In This Issue:

For the latest updates on the Coronavirus pandemic visit the Ballard Spahr Coronavirus Resource Center

 

Ballard Spahr’s Consumer Financial Services Group again receives highest national ranking from Chambers USA

We are pleased to announce that Ballard Spahr’s Consumer Financial Services Group has once again received the highest national ranking from Chambers USA: America’s Leading Lawyers for Business. The Group was ranked in the highest tier nationally in each of the two categories, Compliance and Litigation, used by Chambers USA for Financial Services Regulation.

Only three groups were ranked this high in each category and our CFS Group is one of only two groups to be ranked in the highest tier nationally in both categories. Our CFS Group has been ranked in Band One every year since Chambers USA introduced a national category for consumer finance. The rankings are largely based on client feedback and peer review.

Released last week, the Chambers USA report praised the Group’s skill in supporting clients at both the state and federal regulatory levels. According to the report, the Group is noted for its work with banks and non-banks on the full range of consumer finance regulatory matters, including credit cards, mortgage, and auto finance issues. Chambers USA also noted the Group’s expertise in the areas of fintech, e-commerce, and prepaid cards and its ability to provide robust representation of clients in in CFPB enforcement actions, arbitrations and litigation.

Six individual lawyers from our CFS Group were recognized for excellence by Chambers USA: Alan Kaplinsky, Chris Willis, Rich Andreano, John Culhane, Mark Furletti, and Jeremy Rosenblum.

CFS Group Leader Alan Kaplinsky, who was individually ranked in Band One, was called “the preeminent lawyer in his areas of expertise” and “widely regarded as a national expert on consumer finance issues.” Chris Willis, leader of CFS Litigation and also individually ranked in Band One, was described as “probably the most high-powered intellect in all of financial services.”

We are proud of the work we do, and very grateful to our clients for entrusting us to help them develop new products, defend them in private litigation and against enforcement actions, and assist them in navigating the increasingly complex array of federal and state regulations.

- Barbara S. Mishkin

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Washington, D.C.’s COVID-19 Response Supplemental Emergency Amendment Act and Implications for Mortgage Loan Servicers

Commercial landlords and lenders and servicers for commercial real estate loans should be aware of recent legislation out of the District of Columbia that imposes obligations on servicers to develop and implement deferral programs.

District of Columbia Mayor Muriel Bowser signed D.C.’s COVID-19 Response Supplemental Emergency Amendment Act (Supplemental Act) on Friday, April 10. It was unanimously passed by the D.C. Council on April 7. The Supplemental Act expands upon COVID-related matters that were addressed in D.C.’s initial COVID Act, which took effect on March 17, 2020. (See the Supplemental Act).

Under Section 202 of the Supplemental Act, commercial and residential landlords are required to reduce rent for their tenants if (a) the landlord receives a mortgage deferral under D.C.’s mortgage loan deferral program (described below), and (b) the tenant notifies the landlord of its inability to pay all or a portion of the rent due to the public health emergency. For the period that the mortgage deferral is in place, the tenant’s rent shall be reduced in an amount proportional to the reduced mortgage amount paid by the borrower to the mortgage servicer. The landlord may require the tenant to repay the amount of any reduced rent without interest or fees within the earlier of 18 months or the end of the lease term.

In connection with the foregoing rent reduction provision, the Supplemental Act requires that servicers under the jurisdiction of the Commissioner of the Department of Insurance, Securities and Banking provide a mortgage loan deferment program for any borrower that demonstrates financial hardship due to the pandemic. The Commissioner has jurisdiction over D.C.-chartered financial institutions and financial institutions conducting business in D.C. under the D.C. Banking Code, as well as mortgage loan originators, loan officers, mortgage lenders, and mortgage brokers. The Commissioner currently is taking the position that all lenders and servicers servicing loans in D.C. are subject to the Supplemental Act.

At a minimum, the deferral program required by the Supplemental Act shall (i) grant 90-day deferment of borrower mortgage payments, (ii) waive late fees, processing fees and other fees accrued during the public health emergency, and (iii) not report to a credit bureau any delinquency or other derogatory information as a result of the deferral. A mortgage servicer shall approve a borrower’s request for deferment if the borrower demonstrates financial hardship resulting directly or indirectly from the public health emergency and agrees in writing to pay the deferred amount within a reasonable time agreed-to in writing by borrower and the servicer or the earlier of five years from the end of the deferment period and the end of the original term of the mortgage loan. Mortgage servicers are required to establish application procedures for borrower to apply for deferrals. These deferral applications must be made available online and by telephone.

In addition, D.C.’s emergency legislation provides for the following:

  • Commercial and residential evictions are stayed.
  • Landlords cannot charge late fees to residential tenants during any month that the emergency is in effect.
  • Landlords cannot increase rents for residential tenants that take effect during the period that the public health emergency is in place (commenced March 11, 2020) and for 30 days after the emergency ends. Any rent increases that were noticed or intended to take effect during the emergency are nullified.

Ballard Spahr continues to monitor updates and guidance that may be forthcoming with regard to the deferment program.

- Real Estate Finance Group

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Fannie Mae and Freddie Mac Update Origination and Appraisal Guidance Based on COVID-19 and Suspend Bulk Purchases

On May 5, 2020 Fannie Mae updated Lender Letter 2020-03 and Lender Letter 2020-04 and Freddie Mac issued Bulletin 2020-14, to update and extend temporary origination and appraisal guidance based on COVID-19. The Freddie Mac Bulletin addresses the temporary guidance in Bulletins 2020-11, 2020-8, and 2020-5.

We previously addressed the original guidance and prior updates in alerts on April 15, April 2, and April 1.

Temporary policies previously announced in the guidance that apply to loans with application dates on or before May 17, 2020, are now extended to loans with application dates on or before June 30, 2020.

