Legal Alert

Mortgage Banking Update - February 29, 2024

February 29, 2024

February 29, 2024 – Read the below newsletter for the latest Mortgage Banking and Consumer Finance industry news written by Ballard Spahr attorneys. In this issue we discuss the implications of the Federal Communications Commission’s plan to ban robocalls that feature voices generated by artificial intelligence, aiming to stem the tide of AI-generated scams and misinformation campaigns.

In This Issue:


FinCEN Proposes BSA Reporting Requirements for Residential Real Estate

On February 16, the Financial Crimes Enforcement Center (FinCEN) published a Notice of Proposed Rulemaking (NPRM) regarding residential real estate. The final version of the NPRM published in the Federal Register is 47 pages long. We have created a separate document which more clearly sets forth the proposed regulations themselves, at 31 C.F.R. § 1031.320, here.

FinCEN also has published a Fact Sheet regarding the NPRM, here. The Fact Sheet, slightly over four pages long, is helpful and walks through the basics of many of the proposed requirements.

The NPRM proposes to impose a nation-wide reporting requirement for the details of residential real estate transactions, subject to some exceptions, in which the buyer is a covered entity or trust. Title agencies, escrow companies, settlement agents, and lawyers need to pay particular attention to the NPRM because, based on FinCEN’s “cascade” approach to who should be responsible for complying with the reporting requirements, these parties are the most likely to be responsible.

Although the NPRM pertains only to residential transactions, FinCEN has indicated that it intends to publish a separate proposed rulemaking in 2024 regarding commercial real estate transactions.


The NPRM has been long anticipated. FinCEN issued a lengthy Advanced Notice of Proposed Rule Making (ANPRM) in December 2021. Further, and for years, FinCEN has issued and expanded Geographic Targeting Orders (GTOs), which have accumulated Beneficial Owner (BO) information through reports regarding the purchases of certain real estate by entities in designated U.S. jurisdictions, if they exceeded certain monetary thresholds. The GTOs were a precursor to, and instruments to obtain data to support, the newly-published NPRM. Moreover, the Department of Treasury’s 2024 National Money Laundering Risk Assessment contains, again, a section specific to real estate, which posits that the U.S. real estate market is vulnerable to money laundering because “its historic reputation as a reliable store of long-term value” has attracted “those looking to find a reliable mechanism to launder money[,]” and because of “the ease through which illicit actors can anonymize their identity or the source of their funds through legal entities, legal arrangements, and pooled accounts like IOLTAs.”

In the 2021 ANPRM, FinCEN had raised the possibility that regulations could apply to both the residential and the commercial real estate sectors, and that they could require not just a relatively simple reporting form regarding real estate transactions, but also for covered businesses to implement and maintain more robust anti-money laundering (AML) compliance programs like many other institutions covered by the Bank Secrecy Act (BSA). As we will discuss, the new NPRM is limited to the residential sector and a proposed transaction-based reporting requirement. However, and as noted, FinCEN has stated that it also will propose regulations regarding the commercial real estate market later in 2024.

The Real Estate Report

The NPRM proposes a new BSA reporting form: the “Real Estate Report” (Report). The precise form of the Report will be the subject of a future Federal Register publication by FinCEN in 2024. Summarizing greatly, the Report would require the identification of the BOs of a covered transferee entity or transferee trust. The Report also would require certain information regarding the real property being transferred; the individuals representing the transferee; the seller; the person filing the Report; and payments made.

Importantly, and consistent with the above, the Report would not apply to transactions only between individuals, or to transactions in which the transferee is an individual. Rather, the Report would apply only to transactions involving a covered entity or trust as the transferee.

The NPRM refers to the Report as “a streamlined version of a Suspicious Activity Report (SAR)[.]” But the Report is nothing like a SAR, the filing of which requires, among other things, the exercise of judgment and discretion; a determination that a transaction is “suspicious;” and, typically, an entire BSA/AML program to continually monitor transactions and customers in order to identify suspicious activity. Indeed, the NPRM observes that “[b]ecause of the streamlined nature of these Real Estate Reports compared to traditional SARs, as well as the flexible ‘cascade’ framework, persons subject to this reporting requirement would not need to maintain the types of AML programs otherwise required of financial institutions under the BSA.” It appears that FinCEN characterizes the Report as a “streamlined” SAR because it is promulgating the Report pursuant to its statutory authority at 31 U.S.C. § 5318(g), which pertains to SARs.

Consistent with the above, the NPRM does not propose that a Report verify reported BO information or identify any Politically Exposed Persons, or PEPs, involved in a deal. Such duties “would require reporting persons to undertake independent research that would represent a dramatically increased burden, compared to collecting information from the transferee.”

The Report: Contents

Generalizing greatly, the proposed definition of a reportable BO for a transferee entity approximates the definition of a reportable BO for the purposes of the Corporate Transparency Act (CTA): a person who owns or controls at least 25 percent of the transferee’s ownership interests, or anyone who exercises “substantial control” over the transferee entity – a concept that is very broadly defined. For a transferee trust, a BO would be any individual who is a trustee or who has other, various and specifically-defined rights and powers regarding the trust or its assets.

The NPRM and FinCEN’s Fact Sheet discuss the CTA, apparently to address the critique that the CTA and the reporting requirements the NPRM proposes are overlapping and too costly for industry. According to FinCEN, the CTA and the NPRM “serve different purposes” because “[i]nformation proposed to be collected pursuant to th[e] NPRM would enable law enforcement to directly tie individuals, entities, and trusts of interest to specific non-financed sales and transfers of U.S. residential real estate.” That claim, on its own terms, is accurate. Nonetheless, many entities conducting real estate transactions will need to file BO reports under the CTA, and also will have their transactions reported under the NPRM.

The Report: Application

The NPRM proposes that the Report should apply to all residential deals, as defined, with no monetary threshold. Pure gifts involving zero consideration are subject to reporting. As noted, the deals must involve a defined entity or trust as at least one of the transferees, including foreign entities and trusts. Reportable deals would involve transfers pertaining to single-family houses, townhouses, condominiums, cooperatives, and buildings designed for occupancy by one to four families. The final prong of this definition (buildings designed for occupancy by one to four families) tracks language in the existing definition of real estate transactions involving residential mortgage lenders and originators, to which the BSA and implementing FinCEN regulations already apply. Reportable deals also would include vacant or unimproved land which is zoned or permitted for occupancy by one to four families, and shares in a cooperative housing corporation.

