Federal Court Finds No Willful Violation for Misclassification of Mortgage Loan Officers

A federal court in Oklahoma delivered another blow to claims by mortgage loan officers that they are entitled to overtime under the Fair Labor Standards Act (FLSA). In Chapman v. BOK Financial Corporation, the court considered whether BOK Financial acted willfully in misclassifying its mortgage loan officers as exempt and for failing to pay them back wages after it changed their classification to non-exempt.

Initially, BOK Financial classified its mortgage loan officers as exempt from the FLSA’s overtime requirements based on guidance issued by the U.S. Department of Labor (DOL) in 2006. In March 2010, the DOL reversed course, issuing new guidance finding mortgage loan officers to be non-exempt and entitled to overtime. In light of the DOL’s reversal, BOK Financial reevaluated its classification decision, and ultimately concluded at the end of 2010 that the classification should be changed to non-exempt, effective January 1, 2011. BOK Financial did not pay back wages to affected employees for the period between March 2010 and January 1, 2011. The plaintiffs argued that this failure to do so constituted a willful violation of the FLSA, entitling them to liquidated damages under the statute. The plaintiffs premised their claim on the allegation that BOK Financial knew or showed reckless disregard as to whether its classification decision violated the law.

The court disagreed. It noted that BOK Financial took a number of steps to assess its obligations under the FLSA, including by consulting outside resources, such as banking trade organizations; sending its employees to seminars regarding the effect of the 2010 DOL guidance on mortgage loan officers exempt status; evaluating the applicability of other FLSA exemptions; and surveying peer banks as to their interpretation of the 2010 DOL guidance. The court also rejected the plaintiffs’ argument that the company’s failure to pay back wages for the period between issuance of the DOL guidance and the effective date of its classification decision demonstrated reckless disregard of the law.

Notably, the propriety of the DOL’s about-face already has been rejected by one federal appellate court, and is now under review by the U.S. Supreme Court. The 2010 DOL guidance became the subject of intense litigation in the U.S. Circuit Court of Appeals for the D.C. Circuit, Mortgage Bankers Association v. Harris, which ultimately nullified the guidance and held that the DOL failed to follow the appropriate rulemaking procedures in issuing it. The mortgage loan officers at issue in Harris petitioned the D.C. Circuit to reconsider its position, but the court declined that invitation. The Supreme Court, however, agreed to consider the issue, and oral argument before the Court will be held later this year.

- Brian D. Pedrow and Kelly T. Kindig

HUD Issues Final Rule Regarding ARM Disclosures

On August 26, 2014, the U.S. Department of Housing and Urban Development (HUD) issued a final rule to align HUD rules governing FHA-insured adjustable mortgage rates (ARMs) with the recent CFPB rules regarding ARM interest rate adjustment and disclosures under Regulation Z. As we previously reported, on May 8, 2014, HUD published a proposed rule in response to the CFPB's new Truth in Lending Act (TILA) mortgage servicing rules. The final rule adopts the proposed rule without change and is effective January 10, 2015.

Under the Regulation Z ARM Rules, when the interest rate on a covered mortgage loan adjusts based on index movement, servicers are required to notify borrowers of an impending payment change between 60 and 120 days before the new payment amount is first due. However, for loans that have rate adjustment every 60 days or more frequently, or are originated before January 10, 2015, and have look-back periods for the index value of less than 45 days, the notice may be provided between 25 and 120 days before the adjusted payment amount is first due. HUD interprets the ARM Rules as actually setting the look-back period for the index value as 45 days, which is not the case.

The final rule amends 24 C.F.R. § 203.49(d)(2) to require FHA-insured mortgages to use the most recent index figure available 45 days before an interest rate change becomes effective.

The final rule also amends 24 C.F.R § 203.49(h) to align directly with the ARM Rules under Regulation Z. HUD accomplishes this by cross-referencing 12 C.F.R. § 1026.20 to “not only avoid repetition of regulatory text, but help ensure that HUD’s codified regulations remain current” in the event that the CFPB amends Regulation Z.

