Maryland Issues Revised Proposed Rules for Servicing Transfers

The Maryland Commissioner of Financial Regulation recently issued a revised proposed regulation impacting servicing transfers. The Commissioner previously issued proposed regulations on this topic in January 2015. This revised proposal would have a broad and significant impact on the mortgage servicing industry. An outline of the proposed regulation is provided below, along with our general observations.

General Servicing Transfer Requirements

  • For any transfer of servicing rights covering 7,500 or more loans, the transferee servicer would be required to report certain information to the Commissioner at least 30 days prior to the transfer date. This requirement would apply regardless of whether the transfer includes Maryland loans, but it would exclude loans transferred before the first payment is due.
  • Specifically, for each such transfer, the transferee servicer would be required to report whether the transfer involves a subservicing agreement or an agreement for the sale of mortgage servicing rights; the names of the parties to the transfer agreement; the total number of loans transferred; the total unpaid principal balance for the loans transferred; the total number of additional staff that has been, or will be, hired in order to service the transferred loans; and whether the pool includes Maryland loans. 
  • The proposed regulation includes an appeal mechanism for the 30–day prior notice requirement; however, the only example provided of a qualifying "extenuating circumstance" is a transfer required by a court or regulator. 
  • We note that the 2015 proposal set the threshold at 5,000 loans and would have required at least 60 days advance notice.

Servicing Transfers Including Maryland Loans

  • If the transfer triggers the reporting requirements above (7,500 or more loans), and the pool includes Maryland loans, the transferee servicer must provide the following additional information, also at least 30 days prior to the transfer date:
    • The total number of Maryland loans in the transferred pool;
    • A breakdown of the Maryland loans by investor type;
    • The number of Maryland loans that are delinquent, in categories of 30–plus, 90–plus, and 360–plus days delinquent;
    • The number of Maryland loans with a permanent modification;
    • The number of Maryland loans for which the borrower has completed a trial loan modification and the transferor servicer has not supplied an executed copy of a permanent loan modification to the borrower;
    • The number of Maryland loans with a loan modification that is in a trial period;
    • The number of Maryland loans where the borrower has submitted a complete loss mitigation application and the transferor servicer has not made a decision regarding eligibility for a loss mitigation option;
    • The number of Maryland loans that have incomplete loss mitigation applications; and
    • The number of Maryland loans that include an escrow for taxes, insurance, or other charges.
  • After submitting the required information detailed above, at any time up to five days prior to the transfer date, the Commissioner would be permitted to request additional information regarding the transfer, which would then have to be provided prior to the transfer date. According to the proposed regulation, such information could include, but would not be limited to, the names and loan numbers for Maryland borrowers whose loans are included in any of the categories above; and an informational plan describing how the transferee servicer will manage risk related to the transfer.
  • In addition, for covered pools that include Maryland loans, the transferee servicer would be required to appoint a contact person to administer complaints related to the servicing of Maryland loans in that pool.
  • The proposal also includes a year-end reporting requirement that would apply if a transferee servicer acquired servicing for a total of 15,000 or more loans during the preceding calendar year. Thus, even if no single transfer exceeds the 7,500 loan threshold, the transferee servicer would be required to report the above information for Maryland loans in light of its activity over the entire calendar year. The specific timing for submitting such a report is not stated in the proposed rule.
  • We note that under the 2015 proposed rule, this year-end threshold was set at 5,000 for the entire calendar year.

Policies and Procedures

The proposed rule also includes policy and procedure requirements that apply generally to Maryland licensees involved in a servicing transfer either as transferee or transferor. The proposed rule requires generally that such licensees have policies and procedures in place to ensure compliance with applicable state and federal law regarding mortgage servicing. The proposal then goes on to cite examples of such appropriate policies and procedures, most notably including:

  • Ensuring that discussions with borrowers and any loss mitigation requests, applications, or documentation are provided to the transferee;
  • Creating a customer service plan for responding to borrower inquiries and for identifying whether a loan is subject to a pending loss mitigation application, offer of loss mitigation, or an approved loss mitigation agreement;
  • Creating a customer service plan for responding to and processing loss mitigation requests or inquiries from successors in interest; and
  • Remediating actual harm to borrowers resulting from a servicing transfer.

