New York Set To Adopt Uniform State Test and Transitional MLO Licensing Initiative 

The New York Department of Financial Services (DFS) has announced significant changes to its state mortgage loan originator (MLO) licensing process in an attempt to shorten and improve the approval process.

The changes include the creation of an MLO transitional licensing initiative. Under the new regime, MLOs working in another state or for a bank can now apply for an MLO license before being hired by a New York licensed entity. DFS will process the application and will send a letter to the applicant once it is satisfied that the applicant has met all of the requirements necessary to become an MLO other than affiliation with a New York licensed entity. The applicant may then take the letter to potential employers and get hired. Once the new employer is disclosed to DFS within 30 days of receipt of the letter, DFS will license the MLO.

In addition, DFS announced that New York will become the 42nd state to adopt the National SAFE Mortgage Loan Originator Test with the Uniform State Test (UST). The UST will replace the separate, state-specific test currently required for individuals applying for a New York MLO license. Effective September 2, 2014, passing the UST will satisfy the testing requirement for MLOs in New York, regardless of whether the individual took the UST before or after September 2.

Note that New York's MLO educational requirements will remain the same despite the adoption of the UST. Individuals applying for a license are required to complete three hours of state-specific pre-licensure education. Moreover, licensed MLOs must annually complete at least 11 hours of continuing education, including three hours of state-specific education.

Finally, DFS has proposed regulations to eliminate certain application requirements and to clarify other requirements. Among these changes are the requirements that Mortgage Broker and Mortgage Banker applicants submit a business plan with specific information and a compliance program summary for review. The revised regulations also set forth the process for determining licensing applications to be incomplete. Comments will be due 45 days from publication of the proposed regulations in the New York State Register.

We will continue to update you on these developments as additional information becomes available.

Marc D. Patterson


Virginia Supreme Court Allows Damages Claim for Violation of HUD Regulation Requiring Face-to-Face Meeting before Seeking Foreclosure

The Virginia Supreme Court recently expanded the grounds under which a private borrower can sue a lender for violations of HUD regulations. In Squire v. Virginia Housing Development Authority, a decision issued on April 17, 2014, the court held that a borrower can sue a lender for breach of contract if the lender fails to follow all HUD regulations incorporated into the deed of trust before commencing foreclosure.

The lender and substitute trustee in Squire initiated foreclosure before having, or making reasonable efforts to have, the face-to-face meeting with the borrower required by a section of the HUD regulations governing pre-foreclosure review. The court held that the lender’s failure to comply with this requirement constituted a breach of the deed of trust, which incorporated this requirement by reference. It also held that the borrower could sue the trustee for breach of fiduciary duty for conducting the foreclosure sale before holding the face-to-face meeting.

The court did so in part because the meeting requirement served to "reduce the incidence of foreclosure by providing an environment in which a mortgagee employee can often determine the cause of default, obtain financial information, establish a repayment schedule, and prevent foreclosure by influencing the payment habits of mortgagors.” Even so, the court would not order rescission of the foreclosure sale when the property sold far below appraised value because the plaintiff failed to allege that the sale price was so low that it shocked the conscience and failed to introduce any evidence of fraud.

Notably, three justices dissented from the holding, disagreeing with the majority that HUD regulations support either direct or private causes of action. According to the dissenters, Virginia is in the minority of states, such as Texas and West Virginia, that allow borrowers to use contract law to create private rights of action under HUD.

- John G. Kerkorian and Theodore R. Flo

Federal Court of Appeals Rejects ‘Show-Me-the-Note’ Defense to Foreclosure under Michigan Law

A federal appellate court recently confirmed that, in Michigan, a foreclosing party does not need to hold the mortgage note to have "standing" to foreclose.

In the recent case, an individual borrower faced with foreclosure filed suit against the foreclosing party. Among other relief, the borrower sought a declaratory judgment that the foreclosing party lacked standing to foreclose because it did not own the mortgage note. The district court dismissed the borrower's complaint, and the borrower appealed.