Under the final rule, lenders and servicers of FHA-insured ARM loans will be required to make the initial adjustment disclosures and subsequent adjustment disclosures as required under the ARM Rules. HUD states that it does not insure ARMs with rate adjustment terms of less than 12 months; consequently, the shorter-term exemption found in the ARM Rules is not applicable to FHA-insured ARMs.

- Marc D. Patterson

HUD Issues Final Rule Eliminating ‘Post Payment’ Interest Charges, Preventing FHA Loans from Being Prohibited Next Year

On August 26, 2014, the U.S. Department of Housing and Urban Development (HUD) issued a final rule to allow FHA-approved lenders to charge an FHA loan borrower interest only through the date the loan is prepaid. The final rule also prohibits the charging of interest beyond that date. The revised rule is needed because under the existing rule, FHA loans would be prohibited under the new CFPB rules starting in January 2015. As we previously reported, HUD published a proposed rule on March 13, 2014. The final rule adopts the proposed rule without change and is effective January 21, 2015.

Based on the use of monthly interest accrual amortization with FHA loans, if an FHA loan is prepaid on a date that is not a regular payment due date, the borrower must pay interest through the end of the month even though the loan has been paid off. In adopting the Regulation Z ability-to-repay rule and modifications to the Regulation Z high-cost loan provisions that became effective in January 2014, the CFPB revised the definition of “prepayment penalty” to include a requirement to pay interest on the loan “balance” after the loan is prepaid in full (because the “balance” is still treated as being outstanding), but excepted from the definition FHA loans consummated before January 21, 2015.

The ability-to-repay rule also imposes significant limits on when a loan may be subject to a prepayment penalty, and prohibits a penalty that could be imposed more than 36 months after consummation or that would exceed certain amounts. Also, the modifications to the high-cost loan provisions include:

  • A new prepayment penalty trigger under which the provisions apply to a loan if a prepayment penalty could be imposed more than 36 months after consummation or could exceed a certain amount
  • A complete prohibition against a high-cost loan being subject to a prepayment penalty (prior law permitted certain prepayment penalties)

The combination of these changes and the changes to the definition of “prepayment penalty” would have effectively prohibited the further origination of FHA loans commencing January 21, 2015, unless the requirement to pay interest after a prepayment was eliminated.

Notably, during the rulemaking process, the CFPB and HUD conferred regarding the prepayment penalty issue and negotiated an arrangement under which a requirement to pay interest after a prepayment of an FHA loan would once again be considered a prepayment penalty. The change would not apply, however, for FHA loans consummated before January 21, 2015, to provide HUD sufficient time to modify its rules.

- Marc D. Patterson

VA Announces Upcoming Changes to ARM Disclosure Regulations

On September 5, 2014, the Department of Veterans Affairs (VA) announced in Circular 26-14-25 that it intends to clarify its interest-rate adjustment, disclosure, and notice requirements for ARM and hybrid ARM mortgage loans guaranteed by the VA in view of the CFPB's TILA mortgage servicing rule. The VA noted that the TILA mortgage servicing rule, which generally became effective in January 2014, is not effective for VA-guaranteed ARM and hybrid ARM mortgage loans until January 10, 2015.

The VA advised that it expects to publish in the near future revised regulations covering interest-rate adjustment, disclosure, and notice requirements for VA-guaranteed ARM and hybrid ARM mortgage loans to conform with the terms of the TILA mortgage servicing rule. The VA notes that in the event that its regulations are not in place by January 10, 2015, all lenders and servicers must comply with the terms of the TILA mortgage servicing rule.

- Marc D. Patterson

NY Attorney General Files Redlining Lawsuit Alleging Mortgage Discrimination

The New York Attorney General recently filed a complaint  in a New York federal court against a national bank headquartered in the state and its holding company alleging that the defendants violated the federal Fair Housing Act (FHA) by engaging in “redlining.” The defendants’ actions were also alleged to violate the state’s Human Rights Law and the Buffalo City Code.

