CFPB Expands HMDA Reporting Requirements

The Consumer Financial Protection Bureau issued a proposed rule amending Regulation C to expand data reporting requirements for mortgage industry participants. The proposed rule is 573 pages, and our Mortgage Banking Group will analyze the proposal and work with clients on its impact. Comments are due on or before October 22, 2014.

Because of the absence of important loan and borrower data elements, Home Mortgage Disclosure Act (HMDA) data has long been recognized as providing for a less than robust assessment of mortgage lending activity. Dodd-Frank sought to address the issue by directing the CFPB to expand the HMDA reporting categories. Proposed new data elements include the credit score and age of the applicant, the property’s value (which provides for the determination of the loan to value ratio), the total points and fees, the term to maturity, and the duration of any loan.

The expansion of HMDA data to capture more borrower and transaction information—including sensitive information— presents serious privacy concerns. By combining HMDA data along with other publicly available data, it is possible that the identity of specific consumers can be determined from the Loan Application Registers of mortgage lenders that must be made available under HMDA. With the expansion of HMDA data to include credit score, age, and other elements, the privacy concern will be magnified. Addressing this concern in a press release announcing the proposal, the CFPB states that it is “looking at ways to improve how the public can securely use HMDA data to protect applicant and borrower privacy.” The industry and interested parties should insist on the CFPB making consumer privacy a paramount concern in the consideration of the proposed rule.

In announcing the proposal, the CFPB also states that it “views implementation of the Dodd-Frank Act changes to HMDA as an opportunity to assess other ways to improve upon the data collected, reduce unnecessary burden on financial institutions, and streamline and modernize the manner in which financial institutions collect and report HMDA data.”

CFPB Director Richard Cordray said, “It is critical that we shed more light on the mortgage market—the largest consumer financial market in the world.” He continued to say that HMDA “helps financial regulators and public officials keep a watchful eye on emerging trends and problem areas in the mortgage market.”

The CFPB claims the proposed rule aims to improve market information, data access, and the electronic reporting process; monitor access to credit; standardize the reporting threshold; ease reporting requirements for some small banks; and align reporting requirements with industry data standards. Our Mortgage Banking Group will assess these aspects of the proposal.


Merger Doctrine Does Not Prevent Deed of Trust Beneficiary From Extinguishing Junior Lien through Foreclosure, California Court Holds

The California Court of Appeal recently held that a foreclosure by the beneficiary under a first deed of trust extinguished a junior lien, even though the beneficiary acquired the property by way of a deed in lieu of foreclosure prior to the foreclosure. In reaching its conclusion, the court grappled with the concept of "merger" of lien and title.

The borrower in this case owned real property subject to a first deed of trust and a junior mechanic’s lien. Facing foreclosure on the first deed of trust, the borrower gave the trust deed beneficiary title to the property by way of a deed in lieu of foreclosure. The grantee/beneficiary then foreclosed, purchased the property at the foreclosure sale, and later sold it to a third party. The holder of the junior mechanic’s lien subsequently filed suit to foreclose on its lien.

The mechanic's lienholder argued that its lien was not eliminated by the foreclosure of the trust deed because when the trust deed beneficiary accepted the deed in lieu of foreclosure, the two interests (as beneficiary under the trust deed and as grantee under the deed in lieu) merged, destroying the senior lien. The trial court agreed, finding the mechanic’s lien had priority and was not extinguished by the foreclosure of the trust deed.

On appeal, the California Court of Appeal reversed. The appellate court explained that when a senior lienholder accepts a deed in lieu of foreclosure, it is presumed that the lienholder does not intend for the senior lien and title to merge. Without such merger, the senior lienholder retains the power to foreclose and eliminate the junior liens. Also significant to the court was that the deed in lieu at issue expressly provided that the interest of the grantee under the deed in lieu shall not merge with the interest of the lender under the loan documents. Consequently, the appellate court concluded that there was no merger, the foreclosure was proper, and the foreclosure eliminated the junior mechanic’s lien. Therefore, the third party purchaser took title to the property free from the mechanic’s lien.

