Mortgage Banking Update
In this issue:
- Inside the Beltway: Housing Infrastructure in the 116th Congress
- CFPB Issues Guidance on Applicability of TRID Rule to Assumptions
- This Week’s Podcast: An Update on Cannabis in the Financial Services Industry
- Ballard Spahr Consumer Financial Services Group Again Receives Highest National Ranking From Chambers USA
- CFPB Issues Proposed HMDA Rule and Advance Notice of Proposed Rulemaking
- CFPB Releases Redesigned HMDA Research and Data Page
- NY Federal District Court Deals Blow to OCC Fintech Charter
- South Carolina Enacts Servicemembers Civil Relief Act
- Did You Know?
- Looking Ahead
Since the new legislative session convened in January, congressional leaders and President Trump have repeatedly highlighted the importance of passing legislation to repair our nation’s crumbling infrastructure. And while there is general bipartisan agreement on the scope of the problem, there remain significant differences between Democrats and Republicans over how much money the federal government should invest and how to pay for that investment.
Several weeks ago, President Trump met with Speaker Pelosi and Majority Leader Schumer to discuss the parameters of an infrastructure bill. Both sides announced an agreement for a $2 trillion bill, but discussions over how to pay for it were put off for several weeks. The President agreed with Democrats that a broad infrastructure package should include surface transportation as well as water and broadband. Subsequent to the meeting, House and Senate Republicans, as well as senior White House officials, expressed doubt over being able to find the means to pay for the bill.
Meanwhile, Democrats in the House of Representatives continue to advocate for a broad, bipartisan infrastructure bill with a variety of pay-fors that include raising the gas tax and other taxes, which is a nonstarter for most Republicans. As President Trump prepared to meet with the Democratic congressional leaders, Congresswoman Waters, Chair of the House Financial Services Committee, offered a draft legislative infrastructure proposal, the “Housing is Infrastructure Act of 2019,” focused on increased affordable housing. She also held a hearing titled, “Housing in America: Assessing the Infrastructure Needs of America’s Housing Stock.” In her opening remarks, Chairwoman Waters emphasized that “Congress must recognize that our nation’s infrastructure extends beyond making investments in our roads, bridges, ports, and airports. It also includes our nation’s affordable housing.” To address these concerns, her legislation would provide the following investments:
- $1 billion to fully fund the backlog of capital needs for the Section 515 and 514 rural housing stock;
- $5 billion to support mitigation efforts that can protect communities from future disasters and reduce post-disaster federal spending;
- $5 billion for the Housing Trust Fund to support the creation of hundreds of thousands of new units of housing that would be affordable to the lowest income households;
- $100 million to help low-income elderly households in rural areas age in place;
- $1 billion for the Native American Housing Block Grant Program to address substandard housing conditions on tribal lands;
- $10 billion for a CDBG set-aside to incentivize states and cities to eliminate impact fees and responsibly streamline the process for development of affordable housing; and
- $70 billion to fully address the public housing capital backlog.
President Trump campaigned on investing in our nation’s infrastructure, and it has remained a stated priority for his administration. But given the negative reaction of many congressional Republicans to the $2 trillion price tag for a broad-based infrastructure bill, finding consensus may prove to be a difficult, if not impossible task for Congress and the President to accomplish before the 2020 election season begins to dominate the political agenda.
The CFPB recently issued a factsheet addressing whether a Loan Estimate and Closing Disclosure are required in connection with the assumption of a residential mortgage loan.
As previously reported, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Growth Act) includes a sense of Congress provision that the CFPB should endeavor to provide clearer, authoritative guidance on the applicability of the TRID rule to mortgage loan assumptions. Based on the provision the CFPB engaged in industry outreach regarding the guidance sought, and the factsheet is likely the result of those efforts.
The CFPB advises that if a transaction meets the definition of an “assumption” in Regulation Z section 1026.20(b) and is otherwise subject to the TRID rule, then a Loan Estimate and Closing Disclosure are required. The CFPB also advises that the Loan Estimate and Closing Disclosure must be based on the remaining obligation, and provides the following specific examples:
- The amount financed is the remaining principal balance plus any arrearages or other accrued charges from the original consumer credit transaction.
