CFPB Issues Second Rule to Implement the HELP Act, Expanding Qualified Mortgage Coverage for Lenders in Rural and Underserved Areas

As we have addressed, Congress passed the Helping Expand Lending Practices in Rural Communities Act of 2015 (HELP Act) on December 4, 2015, in efforts to expand the designation of additional areas as being "rural" under Regulation Z of TILA. The HELP Act was passed after the CFPB issued a final rule to expand the definition of "rural areas" under Regulation Z with regard to the authority of small creditors to make certain qualified mortgage loans under the ability to repay rule and avoid the escrow account requirement for certain higher priced mortgage loans, as we previously discussed.

The Consumer Financial Protection Bureau (CFPB) issued its first rule to the implement the HELP Act on March 3, 2016. It establishes the application process for persons or businesses who would like to have a geographic area designated as "rural." Further discussion can be found here.

The CFPB announced on March 22, 2016, that it issued an interim final rule to implement the HELP Act’s amendments to TILA which would potentially increase the number of creditors that may be eligible for certain special provisions under TILA. The provisions permit the origination of balloon-payment qualified mortgages and balloon-payment high cost mortgages, and provide an exemption from the requirement to establish an escrow account for higher-priced mortgage loans. Before the HELP Act, to be eligible for these provisions, a small creditor had to operate predominantly in rural or underserved areas, meaning that the small creditor had to make more than half of its covered mortgage loans on properties located in rural or underserved areas in the prior calendar year. In contrast, the HELP Act provides that a small creditor will be eligible even if it operates in rural or underserved areas that are not the predominant area of its operations. More specifically, Congress struck out the word "predominantly" from TILA provisions.

The interim final rule amends Regulation Z to provide that a small creditor will be eligible for the special TILA provisions if it originates at least one covered mortgage loan secured by a property located in a rural or underserved area in the prior calendar year or for applications received before April 1 of a calendar year, in either of the two prior calendar years.

In addition, the final rule amends the current rule for determining whether an area is rural for the purposes of Regulation Z, by inserting a reference to any areas designated as rural through the application process mandated by the HELP Act. Also, this amendment establishes that only counties or census blocks are eligible for designation as rural under the application process, which is consistent with the current definition of rural area under Regulation Z.

This final rule became effective on March 31, 2016. Comments are due by April 25, 2016. However, the petition process may be limited as it will apply only to lenders that do not make at least one loan in a census block or county already designated as rural.

A copy of the interim final rule can be found here.

- Wendy Tran and Richard J. Andreano, Jr.


Reading the Nevada Tea Leaves after Shadow Wood

In the wake of SFR Investments Pool 1, LLC v. U.S. Bank, N.A., in which the Nevada Supreme Court held that an HOA foreclosure sale may extinguish a first position deed of trust, lenders have advanced numerous arguments as to why the deed of trust in a particular case survived the sale. One such defense that has gained traction is the inadequacy of price doctrine.

Following SFR, lenders typically argued that the purchase price at an HOA sale must have been "commercially reasonable." The Nevada Supreme Court had, prior to SFR, held that the purchase price alone cannot invalidate a foreclosure sale. Rather, price plus "fraud, oppression, unfairness" together can make a foreclosure sale commercially unreasonable. 

More recently, lenders have moved away from the commercial reasonableness doctrine because the term "commercial reasonableness" derives from the Uniform Commercial Code (UCC), which governs personal property, not real property. In some states condominiums are considered personal property, but in Nevada, whether an HOA sale concerns the exercise of lien rights or contract rights is unsettled. Further, Nevada has adopted the Uniform Common Interest Ownership Act (UCIOA), which applies to community associations and condominium regimes. Thus, while the commercial reasonableness argument may provide a persuasive basis to unwind a sale in Nevada on equitable grounds, it is often rejected by Nevada trial courts as technically inapplicable to real property. 

An alternate and more promising avenue for setting aside a sale based on the disparity between the typically low price paid at an HOA sale and the market value of the property is rooted in the 1997 publication of the Restatement (Third) of Property: Mortgages. Specifically, Section 8.3 of the Restatement states that, pursuant to the "inadequacy of price" doctrine, a foreclosure sale may be invalidated based on price alone. The comments to the Restatement state that it would be an abuse of discretion for a court not to invalidate a foreclosure sale based on price alone when the purchase price is less than 20 percent of the fair market value of the property. Several state supreme courts have adopted the inadequacy of price doctrine and it does not appear that any state has explicitly rejected the doctrine post-publication of the 1997 Restatement. Thus, lenders in Nevada have argued that courts should invalidate homeowner association foreclosure sales when the purchase price is less than 20 percent of the fair market value. This would be true even if there is no other evidence of "fraud, oppression, or unfairness."