Importantly, the Report only would apply to “non-financed” transactions. That means that a covered transaction would not involve an extension of credit that is secured by the transferred property, and extended by a financial institution subject to AML and SAR filing requirements. Stated otherwise, if the transaction involves financing by an entity the BSA already covers, then the NPRM does not apply. Explaining in part FinCEN’s justification for this definition, the NPRM states that “approximately 42 percent of non-financed real estate transfers captured by [the GTOs] are conducted by individuals or legal entities on which a SAR has been filed.” In regards to how this definition will impact filings, the 2024 National Money Laundering Risk Assessment, referenced earlier, states that “an estimated 20 to 30 percent of residential real estate purchases in the United States are non-financed and not fully subject to comprehensive AML/CFT requirements.” For context, it has been reported that there were about 4.0 million residential real estate transactions in January 2024. These statistics suggest that approximately 800,000 to 1,200,000 residential, non-financed transactions occurred in 2023.

Although transferee entities and trusts are defined broadly, there are proposed exceptions for highly regulated types of entities that, in FinCEN’s view, illicit actors are less likely to use to launder funds. These exceptions include but are not limited to entities the BSA already covers (such as banks, credit unions, money services business, and broker-dealers in securities) and securities reporting issuers – i.e., U.S. public companies. Thus, although there is no “large entity” exception per se, the exception for securities reporting issuers serves de facto as such an exception, as the NPRM itself implicitly acknowledges.

Transferee trusts are defined broadly. Unlike the CTA, trusts are covered by the NPRM if they are not created through a filing with a state or tribal entity. Rather, a transferee trusts is defined to mean “any legal arrangement created when a person (generally known as a settlor or grantor) places assets under the control of a trustee for the benefit of one or more persons (each generally known as a beneficiary) or for a specified purpose, as well as any legal arrangement similar in structure or function to the above, whether formed under the laws of the United States or a foreign jurisdiction.” The proposed exceptions for transferee trusts are limited: trusts which are securities reporting issuers, trusts in which the trustee is a securities reporting issuer, or statutory trusts. Subsidiaries of exempt entities and trusts are also exempt.

The NPRM makes very clear that the proposed definition of transferee entity includes non-profit organizations – although “the reportable beneficial owners would be limited only to the individuals who exercise substantial control[,]” because the owners or directors of such organizations do not have direct ownership. In regards to pooled investment vehicles (PIVs), the NPRM emphasizes that PIVs that are not registered with the SEC, such as private real estate investment trusts, certain real estate funds, special purpose financing vehicles, and private funds, may be transferee entities.

The Report: Who Files

Only one entity or person must file a Report for a particular covered transaction. FinCEN states it “expects that the obligation to file Real Estate Reports would generally apply to settlement agents, title insurance agents, escrow agents, and attorneys.” More specifically, the NPRM proposes a “cascading” reporting regime by listing seven different functions which could occur in a real estate deal – the business that performs the function that appears highest on the list has the reporting requirement.

Here is FinCEN’s proposed “cascading” list of responsible filers:

  • The person listed as the closing or settlement agent on the closing or settlement statement for the transfer;
  • The person that prepares the closing or settlement statement for the transfer;
  • The person that files with the recordation office the deed or other instrument that transfers ownership of the residential real property;
  • The person that underwrites an owner’s title insurance policy for the transferee with respect to the transferred residential real property, such as a title insurance company;
  • The person that disburses in any form, including from an escrow account, trust account, or lawyers’ trust account, the greatest amount of funds in connection with the residential real property transfer;
  • The person that provides an evaluation of the statute of the title; or
  • The person who prepares the deed or, if no deed is involved, any other legal instrument that transfers ownership of the residential real property.

Importantly, the NPRM also proposes that parties may enter into written agreements with each other to designate exactly who must fulfill the reporting requirement. As noted already, the NPRM includes attorneys involved in real estate transactions, despite commentators who urged otherwise, explaining that “FinCEN would require reporting by attorneys only when they perform certain functions—functions that generally may be performed by non-attorneys.”

The NPRM does not discuss potential penalties for not filing Reports, or for filing inaccurate Reports. However, because FinCEN is invoking its authority under 31 U.S.C. § 5318(g), penalties for Report violations presumably will track the civil and criminal penalty regime for this section – i.e., they will be the same penalties as for SAR violations. Current civil penalties under Section 5318(g) (as adjusted for inflation and effective as of January 25, 2024) are $1,394 for each “negligent” violation and up to $278,937 for each “willful” violation; criminal penalties include up to five years of imprisonment and a criminal fine of up to $250,000.

The Report: When (and Required Records)

A required Report would need to be filed within 30 days of the property’s transfer. The reporting person would need to keep a copy of the Report for five years, along with a form signed by the transferee or its representative certifying the Report is correct. The reporting person also would be required to keep a copy of any designation agreement by the parties.

As to access, the NPRM explains that the Reports and reports filed under the CTA “would be housed in different databases with differing access privileges. The proposed Reports would be stored electronically in the same database as traditional SAR and other BSA reports, in keeping with the nature, purposes, and use of those reports.” The so-called “SAR confidentiality rule” imposed by Section 5318(g), which prohibits a reporting person from disclosing to a report any person involved in the transaction, would not apply to the Reports.

Pending Questions and Requests for Comment

The NPRM contains 61 requests for comment. They include:

  • The benefits and drawbacks to the proposed cascading hierarchy of reporting persons.
  • What due diligence is “normally” conducted on the parties to a transfer and source of funds? Should the NPRM require additional information regarding the source of funds?
  • Generally, comments regarding the various proposed definitions.
  • Whether the NPRM implicates attorney-client privilege concerns.


The NPRM’s Section VII provides a regulatory analysis of the proposed rule. Specifically, the regulatory impact analysis (RIA) attempts to assess the costs and benefits the proposed rule will have on those considered as “reporting persons.” Consistent with other, recent Federal Register publications by FinCEN, this section is very long and detailed.

