CFPB Releases Spring 2016 Rulemaking Agenda

The Consumer Financial Protection Bureau (CFPB) has released its Spring 2016 rulemaking agenda. The agenda sets the following timetables for key rulemaking initiatives: 

Arbitration. The Spring 2016 agenda does not reflect the CFPB's release of its proposed arbitration rule on May 5, 2016, stating only that the CFPB "is preparing to issue a Notice of Proposed Rulemaking this spring." The CFPB’s proposed rule would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service. The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB. We do not expect to see a final rule until next year.

Payday and deposit advance loans. The Spring 2016 agenda also does not reflect the CFPB's announcement that it will hold a field hearing on small dollar lending in Kansas City, Missouri on June 2, 2016. We anticipate the field hearing will coincide with the CFPB's release of its proposed rule which is expected to cover single-payment payday and auto title loans, deposit advance products, and certain high-rate installment and open-end loans. The Spring 2016 agenda indicates only that the CFPB is "conducting a rulemaking to address consumer harms from practices related to payday loans and other similar credit products" and gives a June 2016 estimated date for issuance of a Notice of Proposed Rulemaking (NPRM).

Prepaid financial products. In November 2014, the CFPB issued a proposed rule for prepaid financial products, including general-purpose reloadable prepaid cards and certain digital and mobile wallets. The Spring 2016 agenda estimates the issuance of a final rule in July 2016. The Fall 2015 agenda had estimated that a final rule would be issued in March 2016.

Overdrafts. The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services. In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that it "is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process." Although the Fall 2015 agenda had estimated a January 2016 date for further prerule activities, the new agenda moves that date to August 2016.  In light of the fact that most of the banks subject to CFPB supervisory jurisdiction have changed the order in which they process electronic debits, we believe the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process such debits.

Debt collection. In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection. In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that "it is in the process of analyzing responses to a survey seeking information from consumers about their experiences with debt collectors and is engaged in qualitative testing to determine what information would be useful for consumers to have about debt collection and how that information should be provided to them." The agenda estimates that further prerule activities, which are expected to involve the convening of a Small Business Regulatory Enforcement Fairness Act panel, will occur in June 2016. The CFPB had estimated in its Fall 2015 agenda that further prerule activities would occur in February 2016.

Larger participants. As it did in its Fall  2015 agenda, the CFPB states in the Spring 2016 agenda that it is considering  "larger participant" rules for "consumer installment loans and vehicle title loans." It also repeats the statement in the Fall 2015 agenda that the CFPB is "also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups." (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to "prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.") While the prior agenda estimated a September 2016 date for prerule activities, the new agenda estimates a December 2016 date.

Small business lending data.  Dodd-Frank Section 1071 amended the Equal Credit Opportunity Actto require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data includes the race, sex, and ethnicity of the principal owners of the business. The Spring 2016 agenda estimates a December 2016 date for prerule activities. We recently reported that the CFPB had filled the position of Assistant Director for the Office of Small Business Lending Markets. The CFPB's job posting indicated that the Assistant Director would head the CFPB's team involved in developing rules to implement Section 1071. In the Spring 2016 agenda, the CFPB states that it "will focus on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071. The CFPB then expects to begin developing proposed regulations concerning the data to be collected and appropriate procedures, information safeguards, and privacy protections for information-gathering under this section."

Mortgage rules. In November 2014, the CFPB issued a proposal to amend various provisions of its mortgage servicing rules. The Spring 2016 agenda estimates issuance of a final rule in July 2016. The previous agenda had estimated a June 2016 date. The new agenda also estimates a September 2016 date for issuance of a proposed interagency rule to implement Dodd-Frank amendments to Financial Institutions Reform, Recovery And Enforcement Actconcerning appraisals. The previous agenda had estimated an April 2016 date.  In April 2016, the CFPB announced its intention to reopen the rulemaking for the TILA/RESPA Integrated Disclosure rule. At that time, the CFPB indicated that a NPRM would likely be issued in late July and, consistent with that timetable, the Spring 2016 agenda estimates a July 2016 date for a NPRM.