Obligations on Transferor Servicers

The proposed rule would further require that transferor servicers take certain actions prior to the transfer date. Notable examples of these measures for the transferor include:

  • Providing a description to the transferee servicer of loss mitigation options that are unique to the transferor servicer and that are applicable to one or more transferred loans, including the criteria for determining eligibility;
  • Describing specific regulatory requirements that are applicable to some or all of the transferred loans; and
  • Describing specific requirements related to a settlement agreement applicable to some or all of the transferred loans.

Obligations on Transferee Servicers

Transferee servicers would also be subject to certain requirements, to be completed on or after the transfer date. Among such requirements are the following:

  • Provide general information about the transfer process to borrowers, including a notice of a borrower's complaint resolution rights under applicable state and federal law;
  • Respond, within the time frames established by applicable state and federal law, to any pending written complaint or notice of error sent to the transferor servicer;
  • Confirm the amount and status of scheduled payments, including any fees incurred before the transfer date, with information and documents provided by the transferor from its system of record; and
  • Prior to confirming the amount and status of scheduled payments (as described above), the transferee would be prohibited from charging a late fee or any other fee in connection with the servicing of the loan; beginning or continuing collection activities; or providing information about delinquency to a credit reporting agency.

Analysis

As currently drafted, these proposed rules will have a significant impact on the mortgage servicing industry. First, although the regulations would directly apply only to Maryland-licensed servicers, any non-licensed servicers transferring to or from a licensee would be affected by these requirements. 

The reporting requirements for transferee servicers, especially with respect to Maryland loans, are extensive. The Commissioner's focus on certain categories of loan information, namely information for loans in various stages of loss mitigation upon transfer, signal an attempt to facilitate the identification of regulatory violations in this area, and a corresponding focus for possible enforcement activity. 

With respect to the policy and procedure requirements, and the specific obligations on transferor and transferee servicers, in many respects the proposed regulations go beyond those currently imposed by the CFPB. In addition, many of the proposed requirements are less than clear, and could present compliance issues on application. For example, it is not clear to what degree a transferor would have to describe to the transferee the specific regulatory or settlement agreement requirements applicable to some or all of the transferred loans. 

Another concerning aspect of the proposal is the prohibition from beginning or continuing "collection activities" until the transferee has confirmed the amount and status of scheduled payments, including any fees incurred before the transfer date. The scope of "collection activities" subject to this temporary hold is not defined, and could be quite broad in light of other interpretations of debt collection laws. For example, courts have held that the RESPA servicing transfer notice issued by a transferee servicer is the "initial communication in connection with the collection of a debt" under the federal Fair Debt Collection Practices Act. Strictly applied, this proposed requirement could effectively prohibit a joint (transferor and transferee), pre-transfer notice. 

Attorneys at Ballard Spahr will continue to follow this important regulatory development, and provide updates accordingly. Please note that comments on the proposed rules may be submitted to the DLLR through March 6, 2017.  

The full text of the proposed regulation can be found here

- Reid F. Herlihy


Plaintiffs in Another Case Challenging CFPB's Constitutionality Move to Intervene in PHH Case

The plaintiffs in State National Bank of Big Spring, Texas, et al. v. Lew have filed a "Motion To Intervene In Any En Banc Proceeding That May Be Granted" in the PHH case. The motion follows the D.C. federal district court's denial of the plaintiffs' attempt to consolidate their case with PHH on appeal to the D.C. Circuit.

In July 2016, the D.C. federal district court rejected the plaintiffs' attempt in State National Bank of Big Spring to invalidate the actions taken by Consumer Financial Protection Bureau (CFPB) Director Richard Cordray while he was a recess appointee. The district court deferred ruling on the plaintiffs' separation of powers constitutional challenge pending a decision by the D.C. Circuit in PHH. The D.C. Circuit subsequently ruled in PHH that the CFPB's single-director-removable-only-for-cause structure is unconstitutional. In their motion seeking consolidation filed last month, the plaintiffs argued that judicial economy would be served by having the district court enter partial summary judgment in their favor on their claim that the Dodd-Frank Act's for-cause removal provision is unconstitutional and then certify the partial summary judgment order for interlocutory appeal to the D.C. Circuit.

