Mortgage Banking Update
In This Issue:
- Another Federal Court Dismisses a Lawsuit Alleging Discriminatory Online Ad Targeting
- California DFPI Invites Comments on Proposed Second Rulemaking Under Debt Collection Licensing Act
- CA DFPI Issues Draft Rules to Implement CCFPL Provisions on Complaint Handling, UDAAP Definition for Commercial Transactions
- CFPB Releases 2020 HMDA Data Report
- Federal Banking Agencies Issue Guide for Community Banks on Conducting Due Diligence on Fintech Companies
- This Week’s Podcast: A Look at the Enforcement Challenges Facing Lenders Arising Out of the Federal Paycheck Protection Lending Program (PPP), with Special Guest Louis Bruno, a Partner in EisnerAmper’s Advisory Practice
- Colorado Private Education Lender Registration Takes Effect September 1, and Schools Using Income Share Agreements Are Covered
- New York Enacts Requirements for Check Processing by Banks; Ballard Spahr to Hold Sept. 13 Webinar on Overdraft Practices
- Did You Know?
- Looking Ahead
For the latest updates on the Coronavirus COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
A federal district court in the Northern District of California has dismissed a lawsuit brought against Facebook alleging that Facebook allowed housing advertisers to target users based on protected characteristics under the Fair Housing Act, finding that the plaintiffs failed to allege any injury that would create Article III standing.
This decision is very similar to, and indeed cites, a decision from the District of Maryland that we blogged about last month, which dismissed a similar lawsuit brought against several housing providers.
The precedent is starting to look very unfavorable for ad-targeting cases to be brought by private parties, with more of these decisions starting to emerge. And, as we noted in our prior blog, we wonder how enthusiastic regulatory agencies will be about pursuing similar claims when the federal courts appear to believe that ad targeting causes no consumer injury.
We assume that these decisions will be appealed, so we will be watching the appellate decisions, if and when they occur. But so far, the district courts appear to be very skeptical of these claims.
The California Department of Financial Protection and Innovation (DFPI) recently issued an Invitation for Comments on the Proposed Second Rulemaking under the Debt Collection Licensing Act. The Invitation for Comments seeks further information on topics relating to the scope of certain definitional terms, the types of information required on annual reports, and surety bond amounts.
In key part, the DFPI seeks comments on whether clarification is needed for certain terms, such as, “engage in the business of debt collection,” “in the ordinary course of business” and “regularly” [engage in debt collection], and whether clarity is needed regarding exempt entities or transactions from the Act. The DFPI also requests comments on whether additional information should be required in annual reports to be submitted by licensees and whether higher surety bond amounts should be required, among other points.
Note that in the initial Notice of Rulemaking, the DFPI expressed that it anticipates that the final rules, if adopted, will become effective on or around November 19, 2021, which is intended to allow applicants to apply for a license before January 1, 2022.
Comments should be submitted to the DFPI by October 5, 2021.
The California Department of Financial Protection and Innovation (DFPI) has issued an invitation for comments from interested parties on draft rules to implement certain provisions of the California Consumer Financial Protection Law (CCFPL) which became effective on January 1, 2021. The CCFPL provisions that the draft rules would implement deal with (1) procedures for a covered person or service provider to respond to consumer complaints and inquiries, and (2) the definition of unfair, deceptive, or abusive acts and practices in connection with the offering or providing of commercial financing or other financial products and services to small business recipients, nonprofits, and family farms. Comments are due by September 17, 2021.
In February 2021, the DFPI issued an invitation for stakeholders to provide input on rulemaking to implement the CCFPL. In addition to inviting input on any potential areas for rulemaking, the DFPI identified certain areas where rulemaking may be “appropriate, desirable or necessary at some point.” The specific areas identified included complaint handling and unfair, deceptive, or abusive acts and practices in connection with commercial transactions.
