Mortgage Banking Update - January 19, 2018
A new proposed law to create a statutory framework for regulating persons engaging in virtual-currency business activity, the Uniform Regulation of Virtual-Currency Businesses Act (URVCBA), has been approved by the Uniform Law Commission (ULC) and officially promulgated for consideration and adoption by state legislatures. Fred H. Miller, Ballard Spahr Special Counsel, chaired the URVCBA drafting committee.
"Virtual-currency business activity" essentially means exchanging, transferring, or storing virtual currency; holding electronic precious metals or certificates of electronic precious metals; or exchanging digital representations of value used in online games for virtual currency, legal tender, or bank credit outside the game, on behalf of a resident of the enacting state.
The definition excludes a person using a virtual currency solely on its own behalf, or for personal, family, household, or academic purposes. It also generally excludes merchants’ affinity or rewards programs where value cannot be taken from the program and digital representations of value used only on online game platforms. Other exclusions include activity by a government, a bank, and a person whose activity is expected to be $5,000 or less on an annual basis.
To encompass as many types of virtual currency as possible, the URVCBA uses a technology-neutral definition of "virtual currency." Virtual currency, of which "bitcoin" is one well known type, is defined as a digital representation of value that is used as a medium of exchange, unit of account, or store of value—but is not legal tender. The URVCBA only applies to companies engaged in "virtual-currency business activity" that assume or maintain "control" over a client's virtual currency. "Control" means the power to execute unilaterally or prevent indefinitely a virtual currency transaction.
The URVCBA contains a three-tiered regulatory structure that is designed to provide legal stability to virtual currency transactions while accommodating innovation:
- Tier one: Businesses with annual virtual-currency activity of $5,000 or less are fully exempt from regulation under the URVCBA.
- Tier two: Businesses with annual virtual-currency activity of more than $5,000 but not in excess of $35,000 must register with the state and meet reduced regulatory requirements. Tier two businesses may operate as registrants for up to two years, so long as they remain within the $35,000 threshold. This tier is intended to function as a "regulatory on-ramp" by allowing companies to focus on innovation and experimentation while they are in the early stages of business development.
- Tier three: Businesses with annual virtual-currency activity of more than $35,000 are subject to full licensure.
The information an applicant for a URVCBA license must provide includes:
- a description of the applicant's current business;
- a description of the applicant's business for the previous five years, as applicable;
- a list of any money transmission licenses the applicant holds in other states, if any;
- the litigation and bankruptcy history of the applicant and its executive officers; and
- other relevant information, including any license revocation or suspension, any criminal conviction or pending proceeding, and information about insurance.
The URVCBA creates two methods for a multistate business to use for reciprocal licensing. These methods are intended to encourage reciprocal licensing, thereby conserving state resources and reducing regulatory burdens on businesses. An enacting state can choose to participate in the Nationwide Multistate Licensing System and Registry or it can authorize reciprocity on a bilateral or multilateral basis.
The URVCBA contains numerous consumer/user protections designed to assure persons of the safety and security of their virtual currency transactions. Such protections include requirements for licensees and registrants to provide disclosures to potential customers about their products and services, such as any fees charged or whether there is insurance coverage, and to establish specific policies and compliance programs to guard against fraud, cyberthreats, and terrorist activity. The URVCBA prohibits a licensee or registrant from transferring a client's currency or using it as collateral for a loan to the licensee or registrant without prior consent.
The URVCBA does not include any commercial law rules addressing how a creditor can take and perfect a security interest in virtual currency as collateral, or the nature of the legal title that someone purchasing virtual currency from a company that holds the currency for its owner can expect to receive. The absence of clear rules addressing such issues has been an impediment for virtual currency businesses seeking to raise capital. To create rules to fill this gap, the ULC is currently drafting a companion act that is expected to be ready for states to enact in early fall 2018. In the interim, lenders can seek to incorporate already existing legal principles in loan agreements.
The ULC (also known as the National Conference of Commissioners on Uniform State Laws) comprises more than 350 practicing lawyers, government lawyers, judges, law professors and lawyer-legislators, who are appointed by each state, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The ULC's task is to research, draft, and promote enactment by the legislatures of uniform state laws in areas of state laws where uniformity is desirable and practical.