Student Loan Servicing and Consumer Reporting. As they were in the Fall 2015 agenda, both of these topics continue to be listed as "long-term action" items in the Spring 2016 agenda.

- Barbara S. Mishkin 

CFPB Publishes New Annotated Loan Disclosures

In emails sent to CFPB email subscription holders, the CFPB announced the publication of new annotated versions of the Loan Estimate and Closing Disclosure that include citations to sections in Chapter 2 of the Truth in Lending Act (TILA). The CFPB sent an original email on May 12, and then an updated email on May 13 that includes a direct link to the annotated forms. The emails provide that the citations are to TILA sections referenced in the Integrated Mortgage Disclosure final rule.

The use of the Loan Estimate and Closing Disclosure are required by the TILA/RESPA Integrated Disclosure (TRID) rule which became effective October 3, 2015. The rule incorporates both RESPA and TILA disclosure requirements, and the requirements are set forth in Regulation Z under TILA. Based on the varying nature of liability under RESPA and TILA, the CFPB addressed in the preamble to the TRID rule the sections of TILA, RESPA and/or the Dodd-Frank Act that it used as legal authority for the various TRID rule sections.

Unfortunately, the CFPB may have done more harm than good. For example, as we have previously addressed, in a December 29, 2015 letter to the MBA, CFPB Director Richard Cordray addressed TRID rule liability concerns. He noted that "As a general matter, consistent with existing [TILA] principles, liability for statutory and class action damages would be assessed with reference to the final closing disclosure issued, not to the loan estimate, meaning that a corrected closing disclosure could, in many cases, forestall any such private liability." The industry took this to mean that in many cases errors in the Loan Estimate could be cured through a correct Closing Disclosure. However, by issuing a Loan Estimate with citations to TILA sections the CFPB appears to have raised the issue of whether there is TILA liability for Loan Estimate errors.

Also, the annotated disclosures provide that both the Adjustable Payment (AP) Table and Adjustable Interest Rate (AIR) Table were adopted based on TILA section 128(b)(2)(C)(ii). However, the preamble to the TRID rule reflects that only the AP Table was adopted based on such section, and that the AIR Table was adopted based on general CFPB rulemaking authority.

As we reported, recently the CFPB also announced its intention to re-open the rulemaking corresponding with the TRID rule. Perhaps the CFPB can use the rulemaking initiative to better address industry concerns regarding TRID rule liability.

- Matthew Smith and Richard J. Andreano, Jr.

FinCEN Director Discusses Initiatives to Address Money Laundering Through Real Estate

The Financial Crimes Enforcement Network's (FinCEN) continuing efforts to address the "real estate industry's vulnerability to money laundering” were outlined by FinCEN Director Jennifer Shasky Calvery in an April 12, 2016, speech. Although most real estate transactions already are subject to anti-money laundering (AML) scrutiny through the AML programs and controls of banks and other mortgage lenders and originators, she noted that in the case of an all-cash purchase made "without a mortgage issued by a bank or mortgage broker," "none of the parties involved in the transaction are subject to AML program requirements."

In January 2016, FinCEN issued two geographic targeting orders (GTOs) aimed at combating money laundering in all-cash real estate transactions in Manhattan and Miami-Dade County, Florida—two areas identified by FinCEN as having "a higher than average percentage of all-cash transactions." The GTOs, which took effect in March, require certain title insurance companies to identify the natural persons behind entities using cash to purchase high-end real estate—properties with a sales price of more than $1 million in Miami-Dade County and more than $3 million in Manhattan.   

The GTOs are designed to help close the gap in AML controls for all cash transactions. According to Director Shasky Calvery, the beneficial ownership identification requirement is key to AML risk assessment and enforcement in this area because the use of shell company purchasers "is often enough to dramatically increase the difficulty of tracking the true owner of a property in a transaction." The GTOs represent just one facet of the government's current campaign to identify the true beneficial owners involved in financial transactions in general. This campaign includes pending proposed regulations by FinCEN, which would require certain financial institutions to identify the beneficial owners behind entities that open accounts.