Draft rules on complaint handling. The draft rules would implement CCFPL Section 90008(a), (b), and (d). Section 90008 (a) requires the DFPI to issue rules establishing reasonable procedures for the handling of consumer complaints and inquiries by covered persons. Section 90008(b) requires the DFPI to issue rules requiring covered persons to provide responses to the DFPI regarding consumer complaints or inquiries that include certain information such as what steps were taken to respond to the complaint or inquiry and what responses were received by the covered person from the consumer. Section 90008(d) deals with consumer requests to covered persons for information concerning the consumer financial product or service that the consumer obtained from the covered person. The draft rules address the following:
- A partial exemption for consumer reporting agencies as defined by the FCRA
- Definitions–A “complaint” is defined as “an expression of dissatisfaction” regarding a financial product or service and an “inquiry” is defined as “a question or request for information, interpretation, or clarification” about a financial product or service.
- Complaint processes and procedures
- Inquiry processes and procedures
- Processes and procedures for covered persons to provide a timely response to the DFPI
- Consumer requests for nonpublic or confidential information
Draft rule on UDAAP prohibition for commercial transactions. The draft rule would implement CCFPL Section 90009(e) which authorizes the DFPI to issue rules defining UDAAPs for “commercial financing,” as that term is defined in Cal. Fin. Code 22800(d), or financial products and services offered or provided to small business recipients, nonprofits, and family farms. It also authorizes the DFPI to include in its UDAAP rulemaking requirements for data collection and reporting on the provision of commercial financing or other financial products and services. The draft rule contains two provisions. One provision would establish standards for when an act or practice is unfair, deceptive, or abusive.
The other provision would establish requirements for the reporting of data on commercial financing to the DFPI. The data to be reported would consist of basic information about loan volume, loan size, and loan cost.
The CFPB recently released a report entitled Data Point 2020: Mortgage Market Activity and Trends addressing 2020 Home Mortgage Disclosure Act (HMDA) data.
Among various highlights, the report provides that 4,472 financial institutions reported at least one closed-end loan in 2020, which is down by 18.8 percent from 5,505 financial institutions that reported in 2019. The CFPB notes that the decline likely is related to the change in the HMDA reporting trigger that became effective on July 1, 2020. Prior to that date, based on the October 2015 amendments to the HMDA rule, for closed-end mortgage loans the trigger was the origination of at least 25 loans in each of the previous two years. The change increased the trigger to at least 100 loans in each of the previous two years. Despite the change, the CFPB notes that among the newly exempted institutions, more than half voluntarily reported closed-end mortgage loan HMDA data for 2020.
Based on the low interest rates that prevailed in 2020, it is not surprising that the report shows a significant increase in refinance loans from 2019 to 2020. Total closed-end mortgage loan originations (excluding reverse mortgage loans) increased from about 8.26 million in 2019 to about 13.64 million in 2020, an increase of about 65.2%. The increase was largely driven by refinance loans, which increased from about 3.38 million in 2019 to about 8.42 million in 2020, an increase of about 149.1%. In contrast, purchase money loan volume on site-built one-to-four family homes increased from about 4.31 million in 2019 to about 4.69 million in 2020, an increase of about 9.0%. Home equity line of credit originations decreased from about 1.04 million in 2019 to about 869,000 in 2020, a decrease of about 16.6%.
Other highlights noted in the report include:
- The share of loans secured by closed-end home-purchase loans for site-built, one-to-four-family, first lien, principal-residence properties for Black borrowers increased in 2020 and the share of refinance loans for Asian borrowers increased in 2020.
- Black and Hispanic white borrowers had lower median loan amounts, lower median credit scores, higher denial rates, and paid higher median interest rates and total loan costs compared to non-Hispanic white and Asian borrowers.
The denial rates for home purchase loan applications were about 18.1% for Black applicants, about 12.5% for Hispanic white applicants, about 9.7% for Asian applicants and about 6.9% for non-Hispanic white applicants. The overall denial rate for home purchase loan applications was higher in 2020 than the rate in 2019, although the denial rate for non-Hispanic white applicants decreased slightly in 2020 from the rate in 2019. The denial rates for refinance loan applications were about 23.2% for Black applicants, about 17.6% for Hispanic white applicants, about 12.1% for Asian applicants and about 11.0% for non-Hispanic white applicants. The overall denial rate for refinance loan applications was lower in 2020 than the rate in 2019.
Independent mortgage companies originated about 8.2 million loans, banks originated about 3.8 million loans, credit unions originated about 1.1 million loans and depository institution affiliates originated about 518,000 loans. The report notes that “smaller shares” of loans originated by depository institutions went to minority borrowers, low-to-moderate income borrowers, and borrowers in low-to-moderate income neighborhoods than loans originated by non-depository institutions.
