Mortgage Banking Update
CFPB Releases Beta Version of 2018 HMDA Data Platform
The Consumer Financial Protection Bureau (CFPB) has made available a beta version of its 2018 Home Mortgage Disclosure Act (HMDA) data platform. The platform is for the reporting of data collected in 2018 that must be reported in 2019.
During the beta period, reporting institutions can test and retest 2018 HMDA data files as often as desired to assess if their Loan Application Register (LAR) data complies with the reporting requirements outlined in the Filing Instructions Guide for HMDA data collected in 2018.
No 2018 data can actually be submitted through the platform until January 2019. Based on the substantial changes to HMDA data for 2018, testing whether LAR data complies with the reporting requirements will likely be beneficial for many reporting institutions.- Richard J. Andreano, Jr.
CFPB Settles With VA Lender Regarding Claims of Deception
The Consumer Financial Protection Bureau (CFPB) recently filed a complaint and a proposed stipulated final judgment and order to address claims that Village Capital & Investments LLC (Village) engaged in deceptive acts and practices in the solicitation of veterans for mortgage refinance loans to be guaranteed by the Department of Veterans Affairs (VA).
The CFPB asserts that between March 2017 and August 2018 Village employed loan officers in its San Antonio, Texas, office who were responsible for making in-home sales presentations to veterans for VA Interest Rate Reduction Refinancing Loans to be made by Village. This type of loan is the VA version of a streamlined refinance loan that is primarily intended to provide a veteran borrower with a lower interest rate and monthly payment. The CFPB states that Village provided the loan officers with marketing materials for the in-home presentations, including a worksheet that would be used to compare the veteran's current loan with a proposed refinance loan.
The CFPB asserts that that the worksheets were deceptive because they misrepresented the cost savings to the consumer of the refinanced loan by:
- Inflating the future amount of principal owed under the veteran's existing mortgage loan by underestimating the proportion of the consumer’s existing monthly payment that is applied to principal.
- Underestimating the future amount of the monthly payments on the proposed refinance loan by overestimating the term of the loan.
- Overestimating the total monthly benefit of the proposed refinance loan after the first month.
Without the adjudication of any issue of fact or law, to settle the matter Village agreed to pay $268,869 for the purpose of providing redress to affected consumers, and also agreed to pay a civil penalty of $260,000. Village further agreed not to misrepresent to consumers in connection with the offering of refinance loans (1) the future principal or future monthly payments owed on the consumer’s existing mortgage loan, or (2) the future principal or future monthly payments a consumer would owe on a refinance mortgage loan. Additionally, Village must develop a compliance plan that includes training for loan officers.- Richard J. Andreano, Jr.
Plaintiffs' Firms Continue to Bring Website Accessibility Claims Under Federal and State Law
Courts across the country have increasingly held that the websites of certain businesses that provide goods and services to the public are covered by the Americans with Disabilities Act (ADA). As a result, many businesses, including mortgage lenders, are required to take steps to ensure that their websites are accessible to individuals with disabilities. Courts have required businesses to implement the Web Content Accessibility Guidelines (WCAG) 2.0, a set of voluntary guidelines for accessible online content. WCAG 2.0 provides a roadmap to make websites compatible with screen readers used to navigate the internet by individuals who are blind or have low vision, for example, and ensures that videos on websites are captioned or otherwise accessible to consumers who are deaf or hard of hearing.
In addition to website accessibility litigation under the ADA, plaintiffs' firms have also included claims under state nondiscrimination statutes. In May 2018, a plaintiffs' firm brought a civil action against a restaurant under California's Unruh Civil Rights Act. Thurston v. Midvale Corp., Case No. BC663214 (Cal. Super. Ct., L.A. County, May 21, 2018). The blind plaintiff alleged, for example, that she was unable to access the restaurant's menu online because the menu was offered in a graphic image that was incompatible with her screen reader tool, a PDF link to the menu was inaccessible, and she was not able to make a reservation online like sighted customers.