Director Shasky Calvery highlighted the productive discussions that she has had with the real estate industry as part of the GTO initiative. Her positive comments have been echoed by our clients and other friends in the real estate industry who have engaged directly with FinCEN this year on this effort. As FinCEN continues its "incremental, risk-based approach to regulating this industry," the real estate industry should continue to engage constructively with FinCEN to ensure that regulatory requirements are properly designed to combat money laundering without unnecessary burdens on closing transactions.

- Richard Andreano, Jr., Peter D. Hardy, and Beth Moskow-Schnoll

Solicitor General/OCC Opine Madden Was Incorrectly Decided, But Recommend Denial of Supreme Court Review

In a widely anticipated brief requested by the U.S. Supreme Court, the Solicitor General and the Office of the Comptroller of the Currency (OCC) have expressed the view of the United States that the Court should deny the petition for certiorari filed by the defendants in Madden v. Midland Funding, LLC, despite their view that Madden was wrongly decided. The petition asked the Supreme Court to decide whether the preemption of state usury laws under Section 85 of the National Bank Act (NBA) continues to apply to loans made by a national bank after the bank has sold or otherwise transferred the loans to another entity.

In Madden, the U.S. Court of Appeals for the Second Circuit ruled that a purchaser of charged-off debts from a national bank was not entitled to the benefits of NBA preemption. The Second Circuit found that application of state usury laws to the loans in question would not "significantly interfere" with the national bank's exercise of its powers under the NBA, including the right to "take, receive, reserve, and charge" interest under Section 85 and the right to make and sell loans under Section 24 (Seventh).

The Solicitor General and OCC at some length took issue with the Madden decision, flatly stating that it was "incorrect," and asserting that the Second Circuit's holding of non-preemption constituted error in three principal respects:

  • The court's failure to recognize that a national bank's authority to charge interest on a loan up to the maximum permitted by its home state includes the right to "assign to others the right to charge the same rates;"
  • The court's "misconceived" view that because the bank retained no interest in the debt, application of the New York usury law would only limit the assignee's activities, and not those of the bank itself; and
  • The court's reliance "on an unduly narrow conception of conflict preemption."

They concluded that, "Respondent's state-law usury claim is preempted by Section 85 because it directly interferes with a national bank's authority to make and transfer loans at the permitted rate of interest." 

Despite this acknowledgement, the Solicitor General and OCC asserted that Supreme Court review of the ruling "is not warranted at the present time," and/or that the case would constitute "a poor vehicle for resolution of the question presented” for three reasons:

  • There is no split in the circuits on the question presented because the questions presented in the Fifth and Eighth Circuit decisions cited by the defendants to demonstrate a conflict "were significantly different from the question presented here."
  • The parties did not present key aspects of the preemption analysis to the courts below.  For example, the Solicitor General asserts that the parties' district court briefs "did not distinguish between different types of preemption" and their Second Circuit briefs suffered from a "lack of clarity" regarding the preemption arguments.
  • The Second Circuit's decision is interlocutory and the defendants could still prevail on remand if the district court were to apply the Delaware choice-of-law provision in the defendants' loan agreements or determine that New York law applied but find that New York usury law incorporates the "valid-when-made" principle.

The case has significant implications not only for purchasers of charged-off debt from national banks, but also for a wide variety of other lending programs and arrangements that rely on the originating bank's preemptive authority under federal law to charge interest rates and fees greater than those permitted under otherwise applicable state law, such as marketplace lenders utilizing "bank model" programs and the entities which purchase the loans generated by such structures. As the defendants asserted in their certiorari petition, in the absence of Supreme Court review, the threat will continue for the Second Circuit's decision to "wreak havoc on the national banking system and the Nation’s credit markets by eviscerating a national bank's core prerogative to set interest rates unfettered by state regulation." 

