Mortgage Banking Update - March 16, 2023
In This Issue:
- This Week’s Podcast Episode: The Consumer Financial Protection Bureau’s Proposals to Create Two Public Registries for Nonbanks: What You Need To Know, Part II
- CFPB Seeks Input on Construction and Construction-to-Permanent Loan Trial Disclosure Sandbox Application
- DOJ Announces $9M Agreement to Resolve Redlining Allegations Against Park National Bank
- CFPB Seeks Input on Regulatory Flexibility Act Assessment of Mortgage Loan Originator Rules
- DFPI Releases Modified Proposed California Consumer Financial Protection Law Regulations Addressing Certain Commercial Transactions
- FCC Considering New Requirements for Blocking Text Messages and New Limits on Text Message Senders
- HUD Issues Final Rule Replacing LIBOR With SOFR
- CFPB and Other Federal Agencies Express Concerns to The Appraisal Foundation Regarding Draft Changes to the Uniform Standards of Appraisal Practice
- CFPB Supervisory Highlights Special Edition Looks at “Junk Fees” Charged in Connection With Deposits, Auto Servicing, Mortgage Servicing, Payday and Small-Dollar Lending, and Student Loan Servicing
- CFPB and FTC Issue Request for Information on Background Screening in Connection With Rental Housing
- CFPB Releases Voluntary Report on October 2015 and Subsequent HMDA Rule Amendments
- HUD Finalizes Rule Providing for 40-Year FHA Loan Modifications
- CFPB Announces Memorandum of Understanding with NLRB for Sharing Information to Further Joint Efforts to Protect Workers
- SEC Asks SCOTUS to Review Fifth Circuit Decision With Implications for CFPB’s Use of Administrative Law Judges
- SVB Fallout – Beware of Employment Law Risks
- SCOTUS Rules That Worker Who Was Paid High Daily Wage is Non-Exempt and Entitled to Overtime Pay
- FinCEN and USPS Issue Alert on Mail-Theft Check Fraud and SAR Filing Instructions
- Did You Know?
The CFPB recently issued two proposals that would require nonbanks to register with and submit information to the CFPB for publication in an online, publicly available database. The proposals represent an aggressive attempt by the CFPB to enhance its supervisory and enforcement authorities and carry significant potential implications for nonbanks that would be required to register.
In Part II, we look at the proposal that would require companies to register that “enter into covered form contracts,” meaning consumer contracts that use “covered terms or conditions” (regardless of legal validity or enforceability). After discussing the background of the registry and its relationship to the CFPB’s final arbitration rule that was overturned by Congress, we look at which nonbanks would be required to register, what is a “covered form contract,” when does a company “enter into” such a contract, and what kinds of waivers or limitations are “covered terms or conditions.” We also look at the registration requirements and state level corollaries.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by Richard Andreano, Michael Gordon, John Culhane, and Lisa Lanham, partners in the Group.
To listen to Part II, click here.
To listen to Part I, click here.
The CFPB recently announced that it is seeking input on a trial disclosure sandbox application from the Independent Community Bankers Association (ICBA) for alternative disclosures under the Truth in Lending Act (TILA)/Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure (TRID) rule for construction and construction-to-permanent loans. The application is a template application, which means that if even approved by the CFPB it will not actually be operative. Individual institutions would need to submit their own application for approval to use the trial disclosures. The CFPB will accept submissions on the template application through March 29, 2023.
The CFPB announcement includes the following interesting comments from the CFPB on its revised approach to assessing requests for rulemaking:
“In the past, under the guise of promoting innovation, individual firms privately lobbied the Consumer Financial Protection Bureau to obtain special regulatory treatment. If they were successful, a firm receiving special treatment could then attract investors and customers by wrongly implying that their business model and practices were endorsed by the government. In other situations, companies that were able to successfully lobby for special treatment did not follow through on their end of the bargain.
Consumer protection and financial regulators should not be in the business of picking winners and losers. After concluding that its policies failed to meaningfully promote innovation and after assessing the risks for abuse, the CFPB has shifted toward more open and transparent methods of adjusting its regulations for new business models. Instead, the agency is now inviting petitions for rulemaking and requests for Advisory Opinions, and focusing on other programs, like its Policy to Encourage Trial Disclosure Programs (TDP Policy) and other efforts to promote competition.”
In the application the ICBA explains that “[i]t is not uncommon in rural or small-town communities for first-time homebuyers to build their first home, which may end up being their only option as there are limited existing affordable and good quality “starter” homes,” and that “[c]ommunity banks generally provide the majority of construction financing in many small towns and rural markets.” The ICBA notes that while the CFPB has provided guidance to the industry regarding the use of the Loan Estimate and Closing Disclosure under the TRID rule for construction and construction-to-permanent loans, the disclosures were “designed primarily for standard home purchase or refinance mortgage transaction and in their current form do not adequately disclose all the various components of a construction or construction-to-permanent loan.” The ICBA states that the use of such disclosures for “construction and construction-to-permanent loans remain[s] confusing, causing some creditors to avoid these loans due to compliance concerns.” The ICBA advises that Federal Reserve Governor Michelle Bowman heard the concerns of community banks regarding the use of the disclosures with construction and construction-to-permanent loans, and reached out to ICBA to help address the issue, which resulted in the ICBA’s template application.
The ICBA is “proposing to modify/expand the current Loan Estimate and Closing Disclosure to include improved construction phase detail, construction cost breakdown, and improved disclosure regarding the consumer’s permanent loan financing.” Among other modifications, the ICBA proposes that:
- The Loan Terms section of the disclosures have separate columns for the construction phase and the permanent phase to provide more detail on the interest rates and monthly payments for both phases.
- The Projected Payments section of the disclosure clearly label the construction phase payments and the permanent phase payments.
- The Closing Costs Details section of the disclosures be divided into two sections, one for the construction phase and one for the permanent phase, to more clearly reflect the costs applicable to each phase.
- A construction costs table be added to the disclosures to provide detail regarding the construction costs, lot value or purchase price, down payment and loan amount.
- The Annual Percentage Rate section of the disclosures disclose separate rates for the construction phase and the permanent phase.
- A Pre-Conversion Loan Modification disclosure be added to address changes between the originally anticipated permanent phase loan terms and the modified permanent phase terms. The disclosure would provide for an optional Initial Escrow Account Disclosure Statement. An Initial Escrow Account Disclosure Statement currently is required under RESPA.
In addition to addressing the proposed changes in detail, the template application also includes sample versions of the modified Loan Estimate and Closing Disclosure, and a sample of the proposed Pre-Conversion Loan Modification disclosure.
Park National Bank (“Park National”), based in Ohio, has agreed to pay $9 million to settle allegations brought by the U.S. Department of Justice (DOJ) that it engaged in unlawful redlining practices in the Columbus metropolitan area by not providing mortgage lending services to majority-Black and Hispanic communities from 2015 to 2021.
According to the DOJ’s complaint filed with the U.S. District Court for the Southern District of Ohio, Park National concentrated all of its branches and mortgage lenders in majority-White neighborhoods and did not take any significant steps to make up for its absence in majority-Black and Hispanic communities. Further, the DOJ alleges that peer lenders generated mortgage applications at a rate between five and ten times higher than that of Park National in the majority-Black and Hispanic neighborhoods, and that peer lenders extended mortgage loans in such neighborhoods at a rate between 4.5 and 12.5 times higher than that of Park National.