The California state judge ruled in the plaintiff's favor on a motion for summary judgment, finding that the restaurant’s website was covered by the state civil rights statute and that the inaccessibility of the website was discriminatory under the Unruh Civil Rights Act. The court required the restaurant to conform its website to WCAG 2.0 Level AA and pay statutory damages of $4,000.
The court also rejected the business' defense that its website published an email address and telephone number at which the restaurant could be contacted during business hours, stating: "the provision of an email or phone number does not provide full and equal employment of Defendant's website, but rather imposes a burden on the visually impaired to wait for a response via email or call during business hours rather than have access via Defendant's website as other sighted customers." The court did not opine as to whether provision of 24/7 phone or email access could be sufficient to provide accessibility to consumers.
The last several years have marked a significant rise in the number of claims against businesses regarding the accessibility of their websites. Such claims have been made through demand letters and civil actions in state and federal court, including against mortgage lenders, banks, and other consumer financial services institutions. While the Thurston case involved a restaurant, similar claims have been made against the websites of mortgage lenders, such as regarding the ability of consumers to access applications and other online content using screen readers. Businesses are advised to review the accessibility of their websites, using the WCAG 2.0 guidelines and commonly used screen reader tools, to determine conformance with the WCAG success criteria. Businesses also should ensure that internal risk mitigation controls are in place—including ADA policies and procedures, training, and vendor management—to ensure that websites are monitored for ongoing compliance, given the dynamic nature of online content.- Olabisi Ladeji Okubadejo
Another Temporary Extension of the Flood Insurance Program
As previously reported, the National Flood Insurance Program was scheduled to expire on November 30, 2018, and Congress extended the Program to December 7, 2018. The U.S. House of Representatives and U.S. Senate have once again voted to temporarily extend the Program, this time until December 21, 2018. Perhaps Congress is hoping that someone will come down the chimney and deliver a long-term, sensible reform of the Program.- Richard J. Andreano, Jr.
What Will Mortgage Lenders Do Without Their COFI?
The Federal Home Loan Bank of San Francisco (FHLB of San Francisco) recently announced that it will discontinue publishing certain cost of funds indices, including the 11th District Weighted Average Cost of Funds Index (COFI). (The FHLB of San Francisco is the 11th District in the FHLB system.) Certain mortgage lenders use the COFI as the index for their adjustable rate mortgage loans
Explaining the reason for the discontinuance, the FHLB of San Francisco advised that when the COFI was developed in 1981 there were more than 200 savings institutions that reported cost of funds data to the FHLB, and now there are only nine. The FHLB will cease the calculation and publication of the COFI after the publication of the December 2019 COFI on January 31, 2020.
Lenders still using the COFI will need to use a different index both for existing loans and for future originations. The eventual discontinuance of the London Interbank Offered Rate (LIBOR) index will have a much greater effect on the mortgage industry, and the financial industry in general, as that index is more widely used by lenders than the COFI.- Richard J. Andreano, Jr.
Senate Confirms Kraninger as CFPB Director
On December 6, 2018, by a vote of 50-49, the Senate confirmed Kathy Kraninger as CFPB Director.
Pursuant to the Dodd-Frank Act, the CFPB Director has a five-year term. The approximate 12 months during which Mick Mulvaney has served as Acting Director since former Director Cordray's resignation last November does not count against Ms. Kraninger's five-year term. As a result, Ms. Kraninger could serve as Director for approximately three years of the next four-year presidential term that begins in January 2021 even if a Democratic president is elected.
