Mortgage Assignee Not a 'Creditor' for Purposes of TILA Obligations Existing over the Life of a Loan … at Least for Now

Under the Truth in Lending Act (TILA), the assignee of a mortgage note is not considered a "creditor" and is therefore not bound by TILA requirements imposed solely on creditors. One federal appellate court, however, has recently expressed concern that mortgage note assignees being excluded from TILA's "creditor" definition makes little sense in connection with TILA obligations that exist throughout the life of the loan. The court invited Congress to address the issue.

In the recent case, the plaintiff borrowers alleged, among other things, that the assignee of their mortgage notes violated Section 1666d of TILA by charging unauthorized fees and expenses to their accounts exceeding what is permitted under state law. This allegedly resulted in credit balances that the assignee failed to refund as required by the statute. The district court rejected that claim, reasoning that, because the borrowers' mortgage documents did not name the assignee as the entity to whom the debt was initially payable, the assignee was not a "creditor" under TILA and was thus not subject to liability under Section 1666d.

The Second Circuit agreed. The court acknowledged that, under TILA, "[w]henever a credit balance in excess of $1 is created in connection with a consumer credit transaction ... the creditor shall ... refund any part of the amount of the remaining credit balance." The court observed, however, that TILA "imposes general liability only on creditors and greatly circumscribes the liability of assignees."

The court further observed that TILA defines a "creditor" to include only an entity that both "(1) regularly extends … consumer credit … for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness" (emphasis added). The court explained that "[t]his definition is restrictive and precise, referring only to a person who satisfies both requirements of the provision." The court also noted that the Federal Reserve Board's Official Staff Commentary to Regulation Z, which mirrors the second prong of TILA's "creditor" definition, provides that "[i]f an obligation is initially payable to one person, that person is the creditor even if the obligation by its terms is simultaneously assigned to another person."

The borrowers contended that the assignee should be held liable as a creditor because the assignments occurred before the first payment was due on the loan and that, consequently, the "initial payment" would have been made to the assignee. But the court stated that the assignment's timing "is irrelevant under the Federal Reserve Board's Commentary to Regulation Z," because otherwise "the Commentary's guidance that simultaneous assignments do not alter the identity of the 'creditor' under TILA would make no sense; the assignee of a simultaneous assignment will presumably always be the first 'person' to whom an initial loan payment is made."

The court also pointed out that "TILA does not define 'creditor' as the person to whom the first loan payment is made; rather, it asks to whom the loan is 'initially payable on the face of the evidence of indebtedness.'" Accordingly, the court concluded that, because an assignee of a mortgage note is not the party to whom the loan is initially payable, an assignee is not a "creditor" under TILA, regardless of when the assignment takes place.

Despite that conclusion, the court recognized that the borrowers had "identified an apparent oversight in the statute." The court agreed with the borrowers that "restricting the application of section 1666d to the initial lender does not make much sense," since "[u]nlike most of TILA's provisions, which require creditors to make certain disclosures to debtors at the time of a loan's execution … section 1666d imposes obligations on creditors throughout the life of the loan." The court added that it could "think of no reason why Congress would require a credit balance in a consumer's account be refunded only if the balance was maintained by the original creditor and not a subsequent assignee."

Looking to the legislative history of TILA, the court found that "this gap may be an unintended consequence of congressional reform to TILA," citing the 1980 amendment to TILA aimed at limiting assignees' exposure to liability and simplifying the definition of "creditor" to eliminate confusion. The court stated further: "[W]hen Congress amended TILA, its primary concern was limiting assignee liability for an initial creditor's violations of TILA's disclosure requirements[.]" But because Congress amended "the definition of 'creditor' to exclude assignees without also creating an explicit carveout for a consumer's ongoing right to be refunded a credit balance, consumers cannot rely on TILA as a remedy to force an assignee to refund a credit balance, as is the case here."

In defending its conclusion, the court declared that it could not "rewrite the text of the statute." The court nevertheless opined that "[w]e may think it unwise to allow an assignee to escape TILA liability when it overcharges the debtor and collects unauthorized fees, where the original creditor would otherwise be required to refund the debtor promptly." In addition, the court stated: "We note this discrepancy . . . for the benefit of Congress and the Federal Reserve."

Lenders should be aware that this recent decision could prompt Congress to amend TILA to bring mortgage assignees within the definition of "creditor" regarding TILA obligations—like those under Section 1666d—that exist over the life of the loan. For the time being, however, such assignees are considered to not be "creditors" under TILA, which means they are not obligated under such provisions.