The agencies also address unemployment benefits and furloughed employees. The agencies advise that unemployment benefits may be used to qualify a borrower only when associated with seasonal employment in accordance with the requirements set forth in their guides. The agencies also advise that furloughed employees do not qualify under their guidelines for temporary leave income policy, with Fannie Mae noting that such employees are not able to provide evidence of a stable and reliable flow of employment-related income.

The agencies announce that they are temporarily suspending bulk purchases of loans, and are requiring that all loans sold to them be no more than six months old at the time of sale. The agencies provide details on how the age of loans will be calculated.

Fannie Mae advises that for new Desktop Underwriter® (DU®) loan casefiles created on or after May 4, 2020 through June 30, 2020, it is suspending representation and warranty relief for employment verification within the Desktop Underwriter® (DU®) validation service. Previously, Fannie Mae announced the temporary suspension of employment validation within the Desktop Underwriter® (DU®) validation service “in response to COVID-19’s unprecedented impact on employment.”

Freddie Mac advises that if a seller discovers that a loan it sold to Freddie Mac was in forbearance prior to its eligibility for purchase, or has delivered such a loan to Freddie Mac without a required data point, the seller must report such finding to Freddie Mac within 30 days of discovery. Previously, Fannie Mae and Freddie Mac announced the temporary eligibility for sale of mortgage loans in a COVID-19 forbearance, subject to conditions.

- Mortgage Banking Group

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Fannie Mae and Freddie Mac Address Eligibility for Sale of Loans in COVID-19 Forbearance

On April 22, 2020 Fannie Mae in Lender Letter 2020-06 and Freddie Mac in Bulletin 2020-12 address the temporary eligibility for sale of mortgage loans in a COVID-19 forbearance.

While the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides for mortgage loan forbearance relief with federally-backed mortgage loans, Fannie Mae and Freddie Mac do not expressly refer to a CARES Act forbearance. Rather, under the temporary sale eligibility a loan is considered to be in forbearance if the borrower (1) attested to or otherwise informed the lender or servicer that, after the note date, the borrower suffered financial hardship caused directly or indirectly by COVID-19 and requested forbearance or (2) was approved for a forbearance plan based on a COVID-19 related financial hardship that occurred after the note date.

Fannie Mae and Freddie Mac advise that a borrower inquiry about forbearance without an actual request for forbearance does not itself result in the loan being considered to be in forbearance. The enterprises also caution that lenders should not in any way discourage borrowers from contacting them or encourage borrowers to delay notifying them, either before or after the note date if they are experiencing a COVID-19 related financial hardship.

To be eligible for sale on or after May 1, 2020, a loan in forbearance must have a note date on or after February 1, 2020, and on or before May 31, 2020, and must meet submission or settlement date timeframes outlined in the guidance. Additionally, the loan must be either a purchase loan or limited cash-out refinance loan, and must not be delinquent more than 30 days.

An additional pricing adjustment will be applied to the loans. The amount is five percent if the borrower is a first-time homebuyer and seven percent for other loans.

Fannie Mae and Freddie Mac advise that they expect loans in forbearance that are sold to them under this temporary eligibility will be representative in both profile and volume of a lender’s agency-eligible loans that are typically sold to the enterprises.

Fannie Mae also issued related guidance entitled Scenarios: Loans in Forbearance Due to COVID-19 and Representations and Warranties. The guidance addresses whether a loan is eligible for sale in various scenarios and how various situations affect seller representations and warranties.

- Mortgage Banking Group

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Fannie Mae Suspends Employment Validation Through DU

In a DU Validation Servicing Release Note dated May 1, 2020, Fannie Mae announced the temporary suspension of employment validation within the Desktop Underwriter® (DU®) validation service “in response to COVID-19’s unprecedented impact on employment.” The temporary suspension applies to all new casefiles created in DU on or after May 4, 2020. Lenders will have to perform a verbal verification of employment in accordance with Selling Guide B3-3.1-07, and follow the temporary policies for employment verification outlined in Lender Letter 2020-03.

Fannie Mae advises that lenders still will be able to use the income and asset validation services, but that income validation for a borrower remains dependent on the borrower being employed. Fannie Mae also states that it will continue to monitor the economic environment closely, and at the appropriate time it will communicate the reinstatement of the employment validation service.

- Mortgage Banking Group

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HUD OIG Takes Issue with Mortgage Servicer Websites Addressing CARES Act

The U.S. Department of Housing and Urban Development Office of Inspector General (HUD OIG) issued a statement dated April 27, 2020, that is not complimentary about how mortgage servicer websites are providing information on the CARES Act.

The HUD OIG notes that on April 17, 2020, which was 22 days after the adoption of the CARES Act, it reviewed the websites of the top 30 mortgage servicers regarding information provided on the CARES Act. The HUD OIG states that its “review of the 30 servicers’ websites, which service approximately 90 percent of FHA loans, revealed that those websites provided incomplete, inconsistent, dated, and unclear guidance to borrowers related to their forbearance options under the CARES Act. HUD OIG plans to initiate additional work related to forbearance offered by FHA servicers under the CARES Act.”

- Mortgage Banking Group

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CFPB Addresses Rescission and TRID Rule Waiting Periods and Changed Circumstances in View of COVID-19

On April 29, 2020, the Consumer Financial Protection Bureau (CFPB) announced an interpretive rule addressing the waiting periods under the Regulation Z right to rescind provisions and the TRID rule in view of COVID-19, and also whether increases in fees based on COVID-19 constitute a changed circumstance under the TRID rule. The interpretive rule will become effective upon publication in the Federal Register. The CFPB also issued a compliance aid in the form of a FAQ regarding the ability of a mortgage loan applicant to waive the timing requirement under Equal Credit Opportunity Act (ECOA) and Regulation B provisions that require creditors to provide the applicant with a copy of any written appraisal or other valuation developed in connection with the application (ECOA Valuations Rule).