There is, however, a "wildcard" that could potentially shorten Ms. Kraninger's tenure, namely the ongoing litigation challenging the CFPB's constitutionality. In September 2018, a petition for certiorari was filed in the U.S. Supreme Court by State National Bank of Big Spring, which, together with two D.C.-area nonprofit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB's constitutionality. Following the D.C. Circuit's en banc PHH decision that held the CFPB's structure is constitutional, the D.C. Circuit, based on PHH, summarily affirmed the district court's judgment entered against the plaintiffs. The issue of the CFPB's constitutionality is also currently pending in two circuit courts—the Second Circuit in the RD Legal Funding case and the Fifth Circuit in the All American Check Cashing case. In all of these cases, the CFPB's constitutionality has been challenged based on its single-director-removable-only-for-cause structure.
These cases create a strong likelihood of this issue coming before the Supreme Court in the next year or so. If the CFPB's structure is found to be unconstitutional and severing Dodd-Frank's for-cause removal provision is determined to be the appropriate remedy (as the D.C. Circuit determined in its PHH panel decision), a Democratic president might have the ability to remove Ms. Kraninger without cause before the end of her five-year term.- Barbara S. Mishkin
CA Regulator Invites Comments on Proposed Rulemaking to Implement New Law Requiring Commercial Financing Disclosures
The California Department of Business Oversight (DBO) has issued an invitation for comments from stakeholders in developing regulations to implement SB 1235, the bill signed into law on September 30, 2018, that requires consumer-like disclosures to be made for certain commercial financing products, including small-business loans and merchant cash advances. Companies providing such financing are not required to comply with the new disclosure requirements until the DBO's final regulations become effective.
The DBO's invitation provides an important opportunity for providers of commercial financing products to engage with and educate the DBO as it develops proposed regulations. Comments must be submitted by January 22, 2019.
In the invitation, the DBO lists the following 14 specific potential topics for rulemaking:
- Definitions (The DBO's questions include whether the definitions can be read to cover transactions, individuals, or entities not intended to be regulated by the disclosure requirements or result in ambiguity regarding whether a transaction, individual, or entity is subject to the disclosure requirements.)
- Commercial financing requiring estimated term disclosures (The DBO asks what commercial financing transactions may require an estimated term disclosure and why and suggests that stakeholders provide sample contracts that may require such a disclosure.)
- Disclosure of method, frequency, and amount of payments for commercial financing with flexible or contingent repayment obligations (The DBO suggests that stakeholders provide examples of these types of financing and asks how providers should make the disclosures required for such contracts.)
- Annualized rate disclosure (The DBO notes different methods that might be used for the annualized rate disclosure and asks about the benefits and drawbacks of each disclosure and ways to reduce potential confusion to financing applicants caused by the disclosure.)
- Types of commercial financing (The DBO asks for examples of transactions other than fixed-rate, fixed-payment financing that are subject to SB 1235, noting such examples may include merchant cash advances and recourse and non-recourse factoring, anticipated compliance obstacles in such transactions, and how the DBO can address such obstacles.)
- Types of financing requiring estimated annualized rates (The DBO asks for the types of commercial financing that will require estimated annualized rates and why.)
- Fees and charges included in an annualized rate calculation (The DBO asks what fees and charges should be included in the calculation.)
- Calculating estimated terms and estimated annualized rates (The DBO asks how estimated terms and rates should be calculated for the transactions subject to SB 1235, such as transactions with payments set as a percentage of a business's gross receipts.)
- Reliance upon internal underwriting criteria to calculate estimated terms and estimated annualized rates (The DBO asks if the calculation methodology it establishes should require a provider to rely upon the internal assumptions or calculations it used to underwrite the transaction.)
- Explanatory and qualifying language in connection with estimated terms and estimated annualized rates (The DBO asks what explanatory and qualifying language providers should include when disclosing such estimates.)
- Disclosures for factoring and asset-based lending transactions with master financing agreements (The DBO asks what rules it should establish to clarify when disclosures based on estimates are permitted and to govern what examples, such as financing amount, a provider may use in disclosures.)
- Tolerances (The DBO asks what accuracy requirements and tolerances it should establish and why.)
- Disclosure formatting (The DBO asks what information should be highlighted or prioritized and about the placement and font to be used.)