The OCC, FDIC, and Federal Reserve Board have issued a guide that is intended to assist community banks in conducting due diligence when considering relationships with financial technology (Fintech) companies (the Guide).
The issuance of the Guide follows the agencies’ July 2021 release of proposed interagency guidance for banking organizations on managing risks associated with third-party relationships, including relationships with financial technology-focused entities such as bank/Fintech sponsorship arrangements. The proposal sets forth principles for managing risk in each stage of a third-party relationship life cycle, including conducting due diligence. In the introduction to the Guide, the agencies indicate that the Guide draws from their existing guidance and is consistent with the proposed interagency guidance.
The agencies also note in the Guide’s introduction that while the Guide is written from a community bank perspective, the fundamental concepts discussed may be useful for banks of varying sizes and for other types of third-party relationships. Banks are instructed to reference relevant guidance from the agencies that is listed in a footnote.
In the Guide’s introduction, the agencies indicate that because the Guide does not anticipate all types of third-party relationships and risk, a community bank can tailor how it uses information in the Guide based on its specific circumstances, the risks posed by each third-party relationship, and the related product, service or activity offered by the Fintech company. They also advise community banks that the scope and depth of due diligence will depend on the risk to the bank from the nature and criticality of the prospective activity to be performed by the Fintech company.
The Guide discusses a series of topics to be considered by a community bank when conducting due diligence on a Fintech company and provides potential sources of information and illustrative examples for each topic. These topics consist of a Fintech’s:
- Business experience, business strategies and plans, and the qualifications and backgrounds of directors and principals
- Financial condition and competitive market environment and client base
- Legal and regulatory compliance
- Risk management policies, processes, and controls
- Information security program and information systems
- Business continuity planning, incident response plan, and reliance on subcontractors
The publication of the Guide is another indication of the increased attention that regulators seem to be paying of late to the area of third-party relationship risk management. Whether this increased attention and guidance will translate to a heavier emphasis on such topics in the course of regulatory examinations remains to be seen.
This Week’s Podcast: A Look at the Enforcement Challenges Facing Lenders Arising Out of the Federal Paycheck Protection Lending Program (PPP), with Special Guest Louis Bruno, a Partner in EisnerAmper’s Advisory Practice
In this podcast, we discuss: the compliance challenges that could give rise to enforcement actions against PPP lenders and current and potential future investigatory activity; fair lending guidance for PPP lenders, key fair lending risks, and steps to mitigate fair lending risk; the status of examinations and reviews related to PPP loans; sources of compliance risk for PPP lenders; and suggested best practices for risk mitigation.
Ballard Spahr Senior Counsel Alan Kaplinsky hosts the conversation, joined by Lori Sommerfield, Of Counsel in the firm’s Consumer Financial Services Group, and Terence Grugan, a partner in the firm’s White Collar Defense/Internal Investigations and Securities Enforcement/Corporate Governance Litigation Groups.
Click here to listen to the podcast.
With Colorado’s private education lender registration scheduled to take effect on September 1, the Colorado Department of Law has just announced that they intend to bring a new group within their jurisdiction: private postsecondary schools that use income share agreements (ISAs) to help finance students’ education. Schools regulated by the Division of Private Occupational Schools received notice of this interpretation on Friday.
The Department of Law did not spell out its rationale, though they undoubtedly were influenced by California’s recent consent order bringing educational ISA servicers under the California Student Loan Servicing Law. It’s unclear whether the Department will now seek to regulate (i) other ISA funders, holders, and assignees under the Student Loan Equity Act, (which enacted the private education lender registration) and (ii) ISA servicers under the Colorado Student Loan Servicing Act.
The private education lender registration nominally applies to (1) persons engaged in the business of making or extending private education loans, (2) holders of such loans, and (3) “creditors,” broadly defined as the person who makes or arranges a private education loan and to whom the loan is initially payable, or the assignee of a creditor’s right to payment. The law defines a “private education loan” similarly to federal law but slightly more broadly, in that any postsecondary education expenses may be financed by such a loan (not just those pegged to the “cost of attendance” under the federal Higher Education Act). Colorado also does not except open-end credit from constituting a private education loan.