Changed Circumstances. The TRID rule limits the ability of a creditor to increase various fees, such as appraisal fees, above the amount disclosed in the initial Loan Estimate. One situation in which an increase is permitted is if the increase is based on a changed circumstance that affects one or more settlement charges. For purposes of the TRID rule, a changed circumstance includes, among other situations, an “extraordinary event beyond the control of any interested party,” and the Commentary to the TRID rule indicates that a “war or natural disaster” is an example of such an extraordinary event.

The CFPB notes that it was contacted by stakeholders asking whether the COVID-19 national emergency constitutes an extraordinary event that rises to the level of a changed circumstance that would permit a creditor to increase a settlement charge, such as an appraisal fee. Creditors have noted a sharp increase in appraisal fees based on the circumstances created by the COVID-19 national emergency.

The interpretive rule provides that “[u]pon consideration of the interpretive issues, the Bureau concludes that, as with wars or natural disasters, the COVID-19 pandemic is an example of an extraordinary event beyond the control of any interested party, and thus is a changed circumstance. Accordingly, for purposes of determining good faith, creditors may use revised estimates of settlement charges that consumers would incur in connection with the mortgage transaction if the COVID-19 pandemic has affected the estimate of such settlement charges.” The CFPB notes that the revised fee amount must be reflected on a revised version of the Loan Estimate, on the Closing Disclosure, or on a corrected Closing Disclosure. The guidance on the changed circumstance issue will be welcomed by mortgage and settlement service industry members.

Waiting Periods. For loans subject to the right to rescind under Regulation Z, the consumer has a three business day waiting period after consummation to decide whether or not to rescind the loan. During this time, the creditor may not disburse the loan proceeds to the consumer. Under the TRID rule, the creditor must deliver or place in the mail the initial Loan Estimate at least seven business days before consummation, and the consumer must receive the initial Closing Disclosure at least three business days before consummation. After the consumer receives the applicable disclosures, he or she may waive or modify the waiting period if he or she determines that the credit needs to be extended before the end of the waiting period to meet a bona fide personal financial emergency. Historically, creditors rarely allow consumers to waive or modify a waiting period, as there is scant guidance on what circumstances constitute a bona fide personal financial emergency.

The interpretive rule provides:

“[T]he Bureau is clarifying that (1) if a consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency, (2) the consumer’s brief statement describing the emergency identifies a financial need that is due to the COVID-19 pandemic, and (3) the emergency necessitates consummating the credit transaction before the end of an applicable TRID Rule waiting period or must be met before the end of the Regulation Z Rescission Rules waiting period, then the consumer has a bona fide personal financial emergency that would permit the consumer to utilize the modification and waiver provisions, subject to the applicable procedures set forth in the TRID Rule and the Regulation Z Rescission Rules.”
The CFPB notes that both the Regulation Z rescission right provisions and the TRID rule prohibit the use of printed forms for consumers to agree to waive or modify the applicable waiting period, whether written or electronic. The CFPB also states that while creditors are not obligated to advise consumers of their right to waive or modify the waiting periods, it encourages creditors to consider voluntarily informing consumers during the COVID-19 national emergency of the ability do so.

ECOA Valuations Rule Guidance. The ECOA Valuations Rule requires that creditors provide an applicant for a first lien residential mortgage loan with a copy of written appraisals or valuations developed in connection with the application prior to consummation of the loan or account opening. The FAQ issued by the CFPB presents the question of whether there is flexibility under the ECOA Valuations Rule regarding when creditors must provide valuations to applicants. The CFPB’s answer is:

“Yes. The ECOA Valuations Rule already includes flexibility that allows an applicant to waive certain timing requirements of the Rule. For valuations developed in connection with an application that are subject to the ECOA Valuations Rule, creditors must generally provide applicants with copies of all valuations promptly upon completion, or three business days prior to consummation of the transaction (for closed-end credit) or account opening (for open-end credit), whichever is earlier. However, as noted in a September 14, 2018 Statement on Supervisory Practices Regarding Financial Institutions and Consumers Affected by a Major Disaster or Emergency, the ECOA Valuations Rule permits an applicant to waive the timing requirement through an affirmative oral or written statement and agree to receive any copy at or before consummation or account opening, except where otherwise prohibited by law. This regulatory flexibility available under the ECOA Valuations Rule can expedite access to credit secured by a first lien on a dwelling for consumers affected by the COVID-19 pandemic.”

The CFPB notes that generally the waiver must be obtained at least three business days before consummation or account opening.

Previously the CFPB, along with other agencies, issued a joint statement addressing the requirement to provide the applicant with a copy of a written appraisal or other valuation before consummation in view of the federal banking agencies’ interim rule permitting an appraisal or valuation to be obtained up to 120 days after closing. The joint statement provides that the issuing agencies “will not take enforcement actions against institutions under the ECOA Valuations Rule for post-consummation valuations performed pursuant to the … interim final rule. Nevertheless, the agencies encourage institutions to provide borrowers with copies of such post-consummation valuations as promptly as practicable upon completion.”

The CFPB also issued two factsheets on the ECOA Valuations Rule that are general in nature and not specifically related to COVID-19 matters. One factsheet addresses the transactions that are covered by the rule, and the other factsheet addresses delivery and timing requirements of the rule.

- Mortgage Banking Group

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Fannie Mae and Freddie Mac Make Clear: No Lump Sum Payment Requirement for Borrowers in COVID-19 Forbearance

On April 27, 2020, Fannie Mae and Freddie Mac each issued statements making clear that borrowers in forbearance with their Fannie Mae and Freddie Mac loans because of a COVID-19 related financial hardship will not have to pay any missed payments in a lump sum. The Federal Housing Finance Agency (FHFA) issued a corresponding statement.

