Mortgage Loan Originator ‘Target Pricing’ in the Fair Lending Bull’s-Eye

The Federal Reserve Board indicated it is scrutinizing mortgage loan pricing models that comply with Regulation Z but nonetheless, in the Board’s view, significantly increase fair lending risk. The models set a loan revenue target—based on a higher interest rate, discretionary fees, or both—that varies by mortgage loan originator (MLO). Regulators allege that setting different target prices for MLOs creates a risk of disparate impact if MLOs with higher target prices are concentrated in minority neighborhoods. While this theory is not new, we expect it to feature more prominently in the Consumer Financial Protection Bureau and other regulators’ mortgage loan examinations and enforcement actions, so long as disparate impact remains a viable basis of discrimination under fair lending laws.

In remarks during a federal interagency webinar on October 22, Maureen Yap, Special Counsel/Manager in the Fair Housing Enforcement Section of the Federal Reserve Board’s Division of Consumer and Community Affairs, said that the Board has referred one such case to the U.S. Department of Justice for a possible enforcement action. This warning shot should remind bank and nonbank mortgage lenders that compensation models compliant with Regulation Z’s loan originator compensation rule (LO Comp Rule, or Rule) may still create risks for consumers and originators.

The LO Comp Rule was adopted by the Federal Reserve Board in 2010 and then transferred to the CFPB, which amended the Rule effective in 2014 based on Dodd-Frank. The Rule prohibits basing a loan originator’s compensation on any term of a transaction or proxy for a term, other than paying compensation based on a fixed percentage of the amount of credit extended. Compensating MLOs through a percentage of the amount of credit extended was and remains a common practice.

According to the Federal Reserve Board, under a target pricing model, MLOs are paid a fixed percentage of the loan amount in accordance with the LO Comp Rule, but are directed to hit a revenue target on each loan through additional interest or fees, or a combination of the two. The target is specific to the MLO and is not based on a borrower’s credit characteristics. According to Ms. Yap, the Federal Reserve Board has found that target pricing may cause statistically significant differences in rates and fees charged to minority borrowers compared to similarly situated white borrowers, based on which MLOs serve minority neighborhoods.

The Federal Reserve Board advises that lenders setting target prices for MLOs should do the following to mitigate fair lending risk:

  • Monitor pricing by race and ethnicity across MLO
  • Map loans by target price to identify potential reverse redlining
  • Review pricing models in software, including software provided by vendors
  • Minimize differences in target prices assigned to MLOs within the same geographic area

The U.S. Supreme Court recently, and for the third time, granted certiorari on the issue of whether disparate impact claims are cognizable under the Fair Housing Act. We wrote about the case, Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., here and here.

- Heather S. Klein


Leading Industry Trade Groups Comment on HMDA/Regulation C Proposal

Six leading industry trade groups have submitted a letter commenting on the CFPB’s proposed rule amending Regulation C to expand Home Mortgage Disclosure Act data reporting requirements. The trade groups consist of the Consumer Bankers Association, Mortgage Bankers Association, American Bankers Association, Consumer Mortgage Coalition, Financial Services Roundtable, and Housing Policy Council.

In the letter, the trade groups question the CFPB’s proposal to add various new data fields, including automated underwriting recommendations, borrower paid origination charges, total points and fees, total discount points, interest rate, prepayment penalty, QM status, and HELOC first draw amount. The trade groups ask the CFPB to weigh the consequences and value of adding the new fields.

The trade groups also urge the CFPB:

  • Not to extend the scope of Regulation C to require reporting of commercial and other loans that are for purposes other than home mortgage financing
  • To keep all additional data collected under the proposal private pending promulgation of privacy and data security rules to protect the confidentiality of HMDA data
  • To adopt a reasonable implementation schedule and not require HMDA reporting under a new rule earlier than 24 months after the January 1 that follows the issuance of a final rule
  • To codify data integrity standards with reasonable tolerances either in Regulation C or authoritative guidance
  • To adopt a higher reporting threshold of at least 250 home mortgage financing transactions each year for both depository and non-depository institutions
  • To conform Regulation C with related mortgage regulations and industry standards, and
  • To coordinate with the prudential regulators before making changes that may affect CRA reporting

- Reid F. Herlihy


FCC Gives Entities Six Months To Comply with Order Requiring Opt-Out Notices for Faxed Ads Sent with Prior Consent under TCPA

The Federal Communications Commission (FCC) recently issued an order finally clarifying that opt-out notices are required in solicited facsimile advertisements. In doing so, the FCC recognized the confusion caused by its prior orders and commentary, granting the petitioning entities a retroactive waiver of the opt-out notice requirement and a six-month window within which to come into compliance. The FCC also expressly invited all similarly situated entities to seek the same waiver and compliance window and instructed that such requests should be filed within six months of its order, issued on October 30, 2014.

The FCC was faced with an application for review of a Consumer and Governmental Affairs Bureau (Bureau) order and more than 20 petitions filed by various entities. The petitioners collectively challenged 47 CFR 64.1200(a)(4)(iv), which requires opt-out notices in facsimile advertisements sent with the recipients’ prior express permission. The petitioners primarily argued that Section 227(b) of the Telephone Consumer Protection Act (TCPA) applies only to “unsolicited advertisements” and therefore could not be the statutory basis for such a rule. The petitioners also contended that the FCC offered confusing and conflicting statements regarding the applicability of the rule to solicited facsimile advertisements.