In January 2016, the Nevada Supreme Court issued an opinion in Shadow Wood Homeowners Ass’n, Inc. v. N.Y. Community Bancorp, Inc. In Shadow Wood, the Court found that the purchase price was 23 percent of the fair market value. The Court repeatedly cited to Section 8.3 of the Restatement, including the comment that a price below 20 percent of the fair market value is grossly inadequate and justifies setting aside the sale. However, the Court noted that since the purchase price was just more than 20 percent of the fair market value, then price alone could not invalidate the sale. This reasoning is consistent with the Section 8.3 of the Restatement, which states that "sale improprieties" are necessary when the purchase price is not grossly inadequate—i.e., if the purchase price is above 20 percent of the fair market value, then other sale improprieties are necessary to invalidate the sale such as chilled bidding, improper sale time or place, improper conduct by the lien holder, or defective notice.

The Nevada Supreme Court did not outright adopt the inadequacy of price doctrine in Shadow Wood because it did not have the opportunity to do so—the purchase price was 23 percent, which is not less than 20 percent. However, the Shadow Wood opinion omits and abandons the "commercial reasonableness" standard even though such language appeared in SFR. Via Shadow Wood, the Nevada Supreme Court has signaled a willingness to adopt Section 8.3 of the Restatement when clearly presented with an opportunity to do so.

- Joel E. Tasca, Anthony C. Kaye, Jackie Bosshardt, and Russell J. Burke


FTC Highlights FDCPA Risks for Debt Collectors Using Social Media, Texts

The Federal Trade Commission (FTC) recently published a reminder to debt collectors of the Fair Debt Collection Practices Act (FDCPA) compliance risks that are created by the use of social media or text messages in connection with debt collection efforts.

The FTC highlights the following FDCPA prohibitions and requirements and provides examples of how the use of social media or text messages can violate such prohibitions or requirement:

  • Collectors cannot use deceptive means to collect a debt. The FTC discusses enforcement cases in which it has challenged the sending of texts that allegedly used false pretenses to get consumers to call back the debt collector. As an example, the FTC notes an enforcement action in which the debt collector was alleged to have sent text messages indicating that the consumer's payment using a card was declined and directing the debtor to call a designated phone number immediately. Other examples of deceptive actions given by the FTC are a request to join a debtor's social media (e.g. a Facebook ''friend request'') that does not disclose that the person reaching out to the consumer is a debt collector or an attempt to obtain location information about a consumer by using false pretenses to approach a friend or coworker. Such an attempt might involve the use of a fake Facebook account to send a friend request to a debtor's social connections as way to obtain address or asset information.
  • Collectors must provide certain disclosures in the initial communication and any subsequent communications with a debtor. The FTC notes that these disclosures are required in text messages.
  • Collectors cannot reveal the existence of the debt to a third party or publish ''a list of consumers who allegedly refuse to pay debts.'' The FTC notes that these prohibitions are particularly relevant in the social media context ''where a post on Facebook, Twitter, or Tumblr can instantly be viewed by others—and especially by consumers' social connections.''

Collectors cannot collect charges unless the charge is expressly authorized by the agreement creating the debt or permitted by law. The FTC notes that debt collectors cannot use social media or text messages to collect illegal charges.

The FTC also observes that some industry members use their websites and social media pages ''to offer helpful information for consumers'' and calls on the industry to ''consider whether lawfully using these platforms to offer general information can benefit both your company and consumers.''

In December 2013, the Federal Financial Institutions Examination Council, whose members include the Consumer Financial Protection Bureau (CFPB), issued final supervisory guidance ''Social Media: Consumer Compliance Risk Management Guidance.'' The Guidance was intended to help financial institutions manage the risks of interacting with consumers through social media. Among the topics discussed in the Guidance was how the use of social media can run afoul of the FDCPA. In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPR) on debt collection. In response to the ANPR, industry commenters have asked the CFPB to provide exceptions and/or guidance as to how to give FDCPA disclosures with text messages.