Now in its 126th year, the ULC provides states with non-partisan, well-conceived, and well-drafted legislation that brings clarity and stability to critical areas of state law and thus bolsters the federal system. Since its inception in 1892, the group has promulgated more than 200 acts, among them such bulwarks of state statutory law as the Uniform Commercial Code, the Uniform Probate Code, and the Uniform Partnership Act. The URVCBA was drafted by the ULC in collaboration with representatives of the virtual currency industry, state and federal government representatives, trade associations, and financial services providers, among others.
On February 15, 2018, from noon to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar on the URVCBA and the companion act. The webinar registration form is available here.- Alan S. Kaplinsky, Peter D. Hardy, Fred H. Miller, Marjorie J. Peerce, and Stacey L. Valerio
Sexual harassment has been headline news for many months now. It is almost impossible to go more than a few days without the headlines reporting another high-profile resignation or firing due to harassment allegations. Notably, Time magazine’s 2017 Person of the Year—"the person or group… who most influenced the news during the past year, for better or for worse"—was the Silence Breakers, those whose stories of harassment brought the #MeToo to prominence.
Most human resources professionals and employment lawyers expect a significant increase in workplace harassment and retaliation complaints in 2018, piggybacking on the widespread publicity this issue has received. Significant damage awards and reputational harm are among the potential consequences of not addressing the issue now. Having an effective anti-harassment program is the most important action an employer can take to protect itself—and its employees—from workplace harassment and related claims.
Businesses should take the time now to audit their anti-harassment programs with an eye on the following issues:
The Written Policy:
- The policy should be straightforward and easy to understand. It should include "real life" examples of prohibited conduct and the penalties that may be imposed.
- The policy should be integrated with other, related policies, e.g., computer and internet use, email, social media and anti-fraternization.
- Because the law prohibits workplace harassment based on any legally protected class, the policy should do so as well.
- Consider where to set the bar. Policies can be much more effective in changing workplace behavior, and more understandable to employees, if they set the bar higher than required by law and insist on professional and respectful conduct in the workplace, rather than prohibiting only illegal actions that meet the not-always-easy-to apply legal standard for "harassment."
Communication and Commitment:
- Written policies, although essential to your overall program, are not enough. Disseminate and publicize the anti-harassment policy to all levels of the organization. There should be evident commitment from the "C Suite."
- Consider how often and through what channels the organization's commitment to anti-harassment is disseminated.
- To be useful, training must be effective. Tailor trainings to the appropriate audience. A uniform training program used for both rank and file employees and executives/managers may not be sufficient.
- Periodic training is appropriate, even in states that do not require it, so that the company's message is clear and reinforced.
- Consider using live, interactive training, rather than on-line, off the shelf programs. In-person training can be far more memorable and, thus, more effective.
- Encourage employees to report all instances of harassment.
- Design a complaint procedure that is easy to access, and effectively coordinates the reporting and review process.
- Consider using an ombudsman or a hotline, and think carefully about how complaints against the CEO or others senior leaders will be handled.
- Promptly and thoroughly investigate all complaints.
- Ensure that staff members who will receive and investigate complaints are adequately trained.
- Consider the pros and cons of utilizing internal and/or external investigators. Keep in mind the need to preserve credibility, impartiality, and confidentiality, the experience level needed to address the situation, and the possibility the investigator may have to testify if the matter goes to trial.
- The law does not require discharge in every case. The penalty for a substantiated complaint should be designed to address the behavior at issue.
- Consider this last point when making discipline/discharge decisions. The policy itself may be general but each decision should reflect the facts of each case.
- The policy should contain a no-retaliation pledge. Enforce this pledge strictly and uniformly. And be careful of a backlash by individuals who want to avoid working with employees of other genders, races etc., to avoid the potential for harassment accusations.
Although you may already have anti-harassment policies and/or conduct training, it may have been some time since these measures were implemented and they may no longer be sufficient in today’s workplace. Attorneys from our Labor and Employment Group would be happy to talk through these issues and assist you in evaluating and revising your program if needed.