On appeal, the borrower first argued that the foreclosing party did not comply with Article 3 of the Uniform Commercial Code (UCC). Specifically, the borrower argued, Article 3 requires a person who makes a "presentment" of an instrument to exhibit the instrument and give reasonable identification upon demand. The appellate court rejected the borrower's argument, noting that several federal district courts have held that the UCC does not apply to mortgage foreclosures. More importantly, the court observed, an intermediate Michigan appellate court has held that a mortgage does not constitute a negotiable instrument—and is therefore not subject to the UCC—because it does not contain an unconditional promise or order to pay a sum certain. Instead, a mortgage merely secures payment of a negotiable instrument.

The borrower next argued that, independent of the UCC's requirements, Michigan law still requires a party to hold the mortgage note before it may foreclose. The appellate court rejected this argument as well. The court explained that Michigan's foreclosure-by-advertisement statute does not require that the underlying note be endorsed to the party instituting the foreclosure, or that the party be a holder or a holder-in-due-course of the note. Rather, the court reasoned, the statute only requires that the foreclosing party have "an interest in the indebtedness" secured by the mortgage. The Michigan Supreme Court, the court observed, has specifically held that mortgagees of record have "an interest in the indebtedness," thus entitling them to foreclose under state law.

This recent decision adds to the trend in non-judicial foreclosure jurisdictions, such as Michigan, that an entity need only hold the mortgage, and not necessarily the note, before it may properly foreclose.

Joel E. Tasca

Agencies Issue Statement on Increased Maximum Flood Insurance Coverage for Other Residential Buildings 

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Farm Credit Administration, the National Credit Union Administration, and the Federal Deposit Insurance Corporation (collectively, the Agencies), recently issued an announcement regarding the implementation of new flood insurance laws under the new federal flood insurance regulations. Specifically, the statement sets forth the Agencies' expectations for supervised institutions regarding the availability of increased flood insurance coverage under the National Flood Insurance Program (NFIP) for "Other Residential Buildings."

The announcement provides guidance to financial institutions on the following issues:

  • Under Section 100204 of the Biggert-Waters Flood Insurance Reform Act of 2012, the maximum limit of building coverage available for non-condominium residential buildings designed for use for five or more families has been increased from $250,000 per building to $500,000 per building. The NFIP classifies these types of buildings as Other Residential Buildings. The maximum contents coverage for all policies covering Other Residential Buildings will remain $100,000 per policy.
  • New coverage limits are available for new policies, policy renewals, or existing policies with change endorsements effective as of June 1, 2014.
  • If a financial institution or its servicer receives notification of the increased flood insurance limits available for an Other Residential Building securing a designated loan, the Agencies expect the financial institutions to take any steps necessary to determine whether the property will require increased flood insurance coverage.
  • Although a lender is not required by the agencies to perform an immediate full file search of its loan portfolio, for safety and soundness purposes a lender may want to review its loan portfolio to determine whether additional flood insurance is required for certain loans in light of the availability of increased flood insurance coverage for Other Residential Buildings.
  • If a lender or servicer determines that the building securing the designated loan is now covered by flood insurance in an amount less than required, it should take steps to ensure that the borrower obtains sufficient coverage.

While the Agencies did not mandate full portfolio reviews, they noted existing guidance in the Interagency Questions and Answers Regarding Flood Insurance may be necessary for safety and soundness purposes. It appears that financial institutions should give serious consideration to portfolio reviews.

Marc D. Patterson  

Update on HUD’s Notice Soliciting Comments on Proposed Housing Counseling Pilot, HAWK for New Homebuyers


HUD has issued a correction to a notice published in the Federal Register on May 15, 2014, soliciting public comment on a proposed four-year, two-phase housing counseling pilot, HAWK for New Homebuyers. On May 23, 2014, HUD stated that the previous notice contained the incorrect contact information for those seeking further information.

According to the latest notice, the correct information is: “Email specific program questions to and include ‘HAWK Notice Question’ in the subject line. You may also send inquiries to the attention of: Arlene Nunes, Office of Housing, Department of Housing and Urban Development, 451 7th Street SW., Room 9224, Washington, DC 20410; or call (202) 402–2532 (this is not a toll-free number). Persons with hearing or speech impairments may access this number via TTY by calling the toll-free Federal Relay Service at 800– 877–8339.”.