Although the same result may occur by operation of law, this decision may prompt lenders to strongly consider including an express provision in deeds in lieu that the interest of the beneficiary under the deed of trust, and the interest of the grantee under the deed in lieu, shall not merge.

- Joel E. Tasca and Edward Chang


The State Regulatory Registry Proposes Pre-Licensure Education Expiration Policy

The State Regulatory Registry LLC, through NMLS, recently published a proposal to create a uniform time frame for the expiration of pre-licensure education (PE) for state licensed Mortgage Loan Originators (MLO). The comment submission deadline is August 22, 2014.

The move is needed because while the SAFE Act outlines the minimum requirements for pre-licensure education for MLOs, it does not offer any guidance regarding how timely the education must be relative to an individual's application for a license. In the absence of such guidance, the law is unclear and states handle the expiration of PE inconsistently. For example, in Arizona, PE credits expire two years after course completion, whereas in Maryland, PE credits permanently remain valid for the purposes of filing for a state license. The proposed rule indicates an effort by the State Regulatory Registry to implement a clear and uniform policy regarding the expiration of PE.

According to the NMLS Policy Committee, "individuals that fail to acquire a valid license or federal registration within three years from the date of completion that have not maintained an active license or federal registration are not necessarily keeping themselves current on state and federal mortgage and consumer protection laws and therefore should be required to ‘redo’ the initial course requirements."

Specifically, the proposed PE expiration policy would be:

"An individual who:

(1) Fails to acquire a valid license or federal registration within three years from the date of initial completion of any approved PE course; or

(2) Has obtained a license or federal registration but subsequently did not maintain an active license or federal registration for at least three years,

Must complete 20 hours of PE in order to be eligible for state licensure."

Further, the proposed rules would start a PE course expiration clock from the course completion date when the course is banked to the individual's record in NMLS. When the individual becomes PE compliant by completing at least 20 hours of NMLS approved education, the PE course expiration clock stops. When the clock reaches three years, the course expires and may not be counted toward PE compliance in the future. The proposed policy is also accompanied with four sample scenarios that examine how the rules are implemented in practice.

- Marc D. Patterson


New York AG, FTC Bring Major Action against Debt Collection Operation

The New York Attorney General and Federal Trade Commission (FTC) recently announced a joint debt collection enforcement action that had been filed in June in federal court in Buffalo, New York, against several corporations and their principals. The FTC and Attorney General sued multiple defendants in a 10-count complaint alleging, among other things, violations of Section 5 of the FTC Act, the Fair Debt Collection Practices Act (FDCPA), and Sections 349 and 601 of the New York Business Law and seeking compensatory damages, civil penalties, and injunctive relief. This filing is further evidence of the heightened scrutiny faced by debt collectors in New York at both the state and federal level.

More specifically, the complaint alleged that the defendants “operated as a common enterprise” through “an interrelated network of companies that have common officers, managers, business functions, employees, and boiler room locations, and that commingled funds.” The government agencies claimed that the defendants’ violations included:

  • Misrepresenting that consumers committed check fraud in incurring the debt
  • Threatening consumers with arrest, wage garnishment, and imprisonment if they did not make an immediate phone payment
  • Failing to furnish consumers with debt collection notices and other disclosures mandated by law that “would assist consumers in understanding and challenging the purported debts”
  • Assessing unlawful “processing fees” to consumers making payments by phone
  • Attempting to collect debts previously discharged in bankruptcy court
  • Contacting friends, family members, and employers about the consumers’ debt and advising the consumers had committed check fraud

The government also announced that the federal court had issued a temporary restraining order, which included a complete asset freeze and appointment of a receiver for the corporate defendants. The federal court also ordered both the individual and corporate defendants to provide an immediate accounting “within three days of service of this order,” as well as repatriate all foreign assets.

The announcement of this action comes in the aftermath of the New York Department of Financial Services (DFS) issuing revised proposed debt collection regulations. If the DFS proposed regulations are adopted, the regulator would have additional tools to pursue third-party debt collectors and debt buyers. The Attorney General’s latest enforcement action, in conjunction with the DFS’ proposal, illustrates that debt collectors and debt buyers will remain under intense regulatory scrutiny in New York for the foreseeable future.