Park National and the DOJ memorialized their agreement to settle all of the DOJ’s claims through a consent order filed with the federal court on February 28, 2023. Under the consent order, Park National agreed to invest at least $7.75 million in a loan subsidy fund to provide subsidies for home mortgage loans, home improvement loans, home refinance loans, and home equity loans for applicants in majority-Black and Hispanic communities in the Columbus area. Park National also pledged to allocate at least $750,000 towards advertising, outreach, consumer financial education, and credit counseling in the Columbus area. Further, Park National agreed to invest a minimum of $500,000 developing partnerships with community-based or governmental organizations to provide services related to credit, financial education, homeownership, and foreclosure prevention to residents of majority-Black and Hispanic census tracts in the Columbus Area. Additionally, Park National will open a new full service branch and a mortgage loan production office in majority-Black and Hispanic neighborhoods in the Columbus area, and assign at least four mortgage lenders, including a Spanish-speaking lender, to serve such neighborhoods.
The allegations made by the DOJ in the complaint, and the remedies provided for in the consent order, reflect the types of allegations and remedies in recent redlining settlements resulting from the DOJ’s Combating Redlining Initiative that was launched by Attorney General Merrick B. Garland in October 2021. The initiative is a nationwide effort to address lending discrimination against communities of color and, the settlement with Park National is part of the initiative. Since the initiative’s launch, the DOJ has announced six redlining cases and settlements, including settlements with Trustmark National Bank and Lakeland Bank, securing $84 million in relief for communities of color affected by lending discrimination across the United States.
In October 2021, in connection with announcing the initiative to combat redlining, the DOJ also announced the settlement with Trustmark National Bank regarding allegations of redlining in Memphis, Tennessee. Further, in October 2022, the DOJ settled with Lakeland Bank regarding allegations of redlining in Newark, New Jersey.
The CFPB recently announced that it is conducting a review of the Regulation Z mortgage loan originator rules under the Regulatory Flexibility Act (RFA) and is seeking comments on the economic impact of the rules on small entities. The CFPB advises that “[t]hese comments may assist the Bureau in determining whether the Loan Originator Rules should be continued without change or amended or rescinded to minimize any significant economic impact of the rules upon a substantial number of such small entities, consistent with the stated objectives of applicable Federal statutes.” For those thinking that the rules might be rescinded, don’t get your hopes up.
The CFPB explains that pursuant to RFA section 610, in a review of a rule “agencies must consider several factors:
(1) The continued need for the rule;
(2) The nature of public complaints or comments on the rule;
(3) The complexity of the rule;
(4) The extent to which the rule overlaps, duplicates, or conflicts with Federal, State, or other rules; and
(5) The time since the rule was evaluated or the degree to which technology, market conditions, or other factors have changed the relevant market.”
The CFPB notes that it has received feedback on the mortgage loan originator rules from stakeholders, with topics addressed including (1) whether to permit different loan originator compensation for originating State housing finance authority loans as compared to other loans, (2) whether to permit creditors to decrease a loan originator’s compensation due to the loan originator’s error or to match competition, and (3) how the rule provisions apply to loans originated by mortgage brokers and creditors differently. The CFPB also notes that is has received feedback that the mortgage loan originator rules “provide important consumer protections that have provided benefits to consumers and the market.”
The CFPB requests the public to comment on the impact of the mortgage loan originator rules on small entities by reviewing the following factors:
- The continued need for the mortgage loan originator rules based on the stated objectives of applicable statutes and the rules.
- The complexity of the mortgage loan originator rules.
- The extent to which the mortgage loan originator rules overlap, duplicate or conflict with other federal rules, and, to the extent feasible, with state and local governmental rules.
- The degree to which technology, market conditions, or other factors have changed the relevant market since the mortgage loan originator rules were evaluated, including:
- How the impacts of the rules as a whole, and of major components or provisions of the rules, may differ by origination channel, product type, or other market segment.
- The current scale of the economic impacts of the rules as a whole, and of major components or provisions of the rules, on small entities.
- Other current information relevant to the factors that the CFPB considers in completing a section 610 review under the RFA.
The CFPB advises that commenters should consult the following rules in connection with responding to the specific CFPB comment requests:
- The definition and scope provisions for the mortgage loan originator rules in Regulation Z sections 1026.36(a) and (b).
- The mortgage loan originator compensation and steering restrictions in Regulation Z sections 1026.36(d) and (e).
- The mortgage loan originator compensation record keeping requirements in Regulation Z section 1026.25(c)(2).
- The mortgage loan originator licensing, registration and qualification requirements in Regulation Z section 1026.36(f)
- The screening and training requirements for loan originators who are not licensed in Regulation Z section 1026.36(f).
- The depository institution compliance procedures requirements related to the foregoing in Regulation Z section 1026.36(j).
- The requirement in Regulation Z section 1026.36(g) to include the name and Nationwide Multistate Licensing System & Registry (NMLS) identification number of the loan originator organization and primarily responsible loan originator in certain mortgage loan documents.
- The prohibitions in Regulation Z section 1026.36(h) against mortgage loan documents containing a mandatory arbitration provision or a provision barring a consumer from bringing a claim in court for damages or other relief in connection with any alleged violation of any federal law.
- The prohibition against the financing of single premium credit insurance with mortgage loans in Regulation Z section 1026.36(i).
While the last two items do not relate to mortgage loan originators, the provisions were adopted in a rulemaking that contained the mortgage loan originator provisions.
On February 24, 2023, the California Department of Financial Protection and Innovation (DFPI) released a Notice containing modifications to previously proposed regulations addressing the Consumer Financial Protection Law (CFPL). The CFPL, in addition to its consumer-focused provisions, contains UDAAP and reporting rules regarding certain commercial financial products and services offered to “covered entities,” which is defined to include small businesses, nonprofits, and family farms whose activities are principally directed or managed from California. These rules and restrictions apply to “covered providers,” which are defined as any person engaged in the business of offering or providing commercial financing or another financial products or services to the aforementioned covered entities.
Regarding the UDAAP restrictions, the newly modified regulations remove the prior draft’s prohibition on simply proposing to engage in UDAAP activities (no express reason was disclosed for this change), but leaves the prior draft’s prohibition on engaging in UDAAP activity intact. The modified regulations further clarify that the UDAAP prohibitions apply to any unfair, deceptive, or abusive act or practice “in connection with the offering or provision of commercial financing or another financial product or service to a covered entity.”
Further, the modified regulations significantly redefine the term “small business,” changing it from the prior draft’s incorporation by reference of the term’s definition under CA Civ Pro Code § 1028.5, to a new express definition, which attempts to provide both greater clarity in application, as well as a safe-harbor provision for covered providers:
“Small business” means a business entity organized for profit with annual gross receipts of no more than $16,000,000 or the annual gross receipt level as biennially adjusted by the Department of General Services in accordance with Government Code section 14837, subdivision (d)(3), whichever is greater. For the purpose of determining a business entity’s annual gross receipts, a covered provider may rely on any relevant written representation by the business entity, including information provided in any application or agreement for commercial financing or other financial product or service.
