaking regarding misrepresentations about deposit insurance in tandem and on a coordinated basis.”
Shortly thereafter, on April 22, 2021, the Proposed Rule was issued, and was published in the Federal Register on May 10, 2021. Comments on the Proposed Rule are due on or before July 9, 2021.
We believe several clarifications will be required in order to address certain possibly conflicting, or at least confusing, elements of the Proposed Rule. We are hopeful that stakeholders will review the Proposed Rule and related RFIs carefully and provide thoughtful input to be considered by the FDIC.
The FDIC describes the Proposed Rule’s expected effects as follows: “The proposed rule, if adopted, would primarily affect non-bank entities and individuals who are potentially misusing the FDIC’s name or logo or are making false or misleading representations about deposit insurance. The FDIC currently insures 5,042 depository institutions that could also be affected; however in practice, the proposed rule would primarily affect non-bank entities and private individuals.” We would submit that not only fintechs and other non-banks, but also banks, including but not limited to those involved in marketplace lending programs and other arrangements with non-banks, must carefully analyze and consider the potentially significant effects of the Proposed Rule, and should provide comments to the FDIC to point out areas of concern. And, it would be prudent for all financial services providers, banks and non-banks alike, to take note of the increasing intensity of the FDIC’s focus on potentially deceptive uses of the FDIC name and logo.
The California Department of Financial Protection and Innovation announced earlier this month that it has hired Christina Tetreault to lead the new Office of Financial Technology and Innovation. The hiring of Ms. Tetreault is particularly significant because, according to the DFPI’s press release, “[t]he announcement finalizes hiring for the most critical positions needed to stand up major offices and divisions to carry out the California Consumer Financial Protection Law which took effect Jan. 1.”
Ms. Tetreault most recently served as Manager of Financial Policy for Consumer Reports. She is an attorney with expertise in emerging financial technologies and financial data use. Ms. Tetreault is also a member of the FDIC’s Advisory Committee on Economic Inclusion.
The two other key positions recently filled by the DFPI are the leaders of the Consumer Financial Protection Division and the Office of the Ombuds. The DFPI has described Suzanne Martindale, who has been hired to lead the Consumer Financial Protection Division, as “a veteran consumer advocate and key architect of the new law.” Like Ms. Tetreault, Ms. Martindale also came to the DFPI from Consumer Reports where she served as Senior Policy Counsel and Western States Legislative Manager.
The DFPI has hired Brian Gould to lead the newly created Office of the Ombuds. He most recently served in the Office of State Treasurer.
In December 2020, after the U.S. Supreme Court ruled that the CFPB’s structure was unconstitutional and remanded the case for further consideration, a unanimous panel of the U.S. Court of Appeals for the Ninth Circuit ruled that the civil investigative demand (CID) issued to Seila Law was validly ratified by former Director Kraninger and affirmed the district court’s decision granting the CFPB’s petition to enforce the CID.
Following a sua sponte request from a Ninth Circuit judge for a vote on whether to rehear the case en banc, a vote was taken and a majority of the non-recused Ninth Circuit active judges did not vote in favor of en banc reconsideration. Accordingly, rehearing en banc was denied. However, four judges joined in an opinion dissenting from the denial. Two of the dissenting judges were appointed by President George W. Bush and two were appointed by President Trump.
In its June 2020 decision, the Supreme Court held that the CFPB’s structure was unconstitutional because its Director could only be removed by the President “for cause.” It remanded the case to the Ninth Circuit to consider the CFPB’s argument that former Acting Director Mulvaney’s ratification of the CID issued to Seila Law cured any constitutional deficiency. On remand, the Ninth Circuit panel determined that former Director Kraninger’s ratification made it unnecessary for the panel to decide whether the CID was validly ratified by former Acting Director Mulvaney. The panel concluded that former Director Kraninger’s ratification remedied any constitutional injury that Seila Law may have suffered due to the defect in the Bureau’s structure.
