Legal Alert

Mortgage Banking Update - April 21, 2022

April 21, 2022

In This Issue:

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FHFA Announces Foreclosure Hold for HAF Applicants

The Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac will require servicers to suspend foreclosure activities for up to 60 days if the servicer has been notified that a borrower has applied for assistance from the Treasury Department’s Homeowner Assistance Fund (HAF).

HAF is a federal program that provides money to states, tribes, and territories to assist homeowners with housing costs. These funds can be used to pay down delinquent amounts, so that borrowers can avoid foreclosure or be better positioned for loss mitigation assistance.

Last month, the CFPB published a blog post in which it strongly encouraged mortgage servicers to participate in HAF programs. The CFPB advised servicers that they must ensure borrowers are not improperly referred to foreclosure while the servicer is working with a borrower during the HAF application process or waiting for payment of HAF funds.

Reid F. Herlihy

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Fannie and Freddie Issue Guidance Implementing Foreclosure Hold for HAF Applicants

As previously reported, the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac will require servicers to suspend foreclosure activities for up to 60 days if the servicer has been notified that a borrower has applied for assistance from the Treasury Department’s Homeowner Assistance Fund (HAF).

Fannie Mae and Freddie Mac have issued guidance documents implementing this requirement in Updated Lender Letter 2021-01 and Bulletin 2022-8, respectively. According to the guidance documents, effective immediately, servicers must delay/suspend initiating any judicial or non-judicial foreclosure, moving for a foreclosure judgment or order of sale, or executing a foreclosure sale, for up to 60 days if:

  • The servicer has been notified that the borrower has applied for assistance under HAF;
  • The servicer has sufficient time to delay initiation of the foreclosure process or moving for a foreclosure judgment or order of sale;
  • The servicer, in the case of a foreclosure sale, is notified at least seven days before the sale; and
  • Any foreclosure proceeding or execution of a foreclosure sale can be delayed without dismissal of the action.

The guidance documents further note that if a servicer determines that it did not have sufficient time to delay initiation of the foreclosure process or moving for a foreclosure judgment or order of sale, the servicer must document in the loan file why it was unable to do so.

Reid F. Herlihy

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Praise for Ballard’s Consumer Finance Monitor Podcast From Prominent Consumer Advocate Professor Jeff Sovern

I want to thank Professor Jeff Sovern, a prominent consumer advocate and my frequent sparring partner, for his recent praise of our podcast. Professor Sovern wrote:

Probably my favorite podcast is Ballard Spahr’s Consumer Finance Monitor Podcast. I learn a tremendous amount from it. Yes, it favors the industry view, as it is certainly entitled to do, but many episodes are devoted to interviewing consumer advocates as well. If you don’t listen to it, and you like this blog, you are missing out.

Professor Sovern’s comments were prompted by our recent podcast episode titled “Has America’s Civil Justice System Crashed?” with special guests and consumer advocates Harvey Rosenfield, President of the Consumer Education Foundation, and Laura Antonini, Policy Director of #REPRESENT. As Professor Sovern noted, our podcast guests regularly include consumer advocates. We strive to impart valuable information to our podcast listeners and believe inviting consumer advocates to participate in our podcast is a way of doing that. We think it’s important for industry members to understand the consumer-side perspective when making policy and other key business decisions.

Last month, Chris Peterson, John J. Flynn Endowed Professor of Law, University Of Utah’s S.J. Quinney College Of Law, was our special guest for a podcast episode titled “The CFPB’s First Months Under Director Rohit Chopra.”

Another prominent consumer advocate, Lauren Saunders of the National Consumer Law Center, will be our guest for a podcast episode to be released next week.

The quality of our podcasts also was recognized by Good2BSocial, a top digital marketing agency for lawyers that ranks AmLaw 200 firms based on their social media presence. Their latest rankings, published in November 2021, rank Ballard Spahr No. 2 in the U.S. for podcasts.

Alan S. Kaplinsky

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Podcast: The CFPB Takes Aim at Discrimination as ‘Unfair:’ What Does it Mean for Your Business?

The CFPB recently announced that it is updating its exam manual to direct its examiners to consider discriminatory conduct an “unfair” act or practice represents a significant expansion of its UDAAP authority. We discuss: the CFPB’s legal theory; types of products/services/bases for discrimination the CFPB could reach using unfairness and role of disparate impact analysis; what manual updates tell examiners to ask about and look at; implications for entities the CFPB does not supervise or have jurisdiction over; likely legal challenges to the Bureau’s theory; and how companies can prepare.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by John Culhane and Ron Vaske, partners in the firm’s Consumer Financial Services Group, and Heather Klein, Of Counsel in the Group.

Click here to listen to the podcast.