Lastly, the prior draft of the regulations implemented annual reporting requirements for covered providers. The modified regulations clarify that the reporting requirements would not go into effect until 2025, with the first round of annual reports being due on March 15, 2025. While the modified regulations still maintains the prior draft’s requirement that transactions must be reported by various dollar values organized by bands, it eliminates the requirement to report any commercial financing transactions in excess of $500,000. However, it is important to note that these requirements do not apply to “covered persons” who would otherwise be exempt under CA Fin Code § 90002, which includes banks and thrifts.
Public comment on the modified regulations is open until March 12, 2023. The new draft of the proposed regulations can be found here.
The Federal Communications Commission (FCC) has issued a Report and Order and Further Notice of Proposed Rulemaking that would impose new requirements for the blocking of text messages by mobile wireless providers and propose new limitations on senders of text messages. The document has been circulated for consideration by the FCC at its March 2023 open meeting and the FCC’s ultimate resolution of the issues is subject to change.
In the Report and Order, which would be effective 30 days after publication in the Federal Register, the FCC “for the first time require[s] mobile wireless providers to take action to protect consumers from unwanted and illegal text messages.” Pursuant to the Report and Order, mobile wireless providers would have to block texts that purport to be from numbers on a reasonable Do-Not-Originate list, which include numbers that purport to be from invalid, unallocated, or unused North American Numbering Plan numbers, and numbers for which the subscriber to the number has requested that texts purporting to originate from that number be blocked. To mitigate the risk of erroneous blocking, the FCC would require mobile wireless providers to maintain a single point of contact for senders to report erroneously blocked calls and to post the contact information for their single point of contact on a public-facing website. In explaining its action, the FCC states that its plan to require blocking rather than continue to rely on industry’s voluntary efforts to block “is in part the result of the heightened risk of text messages as both annoyance and vehicles for fraud.”
In the Further Notice of Proposed Rulemaking, the FCC seeks comment on proposals to:
- Require terminating mobile wireless providers to investigate and potentially block texts from a sender after they are on notice from the FCC that the sender is transmitting suspected illegal texts.
- Require prior express invitation or permission in writing for text messages to wireless numbers on the national Do-Not-Call (DNC) Registry. The FCC notes that although it has stated that text messages are “calls” for purposes of the Telephone Consumer Protection Act (TCPA), it has never stated that text messages are subject to DNC protections. The proposal would “clarify” that, before sending a marketing text to a wireless number on the DNC Registry, the texter must have the consumer’s prior express invitation or permission, which must be evidenced by a signed, written agreement between the consumer and seller, which states that the consumer agreed to be contacted by this seller and includes the telephone number to which the calls may be placed.
- Ban the practice of obtaining a single consumer consent as grounds for delivering calls and text messages from multiple marketers on subjects beyond the scope of the original consent (i.e. “the lead generator loophole”). The proposal responds to concerns that lead generators and data brokers use hyperlinked lists (e.g. lists of “partner companies”) to harvest consumer telephone numbers and consent agreements on a website and pass that information to telemarketers and scammers. The FCC is considering amending its TCPA consent requirements to require that such consent be considered granted only to callers logically and topically associated with the website that solicits consent and whose names are clearly disclosed on the same web page.
Comments on the Further Notice of Proposed Rulemaking would have to be filed on or before 30 days after publication in the Federal Register and reply comments would have to be filed on or before 60 days after publication in the Federal Register.
The U.S. Department of Housing and Urban Development (HUD) recently issued a final rule replacing the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate (SOFR) for newly originated FHA-insured adjustable-rate forward mortgage loans and Home Equity Conversion Mortgages (HECMs), and for existing adjustable-rate forward mortgage loans and HECMs. The final rule also establishes for HECMS with monthly rate adjustments a lifetime interest rate cap of 10 percentage points above or below the initial contract interest rate. The final rule is effective March 31, 2023.
For newly originated adjustable-rate forward mortgage loans and annually adjusting HECMs, the acceptable indices are the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year, the 30-day average SOFR published by the Federal Reserve Bank of New York (or a successor administrator), or an alternative SOFR tenor approved by HUD (which HUD may publish by notice). For newly originated monthly adjusting HECMS, the acceptable indices are the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year, the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one month, or an alternative SOFR index approved by HUD.
For existing forward mortgages and HECMs that use a LIBOR index, the mortgages must be transitioned to the spread-adjusted SOFR replacement index approved by HUD by the next interest rate adjustment date for the mortgage that is on or after the replacement date. Currently, the replacement date is likely to be the first London banking day after June 30, 2023 (June 30, 2023, is likely last day on which LIBOR indices will be published and still deemed to be representative rates).
HUD will publish a Mortgagee Letter to implement the requirements of the final rule.
The CFPB and other federal agencies with the responsibility to enforce the Equal Credit Opportunity Act (ECOA) and/or Fair Housing Act (FHAct), recently sent a joint letter to The Appraisal Foundation (TAF) expressing concerns with the Fourth Exposure Draft of Proposed Changes for the 2023 Edition of the Uniform Standards of Professional Appraisal Practice (USPAP). TAF is a private, non-governmental organization that sets professional standards for appraisers. The other agencies are the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Federal Reserve Board, National Credit Union Administration, U.S. Department of Justice, and U.S. Department of Housing and Urban Development.
As previously reported, in February 2022 the agencies sent a joint letter to TAF on the Second Exposure Draft of proposed changes to the USPAP urging TAF to provide a “full presentation” of the anti-discrimination prohibitions in the ECOA and FHAct as they relate to appraisal bias. The agencies also expressed concern that while the Appraisal Standards Board Ethics Rule and Advisory Opinion 16 state that an appraiser cannot rely on “unsupported conclusions relating to [protected characteristics],” these items “do not prohibit an appraiser from relying on “supported conclusions” based on such characteristics and, therefore, suggest that such reliance may be permissible.”
In the recent joint letter, the agencies state that they “were pleased to see that the Third Exposure Draft provided a detailed summary of the FHAct’s and ECOA’s nondiscrimination standards and that any ambiguity as to their applicability was removed. The agencies reviewed the Third Exposure Draft and did not suggest any edits to the text.” With regard to the Fourth Exposure Draft, the agencies express concern that it “eliminated the Third Exposure Draft’s summary of the FHAct’s and ECOA’s nondiscrimination standards and, instead, substituted a distinction between unethical discrimination and unlawful discrimination.” The agencies note three specific concerns:
- The term “unethical discrimination” is not well established in either current law or practice. As a result, the agencies believe the introduction of the term in USPAP, and the resulting need to distinguish between unethical discrimination and unlawful discrimination, would create confusion in the appraisal industry. The agencies also state that federal and state regulators responsible for examining for compliance with USPAP would face difficult challenges in determining when appraisers have engaged in unethical discrimination given that it is not defined in existing legal norms and standards and is inherently vague and subjective.
- The introduction of the concept of unethical discrimination implies that USPAP and the Ethics Rule permit appraisers to engage in “ethical” discrimination. The agencies also state that the term “ethical” discrimination, and reference to the possibility of a protected characteristic being “essential to the assignment and necessary for credible assignment results,” appears to resemble the concept of “supported” discrimination that the agencies previously disfavored.
