Legal Alert

Mortgage Banking Update - August 30, 2018

August 30, 2018

Seventh Circuit: Sending Pleading Directly to Debtor Did Not Violate FDCPA Where Attorney Had Not Entered Appearance

The U.S. Court of Appeals for the Seventh Circuit has ruled that because the plaintiff's attorney had not yet filed a written appearance or pleading with the Illinois state court where the defendant law firm had filed a collection action against her, the law firm did not violate the Fair Debt Collection Practices Act (FDCPA) by mailing notice of a motion for default judgment to the plaintiff instead of only to her attorney.

In Holcomb v. Freedman Anselmo Lindberg, LLC, the plaintiff initially appeared pro se in the defendant's state court lawsuit seeking to collect a credit card debt she owed. The plaintiff subsequently retained an attorney from a legal clinic, who sent a letter to the defendant with notice that the clinic was representing the plaintiff, and also appeared for the plaintiff at two hearings. At both hearings, the court entered a form "trial court order" with a checkbox indicating that the plaintiff's counsel was "present before the court" but which did not identify the individual attorney or the clinic by name. Later, the law firm moved for default judgment and, because the plaintiff's attorney had not yet filed a written appearance or pleading with the state court, mailed notice of the motion to both the plaintiff and her attorney.

In her lawsuit filed in an Ohio federal district court, the plaintiff alleged that by mailing notice of the motion to her, the law firm had violated Section 1692c(a)(2) of the FDCPA, which prohibits a debt collector from communicating with a consumer about collection of a debt when it knows the consumer is represented by counsel. An exception to the prohibition permits direct contact with a represented debtor with the "express permission of a court of competent jurisdiction." Relying on this exception, the law firm moved for summary judgment and argued that it had the court’s express permission to serve the plaintiff because it was required to do so under court rules. Specifically, the law firm pointed to Rule 11 of the Illinois Supreme Court Rules, which provides that "[i]f a party is represented by an attorney of record, service shall be made upon the attorney" and "[o]therwise service shall be made upon the party." The district court rejected the law firm's argument as "hyper-technical" and entered summary judgment for the plaintiff.

In reversing the district court and remanding for entry of judgment in the law firm's favor, the Seventh Circuit rejected the plaintiff's argument that her attorney had become an "attorney of record" when he appeared for her at two hearings and the state court "issued orders" indicating that her counsel was present. Relying on several Illinois state court decisions, the Seventh Circuit concluded that Rule 11 established "a bright-line rule" under which a lawyer could become an attorney of record only by filing a written appearance or other pleading with the court.

The Seventh Circuit also rejected the plaintiff's argument that if Rule 11 were understood to require service on a represented party whose attorney had not yet filed a written appearance, it conflicted with FDCPA Section 1692c(a)(2) and was therefore preempted. Calling the plaintiff's preemption argument one "that verges on frivolous," the Seventh Circuit concluded that because Rule 11 "fits comfortably" within the exception to Section 1692c(a)(2) that allows a debt collector to communicate with a represented debtor if permitted to do so by a court of competent jurisdiction, Rule 11 "operates in harmony with Section 1692c(a)."

Finally, the Seventh Circuit rejected the plaintiff's argument that when an attorney has not yet filed a written appearance, Rule 11 allows its requirement for service on the party to be satisfied by serving the attorney as the party's "agent." According to the Seventh Circuit, the plaintiff's argument rested on "an unsound reading of the rule," which clearly required service on "the party himself, not to his (non-record attorney) as agent" when there was no attorney of record.

- Kaplinsky_Alan, John L. Culhane, Jr., Stefanie H. Jackman

CFPB Publishes Annual CARD Act, HOEPA, QM Adjustments

The CFPB has published a final rule regarding various annual adjustments it is required to make under provisions of Regulation Z (TILA) that implement the CARD Act, HOEPA, and the ability to repay/qualified mortgage provisions of Dodd-Frank. The adjustments reflect changes in the Consumer Price Index in effect on June 1, 2018, and will take effect January 1, 2019.

The CARD Act requires the CFPB to calculate annual adjustments of (1) the minimum interest charge threshold that triggers disclosure of the minimum interest charge in credit card applications, solicitations and account opening disclosures, and (2) the fee thresholds for the penalty fees safe harbor. The calculation did not result in a change for 2019 to the current minimum interest charge threshold—which requires disclosure of any minimum interest charge above $1). However, it did result in a change for 2019 to the first and subsequent violation safe harbor penalty fees. Such fees were increased to $28 (currently $270 and $39 (currently $38), respectively.