In urging the Supreme Court to deny the certiorari petition despite the Second Circuit's incorrect analysis, the Solicitor General and OCC seemingly ignore both the exceptional importance of the question presented in Madden and the Court's ability to consider such importance as a reason for granting a petition even in the absence of a circuit split. The Supreme Court's rules specifically permit the Court, in reviewing a certiorari petition, to consider whether "a state court or a United States court of appeals has decided an important question of federal law that has not been, but should be, settled by this Court." While ordinarily a recommendation from the Solicitor General strongly influences the Supreme Court in deciding whether to grant or deny a petition for certiorari, the outcome here may very well be different because of the obvious importance of the issue and the fact that the Solicitor General and OCC opined that the Second Circuit is flat-out wrong. In any event, the fact that the Solicitor General and the OCC have published their view that Madden was wrongly decided may provide some reassurance to investors and banks, who have been spooked by the decision and other recent regulatory developments in the marketplace lending space.

- Alan S. Kaplinsky, Mark J. Furletti, Scott M. Pearson, Jeremy T. Rosenblum, and Glen P. Trudel

TCPA Under Scrutiny in Court and by Senate

The Telephone Consumer Protection Act (TCPA) and a 2015 omnibus Declaratory Ruling and Order (2015 Order) interpreting the TCPA issued by the Federal Communications Commission (FCC) have recently faced additional challenges in two different forums—a lawsuit in the Eastern District of North Carolina and a full committee hearing before the Senate Commerce Committee.

The TCPA prohibits calls using an automatic telephone dialing system or prerecorded voice to any telephone number assigned to "a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call," unless the call is made with consent, for emergency purposes, or pursuant to an exemption created by Congress or the FCC. In its 2015 Order, the FCC created an exemption for certain financial communications to alert a customer to fraud and identity theft, data security breaches, steps taken to prevent or remedy the harm of identity theft or a data breach, or money transfers.

The Commerce Committee held a hearing on May 18, 2016, to discuss whether the TCPA is still an effective tool to protect consumers from unwanted calls after 25 years. One theme reiterated throughout the hearing: the 2015 Order does not allow companies to send consumers information that they want or need unless such communications fall under one of the TCPA’s narrow exemptions. In particular, despite encouragement by Consumer Financial Protection Bureau Director Richard Cordray that financial institutions should send customers text messages with real-time account updates, financial institutions run the risk of violating the TCPA if they do not obtain the appropriate, prior, express consent.

The TCPA and its exemptions are also being challenged on constitutional grounds in a federal district court. Five political organizations recently filed a suit seeking a declaratory judgment that the TCPA’s restrictions on automated or prerecorded calls to mobile telephones violate the First Amendment. American Association of Political Consultants, Inc. v. Lynch, filed in the Eastern District of North Carolina on May 12, is notable because the defendant is Attorney General Loretta Lynch and its named plaintiffs range across the political spectrum:

  • American Association of Political Consultants, Inc., a bipartisan, nonprofit association of political professionals;
  • Democratic Party of Oregon, a nonprofit organization;
  • Public Policy Polling, LLC, a for-profit company that uses automated telephone surveys to measure and track public opinion;
  • Tea Party Forward PAC, a nonprofit organization that works to promote the interests of the Tea Party; and
  • Washington State Democratic Central Committee, the Democratic Party organization in the State of Washington, which works to elect and support Democrats.

Though politically diverse, all of these organizations call individuals on their mobile telephones. Four of the organizations make such calls to solicit donations and to discuss political and governmental issues.

The complaint notes that the FCC and Congress have created TCPA exemptions, including the financial exemptions discussed above, for package delivery notifications and calls to collect a debt owed to or guaranteed by the United States. The complaint alleges that these exemptions are based on the content of the calls and that by favoring commercial speech over the plaintiffs' political speech, the mobile telephone ban violates the First Amendment rights of these political organizations.