- Justin Angelo


NY Department of Financial Services Issues Revised Proposed Debt Collection Rules

The New York Department of Financial Services (DFS) recently issued revised proposed debt collection regulations, which have important implications concerning charged-off and time-barred debt, for third-party debt collectors and debt buyers. The DFS issued its initial proposed regulations almost one year ago. The CFPB is working on its own debt collection rule, and we expect that certain provisions of the DFS’ proposed regulations could be adopted by the CFPB.

The DFS noted that the majority of the comments were “generally supportive” of its initial proposal, but that the industry warned that “the regulations would increase the cost of collecting valid debts.” The latest version revises numerous provisions of the initial proposed regulations, including:

  • Defining a “charge-off” as “the accounting action taken by an original creditor to remove a debt obligation from its financial statements by treating it as a loss or expense.” The initial regulations did not define this term. The DFS determined that defining charge-off was necessary given that certain disclosures are tied to the date of charge-off.
  • Eliminating the definition for “collection efforts.” In doing so, the DFS noted that this term is no longer used in the revised regulation.
  • Excluding certain collectors from the definition of “debt collector,” including persons involved in a collection action related to or during litigation. The litigation-related collector’s exemption was adopted at the urging of the Commercial Lawyers Conference of New York and clarifies “that the proposed rules are intended to target abusive and deceptive non-litigation consumer debt collection practices.”
  • Exempting the debt collector from providing required disclosures if the consumer satisfies the debt within five days of the initial communication.
  • Requiring the debt collector to maintain “reasonable procedures for determining the statute of limitations applicable to a debt it is collecting and whether a debt is expired.” The debt collector must also warn the consumer before accepting payment on a time-barred debt that filing a collection lawsuit on a time-barred debt is a violation of the Fair Debt Collection Practice Act (FDCPA).
  • Removing the requirement that the statute of limitations notice warn the consumer that a failure to pay a time-barred debt may adversely affect one’s credit history, credit score, and ability to obtain credit.
  • Requiring the debt collector to substantiate consumer disputes for “charged-off” debts. The initial proposal required the debt collector to only substantiate “defaulted debts” disputed by the consumer. Further, the collector now has 60 days to provide written substantiation.

The regulations will become effective 90 days after publication of notice of adoption in the state register. While there is first an additional 30-day comment period, we do not anticipate significant changes to the revised regulations. It is important that third-party debt collectors and debt buyers review their compliance processes regarding charged-off and time-barred debt, as these are clear areas of emphasis in the DFS regulations. The New York Attorney General has brought enforcement actions against debt buyers for filing collection lawsuits and obtaining default judgments against consumers on time-barred debts.

The new proposed regulations would bolster the ability of the Attorney General and DFS to bring similar enforcement actions in the future. Further, while the DFS proposal would exempt attorney litigation activity, courts have held that collection activity by attorneys (including litigation activity) is subject to the FDCPA, and debt collection attorneys continue to find themselves in the crosshairs of the CFPB.

- Justin Angelo


“Operation Mis-Modification” Targets Foreclosure Relief Companies

The CFPB continues to ramp up its enforcement actions and its collaboration with state attorney general offices as part of the new “Operation Mis-Modification.”

The CFPB, the FTC, and 15 states announced a series of lawsuits against what they characterize as “foreclosure relief scammers.” The CFPB filed three lawsuits against individuals and companies—all law firms or associated with law firms—seeking compensation for victims, civil fines, and injunctions. The FTC filed six lawsuits. And, in line with Director Richard Cordray’s previous statements that the CFPB was collaborating with state AG offices, the AGs announced their intent to file 32 lawsuits. It is uncertain whether any of the state AG lawsuits will rely upon Section 1042 of Dodd-Frank, which, as we have previously reported, allows a state AG to bring a civil action for violation of the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices (UDAAP).