- Prepayment policies (The DBO asks what prepayment policies and charges are common for transactions subject to SB 1235 and how such policies and charges are currently characterized to customers.)
CFPB Ombudsman's Office Releases Its Seventh Annual Report
Last week, the CFPB Ombudsman's Office released its seventh annual report covering the Office's activities during fiscal year 2018. The Ombudsman’s Office is intended to serve as an independent, impartial, and confidential resource that assists consumers, financial entities, consumer or trade groups, and others in informally resolving process issues with the Consumer Financial Protection Bureau (CFPB). The Office works outside of the CFPB's business lines, reporting to the Deputy Director with access to the Director. One of its stated goals is to serve as an early warning system and catalyst for change.
In the annual report, the Office provides examples of its work in the 2018 fiscal year and discusses the types of internal and external engagement in which it has participated during that period.
Some noteworthy items include:
- An overview of the Office's efforts in assisting stakeholders in engaging with the Bureau’s Request for Information process, sharing resources to assist consumers in recognizing financial frauds and scams, and facilitating technical assistance to companies responding to consumer complaints.
- Discussion of the Office's continued practice of regular meetings with Bureau leadership and staff and the Office's external outreach activities, including two Ombudsman Forums hosted by the Office and an overview of the new criteria the Office will use in determining the topics and format for future Forums.
- While the CFPB generally prefers to avoid endorsements of groups or entities, the Office received an inquiry about a Bureau blog post that did recommend one group to consumers for a certain kind of assistance. This inquiry led the Office to study the Bureau's internal guidance about naming entities in blogs, social media, and print materials for a positive purpose. The study resulted in the Office recommending that the Bureau supplement its guidance as it relates to the commercial impact of the Bureau recommending a group or entity, incorporate review of agency risk associated with such action, and make internal guidance about the endorsement of entities more widely available to Bureau staff.
- A review of the Bureau's process for responding to consumer complaints about companies initiated by third parties who are unauthorized to receive the company's substantive response to the complaint. In these types of situations, a third party, who is not a customer or authorized person on an account for the company, submits a complaint to the Bureau about the company's handling of an account or some other action taken by the company. When the company researches the complaint, it learns that the person who brought the complaint is not authorized to receive information responding to the substance of the complaint. When the Bureau is notified that the complaint was brought by an unauthorized person, the Bureau closes the consumer complaint and it is not reopened even if the person submits authorization information. The Office recommended ways for the Bureau's telephone contact center to be better prepared to address these situations. More specifically, the Office recommended that the telephone contact center be given information that would allow it to answer questions about the unauthorized third party issue, provide additional information to the third party on what it means to be unauthorized, inform consumers that even if new authorization information is submitted the Bureau will not reopen a complaint that was closed because it was initiated by an unauthorized third party, and share that consumers may submit authorizing information required by the company that is the subject of the complaint in a new consumer complaint to be sent to the company.
- A recommendation that the Bureau provide a direct avenue for non-consumers, meaning anyone who contacts the Bureau about something other than an individual consumer finance question or complaint—including researchers and academics seeking information—to access the Bureau via telephone, or offer a way for non-consumers to know that non-consumer information is available when contacting the Bureau's main telephone number.
