Mortgage Banking Update - July 11, 2019
In this issue:
- FDIC and CFPB to Co-Host Webinar on Elder Financial Abuse
- CFPB Files Amicus Brief in Support of Plaintiff in Fourth Circuit FDCPA Case
- Podcast: How the CFPB’s Proposed Debt Collection Rules Would Impact Creditors and First Party Collections
- CFPB Extends Comment Period for HMDA ANPR
- Seila Law Asks U.S. Supreme Court to Review Ninth Circuit Ruling That CFPB’s Structure is Constitutional
- New Plaintiffs Join Lawsuit Against CFPB for Delaying Section 1071 Implementation
- CFPB 2019 Fair Lending Report Highlights Alternative Scoring Models
- New York Department of Financial Services Opens Investigation Into Facebook Advertisers
- Congress Passes Legislation Addressing VA Refinance Loan Issues
- Did You Know?
- Looking Ahead
On July 25, from 2 to 3 p.m. EST, the FDIC and CFPB will co-host a webinar to outline strategies to address and prevent elder financial abuse.
The webinar will focus on the benefits of collaboration between financial institutions and law enforcement and the challenges involved in detecting and preventing elder financial abuse, including the use of Suspicious Activity Reports (SARs) to combat it.
In March, the CFPB’s Office of Financial Protection for Older Americans issued a report on combating elder abuse. Titled “Suspicious Activity Reports on Elder Financial Exploitation: Issues and Trends,” the report examined non-public data derived from SARs filed with federal regulators from 2013 to 2017.
The CFPB filed an amicus brief in Bender v. Elmore & Throop, P.C., an appeal before the Fourth Circuit involving the application of the FDCPA’s one-year statute of limitations. The brief supports the position of the plaintiff-appellant that the one-year period runs separately for each discrete FDCPA violation. It represents the first CFPB amicus brief filed under Director Kraninger’s leadership.
In February 2016, a debt collection law firm retained by the Benders’ homeowners’ association sent a letter to the Benders stating that they owed unpaid assessment charges plus additional amounts for fees, costs, and attorneys’ fees. After the Benders disputed the outstanding balance and provided proof of timely payment, the law firm acknowledged receipt of the payment but claimed a balance was still owed. The Benders wrote to the law firm in May 2016 asking them to cease communications about the alleged debt, but the law firm continued collection efforts, sending demand letters in February and March 2017. In January 2018, during an unrelated phone conversation about a homeowners’ association meeting, the law firm raised the alleged debt and warned that a lien had been placed on the Benders’ home. In February 2018, the law firm sent a letter purporting to verify the debt and demanding payment.
The Benders filed a lawsuit in April 2018 alleging that the law firm had violated 15 USC section 1692c(c) by continuing to contact them about the debt via the January 2018 phone call and February 2018 letter after they had properly requested that the law firm cease such communications. They also alleged that the February 2018 letter violated the FDCPA prohibitions on deceptive and unfair practices in 15 USC sections 1692e and 1692f because it attempted to collect amounts that were not owed and that were not authorized by law or the agreement creating the debt.
The district court granted the law firm’s motion to dismiss on the basis that the lawsuit was filed beyond the FDCPA’s one-year SOL. The FDCPA authorizes private enforcement actions “within one year from the date on which the violation occurs.” The district court interpreted the provision to mean that the one-year period begins from the date of the first violation and is not restarted by subsequent violations. Accordingly, the district court held that the SOL for the Benders section 1692(c) claim expired no later than March 2018, or one year after the law firm sent the March 2017 letter in disregard of the Benders’ cease communications request. It held that the SOL for the Benders’ sections 1692e and 1692f claims expired in February 2017, or one year after the law firm’s initial demand letter. The district court did not view the January 2018 phone conversation or February 2018 letter as independent FDCPA violations but instead viewed them as “merely subsequent iterations of the same allegedly unlawful debt collection practice initiated at a date preceding the actionable window.”
In its amicus brief, the CFPB argues that the FDCPA’s one-year SOL “means what it says: A plaintiff may sue to challenge violations that occurred in the previous year. There is no exception for violations that are similar to earlier time-barred limitations.” The CFPB asserts that the district court’s interpretation “is inconsistent with the statutory text, the great majority of case law, and Congress’s express purpose in enacting the FDCPA.” With regard to case law, the CFPB argues that all four circuit courts that have considered this question have held that the FDCPA’s SOL runs separately for each discrete violation. (The CFPB cites cases from the Sixth, Eighth, Ninth, and Tenth Circuits.) With regard to the congressional purpose, the CFPB asserts that the district court’s reading would “thwart the purposes of the Act [to eliminate abusive debt collection practices] because it would ‘immunize debt collectors from later wrongdoing.’”