In their motion to intervene, the plaintiffs argue that if the D.C. Circuit grants the CFPB's petition for rehearing en banc but decides the case on RESPA grounds, their "constitutional claims will be left unresolved, and the district court will be left without binding guidance from this Court as to how the constitutional question should be answered." According to the plaintiffs, a decision on RESPA grounds would delay the resolution of their case, "prolonging the harm they suffer from being subject to unconstitutionally promulgated regulations and ensuring that they will wait even longer for an eventual, inevitable merits determination from this Court."

The plaintiffs argue that they meet the standard for intervention of right, which includes a requirement that no party to the action can adequately protect their interests. According to the plaintiffs, they cannot rely on PHH to defend the panel's constitutionality holding as vigorously as the plaintiffs would.

- Barbara S. Mishkin

CFPB January 2017 Complaint Report Highlights Mortgage Complaints, Complaints from Tennessee Consumers

The CFPB has issued its January 2017 complaint report that highlights mortgage complaints. The report also highlights complaints from consumers in Tennessee and the Memphis and Nashville metro areas.

General findings include the following:

  • As of January 1, 2017, the CFPB handled approximately 1,080,700 complaints nationally, including approximately 22,900 complaints in December 2016.
  • Debt collection continued to be the most-complained-about financial product or service in December 2016, representing about 31 percent of complaints submitted. Debt collection, together with credit reporting and mortgages, collectively represented about 65 percent of the complaints submitted in December 2016.
  • Complaints about student loans showed the greatest percentage increase based on a three-month average, increasing about 109 percent from the same time last year (October to December 2015 compared with October to December 2016). In February 2016, the CFPB began accepting complaints about federal student loans. Previously, such complaints were directed to the Department of Education. As we have noted in blog posts about prior complaint reports issued beginning in April 2016, rather than reflecting an increase in the number of borrowers making student loan complaints, the increase most likely reflects the change in where such complaints are sent.
  • Prepaid card complaints showed the greatest percentage decrease based on a three-month average, decreasing about 59 percent from the same time last year (October to December 2015 compared with October to December 2016). Complaints during those periods decreased from 458 in 2015 to 189 in 2016. Prepaid cards also showed the greatest decrease based on a three-month average in the November and December 2016 complaint reports.
  • Payday loan complaints in December 2016 were 23 percent less than in November 2016, representing the product with the greatest month-over-month decrease.
  • Alaska, Georgia, and Louisiana experienced the greatest complaint volume increases from the same time last year (October to December 2015 compared with October to December 2016) with increases of, respectively, 357, 46, and 32 percent.
  • Wyoming, Vermont, and Delaware experienced the greatest complaint volume decreases from the same time last year (October to December 2015 compared with October to December 2016) with decreases of, respectively, 20, 19, and 12 percent.

Findings regarding mortgage complaints include the following:

  • The CFPB has handled approximately 260,500 mortgage complaints.
  • The CFPB found a trend of consumers increasingly identifying issues relating to the issue of "making payments" (which covers loan servicing, payments, and escrow accounts).
  • Consumers reported issues involving escrow account shortages, such as the misapplication of funds resulting in an increase in the monthly payment and a lack of explanation for shortages. Other escrow-related issues included the servicer's purchase of hazard insurance despite the consumer's provision of proof of coverage and the servicer's failure to timely submit insurance payments resulting in inadequate coverage.
  • Consumers complained about the loss of timely payments by servicers resulting in negative credit reporting and improper crediting by servicers of electronic monthly payments made via bill pay services through their financial institutions.
  • Consumers attempting to negotiate loss mitigation assistance complained that servicers were slow to respond, made repeated requests for already submitted documents, and provided ambiguous denial reasons.

Findings regarding complaints from Tennessee consumers include the following:

  • As of January 1, 2017, approximately 17,800 complaints were submitted of which approximately 4,700 and 5,800 were from Memphis and Nashville consumers, respectively.
  • Debt collection was the most-complained-about product, representing 34 percent of all complaints submitted by Tennessee consumers, which was higher than the national average rate of 27 percent of all complaints.
  • Average monthly complaints received from Tennessee consumers increased 8 percent from the same time last year (October to December 2015 to October to December 2016), lower than the increase of 12 percent nationally.