Report of the data and analysis surrounding the individual inquiries received by the Office in FY2018 compared to inquiries received in FY2015-2017. As in the last few years, mortgages were the financial product most commonly underpinning consumer complaint-related inquiries to the Ombudsman, followed by other credit products (26 percent), deposit products (13 percent), credit reporting (13 percent), debt collection (6 percent), and methods of payment (4 percent).- Rachel R. Mentz
OCC and N.Y. State Department of Financial Services Trade Contentious Pre-Motion Letters in Fintech Charter Dispute
Attorneys for defendants, U.S. Comptroller and the Office of the Comptroller of the Currency (together the OCC), in the pending Southern District of New York lawsuit, Vullo v. OCC, submitted a letter to the court announcing their intent to move to dismiss the complaint brought by New York's Superintendent of the Department of Financial Services (DFS). This is the second lawsuit brought by Superintendent Vullo against the OCC and mirrors the litigation being pursued by the Conference of State Bank Supervisors (CSBS) in the District of Columbia. DFS's lawsuit alleges that the OCC's decision to accept applications for "Special Purpose National Bank Charters" (or Fintech charters) from non-fiduciary institutions that do not accept deposits exceeds the OCC’s authority under the National Banking Act (NBA) and would violate the Tenth Amendment by removing such institutions from state regulatory oversight. The first lawsuit, Vullo v. OCC et al. (Vullo I), was dismissed without prejudice last December when Southern District of New York Judge Buchwald ruled that DFS lacked standing to assert its claims, which were unripe for judicial determination.
In its letter, the OCC announced its intention to file a motion to dismiss the latest DFS complaint on substantially identical grounds to those it advanced in Vullo I. The OCC intends to argue that: (1) DFS lacks sanding to bring these claims as it has not suffered an injury in fact; (2) the OCC interpretation of the ambiguous term "business of banking" in the NBA is reasonable, and the OCC therefore has authority under the NBA to issue Fintech charters; (3) DFS's challenge is barred by the applicable statute of limitations; and (4) the OCC's decision to issue Fintech charters would not violate the Tenth Amendment because of the Supremacy Clause and the authority granted to the OCC by the NBA. While DFS had tried to cure its standing issues in the most recent complaint by emphasizing the OCC's decision to issue Fintech charters was the "agency's final decision," the OCC has signaled in its letter that it believes the DFS complaint remains premature. The OCC's letter emphasizes that while "it will accept applications for [F]intech charters, [the agency] has not actually received any such applications, let alone granted one." Accordingly, the OCC will argue that any harm DFS describes in its complaint or in its response to the motion to dismiss remains "future-oriented and speculative."
DFS filed its own letter in response, announcing not only DFS's strategy for overcoming the OCC's anticipated motion to dismiss, but also its intent to file a motion for preliminary injunction in order to prevent the OCC from issuing any Fintech charters while the lawsuit is pending. DFS focused on the reasoning of Judge Buchwald's Vullo I opinion and highlighted several subsequent changes to the regulatory landscape that should change the result. In particular, DFS noted that at the time Judge Buchwald found DFS's claims unripe: (1) the OCC had not yet announced its intent to accept applications from non-depository institutions; (2) the relevant supplement to the OCC licensing manual was still in "draft" form; and (3) the Comptroller at the time was a nominee who had made no public statements regarding whether to offer charters to non-depository institutions. In contrast, presently the OCC has announced that it is accepting Fintech charter applications, the manual detailing procedures for the process has been finalized, and the then-nominee-now-Comptroller has made several public statements regarding the OCC's intent to issue Fintech charters. DFS will argue that, based on these changes to the facts underpinning Judge Buchwald's determination, DFS now has standing to make its claims against the OCC.
DFS also strongly implied that the OCC had been less-than-forthright with the court in its letter when the OCC stated that DFS lacked standing (in part) because the OCC had not actually received, much less granted, any applications for Fintech charters. DFS cited to reports that the OCC has already singled-out the first entity to receive a Fintech charter, and characterized the OCC's representation to the Court that no Fintech charters were currently being considered as "brutishly inconsistent" and duplicitous.
Regarding the merits of the claims (on which DFS will have to prove a substantial likelihood of success if it does indeed seek a preliminary injunction), DFS signaled in its letter that it intends to focus primarily on the history of the NBA, the OCC's traditional deference to congressional authority when regulating non-depository institutions, and the degree to which the OCC's actions in the realm of offering Fintech charters has no precedent. In emphasizing the need for a preliminary injunction, DFS characterized the OCC's "unprecedented issuance" of Fintech charters as "destructive to New York and New Yorkers" insofar as it would preempt state laws that "powerfully protect" consumers from the industry's "well-known abuses."