Barbara S. Mishkin

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CFPB Director Chopra’s Remarks to Community Bank and Credit Union Advisory Councils Focus on Service Provider Competition

CFPB Director Rohit Chopra recently gave opening remarks at the joint meeting of the Community Bank and Credit Union Advisory Councils. In them, he expressed a desire to re-direct the CFPB’s attention to the needs of financial institutions used by local businesses and to make relationship banking a key priority for the CFPB.

Director Chopra took the opportunity to highlight his concerns about the potential imbalance of power between core services providers that small banks and credit unions rely on to keep up with the digitization of consumer financial services. He discussed how small financial institutions are worried about the rising costs of and limited flexibilities offered by core services providers, particularly because the core services provider market has become heavily consolidated – noting that four major companies serve 78 percent of all U.S. banks. His conclusion is that this consolidation affects service and cost, harming local financial institutions’ abilities to keep up with bigger competitors, and has a negative downstream effect on relationship banking and consumers.

Looking ahead, Director Chopra stated that he has asked CFPB staff to work with core services providers, including to answer questions related to banks’ collective bargaining on core services’ contracts. In addition, he states that the CFPB will work with other agencies to examine third-party service providers and to potentially refer complaints to other law enforcement agencies. He finalized his remarks by asserting that these efforts will create a more competitive market that will help every institution, regardless of size, participate in the ever-evolving technological landscape.

Without debating the merits of Director Chopra’s comments, we find ourselves asking whether the concerns about competition he raises are more properly in the purview of the FTC than that of the CFPB.

Aileen Ng

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FDIC Consumer Compliance Supervisory Highlights Looks at Unauthorized EFTs, Overdraft Programs, Re-Presentment of Unpaid Transactions, and Fair Lending

The FDIC has issued the March 2022 edition of Consumer Compliance Supervisory Highlights which includes a description of some of the most significant consumer compliance issues identified by FDIC examiners during consumer compliance examinations conducted in 2021.

The issues described in the report consist of the following:

  • Regulation E liability protections. Examiners found the following instances of consumers being targeted for fraud:
    • Customers of a bank that used a third party service provider (TPSP) to manage its deposit accounts were contacted by someone posing as a representative of the bank’s fraud department who sought the consumers’ account verification codes. Believing they were communicating with the TPSP (working on the bank’s behalf) about unauthorized activity, the consumers provided their two-factor authentication codes which were used by the scammer to steal money from the consumers’ accounts. The bank had attempted to limit its liability through a disclosure in its account agreement that stated neither the bank nor the TPSP would ever request the authentication code. The FDIC concluded that Regulation E’s liability protections for unauthorized electronic fund transfers (EFTs) apply even if a consumer is deceived into giving someone his or her authentication credentials and that banks cannot limit Regulation E consumer protections through account disclosures.
    • Consumers provided their account credentials for fraudulent EFTs through a money payment platform (MPP) such as Cash App, Zelle, or Venmo. When a MPP entered into an agreement with a consumer, the agreement extended to the bank holding the consumer’s account. The bank, as the account holding institution, was held responsible under Regulation E. In addition, the MPP, through whose platform the EFT was made, was also held responsible because it was considered a “financial institution” under Regulation E.

The FDIC’s recommendations for mitigating risk include (1) reviewing account agreements and disclosures (including those with MPPs) to ensure they do not attempt to limit consumers’ rights under Regulation E, and (2) implementing effective fraud detection and prevention measures, such as monitoring geographic data, spending patterns, merchant data, and IP addresses, to help detect potential fraudulent activity. (In June 2021, the CFPB issued Electronic Fund Transfer FAQs which it amended in December 2021 to address similar unauthorized use issues.)

  • Automated overdraft programs. Examiners identified Section 5 (UDAP) violations in connection with the implementation by some banks of conversions of overdraft programs from a static limit to a dynamic limit.  Examiners found that banks had engaged in deceptive acts and practices by failing to disclose sufficient information about the change from a static limit to a dynamic limit. Key changes that banks failed to disclose (and which examiners deemed material) included:
    • Replacement of the fixed amount with an overdraft limit that could change as frequently as daily;
    • The possibility that the new overdraft limit could be higher or lower, at times, than the fixed amount to which the customer was accustomed; and
    • The suspension of the overdraft limit when it falls to zero and how such a change could result in transactions being returned to merchants and other third parties due to insufficient funds.

The FDIC’s recommendations for mitigating risk include (1) providing clear and conspicuous information to existing customers so they have advance notice of how a change from a fixed overdraft limit to a dynamic limit will affect them, (2) disclosing changes in overdraft limits in real time to consumers, and (3) explaining that the dynamic limit is established based on algorithms, or a set of rules, that weigh numerous variables and customer behaviors, how the limit (including frequency) can change, and how the limit can be suspended or reduced to zero when eligibility criteria are no longer met. (The CFPB has made overdraft practices a continuing focus of criticism.)

