Mortgage Banking Update - September 16, 2021
In This Issue:
- CFPB Issues Section 1071 Proposed Rule on Small Business Lending Data Collection
- Podcast: Congress Overrides the OCC’s True Lender Rule - What Are the Risks for Banks and Their Loan Program Nonbank Partners?
- CFPB Alleges Income Share Agreements Are Extensions of Credit in Results-Oriented Enforcement Action Against ISA Originator
- Podcast: Preparing for the CFPB Debt Collection Rule’s November 30, 2021 Effective Date
- Adrienne Harris Nominated to Serve as Superintendent of the NY Department of Financial Services
- D.C. Emergency and Temporary Legislation Limiting Collection Activities to Take Effect September 23, 2021
- Did You Know?
- Looking Ahead
For the latest updates on the Coronavirus COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
The CFPB has issued a notice of proposed rulemaking (NPRM) to implement Section 1071 of the Dodd-Frank Act. Section 1071 amended the ECOA to require financial institutions to collect and report certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. Comments on the NPRM will be due no later than 90 days after the date it is published in the Federal Register.
We will be reviewing the CFPB’s 918-page release and share our thoughts in subsequent blog posts. The full text of the NPRM was accompanied by a summary prepared by the Bureau. Based on the summary, key aspects of the NPRM include the following:
- Financial Institutions Covered. The definition of “financial institution” in Section 1071(h) covers any entity that engages in financial activity and includes both depository institutions and non-depository institutions such as online lenders, platform lenders, lenders involved in equipment and vehicle financing, and commercial finance companies. In September 2020, the CFPB released an outline of the proposals it was considering in anticipation of convening a panel pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA Outline). In the SBREFA Outline, the CFPB indicated that it was considering different standards for exempting financial institutions from Section 1071 data collection and reporting requirements, consisting of a size-based exemption for depository institutions, an activity-based exemption for all financial institutions, and combined size- and activity-based exemptions. In the NPRM, the CFPB is proposing an activity-based exemption for all financial institutions that would exempt financial institutions that originate fewer than 25 “covered credit transactions” to “small businesses” in each of the two preceding calendar years.
- “Small Business” Definition. Section 1071(h) defines a “small business” applicant as having the same meaning as a “small business concern” in the Small Business Act. In the SBREFA Outline, the Bureau indicated that it was considering defining a “small business” by cross-referencing the SBA’s general “small business concern” definition but adopting a simplified size standard for purposes of its Section 1071 rule that used one of three alternative approaches. One of such alternatives was a size standard of gross annual revenue in the prior year of less than $1 million or $5 million. In the NPRM, the Bureau is proposing to define a “small business” as one that had $5 million or less in gross annual revenue for its preceding fiscal year. (Consistent with the SBREFA Outline, the Bureau is not proposing to require that financial institutions collect and report data regarding applications for women-owned and minority-owned businesses that are not a “small business.”)
- “Application” Definition. Section 1071 does not define the term “application.” In the SBREFA Outline, the Bureau indicated that it was considering defining an “application” in a way that was largely consistent with Regulation B (which defines an “application” as “an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested”) but would exclude certain circumstances such as inquiries and prequalifications even if they would be considered an “application” under Regulation B. In the NPRM, the Bureau is proposing to adopt the Regulation B definition of an “application” but exclude (1) reevaluation requests, extension requests, or renewal requests on an existing business account, unless the request seeks additional credit, and (2) inquiries and prequalification requests.
- Credit Transaction Coverage. Section 1071 requires financial institutions to collect and report information regarding applications for business “credit.” In the SBREFA Outline, the Bureau indicated that it was considering a proposal under which a covered transaction under Section 1071 would be one that meets the ECOA definition of “credit” and was not excluded under the Bureau’s Section 1071 rule. Among the excluded transactions were trade credit, factoring, and merchant cash advances. In the NPRM, the Bureau is proposing to define a “covered credit transaction” as one that meets the definition of business credit under Regulation B. In addition to loans, lines of credit, and credit cards, “covered transaction” would include merchant cash advances. The products that would not be covered credit transactions even if they meet the Regulation B definition are trade credit and public utilities credit, securities credit, and incidental credit as defined in Regulation B.
- Data Points. The NPRM includes the data points that a financial institution would be required to collect and report. Pursuant to Section 1071(e), a financial institution must collect and report “the race, sex, and ethnicity of the principal owners of the business.” In the SBREFA outline, the Bureau indicated that it was not considering proposing the use of visual observation or surnames by institutions to determine the race, sex, and ethnicity of a business’s principal owners and instead would propose that such information be based solely on a principal owner’s self-reporting. In the NPRM, the Bureau is proposing that if an applicant does not provide any ethnicity, rate, or sex information for at least one principal owner, the financial institution must collect at least one principal owner’s race and ethnicity (but not sex) via visual observation and/or surname if the financial institution meets in person with any principal owners (including meetings via electronic media with an enabled video component.)