According to the complaint, which the Attorney General claims to have filed pursuant to his parens patriae powers, the defendants intentionally discriminated against African Americans in the Buffalo metro area on the basis of race in violation of the FHA by limiting the geographic area in which the bank marketed and sold its mortgage loan products (termed the bank’s “Trade Area”) to exclude certain neighborhoods in which the majority of residents were African American (termed the “Eastside neighborhoods”). The practice of not offering products or services to residents of predominantly minority communities has been labeled “redlining.” The defendants’ alleged policies and practices on which the Attorney General’s “redlining” claim is based include:

  • Automatically disqualifying borrowers with properties outside the Trade Area from eligibility for certain mortgage loan products regardless of the borrower’s creditworthiness
  • Locating branch offices and branded ATMs outside of the Eastside neighborhoods
  • Placing the majority of advertising in newspapers that are not distributed in the Eastside neighborhoods or in ethnic media sources not directed towards African Americans

To demonstrate “the discriminatory effects” of the defendants’ alleged redlining, the complaint compares the bank’s Home Mortgage Disclosure Act (HMDA) data with HMDA data reported by other Buffalo-area banks. According to the complaint, such data shows that the defendant bank lagged behind other Buffalo area banks in generating mortgage applications from and making mortgage loans to African American borrowers and Eastside neighborhood borrowers of any race. (Peer group HMDA data has similarly been used by the U.S. Department of Justice (DOJ) to support redlining lawsuits.)

While alleging that the defendants’ redlining “is motivated by a discriminatory intent and results in disparate treatment” of Buffalo-area African Americans on the basis of race, the complaint also includes a disparate impact claim. Describing the alleged disparities between the defendant bank’s lending activity and that of other banks shown by the HMDA data as “statistically significant,” the complaint alleges that the defendants’ practices resulted in a “disparate impact on African-Americans and Eastside residents” and “are not necessary to achieve any of [their] substantial legitimate, nondiscriminatory interests.”

In framing the case as an intentional discrimination/disparate treatment case while also including a disparate impact claim, the Attorney General is also following the DOJ, which has pled cases in this way so as not to rely exclusively on a disparate impact theory of liability. (The U.S. Supreme Court may have its third opportunity to decide whether disparate impact claims are available under the FHA if it grants certiorari in Inclusive Communities Project v. Texas Dep’t of Housing.)

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who understand the statistical analyses that underlie fair lending assessments and discrimination claims.

- Barbara S. Mishkin, Marjorie J. Peerce, and Richard J. Andreano, Jr.

FDCPA Is Violated When Consumer’s Account Number Is Visible through Window of Debt Collector’s Envelope, Third Circuit Holds

In a precedential opinion rendered late last month, the U.S. Court of Appeals for the Third Circuit held that the disclosure of a consumer’s account number through the transparent window of a debt collector’s envelope violates Section 1692f(8) of the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, et seq. In so holding, the Third Circuit initially concluded that information visible through the window of a debt collector’s envelope is covered by Section 1692f(8), and the court then rejected the contention that the account number that could be seen through the window fell within any “benign language” exception to Section 1692f(8).

In Douglas v. Convergent Outsourcing, a debt collector, Convergent Outsourcing (Convergent), mailed a collection letter to the plaintiff in an envelope containing a glassine window through which the plaintiff’s account number with Convergent was visible. On behalf of a putative class, the plaintiff alleged that this disclosure of the account number violated Section 1692f(8), which prohibits “using any language or symbol” other than a debt collector’s name and address on an envelope. The district court granted summary judgment in favor of Convergent, concluding that the account number qualified as “benign language” that Section 1692f(8) was not meant to prohibit.

Reversing the district court, the Third Circuit held as a threshold matter that Section 1692f(8)—which applies to language or symbols “on any envelope”—applies to material appearing through a windowed envelope as well as language printed on the envelope itself. The court then concluded that Section 1692f(8)’s prohibition unequivocally applies to account numbers because the statute plainly states that “any language or symbol,” except the debt collector’s address and, in some cases, business name, may not be included on the envelope. Convergent argued that this interpretation would lead to an absurd result because, read literally, Section 1692f(8) would bar any language other than a debt collector’s name and address, including language such as the name and address of the recipient or even a stamp. Thus, Convergent urged the court to adopt a “benign language” exception to the FDCPA that would allow for markings on an envelope so long as they do not suggest the letter’s purpose of debt collection or humiliate or threaten the debtor.