Shane Jasmine Young

California Attorney General Releases Privacy Policy Guidance for 'Do Not Track' Disclosures

California Attorney General Kamala Harris recently released guidance, Making Your Privacy Practice Public, to help companies comply with the California Online Privacy Protection Act's (CalOPPA) "Do Not Track" (DNT) disclosure requirements which took effect on January 1, 2014. CalOPPA requires online privacy policies to disclose whether the company tracks and collects personally identifiable information (PII) (which includes names, contact information, unique identifiers, and passively collected information such as device identifiers and geolocation data) about California residents' online activities over time and across third-party websites or services, including via mobile apps, and whether or not the company recognizes DNT mechanisms that have been designed to prevent such tracking.

If a company does engage in such online tracking, then the online privacy policy must either describe how the company responds to a DNT signal, or provide consumers with a clear and conspicuous link to a DNT mechanism to which the company will respond. The law does not prohibit online consumer tracking, but rather seeks to provide consumers with greater transparency through the additional disclosures.

The guidance expresses a preference for companies to utilize the first option to describe their DNT policies to consumers, as it promotes greater transparency than simply providing consumers with a link to a DNT mechanism. When describing if and how a website responds to DNT signals, the privacy policy should:

  • State whether consumers who use DNT mechanisms are treated differently than consumers who do not, and how the treatment is different (e.g., "Your experience may be degraded . . . ")
  • Disclose whether PII is collected when a DNT signal is received
  • Describe how that information is used if PII is collected when a DNT signal is present

In addition to describing a company's own DNT privacy policies, CalOPPA also requires companies to disclose whether third parties, such as advertising networks that track consumers over time and across websites, are present on the company’s website or service. The guidance poses useful questions to determine whether third-party trackers present on a company's website are authorized to be there and adhere to the company's DNT policy.

The Attorney General's Privacy Enforcement and Protection Unit will begin reviewing companies' privacy policies for compliance and work with companies to help them comply with the DNT disclosure requirements. Companies found to be in noncompliance will have 30 days to comply with CalOPPA before being subject to an enforcement action. Failure to comply with CalOPPA can result in civil penalties of up to $2,500 per violation.

Companies should remember that even if they are not physically present in California, CalOPPA applies if the company collects PII from California residents. In addition, although this alert focuses on the required DNT disclosures, the Attorney General’s guidance offers additional recommendations regarding online privacy policies.

- James N. Duchesne

Maryland Expedites Licensing Process for Registered MLOs

Maryland Governor Martin O’Malley recently signed legislation that will expedite mortgage loan originator (MLO) licensing for registered MLOs.  SB 1091 requires the Commissioner of Financial Regulation to waive the state criminal history records check for any applicant who was employed as a registered MLO within 45 days before the date of application for a Maryland license.

Maryland had originally considered the creation of a transitional MLO license regime. Although the new expedited license process allows registered MLOs to begin engaging in the business of loan origination in Maryland faster, it is more limited in scope than the transitional MLO license initially debated. As we have previously reported in the Mortgage Banking Update, Virginia, North Carolina, and Ohio are the only three states to have passed transitional licensing initiatives.

The law is effective October 1, 2014.

Louisiana to Require Residential Mortgage Servicers to Obtain a License


Governor Bobby Jindal recently signed HB 807/Act 260 into law. Similar to mortgage lenders, brokers, and originators, residential mortgage servicers are now subjected to the Louisiana SAFE Act and are required to obtain a mortgage servicer license. Under the law, "mortgage servicing" is defined as "collecting or remitting payment for another, or the right to collect or remit payments for another, or any of the following: principal, interest, tax, insurance, or other payment under a mortgage loan."  The new law becomes effective on June 30, 2014.

In addition, Governor Jindal signed SB 241/Act 293 into law. Effective June 30 2014, the law authorizes the Commissioner of the Office of Financial Institutions to collect and compile information and data from all licensees concerning the operation, function, and extent of all consumer loan activities. The information must be reported by the licensee by March 1 of each year through the NMLS. The law permits the Commissioner to collect, among other information for the preceding year:

  • The total number and dollar amount of consumer loans originated
  • The total number and dollar amount of consumer loans outstanding
  • The aggregate amount of fees earned, including interest, service charges, late fees, origination fees, documentation fees, and insufficient funds fees
  • The total number of consumer loans in default or collection status and the balance of those loans as of the reporting date

The total number of consumer loans reduced to judgment and the principal amount of these judgments

- Marc D. Patterson

Copyright © 2014 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

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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