In ruling that the ratification was valid, the panel rejected Seila Law’s argument that until the Supreme Court invalidated the for-cause removal provision, the CFPB was exercising its powers unlawfully, which in turn rendered all of the agency’s prior actions void at the time they were taken and therefore incapable of being ratified. In the panel’s view, the constitutional infirmity at issue in Seila Law related to the Director alone, not to the legality of the CFPB itself. Therefore, since the CFPB as an agency had the authority to issue the CID in 2017, the CID was not void and could be validly ratified by former Director Kraninger.
In their opinion, the dissenters call the case “a little like the story of David and Goliath: except here, the Ninth Circuit resurrects Goliath on the battlefield so that he can defeat David.” According to the dissenters, “like David, the one-man firm seemingly defeated the giant CFPB [when the Supreme Court ruled that the CFPB’s structure was unconstitutional]” but “[o]n remand, a panel of our court resuscitated the giant, holding that the CFPB’s post-severance ratification cured any defect in the agency’s past actions.” As a result, the CFPB was permitted to continue its investigation of Seila Law.
The dissenters assert that the Ninth Circuit’s decision to deny rehearing en banc ”effectively means that Seila Law is entitled to no relief from the harms inflicted by an unaccountable and unchecked federal agency.” They assert further:
Thus, while David slayed the giant, Goliath still wins. But that is not the law. As the panel recognized, Supreme Court precedent conditions effective ratification on the principal having the power to do the act ratified at the time of the act—not just at the time of ratification. (emphasis included, citations omitted). And as the Court held, the Director’s insulation from presidential control rendered the whole agency unconstitutional. With no agency empowered to enforce the laws at the time of the CFPB’s prior actions, no ratification is permissible.
The dissent is cited by Seila Law in support of a motion asking the Ninth Circuit for a stay of the mandate pending the filing of a petition for a writ of certiorari in the Supreme Court. Seila Law states that it plans to file a petition “presenting the exceptionally important question of whether ratification of the CFPB’s civil investigative demand is an appropriate remedy for the separation-of-powers violation identified by the Supreme Court.” It also asserts that for the reasons set forth in the dissent, “there is a reasonable chance that the Supreme Court will grant certiorari in this case.”
Vermont Eliminates Combination License and Codifies Remote-Work for MLOs
The Vermont legislature recently made amendments to its licensing statutes, which include the following, among others:
- Eliminating the Combination License, which allowed companies to apply for and receive a combination of up to four license types (Lender, Mortgage Broker, Loan Solicitation, and Loan Servicer Licenses) at a discounted fee. Implementation of the concept within the Nationwide Multistate Licensing System (NMLS) has posed issues with reporting and public records requests, and therefore, elimination of the license will now require companies to apply for the licenses separately as done so previously.
- Permitting mortgage loans originators (MLOs) and employees of other nonbank licensees to work from home without obtaining a branch license for their residence. This amendment codifies practices currently allowed under the emergency rules issued during the COVID-19 health emergency.
- Increasing penalties for failure to comply with annual reporting requirements applicable to nonbank licensees, including Licensed Lenders, Mortgage Brokers, and Loan Servicers, from $100 to $1,000 for each month the report is past due.
The amendments are currently effective.
Comment Period on NMLS Modernization Initiative Due May 31
The deadline to comment on the NMLS Modernization Networked Licensing Model, Licensing Requirements Framework, Core Requirements & Identify Verification Proposal is Monday, May 31. Companies are asked to submit one response that represents its comments, feedback, and views on the proposal.
Submissions should be directed to firstname.lastname@example.org and must include the respondent’s contact information in order to be considered. Comments received, as well as the submitter’s name and company, will be posted on the NMLS Resource Center. A recording of the NMLS Modernization Town Hall that was held May 13 to provide an overview of the proposal may be viewed here.
CSBS Seeks Comment on MSB Business-Specific Requirements Proposal
The Conference of State Bank Supervisors (CSBS) is inviting comment on the NMLS Modernization MSB Business-Specific Requirements Proposal. Comments are due by July 23.
An NMLS Modernization Town Hall is scheduled for Wednesday, June 30, from 3:30 – 5:00PM ET to provide an overview of the proposal. Registration for the meeting is available here.
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