The RIA attempts to articulate the social costs which justify the concrete compliance costs to industry. The RIA asserts that money laundering through real estate creates price distortion and makes it difficult to decipher the information necessary to making optimal decisions from observable market behaviors. The price the property is sold at reflects not only the buyer’s private valuation of the property but also their willingness to pay for money laundering services. Further, purchasing property to launder money can exert additional upward pressure on home prices by creating additional demand in markets where the quantity of demand already exceeds local supply.

The RIA acknowledges the NPRM has requirements that either mirror or are consistent with current reporting and procedural requirements, such as the CTA or the Customer Due Diligence rule. Further, the RIA states the proposed rule will have a bigger effect on transferee trusts than transferee entities because purchases by transferee trusts have not been covered under the GTOs and transferee trusts, as defined, are not subject to the CTA’s BO reporting requirements.

FinCEN estimates the aggregate first-year costs of the proposed rule will be between $267.3 million and $476.2 million, and each subsequent year will cost between $245 million and $453.9 million. One cost affected parties will face is training personnel, as well as drafting and/or revising policies and procedures regarding reporting, complying, and documenting compliance. In total, FinCEN estimates an aggregate cost of $44.3 million for initial training and between $20.2 million and $27.3 million in training costs for each subsequent year.

Another cost the RIA details is the cost associated with reporting non-financed property transactions. While such costs will vary based on the specific facts and circumstances of the transfer (e.g., which party in the cascade is the reporting person), FinCEN’s estimate allots two hours per reportable transaction time cost to collect and review transferee and transaction-specific reportable information and related documents, and thirty minutes for reporting. FinCEN estimates the reporting costs to be between $158.2 million and $314.2 million.

The RIA also details the costs stemming from the proposed rule’s recordkeeping requirements on reporting persons and, in some instances, on members of a given reportable transaction’s cascade that are not reporting persons. The RIA estimates an aggregate recordkeeping cost between $56.3 million and $75.6 million for one year’s reportable transactions. For a party that is the reporting person as a result of a designation agreement, the proposed rule would impose additional recordkeeping costs related to the electronic dissemination, signing, and storage of the agreement. FinCEN estimates this aggregate annual cost to be between $9.5 million and $28.6 million.

Industry commentators of course will react to these estimates. If history is any guide, the feedback will be that these cost estimates are very optimistic and unrealistically low.

Peter D. Hardy, Richard J. Andreano, Jr., Kaley Schafer & Kelly Lin

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Revised Trigger Leads Bill Introduced in U.S. House of Representatives

As previously reported, in 2023 bills were introduced in the U.S. House of Representatives (H.R. 4198) and the U.S. Senate (S. 3502) to amend the Fair Credit Reporting Act (FCRA) to curtail the practice of trigger leads with mortgage loans. While the goals of the bills are the same, the language of the bills differ. Recently, another bill was introduced in the U.S. House of Representatives (H.R. 7297) that uses the same language as the Senate Bill. Both bills provide for the adoption of the Homebuyers Privacy Protection Act, which would amend the FCRA to add certain definitions and the following limitation:

(B) LIMITATION.—If a person requests a consumer report from a consumer reporting agency in connection with a credit transaction involving a residential mortgage loan, that agency may not, solely on the basis of that request, furnish that consumer report to another person unless that other person—

(i) has submitted documentation to that agency certifying that such other person has, pursuant to paragraph (1), the authorization of the consumer to whom the consumer report relates; or

(ii) (I) has originated the current residential mortgage loan of the consumer;

(II) is the servicer of the current residential mortgage loan of the consumer; or

(III) (aa) is an insured depository institution or insured credit union; and

(bb) holds a current account for the consumer to whom the consumer report relates.

Sponsors of the bills include both Democrats and Republicans.

Richard J. Andreano, Jr.

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FCC Issues Final Rule on Revocation of Consent for Robocalls and Robotexts

The Federal Communications Commission (FCC) has issued a final rule amending its regulations implementing the Telephone Consumer Protection Act (TCPA) to add new provisions addressing how consumers may revoke consent to receive autodialed or prerecorded voice calls or texts and the obligations of callers and texters to honor revocation of consent requests.

While the FCC generally asserts that these requirements are merely a codification of existing requirements, the new provisions could require significant operational changes. The new provision on revocation of consent confirmation messages is effective 30 days after publication of the final rule in the Federal Register. The new provisions on revocation of consent and the timeframe for honoring revocation of consent requests will be effective six months following publication in the Federal Register of a notice indicating that the Office of Management and Budget has completed any required review of the final rule.

Revocation of Consent. The final rule provides:

  • Consumers may revoke prior express consent, including prior express written consent, to receive robocalls and robotexts by using any reasonable method to clearly express a desire not to receive further calls or text messages from the caller or sender. Callers or senders of text message may not designate an exclusive means to request revocation of consent.
  • Any revocation request made using an automated, interactive voice or key press-activated opt-out mechanism on a robocall; using a response of “stop,” “quit,” “end,” “revoke,” “opt out,” “cancel,” or “unsubscribe” sent in reply to an incoming text message; or submitted at a website or telephone number provided by the caller to process opt-out requests constitute examples of a reasonable means to revoke consent. If a called party uses any such method to revoke consent, the consent is considered definitively revoked and the caller or sender may not send additional robocalls or robotexts.
  • If a reply to an incoming text uses words or phrases other than those listed above, the sender must treat the reply text as a valid revocation request if a reasonable person would understand those words to have conveyed a request to revoke consent.
  • If a text initiator uses a texting protocol that does not allow reply texts, the text initiator must (1) provide a clear and conspicuous disclosure in each text to the consumer that two-way texting is not available due to technical limitations of the texting protocol, and (2) clearly and conspicuously provide reasonable alternative ways for a consumer to revoke consent. (In its discussion of the final rule, the FCC uses a telephone number, website link, or instructions to text a different number to revoke consent as examples of “alternative ways.”)
  • When a consumer uses a method to revoke consent not listed in the regulation, such as a voicemail or email to any telephone number or email address intended to reach the caller, a rebuttable presumption is created that the consumer has revoked consent when the called party satisfies their obligation to produce evidence that such a request has been made, absent evidence to the contrary. When a consumer has demonstrated that they have made a revocation request and the caller disputes that the request has been made using a reasonable method, a totality of circumstances analysis will determine whether the caller can show that revocation request has not been made in reasonable manner.