HOEPA requires the CFPB to annually adjust the total loan amount and fee thresholds that determine whether a transaction is a high cost mortgage. In the final rule, for 2019, the CFPB increased the current total loan amount threshold from $21,032 to $21,549, and the current points and fees threshold from $1,029 to $1,052. As a result, in 2019, a transaction will be a high-cost mortgage (1) if the total loan amount is $21,549 or more and the points and fees exceed 5 percent of the total loan amount, or (2) if the total loan amount is less than $21,549 and the points and fees exceed the lesser of $1,077 or 8 percent of the total loan amount.

Pursuant to its ability to repay/QM rule, the CFPB must annually adjust the points and fees limits that a loan cannot exceed to satisfy the requirements for a QM. The CFPB must also annually adjust the related loan amount limits. In the final rule, the CFPB increased these limits for 2019 to the following:

  • For a loan amount greater than or equal to $107,747 (currently $105,158), points and fees may not exceed 3 percent of the total loan amount
  • For a loan amount greater than or equal to $64,648 (currently $63,095) but less than $107,747, points and fees may not exceed $3,232
  • For a loan amount greater than or equal to $21,549 (currently $21,032) but less than $64,648, points and fees may not exceed 5 percent of the total loan amount
  • For a loan amount greater than or equal to $13,468 (currently $13,145) but less than $21,549, points and fees may not exceed $1,077
  • For a loan amount less than $13,468 (currently $13,145), points and fees may not exceed 8 percent of the total loan amount

- Barbara S. Mishkin

Treasury's Fintech Report Recommends Changes Directed at Mortgages

A portion of the Department of the Treasury's report titled A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation, focuses on the mortgage industry. A detailed discussion of the Treasury's mortgage-related findings and recommendations is available here.

We have previously blogged about the portion of the Treasury report that focuses on payments and have published a legal alert that discusses other portions of the report.

On September 20, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr will conduct a webinar, "More Than Just Fintech: What Are the Important Takeaways for All Consumer Financial Services Providers from Treasury's Sweeping Report?" A link to register is available here.

- Reid F. Herlihy

Significant Changes to Connecticut Consumer Finance Licensing Laws to Take Effect October 1, 2018

Significant changes to Connecticut's licensing laws for consumer financial services providers will take effect on October 1, 2018. In addition to changes impacting mortgage-related licensees (e.g. mortgage lenders, originators and brokers), Public Act 18-173 revises or creates new licensing requirements for many providers, including small-loan lenders, sales finance companies, money transmitters, check cashers, debt adjustors, debt negotiators, collection agencies, student loan servicers, and mortgage servicers.

New requirements include requirements (1) for licensees to clearly display their unique identifier, including on internet websites and in all audio solicitations, and (2) for licensees to conduct activities subject to licensure from a U.S. office.

Of particular note is a new requirement—which appears to be unprecedented—for sales finance companies to acquire and maintain information about the ethnicity, race, and sex of applicants for motor vehicle retail installment contracts. A licensee will be required to submit the demographic records collected between October 1, 2018, and June 30, 2019, to the Connecticut Banking Department by July 1, 2019.

We understand that representatives of the Banking Department will be meeting with an industry group this week to discuss the Equal Credit Opportunity Act issues presented by this requirement and that the Department hopes to provide guidance soon. (The new requirement presents an apparent conflict with the Regulation B proscription against a non-mortgage creditor inquiring about the race, ethnicity or gender of an applicant. See 12 C.F.R. § 1002.5(b) "A creditor shall not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, except as provided in paragraphs (b)(1) [relating to self-testing that complies with Sections 1002.15 of Regulation B] and (b)(2) of this section [authorizing only an optional request to designate a title on an application form such as Ms., Miss, Mr. or Mrs.]")

For more information on the provisions of Public Act 18-173, click here.

- John D. Socknat


Illinois Adds Exemption and Company Registration Process for Independent Loan Processing Entities

Effective immediately, Illinois has amended the Residential Mortgage License Act to exempt any entity engaged solely in providing independent contractor loan processing services through the sponsoring of individual licensees. In addition, the statute is amended to create an annual registration process for such independent loan processing entities. The new provisions further clarify that a loan processor, who performs clerical or support duties at the direction of and subject to the supervision and instruction of a licensed mortgage loan originator sponsored by the independent loan processing entity, is not required to obtain his or her own mortgage loan originator license. In addition, the statute provides that an independent loan processing entity is not subject to examination by the Illinois regulator. HB4404 can be found here.

- Reid F. Herlihy

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