Mortgage Lender Settles Disability-Based Discrimination Complaint

The Department of Housing and Urban Development’s Office of Fair Housing and Equal Opportunity (FHEO) has announced its successful negotiation of a “conciliation agreement” between the parties to a lawsuit alleging discrimination on the basis of a mortgage applicant’s disability.

The suit, which arose out of an FHEO investigation, was brought by an applicant for a Federal Housing Administration (FHA)-insured loan against Mortgage One, Inc. of Sterling Heights, Michigan. It alleged discrimination on the basis of the applicant’s disability, which is prohibited by the Fair Housing Act.

According to HUD’s November 17, 2015, press release, a Mortgage One loan processor made “intrusive and unnecessary” requests for documentation concerning the nature and expected duration of the applicant’s disability. HUD’s FHA Mortgagee Handbook, which addresses the underwriting treatment of Social Security, Veterans’ or private disability income, states that “Under no circumstance may [a lender] inquire into or request documentation concerning the nature of the disability or the medical condition” of any applicant.

Although it was not required to admit wrongdoing, Mortgage One agreed to make a $10,000  payment to the complainant. The company must also distribute to all loan officers, underwriters, and processors an agreed-upon statement regarding company’s policy concerning information requests, particularly those for personal medical information, from applicants receiving income from Social Security disability or other “public assistance” programs. Finally, the loan processor involved must attend a Fair Housing Act compliance course that covers the Act’s disability status provisions. 

FHEO’s conciliation process is entirely voluntary. However, the conciliation agreement provides that if HUD has “reasonable cause” to believe Mortgage One has failed to comply with its obligations thereunder, HUD may refer the case to the U.S. Attorney General’s Office. 


CFPB Revises Supervisory Appeals Process

As we wrote last week, the CFPB recently published a Fall 2015 Supervisory Highlights which included a summary of changes that have been made to the CFPB’s supervisory appeals process. The original supervisory appeal process was published three years ago in CFPB Bulletin 2012-07. The revised supervisory appeals process incorporates a number of changes. The Bureau’s summary of most of these changes is excerpted below.

We believe the most important change is that the revised appeals process does not permit a supervised entity to appeal “adverse [supervisory] findings . . . related to a recommended or pending investigation or public enforcement action until the enforcement investigation or action has been resolved” (emphasis added). The prior appeal process merely stated that the supervisory appeal process could not be used to appeal “enforcement actions” generally.

This development highlights the importance of preparing compelling responses to CFPB PARR letters, since it is now clear that a decision to resolve examination findings through a public enforcement action cannot be appealed. (The PARR letter— a notice of Potential Action and Request for Response—was discussed in the Summer 2015 edition of Supervisory Highlights.) The PARR letter notifies a supervised entity after an examination when “the Bureau is considering taking supervisory action, such as a non-public memorandum of understanding, or a public enforcement action, based on the potential violations identified” during the course of the examination and described in the letter.

The CFPB expects that examiners will share preliminary negative findings with the supervised entity throughout the examination, and that the company will respond with any relevant information to correct or inform such preliminary findings. The PARR letter supplements this process by affording supervised entities an opportunity to include in their response “any reasons of fact, law or policy as to why the Bureau should not take action against the entity” and to provide supporting documentation. In short, if examiners were not persuaded by the responses and arguments provided during the examination, the PARR letter response gives the supervised entity a second bite at the apple to make any relevant arguments as to why a heightened supervisory action or a public enforcement action should not be undertaken.

After reviewing a PARR letter response, if the Bureau’s senior leadership on the Action Review Committee decides that any issues identified during an examination should be resolved through a public enforcement action, the revised appeals process dictates that this decision cannot be appealed. Thus the PARR letter response is a company’s last chance to keep exam findings within the realm of a confidential, non-public, supervisory resolution. Companies should therefore carefully consider and prepare PARR letter responses with close guidance from counsel experienced in handling CFPB supervisory and enforcement matters to ensure the response is as thorough and strategically-sound as possible.