While not mentioned in the FTC's blog, the use of text messages by debt collectors also raises Telephone Consumer Protection Act (TCPA) compliance issues. In particular, the TCPA requires ''prior express consent'' for prerecorded or autodialed collection calls, which include text messages, to a debtor's cell phone.

On May 5, 2016, Ballard Spahr attorneys will hold a webinar ''Using Social Media and Texts for Debt Collection? Avoiding Liability Under the FDCPA and Other Laws'' from 12 p.m. to 1 p.m. ET. The webinar registration form is available here.

- Alan S. Kaplinsky, Gary W. Becker, John L. Culhane, Jr., Stefanie H. Jackman, Kim Phan, and Christopher J. Willis


Second Circuit Resolves Lower Court Split over Interest and Late Fees in FDCPA Claims

When a consumer's current balance will increase over time due to interest and late fees, a debt collection notice must disclose this information, the U.S. Court of Appeals for the Second Circuit has ruled.

In Avila v. Riexinger & Associates, LLC, the plaintiffs received collection notices from the defendant, a debt collector. While the notice stated a "current balance," it did not disclose that the balance continued to accrue interest, or that the plaintiffs could be charged a late fee if they did not pay on time.

The plaintiffs brought a claim under Section 1693e of the Fair Debt Collection Practices Act (FDCPA) alleging that these notices were misleading because they believed the current balance was "static." Section 1693e broadly prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt." The district court granted the debt collector’s motion to dismiss, holding that failure to disclose that a debt may accrue interest over time or may be subject to fees was not deceptive or misleading.

The Second Circuit reversed. Noting that it was resolving a split among the district courts within the Circuit, the Avila court held that if a consumer's account balance will increase over time due to interest and late fees, a collection notice must disclose this fact. In coming to this conclusion, the Second Circuit reiterated the principles that the FDCPA should be liberally construed as a consumer protection statute and that courts should apply the "least sophisticated consumer standard" to determine whether a challenged practice violates the FDCPA.

To alleviate the "legitimate concern" that consumers may be coerced into paying debts under the threat of interest and fees, the Avila court adopted the "safe harbor" approach set forth by the Seventh Circuit in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark, L.L.C. There, the Court held that a collection notice violated the FDCPA because, while it stated that interest and fees were owed in addition to the "unpaid principal balance," the notice did not include the total amount of the unpaid interest and fees. To minimize similar future litigation, the Seventh Circuit approved safe harbor language for use in collection notices when interest and fees could vary the total amount owed day to day. The Court found the following language acceptable:

As of the date of this letter, you owe $___ [the exact amount due]. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1-800- [phone number].

Though use of this particular disclaimer was not mandatory, Miller held that its use would discharge the debt collector's duty as a matter of law to correctly state the amount due.

As in Miller, the court in Avila did not require that collection notices contain specific safe harbor language, but concluded that debt collectors could avoid future liability if a collection notice "accurately informs the consumer that the amount of the debt stated in the letter will increase over time, or clearly states that the holder of the debt will accept payment of the amount set forth in full satisfaction of the debt if payment is made by a specified date."

- Alan S. Kaplinsky, John L. Culhane, Jr., Barbara S. Mishkin, Scott M. Pearson, and Taylor Steinbacher


NMLS MCR Enhancements

Changes have been made to the NMLS Mortgage Call Report (MCR) which have been reflected as of April 1, 2016.  The changes will affect the Residential Mortgage Loan Activity (RMLA) and the Financial Condition (FC) components for both standard and expanded filers. 

The following changes have been made:

  • The MCR one-click print file option has been implemented (effective January 25, 2016);
  • The CSV upload option has been added;
  • Additional fields have been added for Qualified and Non-Qualified Mortgage Reporting; miscellaneous completeness check and calculation updates have been expanded;
  • The definition of "application" has been revised and enforced.

  For more details, please visit this link.