The CFPB alleges that the defendants used deceptive marketing to persuade thousands of consumers to pay them more than $25 million in illegal fees. The crux of the CFPB’s allegations is that these companies:

  • Charged consumers with advance fees before obtaining a loan modification in violation of Regulation O (formerly known as the Mortgage Assistance Relief Services Rule)
  • Misrepresented in marketing materials the likelihood they would help a consumer save substantial sums in mortgage payments
  • Tricked borrowers into thinking that they would receive legal representation even though many borrowers never spoke with an attorney or had their case reviewed by one
  • Misled consumers to believe they were eligible for a loan modification or they would receive relief within a few short months when the defendants had not contacted the consumers’ lenders or requested or obtained any meaningful relief for them

The CFPB’s new lawsuits are similar to the lawsuit the CFPB filed against Morgan Drexen, a nationwide debt-settlement company, for charging consumers fees for debt-relief services before it actually came to an agreement settling or altering the terms of the debt. As previously reported, the California district court rejected Morgan Drexen’s motion to dismiss based on a challenged to the CFPB’s constitutionality and the Ninth Circuit dismissed the appeal for lack of jurisdiction. That case remains ongoing.

The FTC lawsuits also charge the defendants for violating Regulation O, as well as the FTC Act. In each case, the FTC has sought an order freezing the defendants’ assets pending the outcome of the litigation.

The CFPB’s complaints are available here:

http://www.consumerfinance.gov/f/201407_cfpb_complaint_clausen-cobb.pdf

http://www.consumerfinance.gov/f/201407_cfpb_complaint_cfpb-v-tmlg-et-al.pdf

http://www.consumerfinance.gov/f/201407_cfpb_complaint_hoffman-law-group-et-al.pdf

The FTC’s complaints are available here:

http://www.ftc.gov/system/files/documents/cases/140723danielsoncmpt.pdf

http://www.ftc.gov/system/files/documents/cases/140723fmccmpt.pdf

http://www.ftc.gov/system/files/documents/cases/140723lanierlawcmpt.pdf

http://www.ftc.gov/system/files/documents/cases/140723mortgagereliefcmpt.pdf

http://www.ftc.gov/system/files/documents/cases/140723homereliefcmpt.pdf

http://www.ftc.gov/system/files/documents/cases/140723cdcapitalcmpt.pdf

- Matthew A. Morr


Community Banks Urge CFPB To Expand Small Creditor Exemption

Recently, the Independent Community Bankers of America (ICBA) and a 45-member coalition of state and regional banking associations submitted a letter to the CFPB urging the agency to expand the small creditor exemptions under certain Title XIV mortgage rules that went into effect in January 2014. The ICBA argues that changes are needed to ensure community banks can continue to serve their respective mortgage markets without being burdened by expensive compliance costs.

Specifically, the ICBA would like mortgage loans that small creditors hold in their respective portfolios to automatically receive qualified mortgage safe harbor status as long as the loans are held in portfolio. The letter also calls for a small creditor exemption from escrow requirements for higher-priced mortgage loans held in portfolio. The ICBA claims that the current escrow and qualified mortgage rules make it too cumbersome and expensive to originate loans to certain consumers.

Under the current mortgage rules, small creditors are exempt if they originate 500 or fewer first lien mortgages in the preceding calendar year and have less than $2 billion in total assets at the end of the preceding calendar year. The ICBA believes the loan threshold is too low and notes that many community banks do not qualify for the exemption because they originate more than 500 loans annually.

In support of expanding the exemption, the ICBA argues that community banks operate differently than large creditors. The letter states that community banks know their customers personally, underwrite loans based on personal relationships, and keep a large number of nontraditional loans in their own portfolios. Finally, the ICBA contends that community banks serve a set of consumers that would be unable to get loans through traditional channels.


Welcome to Peter Cubita

We are pleased to welcome Peter N. Cubita to Ballard Spahr. Peter, of counsel in our New York office, is one of the nation’s leading consumer financial services attorneys. He has more than 30 years of wide-ranging experience encompassing regulatory compliance, transactional, class action litigation, and government enforcement matters.

Most recently, Peter was an in-house attorney at Ally Financial Inc. (formerly known as GMAC). In addition to his extensive experience in auto finance and leasing, during his career Peter has worked periodically on residential mortgage matters. For example, he contributed to the briefing of controlling questions of state law certified to the Ohio Supreme Court by a federal district court in State of Ohio v. GMAC Mortgage, LLC and Ally Financial. The certified questions of state law related to the scope of the Ohio Consumer Sales Practices Act. Arguments advanced by GMAC Mortgage and Ally in their case ultimately were adopted by the Ohio Supreme Court in another case that was used as the vehicle for answering two of the certified questions after the GMAC Mortgage case was stayed.