The Supervisory Highlights summary of other changes to the appeals process notes that the revised policy:

  • Expressly allows members of the Supervision, Enforcement, and Fair Lending (SEFL) Associate Director’s staff to participate on the appeal committee, replacing the existing requirement that an Assistant Director serve on the committee;
  • Permits an odd number of appeal committee members in order to facilitate resolution of appeals;
  • Limits oral presentations to issues raised in the written appeal;
  • Provides additional information regarding how appeals will be decided, including the standard the committee will use to evaluate the appeal; and
  • Changes the expected time to issue a written decision on appeals from 45 to 60 days.
- Bowen "Bo" Ranney

NY DFS Proposes New Cybersecurity Regulations for Financial Institutions

The New York Department of Financial Services (NYDFS) has distributed a letter to various federal and state regulatory agencies and associations proposing the development of new cybersecurity regulations for financial institutions. The letter states that cybersecurity is “among the most critical issues facing the financial world today” and that there is “a demonstrated need for robust regulatory action in the cybersecurity space.”

The NYDFS proposal arises in part from the cybersecurity survey that the NYDFS conducted of more than 150 regulated banks and the subsequent findings in the survey reports released earlier this year. The letter identified the following key regulatory proposals that are currently being considered and would require financial institutions to:

  • Implement and maintain written cybersecurity policies and procedures addressing a variety of cybersecurity topics, including data governance, application development, customer data privacy, and incident response.
  • Implement and maintain policies and procedures relating to third-party service providers with access to financial institutions’ sensitive data and systems.
  • Use multi-factor authentication for customer access to web applications that captures or displays confidential information, privileged access to database servers that allow access to confidential information, and any access to internal systems or data from an external network.
  • Designate a Chief Information Security Officer (CISO), who would be required to submit annual reports to the NYDFS.
  • Implement and maintain written procedures, guidelines, and standards relating to applications security, which the NYDFS believes should be reviewed on an annual basis by the CISO.
  • Employ adequate cybersecurity personnel, including mandatory cybersecurity training for such personnel.
  • Conduct annual penetration testing, conduct quarterly vulnerability assessments, and maintain audit trails and activity logs.
  • Notify the NYDFS “immediately” of any cybersecurity incidents that have a reasonable likelihood of materially affecting the normal operations.

Although the NYDFS did not provide a timeline for when it expects to release the proposed cybersecurity regulations, it expressed the hope that the letter would “help spark dialogue, collaboration and, ultimately, regulatory convergence among our agencies on new, strong cybersecurity standards for financial institutions.” These efforts could also prompt these regulatory agencies and associations to accelerate their own cybersecurity initiatives, which might incorporate elements of any NYDFS regulations. Any cybersecurity regulations issued by NYDFS would need to be read in conjunction with federal requirements and guidance, such as the recently released FFIEC Cybersecurity Assessment Tool.

Financial institutions should be aware of the realistic possibility that any regulations imposed by the NYDFS could become the de facto national standard. Although the NYDFS is only seeking input on its cybersecurity proposals at this time from the regulatory agencies and associations to whom the letter was sent, financial institutions should look for opportunities to engage the NYDFS as it moves forward in developing regulations.

- Alan S. Kaplinsky,  Kim Phan, and Philip N. Yannella


Recent Dodd-Frank Diversity and Inclusion Standards Developments

Regulated entities should be aware of two recent developments concerning the final diversity and inclusion standards issued this summer under Dodd-Frank Section 342 by the CFPB, OCC, Fed, FDIC, NCUA and SEC. Given that the final standards have been in effect since June 10, 2015, entities should begin taking steps to incorporate them into their daily business practices and plan for their self-assessments.

The first development was the CFPB’s release of its Diversity and Inclusion Strategic Plan for 2016-2020. The plan sets forth the CFPB’s diversity and inclusion vision statement and describes how the CFPB will promote diversity and inclusion in the workforce and with its suppliers, as well as assess and strengthen diversity and inclusion within its regulated entities. The CFPB expects such entities to take similar steps within their organizations.

The second development is a joint notice, request for comment, and notice of information collection published in the Federal Register on November 6, 2015, by the six agencies that issued the final diversity and inclusion standards. In conjunction with the issuance of the final standards, the agencies had published a 60-day notice requesting public comments on the information collection process and parameters, and how this requirement might affect the regulated entities. The Notice addresses the four comments received during the 60-day comment period, and invites additional comments on the collection of information. Comments are due by December 7, 2015.

For more information about these developments, see our legal alert.

- Dee Spagnuolo


Nevada Federal District Court Rules Lien Statute Unconstitutional

We have reported before on a decision last fall from Nevada’s Supreme Court holding that a homeowners association (HOA) lien is a true super-priority lien that, if foreclosed upon, extinguishes a first deed of trust. Lenders around the country have been affected by the decision, and we have continued to follow its aftermath, including passage of legislation effective October 1, 2015, that made significant changes to the statute at issue. 