- Barbara S. Mishkin


Michigan Department of Insurance and Financial Services Announces New Online Complaint Form

The Michigan Department of Insurance and Financial Services (DIFS) has announced the launch of a finalized version of its online portal to assist Michigan consumers with the filing of electronic complaints. DIFS' Office of Consumer Services stated it plans on using the tool to "start the initial review of complaints against insurance entities, banks, credit unions, mortgage companies, payday lenders, vehicle loans, personal loans, money transfers, and debt management transactions." DIFS launched a beta version of the complaint portal in August 2016 and received, via the new portal, 476 of the total 1,961 complaints that were made through the end of the year.

The portal shares several similarities with the Consumer Financial Protection Bureau's (CFPB) online complaint portal. The CFPB's complaint portal would be eliminated under the Financial Choice Act currently being considered by the U.S. House of Representatives. If the CFPB complaint portal is eliminated, potentially other states may follow the path of the Michigan DIFS. 

- Matthew R. Smith


Ninth Circuit to Decide Key TCPA Insurance Issue

The Ninth Circuit Court of Appeals recently heard oral argument in Los Angeles Lakers, Inc. v. Federal Insurance Company, a case raising the issue of whether an exclusion for invasion of privacy claims in a directors and officers liability insurance policy bars coverage for a claim under the Telephone Consumer Protection Act (TCPA).

The case arises from an underlying TCPA lawsuit alleging that an NBA team improperly sent text message solicitations to a fan who sent a text to the team during a game for possible display on the scoreboard. The insurance carrier rejected the team's tender of the claim for defense and indemnity, citing the privacy exclusion. The team then settled the TCPA case and sued the carrier for breach of the policy. The carrier then successfully moved to dismiss, citing the policy's exclusion for claims "based upon, arising from, or in consequence of . . . invasion of privacy." In granting the motion, the trial court held that all TCPA claims are privacy claims because the statute's purpose is to protect privacy.

Many policies already specifically exclude coverage for TCPA claims. For companies with policies that exclude privacy claims generally, but not TCPA claims specifically, the outcome of the decision will be important.

Ballard Spahr's TCPA Task Force assists clients in navigating the complex and challenging issues that arise under the TCPA. The Task Force, which comprises regulatory attorneys and litigators, provides counsel on TCPA compliance and avoiding TCPA liability, including reviewing policies and practices and helping to design mobile text message and prerecorded and autodialed call campaigns. It also assists clients in commenting on regulatory proposals and handling scrutiny from regulators, including preparing for examinations, responding to investigations, and defending against enforcement actions. Task Force members also defend clients against TCPA class or individual actions.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

- Mark J. Furletti, Daniel JT McKenna, Scott M. Pearson, David M. Stauss, and J. Matthew Thornton


The Eastern District of Michigan Affirms the CFPB's Broad Authority to Issue Civil Investigative Demands

A recent decision from the Eastern District of Michigan in CFPB v. Harbour Portfolio Advisors, LLC; National Asset Advisors, LLC; and National Asset Mortgage, LLC serves as a reminder that the Consumer Financial Protection Bureau's (CFPB) authority to issue a civil investigative demand (CID) is very broad, particularly when compared to discovery in federal litigation. For example, federal courts will often limit discovery to conduct that occurred within the relevant statute of limitations.

In Harbour Portfolio Advisors, however, the court allowed the CFPB to seek information dating back seven years, even though the pertinent statute of limitations was at most three years. In declining to limit the CID to the statute of limitations, the court reasoned that "information dating back to that period will help the Bureau develop a complete understanding of Respondents' practices and operations." Plaintiffs in civil litigation will often argue that they need pre-statute material to tell the full story of a defendant's alleged misconduct, but federal courts rarely permit it in discovery disputes.

In addition to approving the seven-year response period, other features of the opinion highlight the broad nature of the CFPB's investigatory power compared to traditional discovery. The first relates to the subject matter of the CID and the CFPB's authority over it. The CFPB sought information with respect to a product the respondents offered known as an agreement for deed. An agreement for deed is similar to a rent-to-own product, only for real property instead of personal property. In the transaction, a consumer agrees to make periodic payments to the owner of real property until a certain "purchase price" is reached. Once the consumer makes payments that total the purchase price, the owner of the property transfers the deed to the consumer.

