Legal Alert

Mortgage Banking Update - September 13, 2018

September 13, 2018

CFPB Provides Additional Guidance on HMDA Partial Exemption

The CFPB recently released an interpretive and procedural rule to implement and clarify the partial exemption from the Home Mortgage Disclosure Act (HMDA) adopted in the Economic Growth, Regulatory Relief and Consumer Protection Act (also known as S.2155).

As we reported previously, the Act amended the HMDA to create an exemption applicable to the new data categories added by Dodd-Frank and the HMDA rule adopted by the CFPB for insured depository institutions and insured credit unions that originate mortgage loans below certain thresholds. Additionally, depository institutions must meet certain Community Reinvestment Act rating criteria.

For closed-end mortgage loans, the partial exemption will apply if the institution or credit union originated fewer than 500 such loans in each of the preceding two calendar years. For home equity lines of credit (HELOCs), the partial exemption will apply if the institution or credit union originated fewer than 500 HELOCs in each of the preceding two calendar years. The HELOC change will not affect initial reporting because, per a temporary CFPB rule, the threshold for reporting HELOCs from 2018 and 2019 is 500 transactions for each of the preceding two calendar years.

Even if a depository institution originates loans or HELOCs within the applicable threshold, the Act’s partial exemption from reporting the new HMDA data categories will not apply if the institution received a rating of “needs to improve record of meeting community credit needs” during each of its two most recent CRA examinations, or “substantial noncompliance in meeting community credit needs” on its most recent CRA examination.

In July 2018 the CFPB advised that the partial exemption will not affect the format of 2018 Loan Application Registers (LARs) and that:

  • LARs will be formatted according to the previously released 2018 Filing Instructions Guide for HMDA Data Collected in 2018 (2018 FIG);
  • when not reporting information for a certain data field due to the partial exemption, institutions will enter an exemption code for the field specified in a revised 2018 FIG, expected for release by CFPB later this summer; and
  • all LARs will be submitted to the same HMDA platform.

Previously, the CFPB advised that it expected to provide further guidance later in the summer on the partial exemption’s applicability to HMDA data collected in 2018. The interpretive and procedural rule contains this further guidance. The CFPB also issued a revised FIG that included 2018 data to account for the partial exemption.

The interpretive and procedural rule:

  • clarifies the HMDA data points that are covered by the partial exemption. A table in the rule reflects that 26 data points are covered by the partial exemption, and that 22 data points still must be reported by institutions or credit unions that qualify for the partial exemption;
  • provides that institutions and credit unions that qualify for the partial exemption may elect to report the exempted data, provided that they report all data fields within any exempt data point for which they report data. For example, if an institution or credit union elects to report a data field that is part of the property address, it must report all other data fields that are part of the property address data point;
  • clarifies that only closed-end loans and open-end lines of credit that are otherwise reportable under the HMDA count toward the 500-loan and 500-line of credit thresholds;
  • provides that if an institution or credit union elects not to report a universal loan identifier for an application or loan, it must report a non-universal loan identifier that meets specified requirements and is unique within the institution or credit union; and
  • clarifies that the exception to the partial exemption for negative CRA history must be assessed as of December 31 of the preceding calendar year.

The interpretative and procedural rule will become effective upon publication in the Federal Register. The CFPB advises that it expects to initiate a notice-and-comment rulemaking to incorporate the interpretations and procedures contained in the rule into Regulation C and to further implement the Act.

- Richard J. Andreano, Jr.

CFPB Issues Summer 2018 Supervisory Highlights; Ballard Spahr to Hold October 10 Webinar

The CFPB’s newly released Summer 2018 edition of their Supervisory Highlights report is the first to cover supervisory activities conducted under Acting Director Mick Mulvaney and the first since the Summer 2017 edition issued in September last year. The new report confirms that the Bureau’s supervisory activities have continued without significant change under its new leadership.

On October 10, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Key Takeaways from the CFPB’s Summer 2018 Supervisory Highlights.” The webinar registration form is available here.