In another recent development, a federal district court in Nevada has ruled that the statute at issue is unconstitutional. US Bank, N.A. v. SFR Invs. Pool 1, LLC, --- F. Supp. 3d ---, 2015 U.S. Dist. LEXIS 112807 (D. Nev. Aug. 26, 2015). Investors who purchased properties at HOA foreclosures have argued that lenders cannot challenge the statute on due process grounds because an HOA foreclosure does not constitute “state action,” meaning that such a foreclosure does not involve a governmental actor. However, the US Bank court recognized that a lawsuit which seeks court enforcement of state statutes which would extinguish the property rights of another qualifies as state action because it requires the court’s involvement. In short, a non-judicial foreclosure is not state action, but the subsequent step of seeking court enforcement to gain clear title is state action.   

Investors who purchased properties at HOA sales and lenders have argued over whether the statute required that the HOA provide notice to those in first position of the HOA’s intent to foreclose prior to the sale. The US Bank court ruled that the statute does not satisfy constitutional due process because it is an "opt-in" scheme that requires a beneficiary under a deed of trust has to record a request to receive notice of a potential foreclosure sale. The court confirmed this interpretation by noting that the amendments to the statute mentioned above, which went into effect on October 1, 2015, mean that the statute now requires that notice be mailed to all interest holders who have recorded their interest. It suggests that the change was necessary precisely because the older version of the statute did not require such notice. 

In summary, the US Bank case includes two important rulings. First, though a non-judicial foreclosure sale does not implicate state action, when a purchaser at that non-judicial foreclosure then files a lawsuit to extinguish the rights of others with an interest in that property, then state action is implicated and constitutionality can be raised. Second, before it was amended, NRS Chapter 116 failed to satisfy due process because it did not require HOAs to provide mailed notice of foreclosure proceedings to those holding a first position deed of trust.

For now, the US Bank ruling is not binding on other courts. Time will tell whether the ruling is appealed.

- Robert A. Scott, Steven D. Burt, and Russell J. Burke


Financial Literacy Highlighted in Director Cordray’s remarks to the American Bankers Association

Financial literacy was the focus of Director Richard Cordray’s remarks last week at the American Bankers Association Annual Convention. He identified three areas where the CFPB is focusing its efforts and where financial institutions can “band together with [the CFPB]” to advance such efforts.

The first area of focus is financial education in schools, with the goal of helping young people increase their financial capability. Director Cordray commented that he is seeing financial institutions across the country devote “time and effort to finding ways to help young people obtain financial know-how and skill,” including providing support for teacher training. He also discussed the importance of integrating financial education into the school curriculum and urged attendees “to set the goal of making sure that financial education is required learning in all 50 states.”

The second area of focus is workplace financial education. Director Cordray commented that financial institutions “should lead by example” and model employee financial education for other employers. He stated that the CFPB wants “to see big banks, small banks, community banks—all financial providers of all shapes and sizes—and all employers across the entire economy find better ways to connect with their employees during [various] key life moments and implement programs to boost financial capability.” He also commented that banks “can make it a priority to educate their own employees and help them develop and use sound financial strategies, including savings for both emergencies and retirement” and that the CFPB also wants banks “to be conscious of what more you can do to ensure that your employees understand and optimize the existing benefits already available to them.” He suggested that banks “launch strategic awareness campaigns to promote positive financial behavior.”

The third area of focus is financial well-being for older Americans. Director Cordray noted that the CFPB has released guides for lay fiduciaries and discussed the CFPB’s efforts to help older people and their families prevent elder financial exploitation. He commented that “to [banks’] credit,” the CFPB has found that “banks are often the first ones to spot these danger signs” and “can often act to stop older accountholders from being victimized.” He also praised the American Bankers Association Foundation for recently launching the “Safe Banking for Seniors” campaign.

- Barbara S. Mishkin


Former Senior CFPB Enforcement Attorney James Kim Joins Ballard Spahr

I am pleased to introduce my new colleague James Kim, an experienced financial services litigator and regulatory attorney, who recently served as a senior enforcement attorney with the CFPB.

While at the CFPB, James led nationwide investigations involving consumer credit, mobile financial services, emerging payment systems, mortgage origination, and debt collection. He was lead counsel in the CFPB’s first enforcement actions involving mobile payments and was a member of the credit card/prepaid card/emerging payments issue team that helped coordinate enforcement activity with other offices at the CFPB.