In its discussion of the final rule, the FCC indicates that when consent is revoked in any reasonable manner, the revocation extends to both robocalls and robotexts regardless of the medium used to communicate the revocation. In other words, the FCC states that “consent is specific to the called party and not the method of communication used to revoke consent.” For example, if the consumer revokes consent using a reply text message, consent is deemed revoked not only for further robotexts but also for robocalls from the same caller.

Revocation of consent confirmation text messages. The final rule provides:

  • A one-time text message confirming a consumer’s request that no further text messages be sent does not violate the TCPA, provided the confirmation text only confirms the opt-out request and does not include any marketing or promotional information, and is the only additional message sent to the called party after receipt of the opt-out request.
  • If the confirmation text is sent within five minutes of receipt, it will be presumed to fall within the consumer’s prior express consent. If it takes longer, however, the sender will have to make as showing that the delay was reasonable.
  • If the text recipient has consented to several categories of text messages from the sender, the confirmation message can request clarification as to whether the revocation request was meant to cover all categories of messages from the sender. The sender must cease all further robocalls and robotexts for which consent is required absent an affirmative response from the consumer that they do wish to receive further communications from the sender.

Timeframe for honoring revocation of consent requests. The final rule provides:

  • A request to revoke prior express consent or prior express written consent made in any reasonable way must be honored within reasonable time not to exceed ten business days from receipt of such request.
  • Package delivery companies must offer package recipients the ability to opt out of future delivery notification calls and messages and honor an opt-out request within a reasonable time from the date of the request, not to exceed six business days.

NPRM for Wireless Providers’ Text Messages. In addition to the Order, the FCC is seeking comment on whether the TCPA applies to robocalls and robotexts from wireless providers to their own subscribers and, as a result, such providers must have consent to make prerecorded voice, artificial voice, or autodialed calls or texts to their subscribers.

Michael R. Guerrero & Daniel JT McKenna

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TCPA Unsolicited Robocall Ban Now Includes AI-Generated Voices

On February 8, the Federal Communications Commission (FCC) finalized its plan to ban robocalls that feature voices generated by artificial intelligence, aiming to stem the tide of AI-generated scams and misinformation campaigns.

The FCC’s declaratory ruling formalized its position that the Telephone Consumer Protection Act (TCPA)—specifically, the provision prohibiting the initiation of calls “using an artificial prerecorded voice to deliver a message without the prior express consent of the called party”—applies to the use of AI-generated voices. Hence, just as the TCPA requires businesses to obtain prior express written consent from consumers before robocalling them, businesses must now obtain consent for automated telemarketing calls using AI-generated voices. Businesses seeking to deploy AI in its marketing calls using automated dialing systems should therefore consider reviewing and, if necessary, updating applicable disclosures and consents to account for the FCC’s new ruling and limit potential liability under the TCPA.

Kelsey Fayer & J. Matthew Thornton

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FFIEC Issues Examination Principles Statement Regarding Valuation Bias

The Federal Financial Institutions Examination Council (FFIEC) recently issued a statement of principles related to valuation discrimination and bias for member entities to consider in their consumer compliance and safety and soundness examinations. The member entities of the FFIEC are the Comptroller of the Currency, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration and the FFIEC State Liaison Committee.

In the press release announcing the statement of principles, the FFIEC advises that:

“The statement of principles should not be interpreted as new guidance to supervised institutions nor an increased focus on supervised institutions’ appraisal practices. Instead, the statement of principles offers transparency into the examination process and supports risk-focused examination work.”

The introductory portion of the statement addresses the risks to consumers and financial institutions related to deficiencies in real estate valuations, including those due to valuation discrimination or bias. We have previously reported on the federal government’s focus on valuation or appraisal bias, which can be viewed here, here, here and here.

The introductory portion of the statement also identifies applicable statutes, regulations and guidance. Of particular interest, the introductory statement includes the following as an applicable law:

“In addition, section 5 of the Federal Trade Commission Act (FTC Act) prohibits unfair or deceptive acts or practices, and the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits covered persons (e.g., financial institutions) or service providers of covered persons from engaging in unfair, deceptive, or abusive acts or practices.” (Footnotes omitted.)

As previously reported, in March 2022 the CFPB issued a revised version of its UDAAP examination manual to provide that under the unfair prong of UDAAP it can target discriminatory conduct, even when the conduct may not be subject to any fair lending law. In September 2023 a federal district court vacated the changes to the examination manual, and the CFPB subsequently issued a revised version of the examination manual that removed the March 2022 changes. The CFPB appealed the ruling to the U.S. Court of Appeals for the Fifth Circuit, which stayed further proceedings pending a ruling by the U.S. Supreme Court in Community Financial Services Association of America Ltd. v. CFPB regarding the constitutionality of the CFPB’s funding structure. Any continued efforts of the federal government to assert that it can use the unfair prong of UDAAP to challenge alleged discriminatory activity not covered by existing federal fair lending or similar statutes likely will face further challenges in court.

With regard to the actual examination principles, there are two appendices to the statement of principles, one addressing consumer compliance examination principles and one addressing safety and soundness examination principles. The consumer compliance examination principles address the following elements:

  • Board and senior management oversight of the institution, including third-party risk management.
  • Consumer compliance program, including policies and procedures, training program, monitoring and/or audit, and consumer complaint process.