- Implementation. In the SBREFA Outline, the Bureau indicated that it was considering allowing financial institutions approximately two calendar years for implementation following the Bureau’s issuance of a final Section 1071 rule. In the NPRM, the Bureau is proposing that a final rule would become effective 90 days after publication in the Federal Register but compliance would not be required until approximately 18 months after publication.
The OCC’s true lender rule was intended to create a bright line test for when a national bank or federal savings association should be considered the “true lender” in the context of third party partnerships but Congress overturned the rule. After reviewing the relevant background, we examine the Congressional override’s implications for future federal true lender rulemaking and its impact on existing law, key federal and state court challenges and decisions, state legislative and administrative developments, and risk mitigants for bank/nonbank partnerships, including potential loan program structures.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Jeremy Rosenblum and Ron Vaske, partners in the firm’s Consumer Financial Services Group, and Mindy Harris, Of Counsel in the Group.
Click here to listen to the podcast.
(Ballard Spahr will hold a webinar on 9/21 at 3 p.m. ET, “The Path Forward for Income Share Agreements.” Register online here.)
The CFPB issued a consent order against an income share agreement (ISA) provider, Better Future Forward (BFF), in which it concluded that BFF’s ISAs are extensions of credit under the Consumer Financial Protection Act and Truth in Lending Act and are “private education loans” under TILA. In doing so, the CFPB alleged that BFF:
- Engaged in deceptive acts and practices by representing that its ISAs are not loans and do not create debt;
- Violated Regulation Z by failing to disclose an amount financed, finance charge, and annual percentage rate, and by omitting certain private education loan disclosures, including related to the non-dischargeability of loans in bankruptcy; and
- Violated TILA’s prohibition on charging prepayment penalties on private education loans by setting the ISA payment cap at 110% of the funding amount.
We will hold a webinar to share our thoughts on the consent order and other recent ISA developments on Tuesday, September 21 at 3:00 PM Eastern. Please click here to register. Additionally, Heather Klein will present an update on federal and state ISA issues for members of the National Council of Higher Education Resources on Thursday, September 9, at 12:00 PM Eastern.
We discuss a range of practical issues related to the rule’s rapidly-approaching effective date, including: the prospects for further CFPB rulemaking or guidance; the aspects of the rule that should be prioritized by third-party collectors and debt buyers; the rule’s impact on creditors (for internal collections and third-party collector/debt buyer oversight), state law considerations, and steps being taken to mitigate risk; and greatest risks for third-party collectors and creditors once the rule is effective.
Chris Willis, Co-Chair of Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by Stefanie Jackman and John Culhane, partners in the Group.
Click here to listen to the podcast.
New York Governor Kathy Hochul announced this week that she has nominated Adrienne Harris to serve as Superintendent of the state’s Department of Financial Services. If confirmed by the New York Senate, Ms. Harris would succeed Linda Lacewell whose last day at the DFS was August 24.
Ms. Harris previously served as a Senior Advisor in the Treasury Department during the Obama Administration. Following her time at the Treasury Department, Ms. Harris joined The White House, where she was appointed as Special Assistant to the President for Economic Policy, as part of the National Economic Council. Since leaving the White House in January 2017, Ms. Harris has served as General Counsel and Chief Business Officer for a title insurance and settlement services company. She also currently serves as a Professor and Faculty Co-Director at the Gerald R. Ford School of Public Policy’s Center on Finance, Law and Policy at the University of Michigan, as well as a Senior Advisor at the Brunswick Group in Washington D.C. where she advises multinational corporations on mergers and acquisitions, stakeholder communications and management, future-proofing and policy intelligence.
During D.C.’s declared State of Public Health Emergency, several financial protections have been put in place, including some that severely limit, among other things, collection activities relating to consumer contracts, repossession, and legal actions on accounts. On September 1, Mayor Muriel Bowser signed the most recent pair of emergency and temporary legislation to land on her desk, B24-0347 and B24-0348. These bills include a number of provisions impacting collection activities that relate to both third-party debt collectors and creditors collecting their own debts. Since a permanent version of these bills, B24-0357, remains in the Council, the bills signed by the Mayor on September 1 only temporarily amend various provisions of D.C. 28-3814, D.C.’s collections statute.
Before diving into the bills signed last week and the legislation that preceded it, it is important to understand D.C.’s somewhat unique legislative process.
In the District, during a public emergency, the Mayor and the D.C. Council can quickly pass an emergency amendment. (Provided, of course, that the emergency amendment has at least majority support in the Council and is not vetoed by the Mayor.) These emergency amendments require no second reading nor do they go through the required 30-day Congressional review. Emergency amendments last for 90 days. Typically, an emergency amendment and a temporary amendment of the same name are introduced at the same time. Temporary amendments require two readings in the Council and, if passed by the Council, temporary amendments are sent to Congress for a 30-day Congressional review period. If the temporary amendment makes it through the review period, it is considered enacted and has a 225-day lifespan. (It is important to note that days in a Congressional review period are not calendar days or business days, but are instead days when both the Senate and the House are in session.)