Also while at the CFPB, James helped manage relationships with U.S. Attorneys’ Offices, state attorneys general, and state banking regulators and drafted sections of the Office of Enforcement’s internal policies and procedures. As a result of his substantial CFPB experience, James is uniquely positioned to help clients avoid or navigate CFPB investigations.

James has extensive experience with federal consumer finance laws, including UDAAP, TILA, RESPA, EFTA, and the FDCPA. He also has particular skill and experience helping consumer finance clients with matters involving technology, such as financial technology (Fintech) and the launch of card and smartphone-related products. In addition to his regulatory work, James has tried, as first or second chair, more than 20 cases to verdict and has briefed criminal and civil appeals before the U.S. Court of Appeals for the Second Circuit and the New York State Appellate Division.

James is the third attorney to join our practice from the CFPB. Bowen “Bo” Ranney was an examiner-in-charge with the CFPB, working in both supervision and enforcement. Tristram Q. Wolf was a CFPB investigator.

I expect James to be a valuable resource to our clients.

- Alan S. Kaplinsky


Oregon Permanently Adopts Rules Regarding Mortgage Licensing Fees

The Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities has permanently adopted previously temporary rules, setting mortgage licensing fees that mortgage bankers, brokers, and loan originators must pay at the time of application or renewal. The adopted rules retroactively apply to fees assessed by the director on or after October 3, 2011. The fees do not include National Mortgage Licensing System and Registry fees but include the following:

  • Application Fee (Banker or Broker License): $960
  • Renewal Fee (Banker or Broker License): $480
  • Application Fee (Banker or Broker Branch License): $330
  • Renewal Fee ((Banker or Broker Branch License): $165
  • Application Fee (Loan Originator License): $80
  • Renewal Fee (Loan Originator License): $65

This provision became effective on October 2, 2015.  

Georgia Revises Disclosure Requirements to Include TRID

The Georgia Department of Banking and Finance has revised disclosure requirements to reflect the TILA-RESPA Integrated Disclosure Rule (TRID). For loans subject to TRID, licensed mortgage lenders and brokers must provide the Loan Estimate and Closing Disclosure in accordance with federal law and obtain borrowers’ written acknowledgment of these disclosures. This provision became effective on November 16, 2015.

New Jersey Will Prohibit Unsolicited Advertising Via Text Messages

New Jersey has enacted provisions which prohibit the sending of unsolicited advertisements through text messaging without permission from the intended recipient. Permission must be granted through prior expression authorization from the intended recipient. The definition of “text messaging” has been amended to include the wireless transmission of “images or a combination of text and images” through a cellular telephone, a paging or message service, a personal digital assistant, or “any other electronic communications device.”

These provisions will become effective on November 1, 2016. 

- Wendy Tran


Did you know?

by Wendy Tran

Oregon Permanently Adopts Rules Regarding Mortgage Licensing Fees

The Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities has permanently adopted previously temporary rules, setting mortgage licensing fees that mortgage bankers, brokers, and loan originators must pay at the time of application or renewal. The adopted rules retroactively apply to fees assessed by the director on or after October 3, 2011. The fees do not include National Mortgage Licensing System and Registry fees but include the following:

  • Application Fee (Banker or Broker License): $960
  • Renewal Fee (Banker or Broker License): $480
  • Application Fee (Banker or Broker Branch License): $330
  • Renewal Fee (Banker or Broker Branch License): $165
  • Application Fee (Loan Originator License): $80
  • Renewal Fee (Loan Originator License): $65

This provision became effective on October 2, 2015.

Georgia Revises Disclosure Requirements to Include TRID

The Georgia Department of Banking and Finance has revised disclosure requirements to reflect the TILA-RESPA Integrated Disclosure Rule (TRID). For loans subject to TRID, licensed mortgage lenders and brokers must provide the Loan Estimate and Closing Disclosure in accordance with federal law and obtain borrowers’ written acknowledgment of these disclosures. This provision became effective on November 16, 2015.

New Jersey Will Prohibit Unsolicited Advertising Via Text Messages

New Jersey has enacted provisions which prohibit the sending of unsolicited advertisements through text messaging without permission from the intended recipient. Permission must be granted through prior expression authorization from the intended recipient. The definition of “text messaging” has been amended to include the wireless transmission of “images or a combination of text and images” through a cellular telephone, a paging or message service, a personal digital assistant, or “any other electronic communications device.”

These provisions will become effective on November 1, 2016.


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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.