Noticeably absent from the new report’s introduction and the Bureau’s press release about the report are statements touting the amount of restitution payments that resulted from supervisory resolutions, or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities. (The report does, however, summarize the terms of two consent orders entered into by the Bureau. One such order is the Bureau’s settlement with Triton Management Group, Inc.—a small dollar lender—regarding the Bureau’s allegations that Triton violated the Truth in Lending Act and the CFPA’s UDAAP prohibition by underdisclosing finance charges on auto title pledges entered into with consumers.)

The report indicates that in examinations of servicers, Bureau examiners focus on the loss mitigation process and, in particular, on how servicers handle trial modifications where consumers are paying as agreed. In such examinations, the Bureau found unfair acts or practices relating to the conversion of trial modifications to permanent status and the initiation of foreclosures after consumers accepted loss mitigation offers. In reviewing the practices of servicers with policies providing for permanent loan modification if consumers made four timely trial modification payments, the Bureau found that servicers delayed processing the permanent modification for more than 30 days for nearly 300 consumers who had successfully completed the trial modification. These consumers accrued interest and fees that would not have applied had the permanent modification been processed. The servicers did not remediate all the affected consumers, did not have policies or procedures in place to remediate consumers in such circumstances, and attributed the modification delays to insufficient staffing. The Bureau indicates that in response to the examination findings, the servicers are now fully remediating affected consumers and developing and implementing policies and procedures to convert trial modifications to permanent modifications faster in cases where the consumers have met the trial modification conditions.

The Bureau also identified instances in which servicers, due to errors in their systems, engaged in unfair acts or practices by charging consumers amounts not authorized by modification agreements or mortgage notes. The Bureau indicates that in response to the examination findings, the servicers are now remediating affected consumers (presumably by refunding or crediting the unauthorized amounts) and correcting the loan modification terms in their systems.

Regarding foreclosure practices, Bureau examiners found instances where mortgage servicers approved borrowers for loss mitigation options on non-primary residences and initiated foreclosures, despite representing to the borrowers that foreclosures would not be initiated if the borrower accepted loss mitigation offers in writing or by phone by a specified date. The Bureau identified this as a deceptive act or practice. The Bureau also found instances where borrowers who had submitted complete loss mitigation applications less than 37 days from a scheduled foreclosure sale date were sent a notice by their servicer indicating that their application was complete and that the servicer would notify the borrowers of their decision on the applications in writing within 30 days. However, after sending these notices, the servicers conducted the scheduled foreclosure sales without making a decision on the borrowers’ loss mitigation application. Interestingly, while the Bureau did not find that this conduct amounted to a “legal violation,” it did find that it could pose a risk of a deceptive practice.

- Barbara S. Mishkin

Industry Trade Groups Urge HUD to Make Significant Changes to its Disparate Impact Rule; State Attorneys General Oppose Changes

The American Bankers Association jointly with state bankers associations, the American Financial Services Association, and the Mortgage Bankers Association are urging the U.S. Department of Housing and Urban Development (HUD) to make significant changes to its 2013 Disparate Impact Rule in light of the 2015 U.S. Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. The trade groups’ views are set forth in comment letters submitted to HUD in response to its Advance Notice of Proposed Rulemaking, which solicited comments on the need for revisions to the Rule following Inclusive Communities. The ANPR’s comment period ended on August 20.

The rule stipulates that liability may be established under the Fair Housing Act (FHA) based on a practice’s discriminatory effect (i.e., disparate impact) even if the practice was not motivated by a discriminatory intent, and that a challenged practice may still be lawful if supported by a legally sufficient justification. Under the rule, a practice has a discriminatory effect where it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin. The rule also addresses what constitutes legally sufficient justification for a practice and the burden of proof on the parties to an FHA discrimination claim.

While the Supreme Court held in Inclusive Communities that disparate impact claims may be brought under the FHA, it also set forth standards, safeguards, and limitations on such claims that “are necessary to protect potential defendants against abusive disparate impact claims.” Notably, the Supreme Court indicated that a disparate impact claim based upon a statistical disparity “must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity,” and that a “robust causality requirement” ensures that racial imbalance alone does not establish a prima facie case of disparate impact, thereby protecting defendants “from being held liable for racial disparities they did not create.”