  • Re-presentment of unpaid transactions. Examiners identified consumer harm when banks charged multiple NSF fees for the re-presentment of unpaid transactions. Some disclosures and account agreements indicated that one NSF fee would be charged “per item” or “per transaction.” These terms were not clearly defined and the disclosures did not explain that the same transaction could result in multiple NSF fees if re-presented. The FDIC indicates that the failure to disclose material information about re-presentment practices and fees can be deceptive and also potentially unfair and notes that it has required banks to provide additional restitution beyond what was agreed to class action settlements.

The FDIC’s recommendations for mitigating risk include (1) eliminating NSF fees, and (2) declining to charge more than one NSF fee for the same transaction, regardless of whether the item is represented.

  • Fair lending. The following findings were made in matters referred by the FDIC to the Department of Justice:
    • A bank had a practice of using the Cohort Default Rate (CDR) to determine who could apply for private student loan debt consolidation and refinance loans. In general, the CDR cutoffs resulted in the disproportionate exclusion of people who attended historically Black colleges and universities (HBCUs) from applying for credit, as certain HBCUs had CDRs that were above the bank’s cutoff. Although the bank’s use of the CDR to determine school-specific eligibility requirements was a neutral policy, the policy had a disparate impact on the prohibited basis of race, because the graduates of HBCUs were disproportionally Black.
    • There was reason to believe that another bank had engaged in a pattern or practice of illegal credit discrimination on the prohibited basis of race by redlining in certain markets in the bank’s lending areas. This finding was based on an evaluation of the bank’s HMDA data and lending activity in majority-Black census tracts and an analysis of the bank’s branching and marketing and outreach in those areas.

The FDIC’s recommendations for mitigating risk include (1) reviewing any requirements or other criteria used to screen potential applicants to ensure there is no discriminatory impact, (2) understanding the bank’s reasonably expected market area, and the demographics of the geographies within that area, and (3) evaluating the methods by which the bank obtains loan applications, including any marketing or outreach efforts and branches.

John L. Culhane, Jr.

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Connecticut Federal Court Allows CFPB Claims to Proceed Against Mortgage Company and Principals for Alleged Licensing and Other Violations

A Connecticut federal district court refused to dismiss claims filed by the CFPB against a mortgage company and three of its principals for alleged Truth in Lending Act (TILA), Mortgage Act and Practice (MAP) Rule, and Consumer Financial Protection Act (CFPA) violations.

The CFPB’s lawsuit names as defendants 1st Alliance Lending LLC and three individuals consisting of the company’s CEO, President of Production, and President of Capital Marketing. The CFPB alleges:

  • From about 2015 to 2019, 1st Alliance’s business model relied on sales employees called Submission Coordinators (SCs) or Home Loan Consultants (HLCs) as the primary point of contact with consumers during the mortgage origination process.
  • The duties performed by the SCs/HLCs required them to hold a mortgage originator license in every state in which 1st Alliance operated.
  • By 2017, 1st Alliance’s compliance department began to raise concerns to company leadership, including the individual defendants, that SCs were engaging in activities that would require licensing.
  • SCs/HLCs held themselves out as licensed in solicitation emails and social media profiles, required borrowers to submit certain documents before receiving Loan Estimates, and made false and misleading statements to consumers about the availability of FHA refinancing programs and program terms.

Based on these alleged facts, the CFPB makes the following claims:

  • 1st Alliance violated TILA and Regulation Z by failing to ensure that the SCs/HLCs were licensed as loan originators pursuant to SAFE Act and by asking for verifying documentation before providing a Loan E.
  • 1st Alliance violated the MAP Rule by making false and misleading representations to prospective borrowers regarding their eligibility for refinancing programs and the program terms.
  • Each of the above alleged violations also constituted CFPA violations by 1st Alliance.
  • 1st Alliance and the individual defendants engaged in unfair and deceptive acts or practices in violation of the CFPA as a result of using unlicensed SCs/HLCs  and the SCs/HLCs presenting themselves to consumers as licensed and by making misrepresentations about the availability of FHA refinancing programs and program terms.

With the exception of the CFPB’s claim that 1st Alliance and the individual defendants engaged in deceptive acts or practices by making misrepresentations about the availability of FHA refinancing programs and program terms, the court denied the defendants’ motion to dismiss. The court found as follows:

  • With regard to the CFPB’s claim that 1st Alliance violated TILA and Regulation Z by failing to ensure that the SCs/HLCs were licensed as loan originators pursuant to SAFE Act, the court rejected 1st Alliance’s arguments that (1) although licensing is required for loan originators, neither TILA nor the SAFE Act require a creditor to ensure that its individual employees are licensed, and (2) to the extent Regulation Z imposes such a requirement, it constitutes an impermissible exercise of agency authority. The court found that Regulation Z requires loan originator organizations to ensure that their loan originators are licensed and that this requirement is clearly authorized by TILA’s grant of authority to the CFPB to issue implementing regulations.
  • With regard to the CFPB’s claim that 1st Alliance violated TILA and Regulation Z by asking for verifying documentation before providing a Loan Estimate, the court rejected 1st Alliance’s argument that asking for verifying documentation before providing a Loan Estimate would not violate Regulation Z. The court found 1st Alliance’s argument that the prohibition on requiring verifying information is only triggered when an application is complete to be “untenable.” While the court acknowledged that the Regulation Z commentary states that a lender can collect “information” before providing a Loan Estimate, it noted that the commentary expressly states that that documentation to verify the information collected from the consumer cannot be required before providing a Loan E.
  • With regard to the CFPB’s claim that 1st Alliance violated the MAP Rule, the court rejected 1st Alliance’s argument that the complaint had to satisfy the pleading standard for fraud claims. The court cited cases from other district courts within the Second Circuit that had declined to apply the standard for fraud claims in the context of consumer protection claims. The court found that the CFPB’s allegations, such as the allegation that 1st Alliance representatives repeatedly told consumers they would qualify for a mortgage when 1st Alliance already had received information that would disqualify the consumer, were sufficient to plead a claim.
  • Because the above claims survived dismissal, the court found that the CFPB’s CFPA claim based on such violations also survived.
  • With regard to the CFPB’s UDAAP claims against the individual defendants, the court first concluded that the appropriate standard for individual liability for UDAAP claims was the Federal Trade Commission Act’s (FTCA) standard. Under the FTCA, individuals can be liable for unfair or deceptive acts and practices when the individual participated directly in the acts or practices in question or had the authority to control them and also had or should have known or been aware of the acts or practices. The court rejected the defendants’ argument that because the CFPA has a provision under which an individual can be liable for providing “substantial assistance” to a company engaged in UDAAP violations, it would undermine the CFPA’s enforcement scheme to also allow individual liability under the FTCA standard. The court concluded that the “substantial assistance” theory of liability was not relevant to whether an individual had directly engaged in a UDAAP violation. The court found that the CFPB had plausibly alleged that the duties assigned to the SCs/HLCs were subject to the knowledge and approval of the individual defendants and that the individual defendants were on notice that unlicensed employees were performing activities that required licensing or were at least recklessly indifferent to their activities.

With regard to the CFPB’s UDAAP claim based on alleged misrepresentations about the availability of FHA refinancing programs and program terms, the court found the CFPB’s allegations insufficient to support a claim. According to the court, to plausibly allege that the defendants knew of the alleged misrepresentations, the complaint had to allege that the SCs/HLCs made the misrepresentations pursuant to or at least consistent with internal policies and the CFPB’s current allegations had not sufficiently done so. While the court dismissed the CFPB’s claim, it did so without prejudice to refiling.

Richard J. Andreano, Jr.

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CFPB Issues Fall 2021 Semi-Annual Report

The CFPB has issued its Fall 2021 Semi-Annual Report to Congress covering the period April 1, 2021, through September 30, 2021.

Since Rohit Chopra was sworn in as CFPB Director in October 2021, the report only reflects CFPB activity under the leadership of former Acting Director Uejio. Although the report does not contain any noteworthy information about which we have not previously blogged, the format of the report is noteworthy in that it is different in two important respects from previous semi-annual reports.

First, the report does not include an introductory message from the Director (or Acting Director). Previous Directors (or Acting Directors) sometimes used the introductory message to share information about their priorities and plans for the Bureau. Hopefully, Director Chopra will provide insights into his priorities and plans when he appears before the House Financial Services Committee and the Senate Banking Committee to testify about the report. The House Financial Services Committee has scheduled its hearing for April 27, 2022, but no date has yet been announced for the Senate Banking Committee’s hearing.

The second change in the report’s format involves how the information presented is organized. Previous reports were organized by topics such as “Significant problems faced by consumers in shopping for or obtaining consumer financial products or services,” “List of significant rules and orders adopted by the Bureau, as well as other significant initiatives conducted by the Bureau during the preceding year, and the plan of the Bureau for rules, orders or other initiatives to be undertaken during the coming period,” “analysis of complaints…”, and “List, with a brief statement of the issues, of the public supervisory and enforcement actions to which the Bureau was a party during the preceding year.” While the new report appears to cover these same topics, with the exception of sections on “Public enforcement actions and reimbursements–TILA, EFTA, and the CARD Act” and “Outreach related to TILA and EFTA,” the new report presents information on a division by division basis. Accordingly, the primary section of the report is titled “Divisional Reporting” and consists of separate reports from: Consumer Education and External Affairs; Office of Equal Opportunity and Fairness; Operations; Research, Markets and Regulations; and Supervision, Enforcement and Fair Lending.

Alan S. Kaplinsky

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