CFPB, DOJ Settle Fair Lending Claims Involving Allegations of Redlining, Discretionary Underwriting and Pricing, Overt Discrimination

The Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) recently announced a proposed consent order with BancorpSouth Bank to settle charges that the bank’s mortgage lending practices violated the Fair Housing Act and the Equal Credit Opportunity Act. In addition to allegations of redlining and discrimination resulting from discretionary underwriting and pricing, the agencies’ joint complaint filed in federal court in Mississippi includes allegations of overt discrimination that are based in part on what the CFPB has called its first use of testers or "mystery shoppers" posing as consumers to support discrimination charges. While focused on mortgage lending, the settlement has significant fair lending implications for many types of non-mortgage credit.

On July 25, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, "Fair Lending Lessons That Go Beyond Mortgages: The BancorpSouth Bank Consent Order."  The webinar registration form is available here.

For details about the allegations made in the complaint and the remedies imposed by the consent order, see our legal alert.

- Barbara S. Mishkin

Installment Lender Using Bank Partner Model Needs Maryland License, Court of Appeals Rules

The Maryland Court of Appeals, the state's highest court, in CashCall, Inc. et al. v. Maryland Commissioner of Financial Regulation, recently affirmed the judgment of the Court of Special Appeals (MCSA) directing CashCall to cease doing business in Maryland without a Credit Services Business Act (MCSBA) license and to pay $5.6 million in penalties in connection with loans already made. While much attention has been focused on the risks created by Madden v. Midland Funding, LLC and the so-called "true lender" issue, the CashCall decision illustrates how the bank partner structure used by many lenders can be threatened by state licensing statutes as well.

The case arose out of CashCall advertising on its website to consumers and offering them a method to apply for loans online. The loans were made by out-of-state, state-chartered banks at interest rates significantly in excess of the maximum rate permitted by Maryland law, and the banks also charged loan origination fees. Shortly after origination, the banks sold the loans to CashCall, which collected all payments on the loans.

The Commissioner contended that CashCall was a "credit services business" as defined by state law, because it assisted consumers in obtaining an extension of credit "in return for the payment of money or other valuable consideration." CashCall argued that, in the absence of a direct payment to it from the consumer, it could not be properly classified as a credit services business.

The Maryland Court of Appeals granted certiorari ostensibly to review two issues—whether the MCSA erred in holding that the MCSBA does not require a direct payment from the consumer despite a seemingly contrary 2012 ruling by the Court of Appeals that the MCSBA only applies where a payment comes directly from the consumer; and whether a borrower's repayment of principal and interest can be treated as a direct payment in return for CashCall's assistance in obtaining the loan simply because the principal included an origination fee, the economic benefit of which inured entirely to the banks. However, the court narrowed its focus, "consolidating" and rephrasing the questions to the single question of whether the MCSBA definition of "credit services business" requires a "direct payment from a consumer to an entity whose primary business is to market, facilitate, and ultimately acquire the loans it arranged."

In affirming the MCSA's judgment, the Court of Appeals ruled that the MCSA had correctly concluded that no direct payment is required by the MCSBA where a company is exclusively engaged in assisting consumers to obtain loans. The Court of Appeals agreed with the MCSA that the direct payment requirement in its 2012 ruling should be limited to "'mainstream' businesses that, like [the income tax preparer involved in the ruling, which assisted consumers in obtaining refund anticipation loans], offer loan arrangement services as an ancillary service, separate and distinct from the principal services they provide to Maryland consumers."

According to the court, CashCall was a "credit services business" because it received compensation "in return for" assisting consumers in obtaining loans. In the court's view, such compensation took the form of "the exclusive right to collect all payments of principal, interest and fees, including the origination fee." The court also agreed with the MCSA that, in any event, CashCall did receive direct payment in return for services to consumers when it acquired the loans and collected "the full value of the loan, including the origination fee paid by the consumer."

Although the decision did not expressly turn on a "true lender" theory, the court appears to have been influenced by it in deciding the licensing issue. In particular, the court found that CashCall was "the de facto lender" because it "received payment from the consumer for the 'origination fee,'" which Black's Law Dictionary defines as a "fee charged by a lender for preparing and processing the loan."

The Court of Appeals reached an ominous conclusion regarding the impact of federal preemption on the CashCall program. As the court noted, the MCSBA prohibits a credit services business from assisting a consumer in obtaining a loan at an interest rate that exceeds the maximum rate permitted by Maryland law "except for federal preemption of State law." However, according to the court, "[a]lthough federal law allows federally insured banks to charge out-of-state consumers the same interest rate permitted by the bank's home state, regardless of the interest rate caps imposed by the law of the consumer's resident state," the MCSBA does not permit a credit services business to "assist a consumer in obtaining a loan from any in-state or out-of-state bank, at an interest rate prohibited by Maryland law."

Under the court's reading, the MCBSA would effectively prohibit CashCall from assisting a bank in the origination of loans at rates expressly authorized by federal law. In Barnett Bank, however, the U.S. Supreme Court made it clear that any state law that materially impairs the exercise of a federal banking power is preempted. It is unclear whether CashCall intends to seek certiorari from the U.S. Supreme Court on this issue.

While apparently driven by the underlying facts involving a business that was viewed not to be in the "mainstream," the decision demonstrates how a state financial regulator can potentially use its licensing powers to effectively shut down an online business using the bank partner model. In addition to such state licensing threats, marketplace lenders continue to face uncertainty as a result of the U.S. Supreme Court's recent denial of certiorari in Madden. In light of these developments, and ongoing licensing inquiries by other state regulators, participants in marketplace lending programs and others utilizing the bank partnership model would be well-advised to revisit their compliance with state licensing laws and their vulnerability to "true lender" and Madden challenges.