The safety and soundness principles address the following elements:

  • Consideration of consumer compliance examination findings.
  • Consideration of the materiality of residential real estate lending in relation to the institution’s overall lending activities, size, complexity, and risk profile.
  • Assessment of the institution’s policies, processes, staff organization and resources, control systems, and management information systems for residential real estate collateral valuations, as well as the institution’s ability to identify and resolve incidences of potential valuation discrimination or bias.
  • Evaluation of the institution’s practices for selecting, retaining, and overseeing independent, qualified, and competent individuals (and applicable valuation models) that have the ability to render unbiased and credible opinions of collateral value.
  • Evaluation of the institution’s oversight of valuation-related third-parties and their review functions, including the institution’s understanding of how these third parties identify, monitor, and manage the risks related to valuation discrimination or bias.
  • Assessment of the institution’s valuation review function for identifying potentially discriminatory or biased valuation results.
  • Assessment of the institution’s credit risk review function for residential real estate loan portfolios for appropriate consideration of potentially discriminatory or biased valuations.
  • Assessment of the institution’s training program intended to provide staff with the knowledge and skills to identify and resolve valuation discrimination or bias.

It appears that federal regulators will continue to focus on appraisal and valuation bias going forward.

Richard J. Andreano, Jr.

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ABA Issues White Paper on Agency Guidance and Sends Letters to Regulators Commenting on Recently Issued Guidance

The American Bankers Association (ABA) has issued a new white paper, “Effective Agency Guidance: Examining Bank Regulators’ Guidance Practices,” that is intended to help agencies issue guidance that complies with legal requirements while providing useful advice and information to regulated entities. The ABA also sent letters to the FDIC and CFPB in which the white paper serves as the foundation for comments on recently-issued guidance that the ABA believes would benefit from public input.

White paper. The white paper begins with a discussion of the legal requirements applicable to guidance, particularly those related to when agency action should be considered a legislative rule and be subject to the Administrative Procedure Act (APA) notice-and-comment process. It then discusses instances in which agencies have issued guidance consistent with those legal requirements and contrasts those instances with instances when the ABA believes the agencies deviated from those legal requirements. The white paper concludes with recommendations for making agency guidance more effective and compliant with legal requirements. While observing that the best way to make guidance effective would be to follow notice-and-comment procedures for all but ministerial documents, the ABA acknowledges that time or resource constraints can limit when it is feasible to put guidance through those procedures. Accordingly, the ABA describes other practices that can help agencies issue more effective guidance and ensure they are complying with their legal obligations.

To best achieve adherence to good guidance practices, the ABA recommends that the agencies adopt written procedures governing the development, issuance, and use of guidance documents and that, at a minimum, such procedures should:

  • Clearly define the term “guidance document” and identify the specific categories of guidance documents used by the agency.
  • Ensure that all guidance documents comply with all relevant statutes and regulations.
  • Require that all guidance documents identify or include: the term “guidance;” the date of issuance; a short title; a unique numerical identifier; the activity or entities to which the guidance applies; citations to applicable statutes or regulations; a statement indicating whether the guidance is intended to revise or replace previously issued guidance; a short summary of the subject matter covered in the guidance; and a clear and prominent statement declaring that the contents of the document do not have the force and effect of law and are not meant to bind the public in any way.
  • Establish and maintain on the agency’s website a single, searchable, indexed, publicly accessible database containing all guidance documents issued by the agency and identifying whether they are still in effect.
  • Publish all guidance in the Federal Register as required by law.
  • Establish a process for electronic submission of petitions for issuance, reconsideration, modification, or rescission of guidance documents, and for electronic submission of complaints that the agency is not following its guidance regulations or procedures or is improperly treating a guidance document as a binding requirement.
  • Establish a special process for the issuance of “significant” guidance documents, which shall include public notice of a draft of the proposed guidance and a reasonable opportunity to comment before issuance of a final document.
  • Submit all guidance documents to both Houses of Congress and the Government Accountability Office for review under the Congressional Review Act, as required by law.
  • Require a review of existing guidance documents for conformity to the procedures above and revise or rescind the guidance documents, as necessary.

Letters to agencies. The white paper was sent by the ABA to the CFPB, FDIC, Federal Reserve, and OCC, together with a letter in which the ABA called to the agencies’ attention the growing concern of its members regarding “the use of ‘guidance’ to advance regulatory policy agendas.” The letter also references five separate letters sent by the ABA to the FDIC and CFPB consisting of the following:

  • A letter to the FDIC regarding its Financial Institution Letter issued in August 2022 (FIL) and revised in June 2023 (Revised FIL) dealing with banks’ nonsufficient funds (NSF) fee practices. The ABA expresses its concern with the FDIC’s use of the FIL and Revised FIL to establish new regulatory expectations regarding NSF fees without following the APA’s notice-and-comment process.
  • A letter to the CFPB regarding its October 2023 advisory opinion interpreting Dodd-Frank Section 1034(c) to prohibit large banks and credit unions from requiring a consumer to pay a fee or charge to obtain account information. The ABA states that the opinion creates substantive legal obligations, which should have been issued through APA notice-and-comment rulemaking.
  • A letter to the CFPB regarding its February 2023 advisory opinion addressing the applicability of Section 8 of the Real Estate Settlement Procedures Act to operators of certain digital technology platforms that enable consumers to comparison shop for mortgages and other real estate settlement services. The ABA states that parts of the advisory opinion are inconsistent with RESPA and Regulation X and urges the CFPB to solicit additional public feedback to ensure that stakeholders have adequate opportunity to raise additional issues or questions about the opinion.
  • A letter to the CFPB regarding its September 2023 Circular addressing creditors’ responsibility to provide reasons for adverse action under Regulation B in connection with credit decisions using artificial intelligence or complex credit models. The ABA urges the CFPB to rescind the Circular and reissue it as proposed guidance on which it should solicit public comment.
  • A letter to the CFPB regarding the October 2023 Joint Statement issued by the CFPB and the Department of Justice regarding consideration of an applicant’s immigration status in credit decisions. The ABA urges the agencies to withdraw the Joint Statement and repropose it for public comment.

We have previously criticized the CFPB for its use of a wide variety of documents other than formal regulations to make new law. Indeed, last year I sent an open letter to Director Chopra about this practice and urged him to reinstitute the use of Official Staff Commentaries for the regulations as to which the Dodd-Frank Act transferred regulatory jurisdiction from the Federal Reserve Board to the CFPB. Official Staff Commentaries require the use of notice-and-comment procedures.