- In determining the amount of the finance charge and annual percentage rate to be disclosed, the creditor should disregard any prepaid finance charges paid by the original obligor, but must include in the finance charge any prepaid finance charge imposed in connection with the assumption transaction. The CFPB notes that if the creditor requires the new consumer to pay any charges as a condition of the assumption, those charges are prepaid finance charges as to the new consumer, unless they are exempt from the finance charge under Regulation Z section 1026.4.
The CFPB adds that whether or not a Loan Estimate and Closing Disclosure are required when a new consumer is added to an existing obligation, the transaction remains a consumer credit transaction subject to Regulation Z. As a result, ongoing obligations, such as servicing related requirements, must be followed. Additionally, even if a Loan Estimate and Closing Disclosure are not triggered, other disclosures under the Truth in Lending Act (TILA) or Real Estate Settlement Procedures Act (RESPA) may be required. Note that if a transaction is an assumption for TILA and RESPA purposes, but the transaction is not subject to the TRID rule, then a TILA Disclosure Statement, Good Faith Estimate and HUD-1 Settlement Statement would be required.
In this podcast, we review recent developments dealing with the provision of financial services to the cannabis industry, including state approaches to banking services, the status of hemp legalization, the interplay between federal and state cannabis law, FinCEN guidance on Bank Secrecy Act expectations, the status of federal regulatory and enforcement activity, and the status and prospects of proposed federal legislation.
Click here to listen to the podcast.
We are pleased to announce that Ballard Spahr’s Consumer Financial Services Group has once again been ranked in the highest tier nationally in the category of Financial Services Regulation: Consumer Finance (Compliance and Litigation) by Chambers USA: America’s Leading Lawyers for Business.
Our CFS Group is one of only three groups in the country to be ranked this high. It 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 well-known for its work with banks and nonbanks on the full range of consumer finance regulatory matters, including credit cards, mortgage, auto finance, and CFPB enforcement. Chambers USA also noted the Group’s expertise dealing with arbitration and in the areas of Fintech, e-commerce, and prepaid cards.
The 2019 edition quotes our clients, who have said that the Group’s “technical knowledge and responsiveness are excellent” and that “one of the greatest strengths of the Ballard Spahr team is its high degree of internal collaboration.”
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. Group Leader Alan Kaplinsky, who was individually ranked in Band One, was called “a brilliant attorney and a great advocate for his clients.” Chris Willis, leader of the Group’s litigation team and also individually ranked in Band One, was described as a “superstar” and “one of the really amazing lawyers out there.”
We are proud of the work we do, and also grateful to our clients for entrusting us to help them develop new products, defend them in litigation and against enforcement actions, and assist them in navigating the increasingly complex array of federal and state regulations.
The CFPB recently issued both a proposed Home Mortgage Disclosure Act (HMDA) rule and an advance notice of proposed HMDA rulemaking. The CFPB also issued a summary that mainly focuses on the proposed rule, as well as an unofficial redline of how the proposed rule would amend the HMDA rule, known as Regulation C. Comments on the proposed rule and advance notice of proposed rulemaking will be due 30 days and 60 days, respectively, after the items are published in the Federal Register.
The proposed rule includes proposals addressing three main aspects of the HMDA rule:
- A proposal to increase the volume threshold that triggers reporting of closed-end mortgage loans from at least 25 originated loans in each of the prior two calendar years to at least 50 originated loans in each of the prior two calendar years. The CPFB also solicits comments on an alternative threshold of 100 originated loans in each of the prior two calendar years. Before the main implementation of the HMDA rule amendments issued in October 2015, the threshold for reporting closed-end loans applicable to non-depository lenders was 100 originated loans in the prior calendar year.
- A proposal to continue until January 1, 2022, the temporary volume threshold that triggers reporting of open-end lines of credit of at least 500 originated lines of credit in each of the prior two calendar years, and then implement a permanent threshold of 200 originated lines of credit in each of the prior two calendar years. As previously reported, while the HMDA rule amendments adopted in October 2015 established a threshold of 100 originated lines of credit in each of the prior two calendar years, in 2017 the CFPB temporarily increased the threshold to the 500 originated lines of credit level until January 1, 2020.