The CFPB argues that because the defendants have alleged discrete violations of the FDCPA that occurred in January and February 2018 and filed their lawsuit in April 2018, their lawsuit was timely and the judgment of the district court should be reversed.
While directed at third party debt collectors, the CFPB’s proposed rules, if adopted, would significantly impact creditors and their first party collection partners. In this podcast, we look at the actions the proposal would require creditors to take before assigning a debt for collection, what the proposal would mean for third party oversight, and how the CFPB or state regulators might apply the proposal directly to first party collections.
Click here to listen to the podcast.
As previously reported, in May the CFPB issued both a proposal to modify the Home Mortgage Disclosure Act (HMDA) rule and an advance notice of proposed rulemaking seeking comment on three specific aspects of the HMDA rule:
- The new data points added by the CFPB based on discretionary authority.
- The free-form text fields that apply to certain data points.
- The application of the rule to business or commercial-purpose loans made to a non-natural person and secured by a multi-family dwelling.
Originally the CFPB provided for a 60-day comment period that would have ended July 8. The CFPB has now extended the comment period until October 15.
Seila Law has filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the Ninth Circuit’s ruling that the CFPB’s single-director-removable-only-for-cause structure is constitutional. The petition follows the entry of an order by the Ninth Circuit granting Seila Law’s motion for a stay of the Ninth Circuit’s mandate in the case, pending resolution of the petition by the Supreme Court.
There is currently no circuit split regarding the CFPB’s constitutionality, with both the Ninth Circuit and the en banc D.C. Circuit in PHH having ruled that the CFPB’s structure is constitutional. Nevertheless, Seila Law argues that “further percolation” would not benefit the Supreme Court in resolving the question of the CFPB’s constitutionality. In support, Seila Law references the Ninth Circuit’s comment in its decision that “the majority, concurring, and dissenting opinions from the en banc D.C. Circuit in PHH ‘thoroughly canvassed’ the arguments involved in the constitutionality debate.” Seila Law contends that, in light of these “extensive” opinions, “[a]dditional opinions from other courts of appeals will add little to this Court’s consideration of the issue.”
In addition to asserting that “the importance of the [separation-of-powers] question presented [by this case] cannot be overstated,” Seila Law observes that “even outside the circumstances of this case, the Court routinely grants review in cases presenting significant separation-of-powers issues in the absence of a conflict between the courts of appeals.”
The Solicitor General must respond to Seila Law’s petition by July 29. While the DOJ opposed the certiorari petition filed by State National Bank of Big Spring (SNB) that also asked the Supreme Court to decide whether the CFPB’s structure is constitutional, it did so because it viewed that case as “a poor vehicle to consider the [constitutionality] question.” However, the DOJ called the question an “important one that warrants [the Supreme] Court’s review in an appropriate case.” The DOJ pointed to Seila Law, which was then still pending in the Ninth Circuit, as an example of another case that raised a similar constitutional challenge but would be a better vehicle. The DOJ also pointed to All American Check Cashing (in which the Fifth Circuit held oral argument in March 2019) and RD Legal Funding (in which briefing is still ongoing in the Second Circuit) as two other examples. SNB’s petition was denied by the Supreme Court.
The CFPB, which has defended its constitutionality to date, may be unable to separately oppose Seila Law’s petition for certiorari. Dodd-Frank Section 1054(e) provides:
The Bureau may represent itself in its own name before the Supreme Court of the United States, provided that the Bureau makes a written request to the Attorney General within the 10-day period which begins on the date of entry of the judgment which would permit any party to file a petition for writ of certiorari, and the Attorney General concurs with such request or fails to take action within 60 days of the request of the Bureau.
The Ninth Circuit’s judgment was entered on May 6, and we are not aware of a request by the CFPB to the Attorney General to represent itself before the Supreme Court. The DOJ’s position regarding SNB’s certiorari petition makes it seem unlikely that the DOJ would oppose Seila Law’s petition. The more likely scenario would seem to be for the DOJ to agree with Seila Law that the Supreme Court should agree to hear the case and rule that CFPB’s structure is unconstitutional. As a result, should the Supreme Court grant Seila Law’s petition, it may be necessary for the Supreme Court to appoint an amicus curiae to defend the Ninth Circuit’s judgment, an action that is part of the Supreme Court’s usual practice when no party is defending the circuit court’s judgment.