- the Consumer Financial Services Group

CFPB to Hold Second Research Conference

The Consumer Financial Protection Bureau (CFPB) has announced that it plans to host its second research conference on consumer finance on December 15-16, 2016. (The first such conference was held in May 2015.)

The announcement contains a call for complete papers or detailed abstracts that include preliminary results to be submitted by August 26, 2016. The CFPB is encouraging the submission of a variety of research including, but not limited to, work on "the ways consumers and households make decisions about borrowing, saving, and financial risk-taking; how various forms of credit (mortgage, student loans, credit cards, installment loans, etc.) affect household well-being; the structure and functioning of consumer financial markets; distinct and underserved populations; and relevant innovations in modeling or data." A particular area of CFPB interest is the dynamics of households’ balance sheets.

According to the CFPB, the conference is intended "to connect the core community of consumer finance researchers and policymakers with the best research being conducted across the wide range of disciplines and approaches that can inform the topic. Disciplines from which we hope to receive submissions include, but are not limited to, economics, the behavioral sciences, cognitive science, and psychology."

The CFPB’s call for papers lists the names of 10 academics who are members of the conference’s scientific committee.

- Barbara S. Mishkin

Nevada Supreme Court Accepts Certified Question in HOA Lien Litigation Case – Should the SFR Decision Apply Retroactively?

We previously reported on the Nevada Supreme Court’s decision in SFR Investments Pool 1, LLC. v. U.S. Bank, N.A., holding that a homeowners association (HOA) lien is a true super-priority lien that upon foreclosure extinguishes a first deed of trust. This decision came as a surprise to many, including the district court judges who sharply disagreed on the proper interpretation of Nevada's statute and whether it in fact provided for a true super-priority lien. Yet, SFR left many unanswered questions, including whether its core holding—that foreclosure of an HOA lien could extinguish a first deed of trust—applies retroactively.  That question may soon be answered.

The Nevada Supreme Court recently accepted a certified question of law from the U.S. District Court for the District of Nevada which asks the Nevada Supreme Court to determine whether the holding in SFR applies retroactively to foreclosures occurring prior to the date of that decision. The certified question in Christiana Trust v. K&P Homes comes as a result of the District Court ruling that SFR decision does not apply retroactively.

In Chevron Oil Co. v. Huson, the U.S. Supreme Court recognized limitations on the retroactive application of judicial rulings as a matter of common law equity. Under the Huson factors:

  • "the decision to be applied non-retroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed;"
  • the court must "weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation;" and
  • courts consider whether retroactive application "could produce substantial inequitable results."

The District Court in Christiana Trust agreed with the lender's argument that the SFR decision did not apply retroactively, and so dismissed the quiet title complaint of the plaintiff HOA sale purchaser. While the District Court declined to reconsider its ruling, it granted the purchaser's motion to certify the issue to the Nevada Supreme Court. 

The parties recently submitted their briefs to the Nevada Supreme Court addressing retroactivity and, specifically, the three Huson factors. According to the lender, the SFR decision was not clearly foreshadowed because all the relevant industry actors treated the HOA lien as a payment priority not capable of extinguishing a first deed of trust and no Nevada courts prior 2012 had ever addressed this issue. The lender noted further that when the courts were finally presented with the issue, at least 23 judges in Nevada held that an HOA lien did not extinguish a first deed of trust.

In contrast, the HOA sale purchaser argued that the SFR decision was foreseeable, especially in light of the Nevada Real Estate Division’s December 2012 advisory opinion announcing that the HOA lien enjoyed true super-priority status. In addition, the purchaser noted that the Nevada Supreme Court was already presented with and rejected the non-retroactivity argument when it denied the petition for rehearing on the SFR decision.

On July 15, 2016, the Federal Housing Finance Agency filed an amicus brief in support of the lender. No oral argument has been set at this time. Needless to say, lenders rightly are monitoring this matter as the Nevada Supreme Court’s decision on the certified question has the potential to impact more than 5,000 cases currently pending before the lower courts throughout Nevada, as well as in other states with similar statutory schemes.

- Sylvia O. Semper, Christopher N. Tomlin, and Alan S. Petlak

Did you know?

by Wendy Tran

NMLS Publishes Response to Comments and Approved Changes to MU1, MU3 Filing Attestation Language

The State Regulatory Registry (SRR) published its Response to Comments and Approved Changes to the Company Form (MU1) and Branch Form (MU3) Filing Attestation on June 22, 2016. The SRR published changes to the MU1 and MU3 attestation language and accepted public commentary.

Attestations are required as part of filing submissions on NMLS, assuring that the information provided is true, accurate, and updated. Companies must make this legal attestation upon initial license application, subsequent license applications or amendments to the company or branch record, renewal of approved licenses, and when submitting a Mortgage Call Report or financial statement.

The SRR specifically sought comments from the public regarding the inclusion of the " the best of my knowledge, information, and belief...," language as part of the MU1 and MU3 attestation. After reviewing the comments received, the SRR decided to retain the use of this language. See Addendum D of the Response for the final attestation language.

In addition, to accommodate common business practices, two new user roles for Organizational Users will be added, allowing designated third-party users to help with completing company and branch filling without attestation and submission requirements.

Copyright © 2016 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.