- Suggesting that appraisers avoid “bias, prejudice, or stereotype” as general norms would permit individual appraisers’ wide discretion in applying these norms, likely yielding inconsistent results. The agencies also state that although they understand that appraisers may seek additional guidance for valuations, such as those involving housing for older persons, that may be treated differently under the FHAct, they believe that a thorough explanation of those particular legal distinctions would be preferred to the introduction of the concept of “ethical” discrimination or other distinctions not found in current law and practice.
In a blog post authored by Patrice Alexander Ficklin and Tim Lambert, the Fair Lending Director and a Senior Counsel at the CFPB, respectively, the authors state that “the CFPB continues to see reports of appraisers who fail to follow the law and who base their value judgments on biased, unfounded assumptions about borrowers and communities.” The authors also state that “[f]or more than 50 years, federal law has forbidden racial, religious, and other discrimination in home appraisals. It is imperative that TAF provide appraisers clear, detailed, and unambiguous warnings about the requirements of federal law covering appraisal standards. [TAF], however, appears reluctant to act. Its recalcitrance undermines efforts to rid the housing market of bias and discrimination and threatens the market’s fairness and competitiveness.”
Continuing its (and the White House’s) “junk fees” rhetoric, the CFPB has released a new issue of Supervisory Highlights that carries the title “Junk Fees Special Edition.” The report discusses the Bureau’s examinations involving fees in the areas of deposits, auto servicing, mortgage servicing, payday and small-dollar lending, and student loan servicing that were completed between July 1, 2022 and February 1, 2023.
The report’s release coincided with a virtual White House event for state legislators on state efforts to address “junk fees.” According to media reports about the event, White House officials encouraged state lawmakers to take their own actions to address junk fees. The White House also released a “Guide for States: Cracking Down on Junk Fees to Lower Costs for Consumers” that discusses approaches states have taken to address junk fees through enforcement and legislation. CFPB Director Chopra, who spoke at the event, is reported to have offered the CFPB as a resource for state junk fees initiatives and indicated that state lawmakers have sought the CFPB’s advice on potential changes to state consumer protection laws.
Key findings by CFPB examiners include:
Deposits. The Bureau cited institutions for unfair acts or practices based on overdraft fees charged on transactions that authorized against a positive balance, but settled against a negative balance (APSN overdraft fees). Such fees were the subject of a 2022 Circular issued by the Bureau. APSN overdraft fees can occur when a bank assesses overdraft fees for debit card or ATM transactions where the consumer had a sufficient available balance at the time the bank authorized the transaction, but the account is insufficient at the time of settlement. Examiners found instances in which unfair APSN overdraft fees were charged using a consumer’s available balance for fee decisioning, as well as when the consumer’s ledger balance was used. According to the CFPB, consumers could not reasonably avoid the injury irrespective of account-opening disclosures. The institutions were directed to stop charging APSN overdraft fees and to issue remediation to consumers who were charged such fees.
The Bureau also issued matters requiring attention to correct problems that occurred when institutions had enacted policies intended to eliminate APSN overdraft fees but such fees were still charged. This occurred where institutions attempted to prevent APSN overdraft fees by not assessing overdraft fees on transactions that authorized positive, as long as the initial authorization was still in effect at or shortly before settlement. Some transactions, however, settled outside of this time period. Examiners found inadequate compliance management systems where institutions failed to maintain records of transactions sufficient to ensure overdraft fees would not be assessed, or failed to use another solution not to charge APSN overdraft fees.
With regard to non-sufficient (NSF) fees, examiners found institutions had engaged in unfair acts or practices based on the assessment of multiple NSF fees when the same transaction was presented multiple times for payment against an insufficient balance in the consumer’s account. The institutions agreed to cease charging NSF fees for unpaid transactions entirely and were directed to make refunds to consumers. The Bureau reported that”[v]irtually all institutions that Supervision has engaged with on this issue reported plans to stop charging NSF fees altogether.”
Auto servicing. Examiners found that servicers engaged in unfair acts or practices by:
- Assessing late fees in excess of the amounts allowed by consumers’ contracts.
- Assessing late fees not allowed by consumers’ contracts where, as a result of acceleration of the loan balance, the consumers’ contractual obligation to make further periodic payments was eliminated and the servicers’’ contractual right to charge late fees on such periodic payments was also eliminated. Servicers had continued to collect late fees even after repossession of the vehicle on periodic payments scheduled to occur after the date of acceleration.
- Charging estimated repossession fees that were significantly higher than the costs they purported to cover, even where the servicers returned the excess amount to the consumers after they received the invoice for the actual costs.
Examiners also found that auto servicers engaged in unfair and abusive acts or practices by charging payment processing fees that “far exceeded” the servicers’ costs for processing payments. Servicers only offered two free payment options-preauthorized recurring ACH and mailed checks-which were only available to consumers with bank accounts. Approximately 90 percent of payments made by consumers incurred a pay-to-pay fee, with servicers receiving over half the amount of the fees from the servicers’ third-party payment processor.
Mortgage servicing. Examiners found that servicers engaged in unfair acts or practices by:
- Assessing late fees in amounts in excess of the amounts allowed by the borrowers’ loan agreements. This was the result of the servicers’ failure to input late fee caps into their systems where the borrowers’ loan agreements included a maximum permitted late fee. Servicers were also found to have violated Regulation Z by including inaccurate late fee payment amounts in periodic statements (since the amounts exceeded the late fees permitted by the loan agreements).
- Charging consumers for repeat property inspection visits to known bad addresses.
- Failing to waive certain late charges, fees, and penalties accrued outside of CARES Act forbearance periods where required by HUD for a consumer entering into a permanent COVID-19 loss mitigation option.
Examiners found that servicers engaged in deceptive acts or practices by:
- Sending periodic statements and escrow statements that included monthly private mortgage insurance (PMI) premiums that consumers did not owe. These consumers’ loan had lender-paid PMI which should not be billed directly to consumers.
- Sending periodic statements to consumers in their last month of forbearance that incorrectly listed a $0 late fee amount for the subsequent payment, when a late fee was in fact charged if the subsequent payment was late.
Examiners found that servicers violated the Homeowners Protection Act by failing to terminate PMI on the date the principal balance of the mortgage was first scheduled to reach 78 percent loan-to-value on a mortgage loan that was current.
Payday and small-dollar lending. Examiners found that lenders in connection with payday, installment, title, and line-of-credit loans engaged in unfair acts or practices by:
- After unsuccessful debit attempts, without consumers’ authorization, splitting missed payments into as many as four sub-payments and simultaneously or near-simultaneously representing to consumers’ banks for payment by debit card.
- Charging borrowers unexpected fees to retrieve personal property from repossessed vehicles and to cover servicer charges, and withholding the personal property and vehicles until the fees were paid.
- Failing to stop vehicle repossessions before title loan payments were due as-agreed, and then withholding the vehicles until consumers paid repossession-related fees and refinanced their debts.
Student loan servicing. Examiners found that servicers engaged in unfair acts or practices by initially processing credit card payments that were subsequently reversed, leading to additional late fees and interest. Where servicers’ policies did not allow payments to be made using a credit card, customer service representative had erroneously accepted and processed credit card payments. These payments were subsequently reversed, causing consumers to become delinquent on their accounts. Servicers did not consistently send notices explaining the reversals or give consumers an opportunity to use another method for making the payments before reversing the credit card payments.