The OCC anticipates filing its motion to dismiss in early December, though the court has neither ruled on the parties' jointly proposed briefing schedule, nor DFS's request for a pre-motion conference or briefing schedule on the motion for preliminary injunction.
While the OCC's position that the DFS lawsuit is not yet ripe for adjudication because the OCC has not yet approved a Fintech charter may have some merit, it is important to the industry that the legal question of the OCC's authority to issue such a charter get resolved expeditiously. Until that happens, there is likely to be limited interest on the part of the industry in pursuing such a charter.- Elanor A. Mulhern
FCC Chairman Proposes Reassigned Number Database
FCC Chairman Ajit Pai proposed the creation of a comprehensive reassigned numbers database, addressing a significant compliance challenge under the Telephone Consumer Protection Act (TCPA). The TCPA's prohibitions on the use of automatic telephone dialing systems (ATDS) allows calls to be made with the express consent of the recipient. However, as the Chairman noted in the press release announcing this proposal, millions of phone numbers are reassigned each year. Because businesses who have received prior express consent cannot rely on consumers to inform them of a reassignment, they risk violating the TCPA by placing any calls with an ATDS to those numbers after they have been reassigned.
The Chairman's press release and proposed order recognize this challenge and outline the establishment of a database of all phone numbers that have been permanently disconnected (and that are therefore eligible for reassignment). With a single, comprehensive, and authoritative repository for this information, business callers can check the database and determine whether a recipient's number has become eligible for reassignment. This will allow callers to know before placing an ATDS call whether the consumer who consented to receive calls still holds that phone number—and thus whether the prior express consent is still valid.
If approved by the FCC, the proposed order would establish a database based on information provided by phone companies obtaining geographic numbers from the North American Numbering Plan. Voice providers would report all permanently disconnected numbers (i.e., numbers that have thus become eligible for reassignment) on a monthly basis. The draft order would also require an aging period of 45 days before permanently disconnected numbers may be reassigned, ensuring that eligible numbers will be in the database before reassignment occurs. An independent third-party administrator would be responsible for managing the data with funding assessed from voice providers.
Although the TCPA compliance problems around reassigned numbers have existed for years, these issues took on new importance this year after the D.C. Circuit set aside two components of the FCC's 2015 Declaratory Ruling and Order in ACA International v. FCC. The ACA International decision both eliminated the FCC's one-call safe harbor for calls placed to reassigned numbers and set aside the FCC's interpretation of "called party" to mean the current actual subscriber instead of the intended recipient, increasing the uncertainty faced by business callers. The FCC issued a notice seeking comments on this and other issues arising from the ACA International decision in April. This was followed later in the summer by a bipartisan letter from two U.S. Senators calling for the establishment of a reassigned number database, demonstrating consensus that a comprehensive solution to reassigned numbers is overdue.
While the establishment of a reassigned numbers database would certainly be a welcome development, it would not resolve all of the compliance challenges relating to reassigned numbers that resulted from ACA International. The chairman's draft order establishing the database specifically says it would not address "how a caller's use of this database would impact its potential liability under the TCPA for calls to reassigned numbers" but "that use of the database will be a consideration" when the FCC does address the other topics raised in the May 2018 notice.
We recently addressed these and other TCPA compliance developments on our podcast, including the FCC's response to a number of other issues raised by the ACA International decision around what constitutes an ATDS and how a party can revoke prior express consent to receive calls.
The FCC is expected to vote on the Chairman's database proposal at its next Open Commission Meeting on December 12.- Jacob N. Westlund
Did You Know?
2019 NMLS Annual Conference
Registration for the 2019 NMLS Annual Conference & Training is now open. The Conference will be held February 18-21 at the Hilton Orlando Lake Buena Vista in Orlando, FL. Additional details are available here.- John D. Socknat
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