The agencies advise borrowers that about 30 days before the end of the current forbearance plan, their servicer will reach out to assess which available assistance program for the borrower makes sense, or if additional forbearance is needed.

The agencies provide in their statement, or through a website link in their statement, information on options that may be available, such as a repayment plan that provides for the borrower making the missed payments over a period of time, or an actual modification of the loan. While a full repayment is an option, the agencies make clear that a borrower will not be required to immediately pay the missed payments in a lump sum.

- Mortgage Banking Group

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Fannie Mae Addresses FHFA Limiting Mortgage Servicer Advance Obligations

On April 29, 2020, Fannie Mae updated Lender Letter 2020-02 to address the announcement by the Federal Housing Finance Agency (FHFA) that it was aligning the mortgage servicer advance requirements of Fannie Mae with those of Freddie Mac so that a servicer will have no further obligation to make advances once it has advanced four months of missed payments on a loan.

Fannie Mae advises that it is “currently evaluating operational changes to discontinue servicer advances of scheduled remittances of principal and interest payments for delinquent scheduled/scheduled remittance mortgage loans (delinquency advances) after the four consecutive missed monthly payments for mortgage loans serviced under the special servicing option.” Fannie Mae indicates that the changes will become effective for August 2020 remittance activity (based on July 2020 reporting activity) and that additional guidance will be provided in the coming weeks.

- Mortgage Banking Group

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Trade group files lawsuit challenging Massachusetts emergency debt collection regulation

ACA International, the Association of Credit and Collection Professionals, has filed a lawsuit in Massachusetts seeking to have the federal district court declare the emergency debt collection regulation promulgated on March 26 by the MA Attorney General invalid and enjoining the AG from enforcing the regulation against debt collectors and creditors. In addition to filing a Complaint for Declaratory and Injunctive Relief, ACA has filed an Emergency Motion for a Temporary Restraining Order and Preliminary Injunction.

The emergency regulation, entitled “Unfair and Deceptive Debt Collection Practices During the State of Emergency Caused by COVID-19” (940 CMR 35:00), applies to creditors and debt collectors. The regulation makes it an unfair or deceptive act or practice for creditors and debt collectors to engage in various types of activities, including initiating, filing, or threatening to file a new collection lawsuit or initiating, threatening to initiate or acting upon any legal or equitable remedy for the garnishment, seizure, attachment, or withholding of wages, earnings, property, or funds for the payment of debt to a creditor. It also prohibits debt collectors (which includes first-party service providers collecting on behalf of creditors in the creditor’s name) from initiating telephone calls to the debtor’s residence, cellular phone, or other telephone number provided as a personal number.

In its complaint, ACA alleges that the emergency regulation is invalid for the following reasons:

  • It is a content-based restriction on speech that violates the First Amendment of the U.S. Constitution.
  • It restricts the right of debt collectors and creditors to “petition the Government for a redress of grievances” by restricting access to the courts in violation of the First Amendment of the U.S. Constitution.
  • It violates the Massachusetts anti-SLAPP statute which protects parties from actions designed to chill petitioning activity (which actions would presumably flow from any violation of the provision of the regulation restricting court access).
  • It violates the due process clause of the Fourteenth Amendment to the U.S. Constitution because it was issued without notice and comment and exposes ACA members to the potential for liability and sanctions.
  • It violates the Equal Protection Clause of the U.S. Constitution and Article 10 of the Massachusetts Constitution by (1) exempting certain creditors and debt collectors from its prohibitions, thereby arbitrarily discriminating against those creditors and debt collectors who are subject to the regulation’s prohibitions and depriving such creditors and debt collectors of the equal protection of the laws, and (2) making an absolute and arbitrary selection of a class, independently of good reasons for making a distinction.
  • It violates the separation of powers clause in the Massachusetts Constitution by impermissibly interfering with judicial functions.
  • It exceeds the MA AG’s authority to issue regulations.

In its emergency motion, in addition to arguing that it is likely to succeed on the merits of its various claims regarding the regulation’s invalidity, ACA argues that its members will suffer irreparable harm absent injunctive relief because not only does the loss of First Amendment rights constitute irreparable harm, the regulation is inflicting permanent financial harm on ACA members through the loss of revenue and forced employee layoffs. ACA also argues that: (1) the harm to its members outweighs any harm to the AG because an injunction will not harm the AG and if enjoined, the AG will still have a vast array of enforcement tools; and (2) injunctive relief will serve the public interest because it will advance the free flow of helpful and truthful information among creditors, debt collectors, and consumers, and will aid consumers who wish to pay their debts and would benefit from hardship programs that can eliminate the need for litigation over unpaid bills.

- Stefanie Jackman

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NCUA Issues Interim Appraisal Rule Because of COVID-19

On April 21, 2020, the National Credit Union Administration (NCUA) published an interim final rule that will allow for appraisals and written estimates of market value of homes and other real property to be obtained by federally insured credit unions up to 120 days after closing. As previously reported, on April 14, 2020, the federal banking agencies issued a corresponding interim rule, and the banking agencies, along with the NCUA and Consumer Financial Protection Bureau (CFPB), also issued an interagency statement addressing existing flexibilities in appraisal standards and regulations with regard to appraisals of homes and other real property.

The interim final rule became effective on April 21, 2020, and applies to transactions closed on or before December 31, 2020, unless the NCUA extends the date. Comments on the interim final rule are due by June 5, 2020.