The CFPB’s press release describes the “Junk Fees Special Edition” as a report “on unlawful junk fees.” However, it appears that all of the violations cited by CFPB examiners that are discussed in the report did not involve fees that the supervised entity could not lawfully charge. Rather, there were various errors in how or when the fees were assessed that caused them to be “unlawful.” The CFPB’s use of the loaded term “junk fees” to describe the fees discussed in this issue of Supervisory Highlights appears intended to further a political agenda rather than further what the CFPB has always described the goal of Supervisory Highlights to be–namely assisting supervised entities in complying with federal consumer financial law. In recent remarks to the Consumer Law Scholars Conference, CFPB Deputy Director Martinez described credit card late fees as “a fee that has skyrocketed from a small corner of the market to the top of everyone’s most hated junk fee list.” The CFPB’s continued indiscriminate use of the term “junk fees” to describe what in most cases are heavily regulated, clearly disclosed fees for services used by consumers or that consumers incur as a result of avoidable behaviors serves neither the interests of consumers nor those of industry.
The Consumer Financial Protection Bureau and Federal Trade Commission issued a request for information (RFI) yesterday seeking comment on “background screening issues affecting individuals who seek rental housing in the United States, including how the use of criminal and eviction records and algorithms affect tenant screening decisions and may be driving discriminatory outcomes.” Comments in response to the RFI must be received by May 30, 2023.
The RFI follows the White House’s release last month of a “Blueprint for a Renters Bill of Rights” (Blueprint), which set forth principles intended to “create a shared baseline for fairness for renters in the housing market” and directed various federal agencies, including the CFPB and FTC, to take various actions to further those principles. Among those actions was the issuance of RFIs “seek[ing] information on a broad range of practices that affect the rental market, including the creation and use of tenant background checks, the use of algorithms in tenant screenings, the provision of adverse action notices by landlords and property management companies, and how an applicant’s source of income factors into housing decisions.”
The RFI encourages the submission of comments and information by “tenants, prospective tenants, tenants’ rights and housing advocacy groups, industry participants (including property managers, commercial landlords, individual landlords, and consumer reporting agencies that develop credit and tenant screening reports used by landlords and property managers to screen prospective tenants), other members of the public, and government agencies.” The RFI is divided into the following four sections that each contain a series of wide-ranging questions:
- Tenant screening generally
- Criminal records in tenant screening
- Eviction records in tenant screening
- Using algorithms in tenant screening
The CFPB has previously issued two reports on tenant background checks, one discussing consumer complaints received by the CFPB that relate to tenant screening by landlords and the other discussing practices of the tenant screening industry.
As previously reported, in June 2021 the CFPB announced that it would conduct a voluntary review of the significant amendments to the Home Mortgage Disclosure Act (HMDA) rule adopted in October 2015, most of which became effective in January 2018. The CFPB also announced at the time that it was discontinuing planned HMDA rulemakings, one addressing the data points that must be collected and reported and one addressing the public disclosure of HMDA data.
The Dodd-Frank Act requires the CFPB to conduct an assessment of each significant rule or order it has adopted under a federal consumer financial law and publish a report of each assessment no later than five years after the effective date of the rule or order. While the CFPB believed that the October 2015 amendments to the HMDA rule did not constitute a significant rule, a view that raised the eyebrows of some mortgage industry participants, it decided to nevertheless conduct a voluntary assessment of the rule and issue a report. The CFPB recently released the report, which is entitled Report on the Home Mortgage Disclosure Act Rule Voluntary Review. The report addresses not only the October 2015 amendments to the HMDA rule, but also subsequent amendments.
The CFPB states that the “report does not generally consider the potential effectiveness of alternative requirements to HMDA data reporting that might have been or might be adopted by the Bureau, nor does it include specific recommendations by the Bureau to modify any rules. The Bureau expects that the findings made in this report and the public comments received in response to the November 2021 [Request For Information] on its plans to conduct the review will help inform the Bureau’s future policy decisions concerning HMDA reporting requirements, including whether to commence a rulemaking to make the HMDA Rule more effective in meeting its goals.”
The CFPB advises that it considers the balancing test that it applies to determine whether and how HMDA data should be modified prior to its disclosure to the public, in order to protect applicant and borrower privacy while also fulfilling HMDA’s public disclosure purposes, as well as the related policy guidance that it issued in 2018, to be beyond the scope of the review that it conducted.
The CFPB states that:
“Wherever possible, this review analyzed available data to estimate changes in measures (such as mortgage market coverage ratios) and determined whether these changes are attributable to the HMDA Rule. However, in many cases this analysis was not possible given the data available to the Bureau during this review.
The primary challenge to this analysis is establishing a counterfactual—what would have occurred were it not for the HMDA Rule—to provide a baseline for evaluating the effects of the HMDA Rule.”
However, as noted in the report, the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in 2018 modified the HMDA data collection and reporting requirements for insured depository institutions and insured credit unions originating closed-end loans and open-end lines of credit below a certain level to focus their reporting on the pre-October 2015 rule HMDA data elements. (For closed-end loans the level is less than 500 of such loans in the each of the previous two calendar years, and for open-end lines of credit the level is less than 500 of such credit lines in each of the previous two calendar years.)
Much of the data in the report is dated, as it focuses on 2019 HMDA data. Findings in the report include the following:
- HMDA data coverage of all first lien, closed-end originations ranged from 0.93 to 0.97 between Q1 of 2015 and Q4 of 2019 when measured quarterly. This implies that between 93 percent and 97 percent of all first lien, closed-end originations made between Q1 of 2015 and Q4 of 2019 are observed in the HMDA data.
- Consistent with the 2015 Rule’s increase in the closed-end reporting threshold for depository institutions, HMDA data coverage of first lien, closed-end mortgages decreased between Q1 of 2017 and Q1 of 2018.
- Starting in Q1 of 2018, the annual HMDA data coverage of HELOCs was around 0.80. This implies that 80 percent of HELOC originations were reported under HMDA between 2018 and 2020.
- HMDA data coverage is positively related to census tract relative income, with the highest HMDA data coverage occurring in upper income tracts and the lowest HMDA data coverage occurring in low-income tracts.
- HMDA data coverage of non-conventional loans, which make up a small share of the total mortgage market, is higher than HMDA data coverage for conventional loans throughout the 2015-2019 period.
- HMDA data coverage throughout the 2015 to 2019 period is highest in urban census tracts and lowest in rural tracts. The CFPB notes that based on the requirement that a lender must have a home or branch office in a Metropolitan Statistical Area to be subject to HMDA, “this pattern is not surprising.”
- HMDA data coverage ratios for properties located in census tracts where most residents are not White non-Hispanic (“majority-minority census tracts”) and for census tracts where most residents are White non-Hispanic appear similar just before and after most of the October 2015 rule provisions took effect in January of 2018. The declines in HMDA data coverage beginning in Q1 of 2018 are 3.1 and 1.1 percentage points for majority White non-Hispanic and majority-minority census tracts, respectively.
- The 2019 HMDA data show that there is no clear pattern across racial groups on the shares of race and ethnicity information that financial institutions collected on the basis of visual observation or surname. (When a lender takes an application in person and the applicant does not provide race and ethnicity information, the lender must record that information on the basis of visual observation or surname.)