In addition to a declaratory judgment that the TCPA violates the First Amendment, the suit seeks preliminary and permanent injunctions enjoining enforcement of the TCPA by the government, nominal damages of $1, and attorneys' fees and costs.

- Alan S. Kaplinsky, Mark J. Furletti, Daniel JT McKenna, Roshni Patel, and Kim Phan

Third Circuit Holds SCRA Protections Do Not Extend to Servicemember-Owned Businesses

In a unanimous opinion in Davis v. City of Philadelphia, the U.S. Court of Appeals for the Third Circuit has held that Servicemembers Civil Relief Act (SCRA) protections do not extend to a servicemember's solely owned business because a corporate entity is not a servicemember under the statute.

Michael E. Davis, a longtime member of the U.S. Army Reserve, and his company, Global Sales Call Center LLC (Global), sued the City of Philadelphia over allegations that the City violated the SCRA by assessing delinquent property tax interest and penalties against Global while Mr. Davis was on active duty. The U.S. District Court for the Eastern District of Pennsylvania granted the City's motion to dismiss on the grounds that Global lacked statutory standing because it was not a servicemember under the SCRA and that Mr. Davis had not been denied relief under the SCRA because he was not personally liable for Global's tax debt. 

On appeal, the Third Circuit affirmed the district court decision. The clear text of the SCRA limits its protections to property owned individually by a servicemember or jointly by a servicemember and a dependent. Accentuating the distinction between individuals and corporate entities, the court held that Mr. Davis, regardless of whether he was the sole shareholder of the company, could not state a claim for relief under the SCRA because Global owned the property in question and Global alone was liable for the tax debt. "Davis received all the benefits that come with incorporation," the court said, "and he cannot have his cake and eat it too."

The May 4, 2016, decision sheds further light on how courts are interpreting the SCRA as applied to servicemember-owned businesses and indicates that distinguishing between individuals and corporate entities with respect to both property ownership and liability is key to the analysis. 

- Anthony C. Kaye and Juliana D. Gerrick

Nevada Supreme Court Clarifies Extent of HOA Super-Liens

For the past several years, Nevada courts have been flooded with quiet title actions between mortgage lenders and buyers who acquired residential properties at homeowners association (HOA) super-lien foreclosures. Recently, in Horizons at Seven Hills Homeowners Ass'n v. Ikon Holdings, LLC, the Nevada Supreme Court held that the super-lien does not include enforcement and foreclosure costs incurred by the HOA. Instead, it only includes an amount equal to nine months of HOA assessments, plus any charges the HOA has incurred to maintain the property or abate a nuisance at the property. The court's decision will potentially impact cases where a Nevada HOA foreclosed before October 1, 2015 and a mortgage lender paid off (or attempted to pay off) the super-lien to protect its security interest.

Nevada law provides a statutory lien for unpaid assessments to HOAs. If a homeowner fails to keep the assessments current, the HOA may record a lien against the property. A portion of the HOA’s lien enjoys a "super-priority" over a first security interest recorded prior to the HOA lien.  In 2014, the Nevada Supreme Court held in SFR Investments Pool 1, LLC v. U.S. Bank, N.A. that a properly conducted super-lien foreclosure can extinguish a previously recorded first mortgage or deed of trust. However, the court did not clearly explain what particular charges are included in the super-priority lien (and therefore, what charges a lender must pay off to avert any threat to its security interest).

In Horizons, a homeowner financed a residential property with a mortgage loan secured by a deed of trust. The homeowner later became delinquent both on payments under the mortgage loan and assessments owed to the HOA. The HOA responded by recording a lien against the property and commenced foreclosure proceedings. Before the HOA could foreclose, the lender held a trustee’s sale pursuant to its deed of trust. The property was sold to a third-party bidder, which eventually transferred the property to plaintiff Ikon Holdings.