In 2014, the Consumer Financial Protection Bureau (CFPB) promulgated a number of mortgage servicing rules, including rules governing loss mitigation procedures. These rules can be found at 12 C.F.R. §§ 1024.39 through 1024.41, which are a part of Regulation X, the implementing regulation for the Real Estate Settlement Procedures Act (RESPA). Among other things, the loss mitigation rules require mortgage servicers to comply with strict timelines regarding loss mitigation efforts. These timelines apply even in the face of a servicing transfer. For instance, if a loan is transferred to a new servicer while loss mitigation efforts are underway, and the application was complete before the loan was transferred, then the new servicer has thirty days to issue a decision on the application. Lawsuits based on perceived violations of these rules continue to be filed in the aftermath of the market downturn. However, plaintiffs cannot manufacture a cause of action under RESPA, and a court will dismiss a RESPA claim where plaintiffs lack standing, either because they have no cognizable injuries or because they are not borrowers. Such was the case in Ocampo v. Carrington Mortgage Services, -- F.Supp. 3d --, 2017 WL 6610803 (S.D. Fla. Dec. 27, 2017).
In 2007, the plaintiff borrower purchased real property in Doral, Florida by executing a note and mortgage in favor of a mortgage lender. Plaintiff subsequently transferred his ownership interest in the property to a third party by quit claim deed. The note and mortgage went into default and the mortgage lender initiated a foreclosure action against the current owner and the plaintiff who was the borrower under the note. The lender later dismissed plaintiff from the foreclosure action. Plaintiff filed for bankruptcy a year later and obtained a discharge on his personal indebtedness under the note. Shortly thereafter, a judgment of foreclosure was entered against the property. Plaintiff then filed a second bankruptcy, during which the bankruptcy court referred plaintiff and the mortgage servicer to mediation and the requested modification was denied. Plaintiff then filed suit alleging several violations of RESPA, including failure to timely respond to plaintiff's application for modification.
The U.S. District Court for the Southern District of Florida dismissed plaintiff's claims on two bases. First, the Court held that it lacked subject matter jurisdiction because plaintiff did not have Article III standing given that he was never entitled to a mortgage modification. As noted by the Court, "when Plaintiff initiated loan modification proceedings, he no longer had an ownership interest in the Property or any obligation under the Note... [thus], his request was an impossibility. Therefore, his 'injuries' are conjectural, and quite frankly, a legal fiction." The Court went on to describe plaintiff's loan modification proceedings as "frivolous." The Court further found that even if plaintiff had Article III standing, he did not have statutory standing because he was no longer a borrower. Under RESPA, only a borrower may bring a claim, and even though RESPA does not define borrower, courts have consistently held that "a borrower is someone who either signed the note or who is otherwise obligated under the mortgage." Here, plaintiff lost his status as a borrower when the bankruptcy court discharged his debt.
The Pennsylvania Superior Court recently affirmed that the use of the "fluctuating workweek" method to determine the amount of overtime owed violates the Pennsylvania Minimum Wage Act (PMWA), unlike the federal Fair Labor Standards Act (FLSA). This decision can lead to overtime liability for employers with Pennsylvania employees. This decision could be of particular concern to employers in the mortgage industry, who commonly pay nonexempt employees on a fixed salary, rather than a strict hourly basis, including a common arrangement in which loan originators receive minimum wage and commissions to the extent they exceed minimum wage. It will also lead to increased liability for back pay where employees have been misclassified as exempt because it prevents using the fluctuating workweek method to calculate the back pay due, as is commonly the case under the FLSA.
The FLSA permits an employer to satisfy its overtime obligation to a nonexempt employee who is paid a fixed weekly salary regardless of the number of hours actually worked using the fluctuating workweek method. This requires an employer to divide the employee's total weekly salary by the total amount of hours worked in a week to determine the regular rate of pay (e.g., $1,000 per week / 50 hours worked = $20 per hour). The employer then provides the employee with pay for the hours worked in excess of 40 at one-half the regular rate ($10 x 10 hours = $100 of overtime pay).
This method requires an understanding with the employee that the fixed salary will compensate the employee for all their hours each week on a straight-time basis and also requires that the employee receive that same salary, even if his or her hours fall below 40 in a given week, regardless of the reason.
The Pennsylvania Superior Court, however, rejected this methodology under the PMWA, finding that it was not supported by the statute and its implementing regulations—which do not address the fluctuating workweek method specifically. Initially, the court noted that the FLSA merely sets a "floor" to protect Pennsylvania employees.