- Joel E. Tasca 


 

FHA Extends Recertification Deadline for Title I and Title II Mortgagees with Fiscal Year End of December 31, 2013

The Federal Housing Administration (FHA) recently issued Mortgagee Letter 2013-42, which extends the annual recertification filing deadline for Title I and Title II lenders and mortgagees that have a fiscal year end of December 31, 2013. The temporary extension is necessary because the Lender Electronic Assessment Portal (LEAP) (which mortgagees must use going forward to submit the annual certification, financial reports, and recertification fees) will not be deployed until after March 31, 2014.

Accordingly, the filing deadline is extended until 30 days after deployment of the LEAP recertification functionality. While that deployment date is not yet clear, the mortgagee letter states that lenders and mortgagees subject to the extension should be prepared to complete the recertification process, including the submission of financial information and fees, no later than May 31, 2014.

- Reid F. Herlihy


FTC Emphasizes 'Aggressive Enforcement' and 'Vigorous Education' on Military Consumer Protection Issues

Charles A. Harwood, Deputy Director of the Bureau of Consumer Protection of the Federal Trade Commission, recently testified before a U.S. Senate committee about military consumer protection issues. Deputy Director Harwood's remarks, titled "Soldiers as Consumers: Predatory and Unfair Business Practices Harming the Military Community," focused on the FTC's efforts to combat practices that affect servicemembers and their families, touching on recent enforcement activities and educational initiatives.

Deputy Director Harwood highlighted a recent case in which the FTC alleged that Mortgage Investors Corporation, which it identifies as "one of the nation's largest refinancers of veterans' home loans," had made misleading claims directed at current and former servicemembers. He identified the case, United States v. Mortgage Investor Corp. of Ohio, Inc., as "the first action to enforce the Mortgage Acts and Practices – Advertising Rule (MAP Rule)," which has been recodified by the CFPB as Regulation N. The case, which also included allegations that Mortgage Investors Corporation violated the Do Not Call provisions of the FTC's Telemarketing Sales Rule, was settled with the defendant agreeing to pay a $7.5 million civil penalty.

Deputy Director Harwood explained that enforcement actions like the Mortgage Investors case often flow from the FTC's "active monitoring of the marketplace." For example, the FTC uses its Consumer Sentinel Complaint Network and its military-specific subset, Military Sentinel, to track and analyze consumer protection complaints. He said that the top complaint categories for military consumers in 2012 were debt collection; impostor scams; fraud involving offers of prizes, sweepstakes, or gifts; unlawful banking or lending practices; and scams that offer mortgage foreclosure relief or debt management services.

Although Deputy Director Harwood suggested that the complaint trends among military consumers "largely mirror those of the general population," he noted that "mortgage foreclosure relief and debt management services" are exceptions to that general rule. For 2012, they were the sixth-most common complaints for military members, but the 15th-most common for the population as a whole.

Deputy Director Harwood emphasized that the FTC continues to expand its relationships with other agencies and organizations, including the Department of Defense, Department of Veterans Affairs, and the CFPB. The FTC and these organizations will continue to work together to take and review complaints, initiate enforcement actions, and organize initiatives to educate servicemembers of their rights.

Deputy Director Harwood's remarks suggest that the FTC, CFPB, and other agencies will continue a trend of increased scrutiny of issues affecting servicemembers and their families. Industries under FTC and CFPB jurisdiction, particularly those the FTC has identified as the source of significant numbers of complaints, should carefully evaluate their policies relating to servicemembers. Also testifying before the Senate committee were Holly Petraeus, CFPB Assistant Director with the Office of Servicemember Affairs, and representatives from the New York Attorney General's office.

On December 12, 2013, from 12 p.m. to 1 p.m. ET, Ballard Spahr lawyers will conduct a webinar, "Understanding the CFPB's Defense Strategy on Military Lending." Our webinar presenters will discuss recent developments pertaining to the MLA and the Servicemembers Civil Relief Act and the effects of these laws on the financial services industry. More information and a link to register are available here.

Anthony C. Kaye and Steven D. Burt


OCC Announces Standards for Third-Party Consultants

Ballard Spahr to present webinar on January 15, 2014

The Office of the Comptroller of the Currency (OCC) recently issued guidance on what it looks for when requiring national banks and federal thrifts in enforcement orders to engage third-party consultants (3PCs). Bulletin 2013-33 summarizes how OCC will review consultants and monitor their work for federally chartered depository institutions and could very well have a significant impact on a multibillion-dollar industry that has recently come under fire on Capitol Hill.

On January 15, 2014, from 12 p.m.to 1 p.m. ET, Ballard Spahr will conduct a webinar regarding use of third-party consultants by depository institutions. The registration form is now available.

Typically, OCC has required banks to retain independent consultants to assess the banks' compliance with legal requirements in cases involving significant fraud, harm to consumers, and material violations of law, especially violations of the Bank Secrecy Act. In addition, OCC often requires the use of 3PCs for their expertise in addressing operational and management deficiencies. The new guidance addresses concerns about adequate due diligence by a bank in selecting 3PCs and the importance of their maintaining strict independence from bank management.