Consistent with the interim final rule adopted by the federal banking agencies, the interim final rule adopted by the NCUA provides that the “completion of appraisals and written estimate[s] of market value required [by the NCUA appraisal rule] may be deferred up to 120 days from the date of closing.” As is the case with the interim rule of the federal banking agencies, the deferral applies to all residential and commercial real-estate transactions, other than acquisition, development, and construction loans.

Also consistent with statements of the federal banking agencies, in the supplementary information to the interim final rule the NCUA advises that it expects credit unions that defer receipt of an appraisal or written estimate of market value:

  • “[T]o conduct their lending activity consistent with safe and sound underwriting principles, such as the ability of a borrower to repay a loan and other relevant laws and regulations.”
  • To use best efforts and available information to develop a well-informed estimate of the collateral value of the property.
  • To adhere to internal underwriting standards for assessing a borrower’s creditworthiness and repayment capacity, and develop procedures for estimating the collateral’s value for the purposes of extending or refinancing credit.

The NCUA also addresses a clear issue addressed by the federal banking agencies—the possibility of an eventual valuation that is lower than expected. The NCUA states that it “expects credit unions to develop an appropriate risk mitigation strategy if the appraisal or written estimate of market value ultimately reveals a market value significantly lower than the expected market value. A credit union’s risk mitigation strategy should consider safety and soundness risk to the institution, balanced with mitigation of financial harm to COVID–19-affected borrowers.”

- Mortgage Banking Group

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This week’s podcast: A close look at the CFPB’s supplemental proposal requiring disclosures by debt collectors for time-barred debts

Our discussion examines a range of issues, including how the wording of the model forms could create consumer confusion, challenges in determining whether a debt is time-barred, and questions arising from use of a “know or reason to know” that a debt is time-barred standard to trigger disclosures. We also look at industry’s reaction and how the proposal’s finalization is likely to fit with the CFPB’s issuance of a final larger debt collection rule.

Click here to listen to the podcast.

Presented by Alan S. Kaplinsky, Christopher J. Willis, & Stefanie Jackman

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Ballard Spahr to hold May 7 webinar: What’s Happening at the FTC, with Special Guests Andrew Smith and Malini Mithal (including the FTC’s response to COVID-19)

While the leadership and priorities of the Federal Trade Commission have changed under the Trump Administration, the FTC continues to take an active role in the enforcement of consumer financial laws. On May 7, 2020, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “What’s Happening at the FTC.” Our special guest speakers will be Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, and Malini Mithal, Associate Director of the FTC’s Division of Financial Practices.

The topics that our guests and leaders of Ballard Spahr’s Consumer Financial Services Group will discuss include:

  • Important consent orders and enforcement litigation involving consumer financial services during the last year and priorities going forward
  • Coordination with Consumer Financial Protection Bureau and state attorneys general
  • Current activities involving credit reporting, lead generation, fintech companies, and small business lending
  • Issues arising from the use of artificial intelligence and algorithms
  • Privacy and data security developments, including improvements to orders in data security cases
  • Status of litigation challenging the FTC’s authority to seek restitution
  • Actions taken in response to the COVID-19 pandemic

Click here to register for the webinar.

- Barbara S. Mishkin

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Ninth Circuit rules loan to trustee to finance repairs to residential property owned by trust was consumer credit transaction

The U.S. Court of Appeals for the Ninth Circuit recently ruled in Gilliam v. Levine that a loan made to an individual trustee to finance repairs on residential property owned by the trust was a “consumer credit transaction” for purposes of the Truth in Lending Act, the Real Estate Settlement Procedures Act, and California’s Rosenthal Act.

In the case, which the Ninth Circuit described as “present[ing] an issue of first impression under federal and state regulation of consumer credit transactions,” the borrower, an individual acting in her capacity as trustee, obtained a loan from the lender to finance repairs to the residential property that was the trust’s main asset. The loan was secured by the property. The borrower had become the trustee following the death of her sister, who had created the trust for the benefit of the borrower’s niece who resided at the property. The borrower filed a complaint seeking rescission of the loan under TILA and damages under the Rosenthal Act for the lender’s alleged use of unfair means to collect a consumer debt. (The Ninth Circuit does not describe the basis for the borrower’s RESPA claim.) The district court dismissed all of the borrower’s claims, holding that the loan was not a “consumer credit transaction” because the property securing the loan was not the borrower’s primary residence and therefore none of the three statutes applied to the loan.

Reversing the district court, the Ninth Circuit concluded that the loan was a “consumer credit transaction” for purposes of the three statutes. The court first considered whether the loan was a “consumer credit transaction” under TILA, which defines the term to mean a loan to a natural person that is primarily for personal, family, or household purposes. It looked to the Official Staff Commentary to Regulation Z (Comment 3(a)-10) which states that “credit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization.” The comment discusses the possibility that a creditor may “extend credit for consumer purposes to a trust that a consumer has created for tax or estate planning purposes (or both)” and into which a consumer has placed his or her assets “with themselves or themselves and their families or other prospective heirs as beneficiaries, to obtain certain tax benefits and to facilitate the future administration of their estates” while continuing to use the assets and/or trust income as the consumer’s property. The Ninth Circuit highlighted the comment’s statement that “regardless of the capacity or capacities in which the loan documents are executed, assuming the transaction is primarily for personal, family, or household purposes, the transaction is subject to the regulation because in substance (if not form) consumer credit is being extended.”

The Ninth Circuit concluded that by alleging that she obtained the loan to enable her niece (the trust beneficiary) to continue to live in the trust property, the borrower had sufficiently alleged that the loan was obtained “primarily for personal, family, or household purposes” and, based on the commentary discussion, the loan could qualify as a “consumer credit transaction” under TILA. The Ninth Circuit found no case law or other support for the lender’s argument that the trustee must reside at the trust property for the trust to be party to a consumer credit transaction under TILA.