We completely support the ABA’s white paper and letters to the agencies. We suggest that the CFPB’s changes to its UDAAP Exam Manual defining “unfairness” to include discrimination is another example of rulemaking by the CFPB without following APA notice-and-comment procedures. Those changes triggered a lawsuit against the CFPB in which the federal district court vacated the changes. Although the CFPB has since updated its UDAAP Manual to remove the changes, it has appealed the district court’s decision to the Fifth Circuit.

Alan S. Kaplinsky

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HUD Announces FHA Loan Payment Supplement Loss Mitigation Program

The U.S. Department of Housing and Urban Development (HUD) recently announced a Payment Supplement loss mitigation program for Federal Housing Administration (FHA) insured Title 2 mortgage loans, the details of which are set forth in Mortgagee Letter 2024-02. Mortgage servicers may begin implementing the Payment Supplement on May 1, 2024, but must implement the solution for all eligible borrowers by January 1, 2025.

In the press release announcing the Payment Supplement, Federal Housing Commissioner Julia Gordon stated that “FHA developed this innovative tool because after interest rates rose the FHA Recovery Modification could no longer reliably provide payment reduction to borrowers facing a hardship.” The press release also provides that FHA is “extending its full suite of temporary loss mitigation options through April 30, 2025.” The options were scheduled to expire on October 30, 2024.

The Payment Supplement option combines a standalone Partial Claim to bring the mortgage loan current with a new Monthly Principal Reduction (MoPR) that will reduce the borrower’s monthly principal payment for a three-year period, without requiring a modification of the mortgage loan. Servicers may submit to HUD a claim for an incentive of $1,750 following the implementation of a Payment Supplement.

The servicer must first assess if the applicable target payment reduction can be achieved under other available loss mitigation options for FHA-insured loans. If not, then the servicer must review the borrower for a Payment Supplement. Servicers may not charge borrowers any additional fees or interest for the Payment Supplement. Additionally, servicers must waive all late charges and penalties, except that servicers are not required to waive late charges and penalties, if any, accumulated prior to March 1, 2020.

The servicer must ensure that the following eligibility requirements are met:

  • The mortgage is a fixed rate mortgage;
  • Sufficient Partial Claim funds are available to bring the mortgage current and to fund the MoPR as determined in the Payment Supplement Calculations that are set forth in the Mortgagee Letter;
  • The borrower meets the requirements for loss mitigation during bankruptcy proceedings, as applicable;
  • The principal portion of the borrower’s first monthly mortgage payment after the mortgage is brought current will be greater than or equal to the minimum MoPR; and
  • The borrower indicates they have the ability to make the borrower’s portion of the monthly mortgage payment.

Servicers will not be required to obtain income documentation to determine the borrower’s Payment Supplement. The minimum MoPR must be at least 5% of the monthly principal and interest payment, and no less than $20. The maximum MoPR is the lesser of a 25% principal and interest payment reduction for 36 months, or the principal portion of the monthly mortgage payment as of the date the Payment Supplement Period begins.

The funds for the Payment Supplement must be kept in a Payment Supplement Account that is a separate, non-interest bearing, insured custodial account and that is clearly marked as holding funds for the Payment Supplement. The funds must be kept separate from funds associated with the FHA-insured first mortgage, including escrow funds. While servicers are not prohibited from holding MoPR funds for multiple mortgages in a single account, servicers may not commingle funds in the Payment Supplement Account, even temporarily, with any funds held in accounts restricted by agreements with Ginnie Mae, escrow funds, or funds used for the mortgagee’s general operating purposes or any other purpose. The servicer and borrower have no discretion in the use and application of the funds in the Payment Supplement Account.

Servicers must first advance funds for all amounts needed to bring the mortgage current, and then must submit the claim for the Payment Supplement no later than 60 days after the date of execution of the Payment Supplement Documents by the borrower. The claim must include:

  • All amounts needed to bring the mortgage current before the start of the Payment Supplement Period; and
  • The total amount required for all estimated MoPR payments for the full Payment Supplement Period.

For each month of the Payment Supplement Period, the servicer must only disburse funds from the Payment Supplement Account to apply the MoPR to the principal portion of the monthly mortgage payment after the servicer has received and accepted, at a minimum, the borrower’s portion of the monthly mortgage payment. If the borrower pays an amount that is more than their portion of the monthly mortgage payment, the additional funds must not be comingled with the MoPR or funds held in the Payment Supplement Account. Additionally, the servicer must not recalculate the MoPR during the Payment Supplement Period.

The Payment Supplement is implemented with a non-interest bearing note payable to HUD, a subordinate mortgage and a Payment Supplement Agreement. The note and subordinate mortgage do not require repayment until the maturity of the first mortgage, the sale or transfer of the property, the payoff of the mortgage, or the termination of FHA insurance on the mortgage. The Payment Supplement is non-transferrable and not assignable to a new borrower.

Servicers must send the borrower specified written disclosures annually and between 60 and 90 days before the expiration of the Payment Supplement Period. Servicers may develop specific disclosure documents or may use or modify FHA’s model Annual Payment Supplement Disclosure and Final Payment Supplement Disclosure documents. Servicers also must issue Payment Supplement payoff statements upon request, and when the servicer receives a payoff request for the borrower’s first mortgage.

The Mortgagee Letter addresses several topics regarding the Payment Supplement, including:

  • Various calculations that servicers must perform with regard to the Payment Supplement, including when the first mortgage is subject to an interest rate buydown arrangement or is affected by the protections under the Servicemembers Civil Relief Act.
  • Documentation and document delivery requirements.
  • Additional requirements for the Payment Supplement Account.
  • Various requirements to report to HUD in connection with a loan subject to a Payment Supplement.
  • Servicer responsibilities if the borrower becomes delinquent during the Payment Supplement Period.
  • Early termination of the Payment Supplement.
  • Final accounting of the Payment Supplement.
  • The responsibility of servicers when the servicing for a loan subject to a Payment Supplement is transferred.

Richard J. Andreano, Jr.

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VA Addresses Assumption Fees

The U.S. Department of Veterans Affairs (VA) recently issued Circular 26-23-10, Change 1, Circular 26-24-5 and an Exhibit to address fees that may be imposed in connection with the assumption of a VA-guaranteed home loan.