Kansas Modifies Mortgage Business Act

Kansas has modified the provisions in the Mortgage Business Act, including, but not limited to, the following:

  • Definitions added or amended:
    • "Application" means the submission of a consumer's financial information, including the consumer's name, income, and Social Security number to obtain a credit report, the property address, an estimate of the value of the property and the mortgage loan amount sought, for the purpose of obtaining an extension of credit.
    • "Bona fide office" is no longer limited to an applicant's or licensee's principal place of business with an office. 
    • "Individual" means a human being.
    • "Mortgage business" includes "holding the rights to" as follows: engaging in, or holding out to the public as willing to engage in, for compensation or gain, or in the expectation of compensation or gain, directly or indirectly, the business of making, originating, servicing, soliciting, placing, negotiating, acquiring, selling, arranging for others, or holding the rights to or offering to solicit, place, negotiate, acquire, sell or arrange for others, mortgage loans in the primary market.
    • "Mortgage servicing" means collecting payment, remitting payment for another or the right to collect or remit payment of any of the following: principal, interest, tax, insurance, or other payment under a mortgage loan.
    • "Not-for-profit" means a business entity that is granted tax-exempt status by the Internal Revenue Service.
    • "Primary market" means the market wherein mortgage business is conducted including activities conducted by any person who assumes or accepts any mortgage business responsibilities of the original parties to the transaction.
  • Exemptions: A person who is licensed as a supervised lender pursuant to K.S.A. 16a-2-301 et seq., is no longer exempt from licensure. However, not-for-profit entities that provide mortgage loans in conjunction with a mission of building or rehabilitating affordable homes to low-income consumers are now exempt.
  • Licensing and registration:
    • Nothing under this act shall require a licensee to obtain any other license for the sole purpose of conducting non-depository mortgage business.
    • A license or registration shall become effective as of the date specified in writing by the commissioner.
  • Proof of display of license: Each licensee shall make available the evidence of licensure of each licensed location in a way that reasonably assures recognition by consumers and members of the general public.
  • Retention of records:
    • Each licensee shall now maintain a record of all solicitations or advertisements for a period of 36 months (previously 25 months).
    • Each licensee shall maintain the following information: the name, address and telephone number of each loan applicant; the type of loan applied for and the date of the application; and the disposition of each loan application, including the date of loan funding, loan denial, withdrawal and name of lender if applicable and name of loan originator and any compensation or other fees received by the loan originator.
  • Written report: Each licensee must annually file a written report with the commissioner containing the information that the commissioner may reasonably require concerning the licensee's business and operations during the preceding calendar year. The report shall be made in the form prescribed by the commissioner, which now may include reports filed with the nationwide mortgage licensing system and registry.

In addition, the provisions address bond requirements, prohibited acts, and the powers that the commissioner may exercise has expanded, including the ability to enter into any informal agreement with any mortgage company for a plan of action to address violations of law. 

These provisions are effective on July 1, 2016.

Tennessee Prohibits Certain Use of Multi-State Licensing System

The state of Tennessee amended provisions regarding industrial loan and thrift companies by prohibiting the commissioner of financial institutions from using a multi-state automated licensing system to share federal bureau of investigation criminal history background information of any individual other than mortgage loan originators, unless authorized to do so by the SAFE Mortgage Licensing Act of 2008 or other federal law.

These provisions are effective immediately.

Mississippi Amends Safe Mortgage Act

The state of Mississippi reenacted the SAFE Mortgage Act which was set to be repealed on July 1, 2016. In addition, amendments, such as, but not limited to, the following were made:

  • The books, accounts, and records for individual consumer mortgage files must be maintained apart and separate from any other personal loan files made by the same consumer.
  • Failure to produce the books and records within 60 days from the date of request may result in a violation, resulting in a civil penalty.
  • Failure to file accurate, timely, and complete reports on the Nationwide Mortgage Licensing System and Registry may also result in a violation, resulting in a civil penalty.
  • A licensee may not engage in the following: sign a consumer's name to a mortgage loan application or mortgage loan documents on behalf of a consumer; knowingly falsify income or asset information on a mortgage loan application or mortgage loan documents; or discourage a consumer in a mortgage loan transaction from seeking or obtaining independent legal counsel or legal advice.

These provisions are effective on July 1, 2016.

- Wendy Tran


Did you know?

by Wendy Tran

NMLS MCR Enhancements

Changes have been made to the NMLS Mortgage Call Report (MCR) which have been reflected as of April 1, 2016. The changes will affect the Residential Mortgage Loan Activity (RMLA) and the Financial Condition (FC) components for both standards and expanded filers.

The following changes have been made:

  •  The MCR one-click print file option has been implemented (effective January 25, 2016);
  • The CSV upload option has been added;
  • Additional fields have been added for Qualified and Non-Qualified Mortgage Reporting, miscellaneous completeness check and calculation updates have been expanded;
  • The definition of "application" has been revised and enforced.

For more details, please visit this link.