These new standards follow closely on investigative work by New York's increasingly aggressive Department of Financial Services (DFS) into whether consultants were complicit in helping Standard Chartered evade important regulatory requirements. In a speech earlier this year, DFS Superintendent Benjamin Lawsky observed, "The independence and integrity of monitors and independent consultants is . . . of vital concern to DFS. These consultants are installed at banks and other companies usually after an institution has committed serious regulatory violations or broken the law. The intent is that monitors assist companies in improving controls and ensuring that violations do not reoccur. . . . If the monitors or consultants are simply puppets of the big banks that pay their fees―rather than independent voices―then their work-product can hardly be deemed reliable."

OCC's new guidance echoes these views. "Properly used, independent consultants can help further important supervisory objectives, particularly in the context of enforcement actions," said Comptroller of the Currency Thomas J. Curry. "However, while consultants can provide knowledge, expertise, and additional resources, we must take care to ensure they maintain independence and are subject to appropriate oversight."

Overall, the Bulletin addresses three subjects: the factors used by OCC in determining whether to require use of a 3PC, OCC's review of the proposed 3PC, and OCC's oversight of the work of the 3PC. Click this link for a more detailed description.

- Keith R. Fisher


OCC Adds Substantial New Risk Management Burdens for Third-Party Relationships

The Office of the Comptroller of the Currency (OCC) recently issued a new Bulletin 2013-29 containing substantially more onerous risk management guidance for third-party business relationships (3PRs) of national banks and federal savings associations. Predicated on concerns about the growing volume, diversity, and complexity of both domestic and foreign 3PRs and what OCC identifies as new or increased risks―operational, compliance, reputation, strategic, and credit―attending such relationships, the Bulletin updates prior OCC guidance on 3PRs.

Other agencies, such as the FDIC, have previously issued guidance on risk management for 3PRs and identified heightened concerns regarding what they view as higher-risk activities. (Our recent legal alert discussed the FDIC's new supervisory approach to payment processing relationships―direct, or indirect through third parties (3Ps)―with merchants engaged in higher-risk activities.) 

The Bulletin develops a theme intoned by Comptroller Thomas J. Curry in a September 2013 speech in which he announced a program of "heightened expectations" for large banks, such as "strong" internal controls and audit functions ("satisfactory" ratings will no longer be acceptable) and "significant engagement" by directors, including the knowledge and focus to present a "credible challenge" to management.

OCC intends to issue regulations formalizing its "heightened expectations" program. The Bulletin moves in that direction by stressing the integration of 3PR risk management into an institution's strategic goals and risk appetite, all of which should be embodied in a plan and board-approved policies for selection, assessment (including due diligence), and monitoring of vendors, consultants, and others with whom the bank does business. For 3PRs involving "critical activities" (e.g., payments, clearing, settlements, custody) or significant shared services (e.g., IT), that could pose material risks to the bank, the Bulletin indicates that OCC examiners will expect to find comprehensive and rigorous oversight by the bank and its senior management.

The Bulletin contains a fairly detailed discussion of a national bank's responsibilities in the life cycle of 3PRs:

  • Planning and selection
  • Due diligence
  • Contract negotiation and terms (especially important with foreign 3PRs that operate under different legal systems and cultures and are difficult to monitor)
  • Ongoing monitoring
  • Contingency plans for termination of the 3PR
  • Oversight and accountability
  • Documentation and reporting
  • Periodic independent reviews of the 3PR risk management process

While much of the Bulletin is sensible enough in the abstract, the additional compliance burden will be substantial and costly, particularly for community banks, which often must outsource necessary functions that they cannot realistically perform in-house. Although Comptroller Curry's "heightened expectations" as described in his September speech were explicitly directed only at large banks, the Bulletin conspicuously notes its own applicability to community banks. Unfortunately, the capacity of private sector financial institutions to shoulder a cumulative and ever-increasing compliance burden is not unlimited.

The actions that the Bulletin requires national banks to take with regard to 3PRs include the following:

  • An assessment of its financial condition, "growth, earnings, pending litigation, unfunded liabilities," etc., as "comprehensive as if [the bank were] extending credit"
  • Ensuring that it "periodically conducts thorough background checks on its senior management"
  • Evaluating the 3P's legal and regulatory compliance program, including whether it has "the expertise, processes, and controls to enable the bank to remain compliant with domestic and international laws and regulations"
  • Ongoing monitoring that is tantamount to an ongoing due diligence process

We are unconvinced that many 3Ps involved in 3PRs, which largely comprise unregulated, nonfinancial businesses, will find the level of intrusiveness contemplated by the Bulletin acceptable. This is particularly true for those 3Ps (like some cloud computing businesses) whose market share could result in their bank customers, of whatever size, having insufficient leverage to negotiate for what the Bulletin contemplates. The OCC's expectation that a 3P that is not itself a regulated entity would, by virtue of doing business with a national bank or federal thrift, become (or contractually consent to become) "subject to OCC examination oversight, including access to all work papers, drafts, and other materials" is, in our view, a disincentive for 3Ps to do business with national banks and federal thrifts.