The trade groups assert that in promulgating the rule, HUD improperly rejected the U.S. Supreme Court’s 1989 Wards Cove disparate impact standard in favor of the standard that applies to claims under Title VII of the Civil Rights Act of 1964. The trade groups argue that in Inclusive Communities, the Supreme Court confirmed the continuing applicability of Wards Cove to disparate impact claims brought under statutes other than Title VII. They further argue that the Rule needs to be amended to reflect the standards, safeguards, and limitations on disparate impact claims articulated by the Supreme Court in Inclusive Communities.

In contrast, a group of 16 state Attorneys General and the AG for the District of Columbia sent a comment letter to HUD urging it not to make any changes to the rule, arguing that it is “fully consistent” with Inclusive Communities and that any changes would be “susceptible to meritorious legal challenge.” The states whose AGs signed the comment letter are North Carolina, California, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, and Washington.

Although Inclusive Communities did not resolve the question of whether disparate impact claims are cognizable under the Equal Credit Opportunity Act (ECOA), HUD’s approach to the Rule could have significance for ECOA disparate impact claims. CFPB Acting Director Mick Mulvaney has indicated that the CFPB plans to reexamine ECOA requirements in light of Inclusive Communities.

- Barbara S. Mishkin

Bipartisan Bill Introduced to Expand Mortgage Access to the Self-Employed

U.S. Senators Mark R. Warner (D-VA) and Mike Rounds (R-SD) introduced federal legislation on August 28, 2018, that would expand access to mortgages to the self-employed, gig workers, and other creditworthy individuals with non-traditional forms of income. The Self-Employed Mortgage Access Act allows lenders to verify an applicant’s income using documentation forms other than a W-2. The legislation would expand the types of documentation that self-employed individuals may submit to demonstrate their credit worthiness and that lenders may use to keep a loan in qualifying mortgage status. Acceptable documentation would include IRS Form 1040 Schedule C for sole proprietorships, IRS Form 1040 Schedule F for farming, IRS Form 1065 Schedule K-1 for partnerships, and IRS Form 1120-S for S corporations.

According to the press release, the Bill addresses an unintended consequence of the CFPB’s Ability-to-Pay Rule, which requires lenders to look at a customer’s income, assets, savings, and debt in relation to monthly loan payments to satisfy requirements for a Qualified Mortgage (QM). Warner and Rounds noted that “since the QM standard was finalized, lenders and investors in the mortgage market have shown a clear preference for QM loans due to the potential for liability associated with making non-QM loans.”

Under those rules, unless a loan is eligible for sale to Fannie Mae or Freddie Mac or insurance from one of the government agencies, QM loans require lenders to satisfy the “rigid requirements” of the CFPB’s lending guidelines, Warner’s office explained. These guidelines, referred to as Appendix Q, often lead to a “less precise calculation of income for borrowers with non-W-2 income sources, such as rental income, retirement income, or income from self-employment.” The Senators report that this imprecise calculation leads many creditworthy individuals who rely on nontraditional types of income (as many as 42 million Americans, or 30 percent of the labor force) to be “unduly constrained” in their ability to obtain a mortgage.

Representatives from the Mortgage Bankers Association, the Consumer Federation of America, and the Milken Institute indicated that they support the bill.

- Anthony C. Kaye and Jenny N. Perkins

Foreign Investment Brings Corruption-Related Regulatory Burdens

Foreign investment in the U.S. real estate market has been increasing for some time. That brings many benefits. It can also pose unanticipated compliance challenges for U.S. mortgage professionals working on transactions involving foreign investment. A recent case brings these risks into sharp focus.

On September 6, 2018, a federal judge sentenced a real estate broker to six months in prison for attempting to bribe a Middle Eastern official who purportedly controlled investment decisions at a Qatari sovereign wealth fund. The broker allegedly tried to get the official to direct an investment to a large real estate project overseas. The broker’s alleged conduct violated the Foreign Corrupt Practices Act (FCPA), which prohibits any U.S. company or person (broadly defined) from giving anything of value to any foreign official (also broadly defined) to obtain or retain any business (likewise broadly defined).