The FCC rejected the petitioners’ primary argument and held that it had authority to issue the rule under Section 227(b). Specifically, the FCC held that inclusion of the opt-out notice in solicited facsimile advertisements was necessary to determining whether the sender retains the recipient’s prior express permission or is otherwise sending, or will send in the future, an “unsolicited advertisement.” The FCC “directed” the Bureau to conduct outreach to inform potential senders of its “reconfirmed requirement” to include opt-out notices in solicited facsimile advertisements.

However, the FCC found that there was cause for the petitioners’ confusion since it did not explicitly state during its rulemaking that it contemplated an opt-out requirement for solicited facsimile advertisements and had previously issued an order stating that “the opt-out notice requirement only applies to communications that constitute unsolicited advertisements.” Consequently, the FCC granted the petitioners a retroactive waiver of the rule and a six-month window from the date of the order to come into compliance.

The FCC was clear that the waiver applies only to facsimile advertisements sent to recipients who granted prior express consent and does not apply to unsolicited facsimile advertisements or facsimile advertisements sent in the context of an existing business relationship but without the recipient’s prior express consent.

Critically, the waiver and compliance window apply only to the named petitioners. However, the FCC invited similarly situated entities to request the same waiver and compliance window, noting that such applications should be filed within six months of the order. Ballard Spahr’s TCPA Task Force can assist such entities with the application process.

- Daniel JT McKenna


IRS Proposes To Eliminate ‘Confusing’ 36-Month Non-Payment Testing Period for Cancellation of Debt

The Internal Revenue Service recently proposed very well-received regulations under Section 6050P of the Internal Revenue Code (the Code) that would eliminate the requirement for financial entities to treat debt as canceled after 36 months of non-payment for information reporting purposes.

Under the Code, an applicable financial entity (i.e., a (i) financial institution as defined in Code Sections 581 and 591(a) – including a domestic bank, trust company, building and loan or savings and loan association, but not including a REMIC, (ii) credit union, or (iii) Federal executive agency) that discharges (in whole or in part) indebtedness of a debtor in the amount of $600 or more during a calendar year must file an IRS Form 1099-C reporting the amount discharged to the debtor and to the IRS. Under Code Section 6050P and the current regulations, a financial entity’s obligation to file an IRS Form 1099-C is triggered when any of eight identifiable events occur. Seven of these events result in the actual discharge of debt.

However, the eighth event is a rebuttable presumption that 36 months without any payment on the debt by the debtor causes a discharge of the debt. A financial entity can rebut this presumption only by showing that it is undertaking significant, bona fide collection activity or other facts and circumstances that indicate the debt has not been discharged. The possibility that the presumption could be rebutted led to confusion about whether a debtor must report the amount shown on the IRS Form 1099-C as income.

In the preamble to the proposed regulations, the Treasury Department and the IRS stated that the reporting requirements under Code Section 6050P should coincide with an actual discharge of debt to the greatest extent possible. If the new regulations are adopted in their current form, a financial institution will be required to report discharge of debt only upon the occurrence of one of the seven remaining identifiable events, all of which relate to the actual discharge of debt. The regulations are proposed to become effective the date they are published as final regulations in the Federal Register.

- Wayne R. Strasbaugh, and Wendi L. Kotzen


NMLS Announces ‘Your License is Your Business’ Renewal Campaign

The NMLS is launching its “Your License is Your Business” renewal campaign to encourage non-depository entities and mortgage loan originators (MLOs) licensed through the NMLS to submit their annual renewal requests early. Licensees should start reviewing their license records now, because companies and individuals who submit their applications early will have a greater chance of getting approved by the end of the year.

“Renewal requests submitted in November nearly always result in approval by year-end and no disruption in a licensee’s ability to conduct business,” says Sue Clark, Regulatory & Consumer Affairs Director for the Vermont Department of Financial Regulation and Chair of the NMLS Policy Committee. “When looking at the numbers we found 94 percent of all renewal applications submitted during November were approved by December 31.” By comparison, only 46 percent of license renewals requested after December 15 are approved by year-end.

Assuming a licensee has completed its professional requirements such as continuing education and kept its license information up to date throughout the year, renewing a license is simple. To renew a license, log into NMLS, review the license record, select the state agency and license type, pay the associated fees, and submit the renewal request. Further information about renewing a license through NMLS can be found here.

NMLS Adds New Licenses for Pennsylvania, Maine, and Connecticut

Two new states—Pennsylvania and Maine—are now receiving applications for new license types beyond the mortgage industry through the NMLS. The Pennsylvania Department of Banking and Securities has begun receiving new applications for the Debt Settlement License through the NMLS. The Maine Bureau of Consumer Credit Protection is also now taking new applications and transitional filings for the Money Transmitter License through NMLS. In addition, NMLS has begun accepting new application filings for the Mortgage Servicer License for the Connecticut Department of Banking as of
November 1.

- 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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