Peter holds a J.D. from St. John’s University School of Law, where he was Articles Editor on the St. John’s Law Review and the recipient of a St. Thomas More Scholarship, and a B.A. from Iona College, from which he graduated summa cum laude.


Several New States Adopt the National SAFE MLO Test with Uniform State Component

New York, Ohio, Oklahoma, and Connecticut are the latest states to announce that they will be adopting the National SAFE Mortgage Loan Originator (MLO) Test with Uniform State Content. The New York Department of Financial Services is adopting the test effective September 2, 2014. The Ohio Division of Financial Institutions is adopting the test effective September 15, 2014. The Connecticut Department of Banking and Oklahoma Department of Consumer Credit are both adopting the test effective October 1, 2014. With these latest developments, 45 states will no longer require a second state-specific test component to be taken by MLOs seeking licensure.

In addition, the Connecticut Department of Banking announced new pre-licensure education requirements that must be met as a condition for obtaining and maintaining a Connecticut MLO license. Effective October 1, 2014, Connecticut will require one hour of state-specific pre-licensure education. Additionally, Connecticut MLOs seeking to maintain licensure will be required to complete one hour of state-specific continuing education as a condition for licensure renewal beginning January 1, 2015. See the Connecticut Department of Banking's notice for further details.

State Agencies Add New Industry Licenses to NMLS

As previously discussed in the Mortgage Banking Update, the NMLS is constantly expanding to administer additional licenses. The financial agencies of Hawaii, Indiana, Montana, Puerto Rico, and West Virginia announced that new applicants and licensees are now able to submit filings through NMLS for the following licenses:

Hawaii Division of Financial Institutions

  • Money Transmitter Licence
  • Money Transmitter Branch Registration

Indiana Department of Financial Institutions

  • Debt Management License

Montana Division of Banking & Financial Institutions

  • Consumer Loan License
  • Consumer Loan Branch License
  • Deferred Deposit Lender License
  • Deferred Deposit Lender Branch License
  • Escrow Business License
  • Sales Finance Company License
  • Sales Finance Branch License

Puerto Rico Bureau of Financial Institutions

  • Money Transmitter License

West Virginia Division of Financial Institutions

  • Money Transmitter License

Rhode Island To Require Licensing of Third-Party Loan Servicers

Rhode Island Governor Lincoln Chafee recently signed House Bill 7997, which will require third-party loan servicers to obtain a state license to service a loan, directly or indirectly. The new law defines a "third-party loan servicer" as a "person who, directly or indirectly, engages in the business of servicing a loan made to a resident of Rhode Island, or a loan secured by residential real estate located in Rhode Island, for a personal, family, or household purpose, owed or due or asserted to be owed or due another."

The new law also prohibits various practices, and requires licensees to:

  • Pay a licensing fee of $1,100
  • Maintain a net worth of at least $100,000
  • Obtain a surety bond in the amount of $50,000
  • Maintain segregated accounts for amounts paid by borrowers
  • Comply with certain bookkeeping and record requirements

The new requirements for third-party servicers take effect July 1, 2015.

Florida Enacts Law Regarding Consumer Collection Practices

Florida recently enacted provisions relating to consumer collection practices in House Bill 413. Under the new law, a person may not engage in business in Florida as a consumer collection agency without first registering in accordance with the law, and thereafter maintaining a valid registration. A consumer collection agency is defined as "any debt collector or business entity engaged in the business of soliciting consumer debts for collection or of collecting consumer debts."

In addition, the law authorizes the Florida Financial Services Commission to adopt rules, such as those regarding fees, charges, and fines, the performance of investigations or examinations to determine violations of certain provisions, the revision of registration procedures and application requirements, and the requirement of applicants and certain registrants to submit fingerprints. The law also requires the Commission to adopt rules establishing disqualifying periods for certain felonies and misdemeanors involving fraud, dishonesty, and other acts of moral turpitude.

The legislation becomes effective on October 1, 2014.

- 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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