A number of depository institutions are completely exempt from the Student Loan Equity Act: state and federally chartered banks, credit unions, and Utah industrial banks. A number of entities are exempt from registration only: retail sellers, lessors, and their assignees who have filed notification under the Uniform Consumer Credit Code; licensed supervised lenders; licensed collection agencies; and licensed student loan servicers. Public and private nonprofit postsecondary educational institutions have a lower cost of registration ($300) than other institutions ($1,500).
Registrants must share a copy of their consumer agreement and volume and default rate information, which will be published online by the Department. Among other things, the Student Loan Equity Act (i) provides certain protections specifically for loans with cosigners; (ii) expands disability discharge requirements and protections so that a borrower or cosigner may be released from repayment obligations if permanently disabled and so that a lender is prohibited from monitoring the disability status of the borrower after any such discharge ; (iii) requires additional disclosures in connection with any refinancing of an existing education loan; (iv) prohibits “robo-signing” of documents used in collection lawsuits; (v) requires specific evidence of loan origination and chain of ownership of the debt before a loan creditor or collection agency may commence legal proceedings; (vi) prohibits auto-defaults, in which a loan is declared immediately due and payable upon the death or bankruptcy of a cosigner even when there has been no default in payments; (vii) provides legal recourse for borrowers who are harmed by predatory acts and practices of a lender, creditor, or collection agency; and (viii) directs licensing fees and civil penalties to a student loan ombudsperson and student loan servicer fund.
At the end of last month, former New York Governor Andrew Cuomo signed into law a bill that amends the state’s Banking Law to require banks to follow certain check processing practices. The amendments become effective on January 1, 2022.
The new law applies to “consumer checking accounts” offered by “banking institutions.” “Consumer checking accounts” are defined as “accounts established by natural persons primarily for personal, family or household purposes.” Although the legislative history indicates that the new requirements are intended to apply only to New York-chartered banking organizations, the new law does not contain a definition of the term “banking institution.” The new law directs the Department of Financial Services to issue regulations necessary to implement the new requirements and such regulations could clarify the scope of the term “banking institution.”
The new law imposes the following requirements on a “banking institution”:
- Checks must be paid either (i) in the order in which they are received or (ii) from smallest to largest dollar amount for each business day’s transactions.
- If the bank dishonors a check for insufficient funds but then receives checks in smaller amounts that could be covered by the existing account balance, the bank must honor such smaller checks to the extent funds are available to do so.
- A bank must provide a written disclosure to a consumer at the time an account is opened and prior to any change in such policy that indicates the order in which checks will be drawn.
We note that the new law only applies to checks and does not cover electronic payments that do not involve checks, such as ATM, POS, and ACH transactions. In addition, the order of payment mandated by the new law could be contrary to the desires of many consumers. For example, consumers would typically want larger dollar checks (such as those used to make mortgage payments or to make payments on auto financing) to be processed before smaller dollar checks.
On September 13, 2021, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar: “Still in the Crosshairs: An Update on Bank Overdraft Practices.” For more information and to register, click here.
Upcoming NMLS Ombudsman Meeting: Request for Agenda Items
The Nationwide Mortgage Licensing System (NMLS) Ombudsman Meeting will be held virtually on September 30, from 3 p.m. to 5 p.m. ET. The meeting allows participants to raise issues and topics for discussions with state regulators concerning NMLS, state licensing, and federal registration.
Agenda items may be submitted by e-mailing firstname.lastname@example.org by September 10. The items should be submitted on company letterhead along with any relevant information.
Virtual | September 8-9, 2021
COVID-Related and Return-to-Work Legal Questions
Speaker: Meredith S. Dante
COVID-Related and Return-to-Work – Office Hours
Speaker: Meredith S. Dante
Mortgage-Specific and Other Legal Issues
Washington, DC | September 12 - 14, 2021
Speaker: Richard J. Andreano, Jr.
Speaker: Kim Phan
Speaker: Stacey L. Valerio
Speaker: John D. Socknat
Scottsdale, AZ | October 4-6, 2021
Fair Housing and Fair Lending During the Biden Administration
Speaker: Richard J. Andreano, Jr.
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