Given how broadly the FCPA applies and the expansive definition of “foreign official,” mortgage professionals working on deals potentially involving foreign investment would be wise to seek compliance advice early. For example, if a U.S. company works on a deal with a foreign investment banker who also happens to be a government minister, something as seemingly innocuous as taking said investment banker out to dinner could violate the FCPA. While this would not constitute a “slam dunk” case for prosecutors, it could introduce risk that might otherwise be mitigated with early attention to compliance.

- James Kim and Theodore R. Flo

Responding to Consumer-Initiated Inquiry After "Cease" Letter Did Not Violate FDCPA, Eighth Circuit Court Holds

In Scheffler v. Gurstel Chargo, P.A., the U.S. Court of Appeals for the Eighth Circuit rejected a career plaintiff’s attempts to manufacture a Fair Debt Collection Practices Act (FDCPA) claim by baiting a debt collector into discussing the underlying debt following a cease-communications request. Attempts by career plaintiffs and others to bait creditors and debt collectors into unlawful conduct have become increasingly common. While we regularly work with our clients to make sure they are fully prepared to rebut such attempts, creditors and debt collectors should take note that, as this decision illustrates, scurrilous claims of this nature can be successfully defended in litigation.

The plaintiff, Troy Scheffler, is a former debt collector who has spent the last decade regularly litigating FDCPA claims against other debt collectors. In August 2015, he received a garnishment notice from Gurstel, attempting to collect on a 2009 judgment against him. The notice contained a phone number and an invitation to contact Gurstel with any questions. Scheffler called the number, spoke to a collection representative about the underlying debt, and discussed the possibility of settling the debt. Thereafter, Scheffler filed a complaint alleging that Gurstel violated the FDCPA, 15 U.S.C. § 1692c(c), both in sending the garnishment notice and by discussing the debt after having received a cease-and-desist letter from Scheffler.

The district court granted Gurstel’s motion for summary judgment, finding no violation in sending the garnishment notice and characterizing Scheffler’s consumer-initiated inquiry as "an unsubtle and ultimately unsuccessful attempt to provoke [the defendant] into committing an FDCPA violation." The district court cited Eighth Circuit precedent providing that sending a garnishment notice did not violate the FDCPA, and further reasoned that the plaintiff’s conduct and dealings with Gurstel constituted a knowing and voluntary waiver of his cease-and-desist letter.

The Eighth Circuit affirmed both the district court’s ruling and reasoning, noting that it was the plaintiff who voluntarily reached out to the defendant, and that the discussion of the underlying debt happened in response to the plaintiff’s questions about his options with respect to the debt. According to the Eighth Circuit, Gurstel’s representative "fairly answered Scheffler’s questions by stating that Gurstel was willing to settle the debt and asking if Scheffler was interested in doing so. At no point did [Gurstel’s representative] pressure or badger Scheffler in any way."

In so ruling, the Eighth Circuit has joined with the Ninth Circuit in finding "that § 1692c(c) does not prevent a debt collector from responding to a debtor’s post-cease letter inquiry regarding a debt." See Clark v. Capital Credit & Collection Servs., Inc., 460 F.3d 1162, 1171 (9th Cir. 2006). While the Eighth Circuit’s analysis in Scheffler is highly fact-specific, it demonstrates an increasing willingness by courts to scrupulously examine plaintiffs’ conduct when determining the existence of FDCPA violations.

- Alan S. Kaplinsky, John L. Culhane, Jr., Stefanie H. Jackman, and Elanor A. Mulhern

Did You Know?

NMLS Posts Annual Renewal Information

In anticipation of the opening of the renewal process on November 1, NMLS has created the Annual Renewal page on the NMLS Resource Center. The page provides details for various state agencies and licenses, such as renewal deadlines, renewal requirements and fees.

- John D. Socknat

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