- The 2019 HMDA data show that the age distribution of mortgage borrowers varies across race and ethnicity. For instance:
- The median age of Hispanic White borrowers was 41 and their average age was 43, making them the youngest group among all race and ethnicity groups. The median ages of Black and non-Hispanic White borrowers were both 46 in 2019.
- Denial rates also vary by the age of applicants. With the exception of Rural Housing Service/Farm Services Agency loans, the denial rates of most closed-end mortgage applications generally increase with age. In particular, the denial rates for applicants aged 62 or older were higher than those for applicants younger than 62, except for home equity lines of credit (HELOCs) and reverse mortgages.
- For complete applications, in 2019, about 14 percent of applications for a loan on a one-unit property were denied. In contrast, the denial rates for applications for a loan on a two-, three- and four-unit property were 18 percent, 19 percent, and 18 percent respectively.
- In 2019, 65 percent of multifamily originations were for five to 24 units and about 9 percent of originations were for large multifamily dwellings with more than 150 units.
- In 2019, over 1,700 originated manufactured home loans were secured by more than four units. The CFPB observes that “[m]anufactured homes are a vital part of the housing market, providing affordable alternatives to site-built properties, especially in rural areas.”
- In 2019, about 6 percent of multifamily originations were for properties with at least one affordable unit, and more than half of originations with at least one affordable unit were for exclusively income-restricted multifamily dwellings. In general, multifamily loans with a greater number of total units also had a greater share of affordable units.
- In 2019, the median interest rate for loans secured only by the manufactured home (i.e., not also the underlying real estate) was 8.490 percent, while the interest rate for loans secured by the manufactured home and underlying real estate was 4.750 percent.
- In 2019, about 85 percent of all originations were directly submitted, and initially payable, to the reporting institution.
- With regard to HELOCs:
- They are more likely to have a smaller loan amount and higher interest rates than closed-end loans.
- Applicants are more likely to be denied than closed-end loan applicants.
- Borrowers are more likely to be non-Hispanic White, have higher income, and live in high-income tracts and metropolitan areas than closed-end loan borrowers
- Consistent with the median interest rate trends by racial group, Black and Hispanic White borrowers had greater interest rate spreads above a market rate than non-Hispanic White and Asian borrowers.
- Overall, the median total loan costs in 2019 ranged from about $3,400 to a little over $7,100 across different loan types. The average was $4,809. The standard deviation of total loan costs was $9,700, about twice the size of the average, indicating a wide spread of the total loan costs.
- Based on changes to the HMDA rule between 2015 and 2018:
- For existing closed-end loan reporters the estimated increase in ongoing compliance costs for HMDA reporting per loan application (in 2018 dollars) was approximately $42 for a representative low-complexity financial institution with a loan/application register (LAR) size of 50 records, $11 for a representative moderate-complexity financial institution with a LAR size of 1,000 records, and $0.47 for a representative high-complexity financial institution with a LAR size of 50,000 records.
- For open-end reporters, who are almost all newly reporting open-end lines of credit under the HMDA Rule (including financial institutions who previously reported HMDA data for their closed-end loan applications), the estimated increase in ongoing HMDA compliance costs per loan application was approximately $50 for a representative low-complexity financial institution with a LAR size of 500 records, $45 for a representative moderate-complexity financial institution with a LAR size of 1,000 records, and $10 for a representative high-complexity financial institution with a LAR size of 30,000 records.
The U.S. Department of Housing and Urban Development (HUD) recently issued a final rule extending the maximum term of an FHA loan modification from 30 to 40 years. The rule is effective May 8, 2023. HUD also issued Mortgagee Letter 2023-06 incorporating a 40-year standalone loan modification into FHA’s COVID-19 loss mitigation policies for situations in which partial claim funds are not available. (Prior to this change, FHA policies provided for a 40-year loan modification only in cases in which COVID-19 recovery partial claim funds are available.) The changes made by the Mortgagee Letter may be implemented immediately and must be implemented no later than May 8, 2023. Earlier this year, in Mortgagee Letter 2023-02 that was superseded by Mortgagee Letter 2023-03, HUD announced the temporary extension of COVID-19 loss mitigation options to all eligible FHA borrowers in default or facing imminent default, including non-occupant borrowers.
HUD advises in the preamble to the final rule that “[f]urther guidance about how [the change made by the rule] will be implemented inside of HUD’s loss mitigation program will be published in HUD policy.” HUD also addresses in the preamble the issue that the current interest rate environment may offset the usefulness of a 40-year loan modification:
“HUD recognizes that, since the proposed rule was published, interest rates have increased. An increase in interest rates may decrease the effectiveness of a modification in providing significant payment reduction, because the modified loan may be at a higher interest rate than the original loan. While rising interest rates may keep the 40-year loan modification from providing significant payment reduction, HUD believes that rising interest rates make the 40-year loan modification more critical in circumstances where the 30-year loan modification does not sufficiently decrease the monthly payment to an amount that the borrower could afford to retain their home. As a result, HUD believes that this rule will provide a critical home retention tool for borrowers as interest rates change over the long term.”
The CFPB announced earlier this week that it has entered into a Memorandum of Understanding (MOU) with the National Labor Relations Board (NLRB) that is intended to “help to identify and end financial practices that harm workers and to enhance the enforcement of federal consumer financial protection and labor laws and regulations.” According to the CFPB, the MOU “recognizes the overlap of potentially harmful conduct that may pose risks to consumers and workers under federal consumer financial protection law and the National Labor Relations Act.”
The MOU addresses the sharing of information between the two agencies and the confidentiality of that information. While the MOU does not identify any specific topics about which the agencies plan to share information, the CFPB’s press release about the MOU identifies “employer surveillance and employer-driven debt” as areas of immediate concern. The press release quotes remarks from CFPB Director Rohit Chopra in which he stated that “Information sharing with the National Labor Relations Board will support our efforts to end debt traps that stop workers from leaving one job for another.” It also quotes remarks from NLRB General Counsel Jennifer Abruzzo in which she stated that “[e]mployers’ practices and use of artificial intelligence tools can chill workers from exercising their labor rights.”
With regard to employer surveillance and employer-driven debt, the CFFB indicated that the comments it received in response to its June 2022 request for information on employer-driven debt and an earlier roundtable with worker organizations and labor unions provided the following information:
Employer-driven debt: Workers often incur significant debt to employers arising from unnecessary employer-mandated training or equipment or that might be more expensive or harmful than what they might purchase in a competitive market. Such debt can interfere with workers’ ability to change jobs.
Employer surveillance: Workers may be unaware that employer surveillance tools can continue to track them outside of working hours, and the companies that own the surveillance tools might sell worker data to financial institutions, insurers, and other employers. Certain actions by these surveillance companies may be violating the Fair Credit Reporting Act along with other consumer financial protection laws.
Ballard Spahr LLP’s Labor and Employment and Consumer Financial Services attorneys are prepared to answer questions regarding the MOU and the areas of concern identified by the CFPB.
The Securities and Exchange Commission (SEC) has filed a petition for certiorari with the U.S. Supreme Court seeking review of the Fifth Circuit’s decision in Jarkesy v. Securities and Exchange Commission, a case with significant implications for the use of administrative law judges (ALJs) by federal agencies, including the CFPB.