The VA advises in the Circulars that the holder or servicer of a VA-guaranteed home loan with automatic authority may charge an assumption processing fee not to exceed $300. The assumption processing fee for parties without automatic authority is capped at $250. Both amounts are subject to any lower state maximum assumption fee.

Circular 26-24-5 provides for a variance to these amounts based on the location of the property. The assumption processing fee is intended to cover all costs of underwriting, processing and closing the assumption. (If the assumption is not approved and remains not approved after 60 calendar days, and the assumption fee was collected previously, the portion attributable to changing the loan records ($50) must be returned to the party who paid the fee.)

The following charges, if incident to the loan assumption, may be charged to the assumer (regardless of the assumer’s veteran status):

  • The assumption processing fee.
  • The VA funding fee (unless the assumer is exempt, or the transaction is the result of an unrestricted transfer, such as an assumption processed as the result of a divorce).
  • Credit report fee.
  • Recording fees and recording taxes incident to recordation.
  • Applicable taxes, hazard insurance, flood insurance and assessments.
  • Fee for the title examination (including title searches), title insurance, and endorsements, if any.
  • Fees approved in advance as local deviations.

Fees and charges not expressly listed may not be charged to or paid by the assumer of a VA-guaranteed home loan. It is permissible for the seller of the home to pay for real estate commission or brokerage fees.

As noted above, Circular 26-24-5 provides for variances to the $300/$250 assumption fee amount based on the location of the property. The variances, which are referred to as the Assumption Locality Variance, are set forth in the Exhibit to the Circular and are as follows:

  • Midwest, $386
  • South, $404
  • Northeast, $409
  • West, $463

The Exhibit identifies the states that are included in each geographic category.

Significantly, Circular 26-24-5 provides that the noted fees “may be charged as a local variance in addition to the [$300/$250 base assumption] fee . . . and other allowable fees.”

Richard J. Andreano, Jr.

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HUD Issues 2023 Update to Housing Equity Action Plan

The U.S. Department of Housing and Urban Development (HUD) recently issued a press release announcing a 2023 update to its Equity Action Plan. The Equity Action Plan is part of HUD’s efforts to implement President Biden’s Executive Order on “Advancing Racial Equity and Support for Underserved Communities Through the Federal Government.”

The Action Plan first sets forth various efforts undertaken and planned by HUD to address housing equity, and then identifies five strategies to advance the goal of housing equity in fiscal year 2024 (the federal government’s fiscal year is October 1 to September 30). While the Action Plan mostly focuses on housing-related matters, it also reflects the continued focus of the federal government on appraisal bias in residential mortgage lending, and the continued approach of the federal government to intertwine Limited English Proficiency (LEP) with fair lending and fair housing concepts.

Appraisal Bias

In addressing efforts already undertaken by HUD the Action Plan provides:

“The Office of Single Family Housing is working to empower consumers to take action against appraisal bias by creating a process to allow prospective borrowers applying for FHA-insured loans to request a Reconsideration of Value (ROV) on a property if the initial valuation is lower because of suspected illegal discrimination; increased transparency and leveraged federal data to inform policy and improve enforcement against appraisal bias and discrimination by providing the public with access to the data and trends found in appraisal reports.”

We previously reported on efforts by HUD and by the CFPB, along with other federal agencies, to develop ROV guidance.

Additionally, the Action Plan provides that:

“HUD has also partnered with the National Association of Real Estate Brokers (NAREB), an organization that aims to utilize economic, political, legal, and social leverage to remediate disparate and discriminatory housing and property ownership policies and practices prevailing in the United States, to tackle appraisal bias and discrimination in the housing market that will focus on increasing education, outreach, and efforts to combat racial appraisal bias in home property valuation.”

Of the five strategies in the Action Plan, the second strategy is “[a]dvance sustainable homeownership and wealth generation by reducing appraisal bias and expanding access to homeownership.” The collaborating federal agencies with regard to this strategy are the U.S. Department of Transportation, Environmental Protection Agency, U.S. Department of Commerce, General Services Administration, U.S. Department of Agriculture, U.S. Department of Energy, and U.S. Department of Treasury. To help address appraisal bias the Action Plan notes that the Federal Housing Administration (FHA) is now contributing its appraisal data to the Federal Housing Finance Agency’s (FHFA’s) Federal Shared Appraisal Database, which is the nation’s first publicly available datasets of aggregate statistics on appraisal records. The FHFA’s appraisal data also includes information from Fannie Mae and Freddie Mac. We have previously reported on FHFA’s assessment of such data as reflecting appraisal bias here and here.

The Action Plan also provides that “[t]hrough HUD’s new partnership with [NAREB, it] will work to increase education and outreach, and take a bold step toward remedying appraisal discrimination, closing the wealth gap, and advancing racial equity.” Additionally, the Action plan notes that HUD and the FHFA have initiated a working group to increase coordination and develop more consistent standards for the ROV processes of FHA, Fannie Mae, and Freddie Mac lenders.


In connection with the second strategy, the Action Plan identifies various barriers preventing families from becoming homeowners, and includes as one of the barriers a lack of understanding and information about the home-buying process, especially for families for whom English is a second language. Additionally, the third strategy identified in the Action Plan is “[r]educe barriers and enhance support for protected classes of people by enforcing fair housing regulations, advancing housing justice, and improving rental assistance.” The whole-of government equity objective for this strategy is “[p]rotect the civil and constitutional rights of all persons including the right to vote, language access, and prohibitions on discrimination on the basis of race, sex, disability, etc.” The collaborating agencies for this strategy are the U.S. Department of Justice, CFPB, and U.S. Department of Health and Human Services. The Action Plan does not identify any planned actions by HUD regarding LEP in connection with housing equity.

Richard J. Andreano, Jr.