The Third Circuit declined to decide whether Section 1692f(8) contains a benign language exception because it held that, even if such an exception exists, a consumer’s account number is not benign. Citing Section 1692(a), the court observed that a core concern animating the FDCPA is the invasion of individual privacy. An account number, the court reasoned, raises privacy concerns because it is a core piece of information pertaining to the consumer’s status as a debtor and the debt collection effort. The court rejected Convergent’s contention that the account number was a meaningless string of numbers that could not possibly harm the plaintiff if it were disclosed. The court reasoned that the account number could be used to identify the plaintiff, and to expose to the public her financial predicament.

As part of its analysis, the Third Circuit distinguished decisions by other federal courts—including the Fifth and Eighth Circuits—in which a benign language exception was held to apply. The particular language and markings on the envelopes in those cases, the Third Circuit concluded, did not reveal core information relating to the debt collection effort, or raise privacy concerns, as did the disclosure of the account number. The court likewise distinguished certain Staff Commentary from the Federal Trade Commission that presented examples of “harmless” words or markings, such as a Western Union logo, the label “telegram,” or the words “Personal” or “Confidential.” Unlike an account number, the court concluded, the examples cited in the Staff Commentary did not have the potential to identify the debtor and her debt.

- Joel E. Tasca

FTC Reviewing Telemarketing Sales Rule

As part of a systematic review of its regulations, the Federal Trade Commission (FTC) is seeking comment on a variety of issues relating to its Telemarketing Sales Rule (TSR). The FTC is conducting the review “to determine whether the TSR continues to serve a useful purpose, and, if so, how it could or should be improved.” Comments must be received on or before October 14, 2014.

The request for comments highlights three “specific areas of interest” for the FTC review:

  • Preacquired account information. The FTC observes that the legal landscape has changed significantly since the TSR was amended in 2003 to address the use of preacquired account information in telemarketing. (Preacquired account information is described in the notice as “any information that enables a seller or telemarketer to cause a charge to be placed against a consumer’s account without obtaining the account number directly from the consumer.”) The FTC discusses the prohibition on the disclosure of pre-acquired account information by and among merchants in the 2010 Restore Online Shoppers Confidence Act (ROSCA) and the current operating rules of the three major credit card associations. Observing that, in contrast, the existing TSR generally permits the use of preacquired account information by and among third parties, the FTC invites comment on what effect the post-2003 legal and industry changes should have on the TSR. 

  • Negative option marketing. The FTC discusses the increased use of general media by marketers to solicit inbound calls from consumers in response to “do not call” rules, including for purchases involving negative option offers, since the TSR was amended in 2003 to address negative options. Noting that ROSCA also includes provisions dealing with negative options, the FTC invites comment on what impact such post-2003 legal and marketplace changes should have on the TSR.

  • Recordkeeping. The FTC notes that the TSR does not require sellers and telemarketers to retain a record of the telemarketing calls they place. It states that the absence of such a requirement was based on an incorrect assumption that such records would be readily available from telephone carriers. Recognizing that compliance costs and burdens would likely be created by requiring sellers and telemarketers to retain their own records, the FTC seeks comments detailing such costs and burdens and offering suggestions for feasible alternatives.

The notice also includes 38 specific questions (with many containing multiple subquestions), dealing with:

  • The continuing need for the TSR, the TSR’s impact on consumers, entities that must comply, small business sellers and telemarketers, and the TSR’s relationship to other federal, state, or local laws or regulations

  • Various existing TSR prohibitions and requirements

  • Existing TSR exemptions

  • The telemarketing industry generally, such as sales volume, technology innovations, self-regulatory efforts, government regulation, and consumer issues

In the notice, the FTC references the TSR changes it proposed last year that would prohibit sellers and telemarketers from accepting or requesting remotely created checks or payment orders, cash-to-cash money transfers, and cash reload mechanisms as payment in inbound and outbound telemarketing transactions. The FTC notes that it has not yet completed the rulemaking process or issued any further notice regarding the proposal since it was published in the Federal Register in July 2013.