The underlying case in Jarkesy involved an SEC investigation that resulted in an administrative action against the petitioners in which the SEC alleged that the petitioners had committed securities fraud and sought both monetary and equitable relief. The petitioners then sued in the U.S. District Court for the District of Columbia to enjoin the proceedings, claiming violations of several constitutional rights. The district court, and subsequently the U.S. Court of Appeals for the D.C. Circuit, refused to issue an injunction, deciding that the district court had no jurisdiction and that the petitioners were required to continue the administrative proceeding and then appeal.
After an evidentiary hearing, an SEC ALJ found that the petitioners had committed securities fraud. The petitioners sought review by the SEC, which affirmed the fraud finding and ordered the petitioners to pay a civil penalty of $300,000, banned the individual petitioner from participating in the securities industry, and ordered the company petitioner to pay nearly $685,000 in disgorgement. Petitioners then sought review by the Fifth Circuit. A divided 3-judge Fifth Circuit panel ruled that the proceedings suffered from three constitutional defects, vacated the SEC’s decision, and remanded the matter to the SEC for further proceedings. The SEC filed a petition for rehearing en banc which was denied by the Fifth Circuit.
The following two questions presented in the SEC’s certiorari petition could have significant implications for the CFPB’s use of ALJs:
- Whether the statutory provision that empowers the SEC to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violated the Seventh Amendment of the U.S. Constitution. The Fifth Circuit panel concluded that the SEC’s use of an administrative proceeding violated the petitioners’ Seventh Amendment right to a jury trial because the SEC’s fraud claims are analogous to traditional fraud claims at common law to which a right to a jury trial applies when civil penalties are sought. In its petition, the SEC argues that Congress’s power to assign an enforcement proceeding to a non-Article III tribunal does not depend on the extent to which that proceeding resembles common-law actions. To the extent the CFPB’s authority to challenge deceptive practices is rooted in common law fraud claims or other enforcement actions brought by the CFPB are deemed to resemble common-law actions, the CFPB’s use of ALJs in a proceeding seeking civil penalties could similarly be challenged as a violation of the respondent’s Seventh Amendment right to a jury trial.
- Whether statutory provisions that authorized the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine. The Fifth Circuit panel concluded that Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle to guide the SEC’s use of its discretion to decide whether to bring securities fraud enforcement cases either in district court or within the agency. In its petition, the SEC argues that in deciding whether and how to enforce the securities laws, the SEC does not exercise legislative power and instead exercises only enforcement discretion, which is a classic executive power. As the Dodd-Frank Act gives the CFPB unfettered discretion to choose whether to bring an action before an ALJ or in federal district court, the CFPB’s use of an ALJ for an enforcement action could similarly be challenged under the nondelegation doctrine.
The third question presented by the SEC’s petition is whether Congress violated Article II of the Constitution by granting for-cause removal protection to ALJs in agencies whose heads can only be removed by the President for cause. While CFPB ALJs, like SEC ALJs, can only be removed for cause established and determined by the Merit Systems Protection Board, the CFPB Director, unlike SEC Commissioners, can be removed without cause.
The CFPB recently finalized a procedural rule that updates its Rules of Practice for Adjudication Proceedings. In a blog post about the final rule, the CFPB stated that it “still plans to bring the vast majority of its matters in district court, but in certain circumstances, administrative adjudications can be valuable.” Nevertheless, we expect the CFPB will be deterred from using administrative proceedings as a result of the legal cloud created by Jarkesy.
Companies impacted by the Silicon Valley Bank (SVB) failure may be concerned about their ability to meet immediate payroll obligations as they await funds from government regulators. Despite regulatory assurances that funds will be available in the near-term, employers with funds in SVB may remain concerned about their ability to meet ongoing obligations. As a result, employers may be considering alternatives and stop-gap measures and should assess the following employment law issues and look at the specific laws of those jurisdictions in which their employees work:
- Failure to pay employees on announced pay dates puts an employer at risk of liability under the federal Fair Labor Standards Act (FLSA) as well as wage payment laws in many states. These laws provide for the recovery of back pay, attorneys’ fees and liquidated damages, which may be 100 percent of the back pay owed under the FLSA or even more in some states that provide for treble damages.
- State wage theft laws may demand notices to employees who will not be paid and further may provide for statutory penalties and fines and even criminal penalties in some circumstances.
- Missed payroll also may have payroll tax implications for failure to deposit employment taxes with the IRS on time. Penalties vary by how many days past due the taxes are, with fines ranging from 2-15 percent. To conserve funds, or in an attempt to avoid missed payroll, employers may consider pushing back payroll dates, but there are limits and notice is often required. Many states require employees to be paid at least twice a month, although a number of states allow employees who are exempt from overtime requirements to be paid less frequently. Generally, changes in the pay date will require notice under state laws, typically ranging from seven calendar days to a month.
- Employers may consider reducing employee compensation or furloughing employees to save cash. Reductions in employee compensation must be prospective only, and state laws may require notice for changes in employee compensation. Furloughs (also known as temporary layoffs) may trigger obligations to pay employees for accrued but unused paid time off under employer policies and state laws. In addition, reductions in compensation for exempt employees should be done consistent with the FLSA to preserve the salary basis payment method and avoid overtime liability.
- Employers making changes in the workforce through layoffs, furloughs or reduction of hours need to be cognizant of when such actions may trigger notice requirements under the federal Worker Adjustment Notification Act (WARN) and corresponding state and local laws.
- Unionized employers may have an obligation to bargain with the representatives of their employees over any changes, including missed or modified payroll practices, and provide information to the union upon request. In addition, failure to make payroll will have implications for employers participating in union multi-employer pension, health and welfare and other funds, and employers should consider the impact under the funds’ delinquency policies which often are incorporated into collective bargaining agreements.
Ballard Spahr’s Labor and Employment Group frequently advises employers on all of the above referenced issues. Please contact us if we can assist you in understanding these legal requirements and the measures an employer should take to remain in compliance with applicable laws.
On February 22, 2023, the Supreme Court of the United States ruled that an employee who is paid a daily rate for each day worked, no matter how high the rate, is not exempt from the overtime provisions of the Fair Labor Standards Act (FLSA) and, therefore, entitled to overtime pay for hours worked over 40 in a work week. The Court found that although the employee was highly compensated, his daily wage did not meet the salary basis requirements for exempt status under the FLSA and its implementing regulations.
In Helix Energy Solutions Group Inc v. Hewitt, No. 21-984, 598 U.S. ___ (2023), the employee, an oil rig worker, made $200,000 a year. A federal district court in Texas found that the worker, who was paid a daily rate of between $963 and $1,341 for each day worked, was paid on a salary basis when the evidence showed he was paid at least $455 a week (the salary basis threshold for exemption at the time) for each week that worked, regardless of the quantity or quality of his work. Hewitt v. Helix Energy Solutions Group, Inc., No. 4:17-CV-2545 (S.D. Tex. Dec. 21, 2018).
The Fifth Circuit Court of Appeals reversed, holding that a “daily-rate employee (like Hewitt) does not fall within the main salary-basis provision of 541.602(a) … [and] ‘daily-rate’ workers can qualify as paid on a salary basis only through the ‘special rule’ of 541.604(b), which focuses on workers whose compensation is ‘computed on an hourly, a daily or a shift basis.’” The Fifth Circuit found that because the conditions of 541.604(b) were not met, Hewitt was not exempt from the FLSA’s overtime rules. Hewitt v. Helix Energy Solutions Group, Inc., 19-20023 (5th Cir. Dec. 21, 2020).