The respondents, issuers, and servicers of agreements for deeds argued that the CFPB does not have jurisdiction over agreements for deeds because they are not credit products, much in the way that rent-to-own agreements are not credit products. The court held that it did not need to decide whether an agreement for deed is a credit product, however, because that argument is relevant to an enforcement action, not a CID. Instead, the court held that the inquiry was limited to whether the CFPB’s jurisdiction was "plainly lacking." If the CFPB has a "plausible basis" for jurisdiction over the activity, the court reasoned, it must enforce the CID. The court then held that because there was at least a plausible basis for believing an agreement for deed is a credit product, the CFPB had jurisdiction to issue the CID. In reaching this decision, the court distinguished the CFPB's attempt to enforce a CID against a college accrediting agency, in which case another federal district court ruled that the CFPB's jurisdiction was plainly lacking.

The "plainly lacking" standard could end up being the most significant aspect of the case. The CFPB's authority to enforce a CID against the supplier of a product that is arguably not a consumer financial product or service is currently at issue in the Eastern District of Pennsylvania, involving a CID directed to an issuer of settlement annuities. The target of the CID, and the Chamber of Commerce of the United States as amicus, argued that the settlement annuities are not a consumer financial product or service, and, therefore, the CFPB does not have jurisdiction to regulate them. On the same day the Harbour Portfolio decision was issued, the CFPB submitted it as supplemental authority. We will monitor that case closely to determine whether the Eastern District of Pennsylvania finds Harbour Portfolio persuasive.

The Harbour Portfolio court similarly drew a distinction between an enforcement action and a CID with respect to the respondents' "fair notice" argument. The respondents argued that they did not have fair notice that an agreement for deed was a financial product subject to CFPB jurisdiction. The court held that fair notice only comes into play if the CFPB proceeds beyond the investigative stage and into the enforcement stage. Because a CID is part of the investigative stage, the court did not rule on the merits of the argument, and deferred consideration of it to a future enforcement action, should one occur.

Finally, the court rejected the respondents' undue burden argument because, in the court's view, the respondents did not put forth sufficient evidence of the burden of production. This holding is a useful reminder to entities facing CIDs from the CFPB and other agencies that, when making a burden argument, the better strategy is to come forward with very specific evidence of the cost, time, and resources necessary to comply with information requests. This evidence should be presented to the CFPB in the first instance, as enforcement attorneys will often work with targets of an investigation to reach modifications to the requests. In our experience, such requests are more likely to be granted when supported by specific evidence of the exact nature of the burden involved. If an agreement with the CFPB is not possible, evidence of the burden will almost certainly be required from a court. Thus, it is invariably worth the effort to establish the burden by specific evidence as early as possible.

Almost as interesting as the opinion itself is the fact that The New York Times covered it. It is rare for a major newspaper to run a lengthy article on what essentially amounts to a discovery dispute. But the article is best understood as not being about a single dispute over a CID, but the broader debate over the future of the CFPB itself. With bills being introduced in Congress that would eliminate or substantially reshape the CID, all of its actions will likely receive heightened attention in the press, as all sides of the debate seek to shape the public narrative around the future of the agency.

- Daniel L. Delnero


New CFPB Webinar Available on 2015 HMDA Final Rule

The Consumer Financial Protection Bureau (CFPB) released a final rule amending Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), requiring certain data on mortgage applications and loans to be collected beginning in 2017 by "covered institutions."

The CFPB has previously made various resources available for HMDA filers, including a recording of a webinar conducted by the CFPB staff that provides an overview of the 2015 HMDA final rule. Last week, the CFPB posted a recording of a new webinar on the final rule that discusses identifiers and other data points, including those related to applicants and borrowers.

- Richard J. Andreano, Jr.


Did you know?

by Wendy T. Novotne

Oregon Allows for Electronic Surety Bond Submission on NMLS

The Oregon Department of Consumer and Business Services will allow mortgage banker, mortgage broker, and consumer finance applicants and licensees to submit corporate surety bond information through NMLS. As we have reported, NMLS allowed for the electronic submission of surety bonds in 2016. More information on submitting Electronic Surety Bonds (ESB) on NMLS can be found here

These provisions are effective April 1, 2017. 

NMLS Release 2017.1

The NMLS Release 2017 will contain enhancements and system maintenance updates including the NMLS Money Services Businesses Call Report (MSBCR) and Electronic Surety Bonds (ESB).

The release has been targeted for March 20, 2017.

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