Noting that he Rosenthal Act’s definition of “consumer credit transaction” is identical to the TILA definition and that RESPA-covered transactions are those “for a consumer purpose,” the Ninth Circuit concluded that the loan was also a consumer credit transaction under the Rosenthal Act and RESPA. Accordingly, the Ninth Circuit ruled that the district court had erred by construing the three statutes too narrowly and should not have dismissed the complaint. It therefore reversed the district court and remanded for further proceedings.

- John L. Culhane, Jr.

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House Democrats Add to Calls for Mortgage Servicer Liquidity Facility

In a letter dated April 23, 2020 sent to federal regulators, 27 Democratic members of the House of Representatives joined the call of other members of Congress to create a liquidity facility for residential mortgage loan servicers. 16 of the members signing the letter serve on the House Financial Services Committee.

The members note that third-party mortgage servicers are contractually obligated to advance the payments to the loan owner when borrowers do not pay, either due to delinquency or forbearance. The members then state that “[a]s more borrowers take advantage of forbearance, mortgage servicers will increasingly have to step in, and the required advances seem likely to exhaust the cash reserves of many or all of the mortgage servicers.” As a result, the members urge the federal government to create a liquidity facility that the servicers can draw upon to make the necessary advances. The members, however, argue that there be a condition to the use of the facility by a mortgage servicer. Noting that only federally-backed mortgage loans are eligible for a forbearance under the CARES Act, the members state that mortgage servicers who use the liquidity facility should be required “to offer the same forbearance and modification options to all borrowers.” The members note that $4 trillion in single-family mortgage loans are not covered by the CARES Act. While the CARES Act provides for forbearances, and not the ultimate modification of loans, the members address the issue of modifying loans to account for the missed payments that result from a forbearance.

While the members support the goal of tailoring each solution to the borrower’s specific situation, they state that “simplicity is a greater virtue when we likely will see millions of Americans exiting forbearance in a narrow window next Spring.” The members also state that a simplified approach will improve communications to borrowers and reduce the potential for mortgage servicers being overwhelmed in trying to modify loans. The members call upon federal agencies to “deploy a few, uniform modification options for borrowers at the end of their CARES Act forbearance period.” The members state that the options should include the FHA National Emergency Partial Claim approach, in which missed payments are rolled into an interest-free second mortgage, and that the selection of the final modification should be driven by affordability to the borrower. The members also state that all servicers should be required to demonstrate compliance with fair lending laws in conducting the modifications.

The members conclude by addressing concerns regarding the servicing industry, but noting that the immediate focus is addressing the liquidity issue: “[s]everal of us have longstanding concerns with the structure of the mortgage servicing market. We support further examination and regulation of capital and liquidity requirements in mortgage servicing, and we will work closely with you on any legislative proposals you have on this subject. But for now, the focus must be on urgent action to ensure that we do not face massive disruptions of the mortgage market and that homeowners get the assistance to which they are entitled.”

The letter was sent to U.S. Department of Treasury Secretary Steven Mnuchin, Federal Reserve Board Chair Jerome Powell, U.S. Department of Agriculture Secretary Sonny Perdue, U.S. Department of Housing and Urban Development Secretary Ben Carson, Federal Housing Finance Agency Director Mark Calabria, and U.S. Department of Veterans Affairs Secretary Robert Wilkie.

- Mortgage Banking Group

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CFPB makes enhancements to consumer complaint database

The CFPB issued a press release earlier this week to announce that it has made a series of enhancements to its consumer complaint database. The CFPB announced its plans to make the enhancements in September 2019 in conjunction with its announcement that it would continue to publicly disclose consumer complaints.

One of the enhancements is the addition of a geospatial view that allows complaints to be viewed by state with a U.S. map visualization. Other enhancements allow database users to:

  • Select from set of pre-defined time frames (e.g., 3 years)
  • Map complaints per 1,000 population or total complaints by state
  • View aggregate information about products and issues consumers submit complaints about
  • Apply word searches and filters to update the interactive map

- Barbara S. Mishkin

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CFPB highlights fair lending protections for small businesses impacted by COVID-19 pandemic

In a new blog post, the CFPB highlights fair lending protections available to small businesses that have been impacted by the COVID-19 pandemic, particularly minority and women-owned businesses.

While the blog post emphasizes the CARES Act Paycheck Protection Program, it is intended to address all credit programs available to small businesses. It contains a reminder that anti-discrimination laws, such as the federal Equal Credit Opportunity Act, protect business owners from discrimination because of race, color, national origin, sex, and other protected characteristics and that such protections apply to new and existing customers (including depository customers) seeking loans at financial institutions.

The blog post also includes the following examples of “potential warning signs of lending discrimination based on race, sex, or other protected category”:

  • Refusal of available loan or workout option even though you qualify for it based on advertised requirements
  • Offers of credit or workout options with a higher rate or worse terms than the one you applied for, even though you qualify for the lower rate
  • Discouragement from applying for credit by the lender because of a protected characteristic
  • Denial of credit, but are not given a reason why or told how to find out why
  • Negative comments about race, national origin, sex, or other protected statuses

- John L. Culhane, Jr.

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This week’s podcast: Staying ahead of UDAP and fair lending risk to consumer financial services providers arising from the COVID-19 pandemic

After looking at how the 2008 financial crisis and its aftermath might inform regulators’ response to the pandemic, we discuss how collections, loss mitigation/hardship programs, and originations of existing products and new programs designed to assist pandemic-impacted consumers (including changes to credit risk/fraud models to address the pandemic’s effects) can create UDAP and fair lending risk.

Click here to listen to the podcast.