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Third Circuit Rules Pennsylvania Consumer Discount Company Act Does Not Regulate Collection of Charged-Off Debts

On February 7, 2024, the U.S. Court of Appeals for the Third Circuit affirmed the district court’s Order granting a motion for judgment on the pleadings and holding that a charged-off loan made by a lender licensed under the Consumer Discount Company Act (CDCA) that is subsequently sold to a third-party debt collector is no longer subject to the CDCA and collecting on the debt without holding a CDCA license is not in and of itself a violation of the Fair Debt Collection Practices Act (FDCPA). Section 14I of the CDCA states:

“I. A licensee may sell contracts to and buy contracts from another licensee upon giving prior written notification to the Secretary of Banking. The written notification shall state the name and address of the licensee to whom or from whom the contracts are being sold or purchased, the type of loan and number of contracts in the transaction and their aggregate principal balances. A licensee may not sell contracts to a person or corporation not holding a license under this act without the prior written approval of the Secretary of Banking.”

After the debtor defaulted on the loan, the loan was charged-off by the lender. The charged-off loan was then sold by the lender, re-sold, and finally assigned to a third entity to collect the debt. None of the sales were approved by the Pennsylvania Department of Banking and Securities (the state agency charged with enforcement of the CDCA); nor were the purchasers the types of businesses required to be licensed under the CDCA. The charged-off debt did not include additional charges, such as interest or late fees, only the original loan balance.

The debtor alleged that the filing of a proof of claim against his bankruptcy estate and attempting to collect the outstanding balance on the charged-off loan constituted a false, deceptive, or misleading representation in connection with the collection of a debt and/or the use of an unfair or unconscionable means to collect or attempt to collect a debt in violation the FDCPA because the CDCA prohibits a licensee from selling loans to an unlicensed person or entity.

Agreeing with the district court, the Third Circuit concluded that an attempt to collect charged-off debt is not an activity regulated by the CDCA because “[t]he CDCA is a loan statute, not a debt collection statute,” and “entities in the business of purchasing and collecting charged-off consumer debt are not subject to the CDCA’s regulatory scheme.” The decision is based in part on an amicus curiae letter from the Pennsylvania Department of Banking and Securities, which confirmed the CDCA does not apply to an unlicensed entity that purchases or attempts to collect on charged-off consumer loan accounts of debtors in bankruptcy.

The Third Circuit further explained that selling charged-off debt is not the same as selling the defaulted loan contract (which the borrower can cure), because the charged-off debt has been deemed uncollectable and is no longer performing as a loan. As a result, the Third Circuit concluded that the charged-off debt did not fall under the CDCA’s scheme and the district court had properly dismissed the debtor’s complaint.

This opinion is important to debt buyers who are purchasing charged-off debt. The last sentence of Section 14I of the CDCA, if read literally, seems to require the approval of the Pennsylvania Secretary of Banking and Securities before a loan originated under the CDCA may be transferred to an entity not licensed under the CDCA, however, the Third Circuit makes it clear that such approval need not be sought nor obtained if the loan is charged-off.

Kimberly Carabotta

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Carrots and Sticks – FTC Presses Parties Under Investigation to Accept Tolling Agreements

On February 20, 2024, Director Samuel Levine of the Federal Trade Commission’s Bureau of Consumer Protection (Bureau) issued a statement promoting the use and acceptance of tolling agreements. Tolling agreements pause the running of statutes of limitations, permitting enforcement agencies such as the Federal Trade Commission (FTC) to file an enforcement action against a party after the deadline otherwise established by the applicable statute.

Director Levine explains that tolling agreements now are needed more frequently. In the past, the FTC was able to seek monetary penalties under Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), which does not have a statute of limitation; however, this approach was barred under the Supreme Court’s ruling in AMG Capital Mgmt., LLC v. FTC, 141 S. Ct. 1341 (2021). Now, the FTC often pursues monetary penalties under 15 U.S.C. § 57b, which has a three-year statute of limitations.

Director Levine posits that tolling agreements improve the FTC’s ability to redress consumer injuries, and provide benefits to parties under investigation. He “strongly encourages” parties to sign tolling agreements when FTC staff requests them:

When parties sign a tolling agreement, they get the time needed to collect and produce information relevant to the investigation, draft written submissions, and engage in dialogue with the Commission. And Commission staff can provide this additional time without impairing the Commission’s potential claims or relief. This increases the likelihood of achieving a pre-litigation settlement or closing the investigation in appropriate cases.

On the other hand, Director Levine cautions about the negative consequences of refusing a tolling agreement:

In situations where parties decline, Bureau management and staff will take this into account when presented with extension requests, including to respond to civil investigative demands, and meeting requests. Furthermore, in cases where the Bureau is recommending that the Commission authorize the filing of a complaint, Commissioners may decline to take meetings with parties if such meetings would impair the agency’s ability to protect the public. In such cases, the Bureau will instead recommend that the Commission authorize the filing of a complaint in order to protect the interests of harmed consumers.

Particularly in light of these not-so-veiled warnings, parties subject to FTC investigation should carefully consider, and obtain the advice of counsel as to, the pros and cons of accepting or rejecting a request to sign a tolling agreement.

Thomas Burke & Elliot Johnson

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Looking Ahead

What Do The CFPB’s Proposed Rules On Overdraft And NSF Fees Mean For You?

A Ballard Spahr Webinar | March 5, 2024, 12:00 PM – 1:00 PM ET

Speakers: Alan S. KaplinskyJohn L. Culhane, Jr., & Kristen Larson

RESPRO 31 | One-Stop

March 7-8, 2024 | The Houstonian, Houston, TX

Compliance is Key

March 8, 2024 – 9:15 AM CT

Speaker: Richard J. Andreano, Jr.

MBA Legal Issues and Regulatory Compliance Conference

May 5-8, 2024 | Manchester Grand Hyatt, San Diego, CA

APPLIED COMPLIANCE TRACK: Loan Originator Compensation

May 6, 2024 – 2:30 PM PT

Speaker: Richard J. Andreano, Jr.

KEY UPDATES TRACK: Changes to State Reporting Requirements and State Licensing

May 6, 2024 – 4:00 PM PT

Speaker: John D. Socknat

EMERGING ISSUES TRACK: Labor Law – Best Practices for Compensation and Recruiting in a Changing Landscape

May 7, 2024 – 1:00 PM PT

Speaker: Meredith S. Dante

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