- A proposal to incorporate into Regulation C the interpretation and procedures previously issued by the CFPB to implement the partial exemption from HMDA reporting for smaller volume bank and credit union lenders adopted in the Economic Recovery, Regulatory Relief, and Consumer Protection Act.
Advance Notice of Proposed Rulemaking
The HMDA amendments adopted by the CFPB in October of 2015 revised certain pre-existing data points, added data points set forth in Dodd-Frank, and included additional data points based on authority in Dodd-Frank for the CFPB to mandate reporting of such other information as it may require. The discretionary data points added by the CFPB are:
- Reasons for denial (previously optional)
- Total origination charges
- Total discount points
- Amount of lender credits
- Interest rate at closing or account opening
- Debt-to-income ratio
- Combined loan-to-value ratio
- For transactions involving a manufactured home, whether the loan is or would have been secured by the home and land, or only the home
- For transactions involving a manufactured home, whether the consumer owns or would have owned the land, or leases or would have leased the land
- When an automated underwriting system is used to evaluate an application, the name of the system and the result generated by the system
- Whether the loan is a reverse mortgage loan
- Whether the loan is an open-end line of credit
- Whether the loan is primarily for a business or commercial purpose
- The total number of individual dwelling units in the security property (The CFPB describes this item as a data point that was revised, but it is a new data point.)
- For a multifamily dwelling, the number of units that are income-restricted under federal, state or local affordable housing programs
For certain data points, the October 2015 amendments provide for the completion of free-form text fields under certain conditions. The amendments also significantly revised the race and ethnicity data points by allowing applicants to:
- Indicate certain specified subcategories (e.g. Mexican, Puerto Rican or Cuban) in addition to indicating the main Hispanic or Latino category, and/or indicate a non-specified Hispanic or Latino subcategory in a free form text field.
- For individuals indicating they are American Indian or Alaskan Native, enter a specific tribe in a free form text field.
- For the Asian and the Native Hawaiian or Other Pacific Islander race categories, indicate certain specified subcategories of those races and/or indicate a non-specified race subcategory in a free form text field.
The October 2015 amendments also expanded the scope of reportable loans by requiring the reporting of dwelling-secured business or commercial purpose loans that meet the definition of a home purchase, refinancing or home improvement transaction.
The CFPB is seeking comment on whether to make changes to the revised or new data points, and the coverage of business or commercial-purpose loans that are made to a non-natural person and secured by a multifamily dwelling. The CFPB encourages commenters to be specific and, when possible, include relevant empirical evidence.
With regard to data points, the CFPB specifically asks for comments on four topics:
- Identify any new data point or any data point revised to require additional information for which the cost of collecting and reporting the information does not justify the benefit that the information collected and reported provides in furthering the purposes of HMDA.
- For each free-form text field required by the 2015 HMDA rule amendments:
- What are the costs of providing information through the free-form text field?
- What are the benefits of providing information through the free-form text field?
- Are there alternatives that are better than providing information through the free-form text field?
- Are there other considerations the Bureau should take into account in deciding whether to propose to eliminate or revise any new data point or revised data point from the 2015 HMDA rule amendments?
- Are there new or revised data points under the 2015 HMDA rule amendments for which more explanation is needed to clarify the collection and reporting requirements?
If so, please identify any data point for which additional clarity could reduce the costs associated with collecting and reporting the data and improve the value of the data in furthering the purposes of HMDA.
With regard to loans that are made to a non-natural person and secured by a multifamily dwelling, the CFPB seeks information that might assist it in deciding whether to propose to exclude such transactions from HMDA’s requirements, including information about the following:
- The value that the required HMDA data on such transactions provides in serving HMDA’s purposes.
- Other benefits associated with reporting such transactions.
- The burden imposed by the requirement to report data on such transactions.
The CFPB recently released a redesigned version of its HMDA data and research page. The webpage provides access to various types of HMDA information and data, including HMDA data of individual institutions, and HMDA data aggregated on a national basis and a metropolitan area basis.
The CFPB advises that in the coming months the Federal Financial Institutions Examination Council (FFIEC) will publish a query tool for the 2018 HMDA data. Calendar year 2018 was the first year that institutions were required to collect information based on the greatly expanded and revised HMDA data requirements adopted in October of 2015. Please see our blog post on CFPB efforts to revisit the changes to the HMDA rule made in October 2015.