Ballard Spahr attorneys are available to advise sellers and telemarketers on compliance with the TSR, as well as other applicable consumer financial services laws. The firm’s attorneys can also review internal rules and provide guidance in conducting periodic audits to ensure the TSR is being followed. The firm’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

Barbara S. Mishkin and Alan S. Kaplinsky

Is a Uniform Debt Buying Code on Its Way?

The Uniform Law Commission (ULC), a non-partisan organization committed to drafting uniform state laws, has authorized the formation of a committee to study the need for and feasibility of state legislation to address the debt buying industry. The ULC Transfer and Recording of Consumer Debt Study Committee will also investigate the viability of a registration system to record transfers of consumer debt from originating creditors to debt buying entities. The creation of a so-called national debt registry could also be split up into multiple registries among the states, so that the title to a consumer debt can be tracked as the debt is sold from one entity to another.

In a press release announcing the formation of the study committee, the ULC observed that the Office of the Comptroller of the Currency (OCC) recently issued best practices for the sale of consumer debt while also expressing concerns about the safety, soundness, and consumer protection issues involved with such sales. The study committee will review existing debt buying laws and make a recommendation on whether the ULC should proceed with drafting a uniform law in this area. Based on the ULC criteria to make such a recommendation, the 17-member study committee must conclude that a uniform debt buying code will produce significant benefits to the public through uniformity of state laws. Although the study committee members have disparate practices from all across the country, some have prior experience with financial services, specifically the debt industry, and at least four have previously served on the ULC committee that drafted the Uniform Debt Management Services Act. To further their investigation, the ULC study committee may choose to meet with industry stakeholders to gauge the need for uniform state legislation on debt buying, the likely scope of any drafting project, and the potential support for such a project.

The ULC, also known as the National Conference of Commissioners on Uniform State Laws, was established in 1892. The ULC is a state-supported organization comprising volunteer lawyers who are appointed from all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The ULC researches, drafts, and promotes the enactment of uniform state laws in areas where having differing legal regimes among the states undermines the interests of citizens throughout the United States. Among the ULC’s achievements are the development of the Uniform Commercial Code, Uniform Trade Secrets Act, and Uniform Electronic Transactions Act.

The formation of the study committee is only the first step in a lengthy process that may or may not lead to a uniform debt buying code. Any draft legislation ultimately produced by the ULC will be years in the making. The recommendation of the study committee will be vetted by the ULC’s Scope and Program Committee before proceeding to the ULC’s Executive Committee. If the Executive Committee approves the recommendation, a ULC drafting committee will be formed to prepare preliminary drafts that will be subject to extensive committee consideration. Drafts that proceed out of committee will then be subject to debate by the entire ULC at a minimum of two annual meetings. Even after the ULC has approved a final draft debt buying code, the ULC must advocate for passage of the draft legislation by the various states as no uniform code is effective until a state legislature enacts it into law.

Meanwhile, debt buyers must continue to navigate carefully through a highly complex and rapidly changing legal environment, which already includes the federal Fair Debt Collection Practices Act, the various state laws such as the California Fair Debt Buying Practices Act, and the impending CFPB debt collection rules.

- Keith R. Fisher and Kim Phan

NMLS Expansion Update: D.C., Georgia, and Texas Edition

As noted in prior editions of the Mortgage Banking Update, states are transitioning non-mortgage licenses to the NMLS. Most recently, regulators in Washington, D.C., Georgia, and Texas have begun receiving new applications and transition filings for new industry licenses as of early September.

Below is a list of the new license types now being administered through the NMLS:

D.C. Department of Insurance and Banking

  • Automated Teller Machine Operator License
  • Automated Teller Machine Operator Branch License
  • Check Casher License
  • Check Casher Branch License
  • Money Lender License
  • Money Lender Branch License
  • Money Transmitter License
  • Retail Seller and Consumer Sales Finance License
  • Retail Seller and Consumer Sales Finance Branch License

Georgia Department of Banking and Finance

  • Check Casher License
  • Check Casher Branch Location
  • Money Transmitter License
  • Seller of Payment Instrument License

Texas Department of Banking

  • Money Transmission License

For questions on acquiring and maintaining these and other state licenses, please contact the Mortgage Banking Group.

- 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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