Helix argued that because the employee was paid more than the weekly salary basis threshold as a daily rate, he was guaranteed to satisfy the salary threshold for any week in which he worked. Under FLSA regulations, exempt employees need not satisfy the salary threshold for any week in which they perform no work. The company also argued that the Fifth Circuit decision was incompatible with the FLSA, which was intended to protect front line workers, not highly compensated supervisors, and would deal a blow to the oil and gas industry, among others, where daily compensation arrangements are common.
The Supreme Court affirmed the Fifth Circuit’s decision, holding that Hewitt was not exempt because Helix paid Hewitt a fixed daily wage rate, not a salary, because the amount of his compensation depended on the number of days he worked. Hewitt was not guaranteed a weekly payment regardless of the “quantity or quality of the work performed” – a requirement under the regulations – and, therefore, the payment of a daily rate did not meet the salary basis requirement for exemption under the FLSA.
The Court also held that the highly-compensated exemption, which relaxes the duties test for workers earning above an annual threshold ($100,000 at the time of the suit, currently $107,432), did not apply because it still requires that employees be paid on a salary basis and Hewitt’s daily rate, no matter how high, did not meet that standard. Although the FLSA has a path for employees who are paid on a daily, hourly or shift rate to be considered exempt, Helix conceded that Hewitt’s compensation did not satisfy the requirements of that regulation. Under that provision, 29 CFR § 541.604(b), an employee who is paid on a daily, hourly or shift basis can be exempt only if they are guaranteed a salary for each week they work that at least satisfies the threshold ($455 at the time of the suit, currently $684), and the total amount of their weekly compensation bears a reasonable relationship to the guaranteed pay. The Department of Labor has pegged that “reasonable relationship” at no more than one-and-a half times the employee’s guaranteed salary.
The takeaway for employers is that paying individuals a high daily, hourly or shift rate that equates to or even guarantees that they earn an amount over the salary basis threshold in any one week is not enough to make them exempt.
It is worth noting that at oral argument before the Supreme Court, and in his dissenting opinion, Justice Kavanaugh suggested that the regulations themselves are invalid because they improperly limit the broad exemptions the FLSA provides. Helix had not challenged the validity of the regulations themselves in this case, so this issue was not addressed by the Court majority. There is little doubt that other litigants will look for the opportunity to bring that issue before the Court in a future case, suggesting that this may not be the end of litigation over this issue. However, employers must now comply with the current Supreme Court precedent.
Ballard Spahr’s Labor and Employment Group frequently advises employers on wage and hour compliance and defends employers in wage and hour matters. Please contact us if we can assist you in understanding your company’s legal requirements and the measures your business should take to remain in compliance with applicable law.
On February 27, 2023, the Financial Crimes Enforcement Network (FinCEN) in conjunction with the United States Postal Service (USPS) issued a press release and alert concerning the “national surge in check fraud schemes targeting the U.S. Mail.” In what FinCEN Acting Director Himamauli Das called a “disturbing trend,” criminals are increasingly stealing checks from the U.S. Mail and USPS mail carriers—sometimes by force—and using the personal information contained therein to commit identity theft or other crimes.
In the past, significant mail theft-related check fraud schemes were mostly confined to cases involving USPS employees at sorting and distribution facilities who had access to large amounts of mail. For example, the Department of Justice—with the help of the United States Postal Inspection Service (USPIS) and the USPS Office of Inspector General—charged USPS employees and other individuals with running an alleged $1.3-million fraud and identity theft scheme and uncovered an alleged bribery scheme involving USPS employees who diverted Covid-19 benefits sent by the New York Department of Labor.
But the recent uptick in mail theft-related check fraud is “increasingly committed by non-USPS employees, ranging from individual fraudsters to organized criminal groups comprised of the organizers of the criminal scheme, recruiters, check washers, and money mules.” Criminals have targeted everything from residential mailboxes to cluster boxes in apartments and commercial buildings, sometimes forcing them open or using improvised fishing devices. Criminals have also allegedly obtained USPS master keys, Arrow Keys, and used them to access USPS blue collection boxes. To obtain the Arrow Keys, individuals have allegedly resorted to force, sometimes robbing mail carriers at gun point, or conspiring with mail carriers to make copies.
According to FinCEN, Suspicious Activity Reports (SARs) for check fraud increased 23 percent in 2021 and nearly doubled in 2022, totaling 680,000 SARs for check fraud. While the number includes all SARs involving check fraud, FinCEN and the USPS attribute this increase, in part, to mail theft-related check fraud. The increased criminal activity has become enough of a concern that FinCEN issued a joint alert with the USPS discussing typologies, red flags, and reminders about SAR filings.
The alert describes the typology for these crimes. Typically, criminals involved in these schemes “wash” the checks (i.e., use chemicals to remove the original ink) to remove payee and check amount information and replace it with their own identities (or fraudulent ones) and new amounts to increase the value of their ill-gotten gains. Criminals may also copy and print the washed checks to use or sell, potentially on the “dark web.” Similarly, criminals may use personal information found on the check (or in other pieces of mail) to commit future fraud schemes, like credit card fraud or identity theft. Sometimes, checks are deposited in person, through ATMs, or via remote deposit to fraudulent payees. But sometimes cashing the checks can be much more complicated. To further obfuscate their involvement, criminals may retain the services of a money mule. Typically, the money mule will have an existing account at a financial institution in which to deposit the fraudulent checks. Once deposited, the funds are quickly withdrawn or wired to multiple accounts, usually at different financial institutions, to hide the source of the funds.
The red flags provided by FinCEN are informed by the typologies discussed above. Banks should be suspicious of:
- non-characteristic check activity on their customer’s accounts, including large checks to new payees, new check deposits when the customer did not typically use checks, and abnormal check deposits;
- checks cashed on a customer’s account when the customer reports checks were stolen or that the intended recipient did not receive a check sent in the mail;
- checks bearing physical characteristics indicating check fraud, like faded handwriting or different check stock;
- customer accounts that deposit checks and quickly initiate withdrawals and transfers or that have “indicators of other suspicious activity, such as pandemic-related fraud”; and
- non-customers attempting to cash large checks in-person who provide suspicious explanations for their activity or otherwise appear to be acting as a money mule.
FinCEN also suggests that if financial institutions learn of possible mail theft-related check fraud from their customers they should refer them to USPIS’s tips on mail and package theft and, if it involves USPS money orders, should refer customers to USPS’s FAQs on lost or stolen money orders.
When filing SARs believed to involve mail theft-related check fraud, financial institutions should enter the key term “FIN-2023-MAILTHEFT.” (Financial institutions should do the same when filing a Form 8300, a Report of Cash Payments Over $10,000 Received in a Trade or Business.) FinCEN also requests financial institutions to provide “any and all available information relating to the account and locations involved in the reported activity” including legal entities and individuals involved, the beneficial ownership of those legal entities, and other financial institutions involved. FinCEN strongly recommends that financial institutions voluntarily engage in information sharing, under the safe harbor authorized by Section 314(b) of the USA PATRIOT Act, to fight the rise in mail-theft check fraud.
The NMLS will roll out new updates on March 18, 2023, which in part will allow a user to hide or unhide a password on any screen in which a password is entered.
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