Kansas Modifies Mortgage Business Act

Kansas has modified the provisions in the Mortgage Business Act, including, but not limited to, the following:

  • Definitions added or amended:
    • "Application" means the submission of a consumer's financial information, including the consumer's name, income, and Social Security number to obtain a credit report, the property address, an estimate of the value of the property and the mortgage loan amount sought, for the purpose of obtaining an extension of credit.
    • "Bona fide office" is no longer limited to an applicant's or licensee's principal place of business with an office.
    • "Individual" means a human being.
    • "Mortgage business" includes "holding the rights to" as follows: engaging in, or holding out to the public as willing to engage in, for compensation or gain, or in the expectation of compensation or gain, directly or indirectly, the business of making, originating, servicing, soliciting, placing, negotiating, acquiring, selling, arranging for others, or holding the rights to or offering to solicit, place, negotiate, acquire, sell or arrange for others, mortgage loans in the primary market.
    • "Mortgage servicing" means collecting payment, remitting payment for another or the right to collect or remit payment of any of the following: principal, interest, tax, insurance, or other payment under a mortgage loan.
    • "Not-for-profit" means a business entity that is granted tax-exempt status by the Internal Revenue Service.
    • "Primary market" means the market wherein mortgage business is conducted including activities conducted by any person who assumes or accepts any mortgage business responsibilities of the original parties to the transaction.
  • Exemptions: A person who is licensed as a supervised lender pursuant to K.S.A. 16a-2-301 et seq., is no longer exempt from licensure. However, not-for-profit entities that provide mortgage loans in conjunction with a mission of building or rehabilitating affordable homes to low-income consumers are now exempt.
  •  Licensing and registration:
    • Nothing under this act shall require a licensee to obtain any other license for the sole purpose of conducting non-depository mortgage business.
    • A license or registration shall become effective as of the date specified in writing by the commissioner.
  • Proof of display of license: Each licensee shall make available the evidence of licensure of each licensed location in a way that reasonably assures recognition by consumers and members of the general public.
  • Retention of records:
    • Each licensee shall now maintain a record of all solicitations or advertisements for a period of 36 months (previously 25 months).
    • Each licensee shall maintain the following information: the name, address and telephone number of each loan applicant; the type of loan applied for and the date of the application; and the disposition of each loan application, including the date of loan funding, loan denial, withdrawal and name of lender if applicable and name of loan originator and any compensation or other fees received by the loan originator.
  • Written report: Each licensee must annually file a written report with the commissioner containing the information that the commissioner may reasonably require concerning the licensee's business and operations during the preceding calendar year. The report shall be made in the form prescribed by the commissioner, which now may include reports filed with the nationwide mortgage licensing system and registry.

In addition, the provisions address bond requirements, prohibited acts, and the powers that the commissioner may exercise has expanded, including the ability to enter to enter into any informal agreement with any mortgage company for a plan of action to address violations of law.

These provisions are effective on July 1, 2016.

Tennessee Prohibits Certain Use of Multi-State Licensing System

The state of Tennessee amended provisions regarding industrial loan and thrift companies by prohibiting the commissioner of financial institutions from using a multi-state automated licensing system to share federal bureau of investigation criminal history background information of any individual other than mortgage loan originators, unless authorized to do so by the SAFE mortgage Licensing Act of 2008 or other federal law.

These provisions are effective immediately.

Mississippi Amends Safe Mortgage Act

The State of Mississippi reenacted the SAFE Mortgage Act which was set to be repealed on July 1, 2016. In addition, amendments, such as, but not limited to, the following were made:

  • The books, accounts, and records for individual consumer mortgage files must be maintained apart and separate from any other personal loan files made by the same consumer.
  • Failure to produce the books and records within 60 days from the date of request may result in a violation, resulting in a civil penalty.
  • Failure to file accurate, timely, and complete reports on the Nationwide Mortgage Licensing System and Registry may also result in a violation, resulting in a civil penalty.
  • A licensee may not engage in the following: sign a consumer's name to a mortgage loan application or mortgage loan documents on behalf of a consumer; knowingly falsify income or asset information on a mortgage loan application or mortgage loan documents; or discourage a consumer in a mortgage loan transaction from seeking or obtaining independent legal counsel or legal advice.

 These provisions are effective on July 1, 2016.


Copyright © 2016 by Ballard Spahr LLP.

www.ballardspahr.com
(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.