Once the new FFIEC query tool becomes available, the CFPB will retire the current HMDA Explorer tool and the application programming interface (API) that powers the tool, as they are not compatible with the HMDA data collected in 2018 or later.
A dark cloud is now hanging over the OCC’s decision to accept applications for special purpose national bank (SPNB) charters from Fintech companies as a result of the opinion issued last week by a New York federal district court in the lawsuit filed by the New York Department of Financial Services (NYDFS) seeking to block the OCC’s issuance of the charters. In denying the OCC’s motion to dismiss, the court concluded not only that the NYDFS had established standing to sue and that its claims were ripe for decision, but also that the NYDFS had stated a claim under the Administrative Procedure Act (APA). In doing so, the court found that the term “business of banking” as used in the National Bank Act (NBA) “unambiguously requires receiving deposits as an aspect of the business.”
In its motion to dismiss, the OCC argued that the court lacked subject matter jurisdiction over the NYDFS’s claims because (1) the NYDFS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could the NYDFS suffer an injury in fact; and (2) the OCC had not yet received an application for an SPNB charter or granted a charter, thus making the matter not ripe for judicial review. The OCC also argued that the NYDFS’s claims were untimely because it can no longer challenge the OCC’s longstanding regulation (12 C.F.R. § 5.20(e)(1)) interpreting the term “business of banking” in the NBA.
The district court found that the NYDFS had demonstrated a substantial risk of harm that was sufficient to establish constitutional standing and that the NYDFS’s claims were ripe for adjudication because “the very narrowness of the question raised in this action supports answering it before a Fintech company wastes its and the OCC’s time and money obtaining an SPNB charter.” With regard to the OCC’s argument that the NYDFS’s APA challenge was untimely because it was not brought within the six-year federal statute of limitations for APA claims, the court found that the statute of limitations “does not operate as a jurisdictional bar in this case” and that the OCC’s timeliness defense was likely defeated by the “reopening doctrine” which “permits courts to review recent agency action based on prior agency interpretations.”
While the standing, ripeness, and limitations arguments are interesting, the primary significance of the decision is the aspect touching on the merits. Here, the OCC pointed to 12 C.F.R. § 520(e)(1), which contains a sentence that directly justifies the SPNB charter: “A special purpose bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking functions: Receiving deposits; paying checks; or lending money.” The OCC argued that the NYDFS’ complaint failed to state an APA claim because this regulation is entitled to deference under the U.S. Supreme Court’s 1984 decision Chevron U.S.A. Inc. v. National Resources Defense Council, Inc. According to the OCC, the regulation represents a reasonable interpretation of ambiguous language in the NBA.
In finding that the NYDFS had stated an APA claim, the district court rejected the OCC’s argument and instead concluded that the “business of banking” in the NBA, “read in the light of its plain language, history, and legislative context, unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters.” Having found the NBA’s text to be unambiguous, the court did not reach the second step of Chevron deference analysis under which a court considers whether an agency’s interpretation is reasonable and therefore entitled to judicial deference.
The court’s conclusion on this point strikes us as incorrect and outcome-oriented. We think it clear that the statutory reference to the “business of banking” is not “plain and unambiguous.” The court’s textual analysis started with a review of the powers of national banks under the NBA. The court failed to comment on the fact that the powers of national banks include “receiving deposits” and “loaning money on real and personal security” but do not give primacy to either of these powers over the other. The court also looked to dictionaries published just prior to the enactment of the NBA. All the court could say about these dictionaries was that their listing of bank powers with the word “and” rather than “or” somehow “implies that receiving deposits is not an optional alternative to the other listed activities.” However, the court conceding the existence of “some ambiguity on this point.”
The court also noted (1) that the NBA contains two references to deposit-taking in addition to the powers clause, (2) New York’s experience with banking at the time the NBA was enacted, (3) the fact that the NBA has never previously chartered a non-depository entity on the basis of the NBA’s “business of banking” clause, and (4) the fact that Congress expressly authorized non-depository national bank trust companies and bankers’ banks. It did not claim that these observations rendered the phrase “business of banking” unambiguous.