The latest in the line of pandemic-related legislation enacting various collection restrictions introduced by D.C. Council Chairperson Phil Mendelson since the onset of the pandemic are the Coronavirus Support Emergency Amendment Act of 2021 (B24-0139) and the Coronavirus Support Temporary Amendment of 2021 (B24-0140). These amendments prohibited debt collectors, “during a public health emergency and for 60 days after its conclusion,” from filing new collection lawsuits, garnishing wages, or repossessing vehicles. (Cf. Section 303, “Debt collection,” on page 31 of the emergency amendment, and page 24 of the temporary amendment, herein after “Section 303”).
B24-0139, the emergency act, was signed by Mayor Bowser on March 17, 2021 and expired on June 15. B24-0140, the temporary act, was signed by Mayor Bowser on May 3, 2021. It is effective from June 24, 2021 through February 4, 2022. However, Section 303 prohibiting lawsuits, garnishments, and repossessions, was subject to sunset 60 days after the conclusion of a public health emergency. The Mayor ended the public health emergency in D.C. on July 25, 2021.
Moving forward, the next pieces of pandemic-related consumer protection legislation were the Public Emergency Extension and Eviction and Utility Moratorium Phasing Emergency Amendment Act of 2021 (B24-0345) and the Public Temporary Extension and Eviction and Utility Moratorium Phasing Emergency Amendment Act of 2021 (B24-0346). Per these amendments, housing providers may begin eviction proceedings for some tenants in the District. (An eviction moratorium had been in place during D.C.’s State of Public Health Emergency.) Prior to January 1, 2022, evictions are allowed in instances where the tenant’s continuing presence would create a threat to health and safety and in instances where the tenant has caused significant damage to the property. Evictions for non-payment of rent can begin on October 12, 2021, provided the landlord has applied for emergency assistance on behalf of the tenant through D.C.’s Stronger Together by Assisting You (STAY) program, and notified the tenant in writing that an application has been submitted. Eviction suits in general are scheduled to be fully allowed starting on January 1, 2022.
These amendments also repealed Section 303 in both the Coronavirus Support Emergency and Temporary Amendments. B24-0345 was signed by Mayor Bowser on July 24, 2021, and expires on October 22, 2021. B24-0346 was signed by Mayor Bowser on September 1, 2021, and is now in its 30-day Congressional review period. However, as noted above, Section 303 was subject to sunset 60 days after the conclusion of a public health emergency. Thus, had it not been repealed by B24-0345 and B24-0346, Section 303 would have expired on September 23, 60 days after Mayor Bowser ended the public health emergency.
The final two pieces of consumer protection legislation are the Protecting Consumers from Unjust Debt Collection Practices Emergency Amendment Act of 2021 (B24-0347) and the Protecting Consumers from Unjust Debt Collection Practices Temporary Amendment Act of 2021 (B24-0348). Notably, these amendments incorporated prior Section 303 from B24-0140, which restricted debt collection activities “[d]uring a public health emergency and for 60 days after its conclusion.” Both B24-0347 and B24-0348 were signed by Mayor Bowser on September 1, 2021. B24-0347 has an effective date of September 23, 2021, and lasts for 90 days. B24-0348 is currently in its 30-day Congressional review period, and, provided it encounters no objection, also has an effective date of September 23, 2021 and lasts for 225 days. (In the meantime, there is a final bill version of Protecting Consumers from Unjust Debt Collection Practices Amendment Act of 2021 that remains in Council, B24-0357. If it is signed and survives its 30-day Congressional review, it would be official law with no expiration date.)
Requirements for debt collectors and creditors in B24-0347 and -0348 (and which also appear in the still-pending permanent bill, -0357) include:
- Prohibiting debt collectors from making more than 3 phone calls to a consumer in a 7 day period (unless the debtor requests additional calls)
- Prohibiting communication of a consumer’s debts to his or her employer
- Prohibiting communication of a consumer’s debts to family, friends, or neighbors (except through proper legal process)
- Providing complete documentation related to the debt being collected
- Providing a complete schedule or agreement for any payment plan
The emergency, temporary, and final amendments also allow for the awarding of damages and fees to a consumer if a debt collector violates any of the requirements.
Did You Know?
California Financing Law License Transitions to NMLS
The California Financing Law (CFL) final rules, which were recently adopted by the California Department of Financial Protection (DFPI) become operative on October 1, 2021. Among other items, the new regulations provide that:
All new license applications under the CFL must be submitted through NMLS on and after October 1, 2021.
All CFL licensees not yet on NMLS must transition onto NMLS by December 31, 2021.
FAQs regarding the transition to NMLS are available here.
Scottsdale, AZ | October 4-6, 2021
Fair Housing and Fair Lending During the Biden Administration
Speaker: Richard J. Andreano, Jr.