The HOA claimed that Ikon Holdings acquired the property subject to the super-priority portion of the HOA's lien. Ikon Holdings did not dispute that the super-lien was senior to the lender's deed of trust, and therefore, that the super-lien survived the trustee’s sale. However, the HOA and Ikon Holdings disputed the composition and amount of the super-lien. The HOA claimed it included the enforcement and foreclosure costs incurred in earlier foreclosure proceedings. Ikon Holdings countered that Nevada law specifically limited super-liens to nine months of assessments, and charges for maintenance and abatement. 

The Nevada Supreme Court held the super-lien did not include foreclosure and enforcement costs. It rejected a 1992 case which held that under Connecticut's HOA statutes—which are largely identical to Nevada's—such costs are included in the super-lien. The court noted the Connecticut opinion did not conduct any statutory analysis of the relevant super-lien language, and that it involved a judicial foreclosure, unlike Horizons. The court also rejected the HOA's argument that excluding foreclosure and collection costs from the super-lien would be inconsistent with a Nevada regulation governing the amount of such costs that an HOA can charge to a homeowner. The court also noted that the Nevada Legislature had considered several bills prior to 2015 that would have included collection costs in the super-priority lien, but none of the bills passed. The court also cited a 2012 advisory opinion from the Nevada Real Estate Division, the agency responsible for administering Nevada’s HOA statutes. That opinion found that the super-priority lien should not include costs of collecting. Finally, the court held that Nevada's HOA statutes preempted a provision of the HOA's declaration which purported to include enforcement costs in the super-priority lien. The court held that Nevada law likewise preempted a section of the declaration that purportedly limited the super-priority lien to six months of assessments, rather than nine months of assessments.

Although Horizons involved a lender's foreclosure under its deed of trust, it is relevant in cases where an HOA foreclosed under its super-lien. Where the HOA foreclosed prior to October 2015, and where the lender paid off (or tried to pay off) the portion of the lien that enjoys a super-priority under Horizons, the lender arguably satisfied the only portion of the lien that could extinguish its first security interest. Importantly, the Horizons case only applies to HOA foreclosure sales held prior to October 1, 2015. Effective that date, the Nevada Legislature amended N.R.S. Chapter 116 to provide that certain types of collection and foreclosure costs are part of the super-priority lien. However, the vast majority of pending lawsuits involve HOA foreclosures that were conducted under the pre-amendment version of the statute.

- Alan S. Petlak and Matthew D. Lamb

Did you know?

by Wendy Tran

The State Regulatory Registry LLC (SRR) is soliciting proposals for the replacement of the existing Background Check Automation System (BCAS), a NMLS fingerprint-based criminal background check processing function. More information about the BCAS can be found here.

The Request for Proposals (RFP)has been sent to interested parties that completed the Non-Disclosure Agreement. RFPs are due by June 27, 2016.

Delaware Amends Licensing Provisions

Delaware has updated certain licensing provisions, enabling the Office of the State Bank Commissioner to reduce the volume of paper generated by the office by eliminating outdated requirements relating to the issuance of paper licenses and the display and posting of paper licenses. More specifically, licensed lenders and mortgage loan broker licenses are no longer required to post their license in a prominent position in their designated place of business. However, licensees must obtain a license for each office or other place of business from which their licensed business is conducted.

These provisions were effective May 9, 2017.

Maryland Amends MILO State Criminal History Records Check Requirement

Maryland has revised provisions regarding the state criminal history records check requirements for mortgage originator license applications. Applicants and licensees are no longer required to provide fingerprints for use by the Maryland Criminal Justice Information System Central Repository to conduct criminal history records checks. In addition, provisions allowing for an expedited process for the renewal of a license, change of status of a license, or issuance of a license to a service member, veteran, or military spouse have been amended. The Commissioner may now waive or suspend any licensing requirements to the extent that the waiver or suspension does not result in the failure to meet the minimum licensing standards.

These provisions are effective July 1, 2016.

Copyright © 2016 by Ballard Spahr LLP.
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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.