Presented by Alan S. Kaplinsky & Christopher J. Willis

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Banking trade groups file petition with FCC for ruling on scope of TCPA emergency purposes exception

A group of banking trade associations have filed a “Petition for Expedited Declaratory Ruling, Clarification, or Waiver“ with the FCC regarding how the Telephone Communication Protection Act’s “emergency purposes” exception applies to phone calls and text messages placed by banks, credit unions, and other financial institutions on matters related to the COVID-19 pandemic.

The TCPA includes an “emergency purposes” exception to its general prohibition on making automated or prerecorded calls to a cellular telephone number without the called party’s prior express consent. FCC rules define “emergency purposes” to mean “calls made necessary in any situation affecting the health and safety of consumers.” The FCC has stated that the exception is intended for “instances [that] pose significant risks to public health and safety, and [where] the use of prerecorded message calls could speed the dissemination of information regarding…potentially hazardous conditions to the public.”

In March 2020, on its own motion, the FCC issued a Declaratory Ruing in which it confirmed that the COVID-19 pandemic constitutes an “emergency” under the TCPA and stated that whether a call relating to the pandemic qualifies for the “emergency purposes” exception will depend on the caller’s identity and the call’s content. With regard to the caller, the caller “must be from a hospital, or be a health care provider, state or local health official, or other government official as well as a person under the express direction of such an organization and acting on its behalf.” With regard to the call’s content, the content “must be solely informational, made necessary because of the COVID-19 outbreak, and directly related to the imminent health or safety risk arising out of the COVID-19 outbreak.” The ruling also made clear that the “emergency purposes” exception does not include “calls that contain advertising or telemarketing of services” or “calls made to collect debt, even if such debt arises from related health care treatment.”

In their petition, the trade groups ask the FCC to confirm that calls to cellular phones and text messages made by financial institutions using an automated dialing system or prerecorded or artificial voice about matters related to COVID-19 are calls made for “emergency purposes” and thus may be made without the called party’s consent. The trade groups assert that the categories of calls they seek to make should fall within the exception because they are intended to protect the financial health or safety of consumers. These categories are:

  • Calls to offer deferrals, extensions, or other modifications of mortgage or other loan payments
  • Calls and text messages to advise consumers of branch closings, service limitations, reduced hours, or the availability of remote account options
  • Calls and text messages to warn consumers of potential fraud on the consumer’s account

The trade groups note in their petition that in 2015, the FCC granted an exception from the TCPA’s consent requirement for certain time-sensitive messages, including messages concerning suspected fraud. However, the exception was conditioned on the caller’s use of a wireless number provided by the customer. The banking groups claim that this condition significantly reduces the value of the exception and that few institutions are using it to make such calls.

A group of consumer groups filed a response to the trade groups’ petition. While the consumer groups have joined the banking groups in urging the FCC to act expeditiously, they disagree with the banking groups on the scope of the “emergency purposes” exception. The banking groups urge the FCC not to limit the exception to calls protecting only a consumer’s physical health and safety and instead argue that it should include calls that protect a consumer’s financial health. The consumer groups urge a narrower reading that limits the exception to calls directly related to health and physical safety. The calls that they agree would fall within the emergency exception are calls relating to loan modifications or forbearances for payments due on loans secured by homes or vehicles since the loss of either a home or a car puts the consumer and the consumer’s family at greater risk of contracting the coronavirus.

The consumer groups also do not agree that the emergency exception covers fraud alerts. In their view, the concerns expressed by the banking groups can be addressed by expanding the permissible ways in which institutions can obtain numbers to be called for fraud alerts. Specifically, it would be reasonable for an institution to use numbers that were supplied by a family member or other cardholder on the account, captured when the consumer called the institution, or contained in records included with accounts purchased from other institutions. The consumer groups believe that in each of these circumstances, there would be a very high likelihood that the number belongs to the consumer even if the consumer did not directly provide the number to the institution.

Finally, CFPB Director Kraninger sent a letter to the FCC regarding the trade groups’ petition. In the letter, she stated that allowing financial institutions “to make a limited number of automated calls to their customers alerting them to offers of forbearance; payment deferrals; fee waivers; extension or relaxation of payment terms; loan modifications; and other programs, relief and resources relating to loans secured by homes or vehicles is an important avenue to ensuring that consumers know the various options that may be available to them.”

- Daniel JT McKenna

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Eleventh Circuit holds TCPA does not permit unilateral revocation of contractual consent

The U.S. Court of Appeals for the Eleventh Circuit held last week, in Medley v. DISH Network, LLC, that the Telephone Consumer Protection Act (TCPA) does not allow a consumer to unilaterally revoke consent to receive automated calls when such consent is given as part of a bargained-for exchange. In its decision, the Eleventh Circuit expressed its agreement with the Second Circuit’s 2017 decision in Reyes v. Lincoln Automotive Financial Services which held that TCPA consent cannot be revoked when it is part of the bargained-for exchange memorialized in the parties’ contract.

The plaintiff in Medley entered into an agreement with DISH to receive satellite television services in exchange for monthly payments. The agreement contained a pause feature that allowed customers to temporarily suspend satellite services for up to nine months for a monthly fee, with the original term of the agreement to be extended by the length of the suspension period. As part of the agreement, the plaintiff provided her cellular telephone number and authorized DISH to contact her regarding her account or to recover any unpaid charges “through an automated or predictive dialing system or prerecorded message system.” After several months, the plaintiff called DISH to cancel her services but, after learning of early termination fees that would apply, she elected to suspend her services using the pause feature.