Thus, the natural consequence (perhaps unintended) of the Bulletin will likely be a reduction in the number of 3Ps willing to do business with federally chartered depository institutions or increased costs to such institutions for 3P goods and services. Unless the Federal Reserve and the FDIC promulgate similarly burdensome guidance, the Bulletin will result in a competitive advantage for state-chartered institutions.

Keith R. Fisher


Privacy and Cybersecurity Bank Audits

Are Your Controls Adequate To Work with a Large Bank?

Federal regulators are concerned about potentially lax cybersecurity by mortgage originators and other entities that present consumer accounts to large banks. Regulatory pressure has led large banks in recent years to conduct audits on most vendors and business partners that hold nonpublic personal information on their behalf. The banks are looking for substantive security controls, information security policies that have been implemented, and a risk-aware corporate culture. It is not enough to simply have an information security policy in place because it may not necessarily be fully implemented.

Ballard Spahr attorneys have spent considerable time with financial institutions of all sizes developing (or fine-tuning) their information security programs. Please find attached our framework for cybersecurity legal services to help clients begin to think about how they can meaningfully evaluate cybersecurity within their enterprise. 

The goal of our cybersecurity reviews is to make compliance routine, giving IT and security teams more time for creative security discussions and threat education. We cannot guarantee that hardened practices will repel every attack, but we can make the hacker economic model (which seeks rich data in an easy attack vector) much more difficult. And greater security, with appropriately documented policies, will make those annual audits a far less nerve-racking experience.


 

CFPB Monitor Named to the ABA's Top 100 Blog List

For the second year in a row, Ballard Spahr's CFPB Monitor blog has made the American Bar Association's Blawg 100 list, the ABA's annual list of the best blogs about lawyers and the law. We are honored to have once again received so many recommendations from our readers and thank you for helping CFPB Monitor make the 2013 list.

Like last year, CFPB Monitor is the only blog focused on the CFPB in the ABA's top 100. In describing CFPB Monitor, the ABA said that our blog assesses "whether the bureau is right on the law" and that we "often find fault with the bureau's moves and pull no punches." We hope our readers agree that our blog provides an insightful and direct perspective on CFPB developments.

The editors of the ABA Journal have asked readers to weigh in and vote for their favorites in each of the Blawg 100′s 13 categories. We have been placed in the "niche" category with 14 other excellent blogs. If you are a fan of CFPB Monitor, we humbly ask that you cast your vote for us in the "niche" category by clicking here (you will be prompted to register before voting by creating a username and password).


Welcome to Jared Kelly

We are pleased to welcome Jared R. Kelly as the newest member of our Mortgage Banking Group. Jared is an associate in the firm's Washington, D.C., office and advises financial services industry clients on both state and federal law.

Jared's practice focuses on regulatory and compliance matters affecting banks, mortgage lenders, and other financial institutions and their boards. During law school, he worked for the American Association of Bank Directors, drafting policy statements and corporate governance materials.

Jared holds at J.D. from Georgetown University Law Center, where he was a Decrane Scholar, and a B.S. from Florida State University, graduating magna cum laude.


NMLS Issues Third Quarter 2013 Licensing Report

The NMLS reported 16,076 state-licensed mortgage companies registered in the NMLS for the quarter that ended September 30, 2013, a decrease of 2 percent from 16,397 compared to the third quarter of 2012. During the same period, the number of licenses held by those companies increased by 4.6 percent, from 33,129 to 34,663. The license counts include separate licenses required for DBAs (Doing Business As) and multiple licenses for different authorities required in certain states.

New York reported the greatest decline in company license applications, which was an annual percentage change of 12.6 percent. The state that experienced the greatest increase in applications was Rhode Island, which had an annual percentage change of 42.8 percent. The rates in California held steady over the previous 12 months—the Bureau of Real Estate saw an increase of 0.5 percent, and the Department of Business Oversight saw an increase of 3.2 percent in application filings.

The NMLS Third Quarter 2013 report shows that the number of Mortgage Loan Originators (MLO) who are state-licensed or state-registered through NMLS increased by 8.4 percent, from 115,826 to 125,572. The number of licenses held by those MLOs also increased by 27.8 percent, from 243,840 to 311,589.

In addition, the number of federally registered MLOs is 404,385 and the number of institutions is 10,747. 

The NMLS state-licensing report can be accessed here, and the federal registration report can be accessed here.

- Marc D. Patterson


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

 

 

 

 

 

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