Rather, the court seemed to regard the OCC chartering of SPNB’s as national banks as tantamount to the “unheralded power to regulate a significant portion of the American economy”—a power the Supreme Court has greeted in the past with a “measure of skepticism.” The key passage of the opinion reads:
As one instance of the consequential effects of issuing SPNB charters to non-depository Fintech companies, the court notes that such action would entail federal preemption of the state banking regulatory scheme nationwide as it relates to such fintech entities. Such dramatic disruption of federal-state relationships in the banking industry occasioned by a federal regulatory agency lends weight to the argument that it represents exercise of authority that exceeds what Congress may have contemplated in passing the NBA.
Respectfully, this policy argument sheds little if any light on whether the “business of banking” unambiguously requires a bank to engage in deposit-taking activity.
It is hard to predict exactly where the case will go from here. In light of the importance of the issue and because the decision casts doubt on SPNB chartering, we would welcome a Second Circuit decision at the earliest opportunity. One option for the OCC would be to seek an interlocutory appeal. However, this would require consent of both the district court and the Second Circuit. Another option would be for the OCC to agree to entry of judgment on the pleadings in favor of the NYDFS. However, this might make it difficult for the OCC to contest some of the NYDFS’ allegations as to the consequences of SPNB chartering.
Another OCC motion to dismiss is currently pending in the lawsuit filed by the Conference of State Bank Supervisors (CSBS) in federal district court in D.C. to block the OCC from issuing SPNB charters. The OCC’s motion is based on arguments substantially similar to those it made in moving to dismiss the NYDFS’s lawsuit. (Last Friday, the CSBS filed the New York federal district court’s decision as supplemental authority.)
If nothing more, the New York decision makes clear that seeking an SPNB charter entails legal risk. Accordingly, companies in a position to do so may wish to consider other alternatives. One alternative is acquiring or forming a full service national bank or state bank, where ownership would be subject to the Bank Holding Company Act (BHCA). A second alternative is to charter or acquire an industrial bank under Utah law, where ownership would not be subject to the BHCA. A third alternative is to continue or revisit bank partnerships and address the risks created by the Madden decision and “true lender” issues. Risks inherent in these partnerships could (and should) be mitigated by careful structuring and, potentially, OCC or FDIC rulemaking.
On April 26, the South Carolina Servicemembers Civil Relief Act was signed into law and went into immediate effect. The act seeks to “expand and supplement” the federal Servicemembers Civil Relief Act (SCRA), and provides that an SCRA violation constitutes a violation under the Act. The act expands servicemember protections in a few important ways:
- the act’s definition of “military service” covers members of the South Carolina National Guard who are on active duty (as defined by the statute) for a period of more than 30 days;
- the act’s protections extend to dependents of servicemembers engaged in military service; and
- a servicemember may terminate certain types of contracts after receiving “military orders to relocate for a period of service of at least ninety days to a location that does not support the contract” without being subject to an early termination fee.
The act includes a private cause of action and, in the event of an intentional violation, the Act provides for a civil penalty not to exceed $5,000 per violation that is to be retained by the state. The Act applies to contracts entered into on or after April 26, 2019.
Minnesota Revises Its Residential Mortgage Originator and Servicer Licensing Act to Remove References to “Subprime”
Effective July 1, 2019, among other things, the definition of “subprime loan” set forth in Subdivision 27 of Section 58.02 of the Residential Mortgage Originator and Servicer Licensing Act is repealed.
However, the existing prohibition on a residential mortgage originator entering into a “subprime loan” containing a provision requiring or permitting a penalty, fee, premium, or other charge upon whole or partial prepayment (Section 58.137, subdivision 2, subsection (c)) is effectively retained, as the amendment incorporates the former definition of “subprime loan” into the text of the prohibition. That prohibition does not apply to any loan with a principal amount (or in the case of an open-end credit plan, in which the borrower’s initial maximum credit limit) exceeds the conforming loan size limit for a single-family dwelling as established by the Federal Housing Finance Administration or its successor.
A Ballard Spahr event, live in various locations and via webinar
May 22, 2019
Speakers: Wendi L. Kotzen, Molly R. Bryson, April Hamlin, Linda B. Schakel
Webinar June 19, 2019
Speakers: Molly R. Bryson and Linda B. Schakel
Copyright © 2019 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.