Thereafter, she filed a voluntary bankruptcy petition and listed an amount owed to DISH as an unsecured creditor but did not include the DISH agreement in her list of executory contracts and unexpired leases. The amount listed as owed to DISH was discharged pursuant to the bankruptcy court’s discharge order. DISH wrote off that amount but continued to bill the plaintiff the monthly fee for the pause program. In response to emails sent by DISH to the plaintiff seeking payment of the pause program fees, DISH received facsimiles from the plaintiff’s attorneys indicating that they represented the plaintiff with regard to her debts. The facsimiles also noted the TCPA prohibition against making automated calls to cellular phones using an autodialer or artificial or prerecorded voice without prior consent and stated that to the extent such prior extent existed, it was revoked “consistent with” Florida and federal law. DISH made six automated calls after receiving the first of such facsimiles.

The plaintiff subsequently filed a lawsuit against DISH. In addition to alleging violations by DISH of Florida’s debt collection law, the plaintiff alleged that DISH had violated the TCPA by contacting her about her debt through automated calls to her cellular phone after she revoked her consent to receive such calls. The district court granted summary judgment in favor of DISH on the plaintiff’s TCPA claim. It found that DISH’s automated calls did not violate the TCPA because the TCPA does not allow unilateral revocation of consent to receive such calls when the consent is given in a bargained-for contractual provision.

The Eleventh Circuit affirmed the district court’s ruling on the TCPA claim. It determined that because the TCPA is silent as to how consent can be provided or revoked and the plaintiff gave her consent as a mutually-agreed-upon term in a contract, the question of whether she revoked her consent must be analyzed under common law principles governing contracts. The Eleventh Circuit concluded that because such common law principles do not allow unilateral revocation of consent when given as consideration in a bargained-for agreement, it would “run counter to black-letter contract law in effect at the time Congress enacted the TCPA” to allow the plaintiff “to unilaterally revoke a mutually-agreed-upon term in a contract.” (The Eleventh Circuit distinguished its 2014 decision in Osorio v. State Farm Bank, F.S.B., which held that a consumer could orally revoke consent to receive automated calls and a 2015 FCC Declaratory Ruling that concluded that “prior express consent” is revocable under the TCPA. According to the Eleventh Circuit, Osorio and the FCC Ruling did not address consent given in a legally binding agreement and instead “address consent given generally and rely on common law tort principles to find that consent is revocable under the TCPA.”)

Industry continues to wait for FCC guidance on revocation of consent under the TCPA. In 2018, the FCC issued a notice announcing that it was seeking comments on several TCPA issues following the D. C. Circuit’s decision in ACA International v. FCC. In that decision, the D.C. Circuit upheld the FCC’s 2015 Ruling that a called party can revoke consent to receive autodialed calls at a wireless number. Among the TCPA issues on which the FCC sought comment was methods for revoking consent.

- Daniel JT McKenna, Stefanie Jackman, & Joel E. Tasca

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Did You Know?

New Jersey Extends Application Deadlines for Mortgage Servicer License and RMLA-Licensed Mortgage Servicer Registration

The New Jersey Department of Banking and Insurance recently issued Bulletin No. 20-18 to extend the deadline for submitting the Mortgage Servicer License and the RMLA-licensed Mortgage Servicer Registration application required under the New Jersey Mortgage Servicers Act. The act requires non-exempt entities that are in the business of servicing residential mortgage loans, which are not already licensed as residential mortgage lenders, to become licensed. The application deadline was initially set for April 13, 2020. However, due to challenges caused by the COVID-19 public health emergency, the department is extending the application deadline by 60 days to June 12, 2020.

Texas Adopts Amendments to MLO Licensing Application Procedures

The Texas Finance Commission recently adopted amendments, published in 45 Texas Register 2827, to regulations relating to certain application procedures for the licensing of residential mortgage loan originators (MLOs), such as application and renewal fees, and the denial, suspension, or revocation of licensure based on criminal history.

The amendments will lower the cost of the application and renewal fees from $300 to $200, the purpose of which is to reduce barriers for individuals to engage in the occupation as MLOs. The amendments also will add a list of crimes that directly relate to the duties and responsibilities of being a licensee, which may be grounds for denial, suspension, or revocation. Further, to ensure consistency with previously enacted occupational licensing procedures (in HB 1342), the amendments will remove a provision that generally allowed denial, suspension, or revocation for any offense that occurred in the five years preceding the date of the application and will remove previous language specifying who could provide a letter of recommendation on behalf of an applicant.

The amendments are effective on May 7, 2020.

Updates to the NMLS Policy Guidebook

NMLS recently published an updated version of the NMLS Policy Guidebook to the NMLS Resource Center and the Regulator Resource Center. The new changes include, in part, adding language to the Temporary Authority to Operate Consumer Access section to state, “Consumer Access will show that an MLO is ‘Authorized to Represent’ once sponsorship has been requested or accepted,” inserting a new section titled, “Non-Disclosable Events and Regulatory Actions,” and defining the term “Temporary Authority to Operate” in the Glossary section.

- Aileen Ng

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Looking Ahead

Ballard Spahr LLP Webinar

May 20, 2020, 1:00 PM ET

Fair Lending and UDAAP Considerations During the COVID-19 Era

Speakers: Christopher J. Willis, Reid F. Herlihy, and Lori Sommerfield

 

RESPRO Webinar

May 20, 2020, 2:00 PM ET

Money Laundering and the Real Estate Industry

Speakers: Peter D. Hardy, Priya Roy and Richard J. Andreano, Jr.

 

MBA Live - Legal Issues and Regulatory Compliance Conference

Virtual Conference, Online | May 26-27, 2020

Applied Compliance: Implementing Loan Originator Compensation

May 27, 2020, 1:00 PM ET

Speaker: Richard J. Andreano, Jr.

Complying Under Temporary Authority and Licensing Issues

May 27, 2020, 3:00 PM ET

Speaker: Stacey L. Valerio

 

RESPRO27

Tempe, AZ | June 23-24, 2020

Social Media – Staying Compliant While Staying Connected

Speakers: Richard J. Andreano, Jr. and Kim Phan

  

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