After reviewing both state and federal regulations regarding calculation of the regular rate, the court found that the PMWA permits the regular rate to be calculated consistent with the fluctuating work week method. That is, employers can calculate the regular rate by dividing the number of hours worked in a given week into the weekly salary—which results in a regular rate that fluctuates from week to week—rather than always dividing the weekly salary by 40 hours to calculate a regular rate that remains fixed.
When it comes to how the overtime due should be calculated using that regular rate, however, the court found that Pennsylvania and federal law diverge. Addressing the appropriate multiplier for calculating overtime payments, the Superior Court explained that 34 Pa. Code § 231.41 requires Pennsylvania employers to pay "not less than 1½ times the employee's regular rate of pay for all hours in excess of 40 hours in a workweek."
In contrast, the applicable FLSA regulation permits employers to pay only an additional one-half the regular rate for hours over 40 using the fluctuating workweek methodology. Thus, the court determined that salaried nonexempt employees are entitled to greater overtime protections under the PMWA than under the FLSA.
To comply with the PMWA under this decision, Pennsylvania employers who pay nonexempt employees a weekly salary must convert it to an hourly rate by one of two methods which should be determined and agreed to by the employee in advance: (1) dividing the salary by 40 or (2) dividing the salary by the actual number of hours worked each week. Employers then must pay the employee overtime calculated at 150% of that regular rate for hours worked in excess of 40 each workweek.
To highlight the impact of the difference between the PMWA and FLSA methods, a nonexempt employee with a regular rate of $20 per hour would earn $300 for working 10 overtime hours under Pennsylvania law ($30 per hour for 10 additional hours worked), instead of $100 under federal law. Like the FLSA, the PMWA provides for back pay and liquidated damages—as well as attorneys' fees—making noncompliance costly.
This case serves as a timely reminder that employers need to ensure compliance with state wage and hour laws, in addition to the FLSA, to avoid liability for their pay practices.
Ballard Spahr's Labor and Employment Group routinely assists employers in navigating the FLSA and its intersection with these state wage and hour laws.
- Shannon D. Farmer, Kelly T. Kindig, and Noah J. Goodman
On December 29, 2017, the Lower East Side People’s Credit Union (People’s) filed a reply brief in support of its preliminary injunction motion seeking to block the appointment of Mick Mulvaney as the Acting CFPB Director. The arguments were largely the same as those advanced in its motion.
The one exception is that People’s spent considerable time arguing that Mulvaney’s decision to pause HMDA-related enforcement actions was causing People’s concrete harm. Banks know that regulators use HMDA data to evaluate Community Reinvestment Act (“CRA”) compliance. People’s claims that, to satisfy their CRA obligations, banks often make deposits at People’s that pay no or low interest. People’s uses those deposits to make loans in the community. People’s argued that Mulvaney’s policy with respect to HMDA enforcement will give banks an incentive to falsify their HMDA data to appear compliant with the CRA without actually making the deposits. This, People’s argues, will have an adverse interest on its bottom line. To call the argument “strained” is beyond generous.
On January 20, 2018, NMLS will release certain system enhancements and maintenance updates with NMLS 2018.1. More information can be found here.
The Texas Finance Commission of Texas adopted a new provision requiring the following individuals to retake the 20 hours of pre-licensing education as required by the S.A.F.E. Mortgage Licensing Act:
- Individuals who fail to obtain a valid license or federal registration within five years from the date of completion; or
- Licensed individuals who fail to maintain the license or federal registration for at least five consecutive years.
These provisions are applicable to residential mortgage loan originators licenses administered by the Office of Consumer Credit Commissioner (effective January 4, 2018) and the Department of Savings and Mortgage Lending (effective January 7, 2018).
The Texas Finance Commission of Texas amended and simplified the definition of “physical office” to mean “an actual office where the business of mortgage lending and/or the business of taking or soliciting residential mortgage loan applications are conducted.” This definition appears in the Texas Residential Mortgage Loan Companies and Mortgage Bankers and Residential Mortgage Loan Originators chapters.
This new definition was effective on January 7, 2018.
- Wendy T. Novotne
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