The National Association for Latino Community Asset Builders (NALCAB) and two individual small business owners have joined the lawsuit filed against the CFPB in May 2019 by the California Reinvestment Coalition in a California federal district court seeking a declaration that the CFPB’s failure to issue regulations implementing Section 1071 of the Dodd-Frank Act violates the Administrative Procedure Act and requiring the CFPB to promptly issue such regulations.
Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. Such data includes the race, sex, and ethnicity of the principal owners of the business. In April 2011, the CFPB issued guidance indicating that it would not enforce Section 1071 until it issued implementing regulations. In May 2017, the CFPB issued a RFI and a white paper on small business lending in conjunction with a field hearing on small business lending. The RFI was intended to inform the CFPB’s Section 1071 rulemaking.
In the amended complaint adding the new plaintiffs, the NALCAB is described as a nonprofit organization whose “mission is to strengthen the economy by advancing economic mobility in Latino communities.” The NALCAB alleges that its members are directly harmed by the CFPB’s failure to implement Section 1071 because they are “hindered in their efforts to provide and secure loans for members of the affected communities.” It claims that without the data mandated by Section 1071, its members “have to expend additional organizational resources–and in some respects are entirely unable–to identify particular needs and opportunities.”
The new individual plaintiffs are both alleged to be women who own small businesses. One of the women is alleged to be a black woman. In the amended complaint, the women allege that they have encountered discrimination in obtaining access to financing for their businesses because of their gender, or race and gender. They claim that publication of the data required to be collected by Section 1071 would deter lenders from engaging in such discrimination and that the CFPB’s failure to implement Section 1071 has therefore harmed them by impairing their ability to obtain working capital for their businesses.
While previously classified in the Bureau’s semi-annual rulemaking agendas as a current rulemaking, the Bureau’s Fall 2018 agenda reclassified the Section 1071 rulemaking as a long-term action item. In the Fall 2018 agenda’s preamble, the CFPB attributed the rulemaking’s new status to the Bureau’s need to focus additional resources on various HMDA initiatives. However, in the CFPB’s Spring 2019 rulemaking agenda that was released after the filing of the original complaint by the California Reinvestment Coalition, the Section 1071 rulemaking was restored to current rulemaking status, with January 2020 indicated as the date for pre-rule activity.
In the agenda’s preamble, the CFPB stated that it “intends to recommence work later this year to develop rules to implement section 1071 of the Dodd-Frank Act.” It also stated that it “delayed rulemaking to implement this provision pending implementation of the Dodd-Frank Act amendments to HMDA and started work on the project after the HMDA rules were issued in 2015. The Bureau decided to pause work on section 1071 in 2018 in light of resource constraints and the priority accorded to various HMDA initiatives. The Bureau expects that it will be able to resume pre-rulemaking activities on the section 1071 project within this next year.”
The amended complaint references these statements in the Spring 2019 rulemaking agenda and alleges that they “contain no commitment whatsoever as to a timeline for implementation of Section 1071, despite the many years of delay that have already occurred, nor any explanation of why further ‘pre-rulemaking activities’ are needed after the 2017 efforts.” The CFPB has not yet filed an answer or other response to the complaint.
The CFPB’s annual fair lending report covering its 2018 activities was published in the July 8 Federal Register. While most of the report recycles information we have previously covered, it does contain the following noteworthy information:
- In September 2018, the CFPB held a symposium to address the issue of access to credit for consumers who are “credit invisible” – that is, those without an established credit history with the three national credit reporting agencies – and who therefore cannot be scored by most traditional credit scoring models. In conjunction with the symposium, the Bureau released its third “Data Point” report focused on “credit invisibles.” In our blog post about that report, we commented that the CFPB should encourage alternative scoring models that enable underwriting decisions to be made with respect to “invisible” consumers, and should refrain from heavy-handed application of the disparate impact theory with respect to such models. (That theory could, theoretically, be used to attack scoring models that approve members of protected classes proportionately less, but the business justification of the model’s ability to predict repayment performance should cause the Bureau to refrain from asserting it in this context.)
- In addition to discussing the symposium and Data Point report in the section on “Access to Credit,” the new fair lending report discusses conducting supervisory reviews of alternative credit scoring models. It comments that “[t]he use of alternative data and modeling techniques may expand access to credit or lower credit cost and, at the same time, present fair lending risks.” The Bureau states that in 2018, the Office of Fair Lending recommended supervisory reviews of third-party scoring models that would “focus on obtaining information about the models and compliance systems of third-party scoring companies for the purpose of assessing fair lending risks to consumers and whether the models are likely to increase access to credit. Observations from these reviews are expected to further the Bureau’s interest in identifying potential benefits and risks associated with the use of alternative data and modeling techniques.” The Bureau also comments that while a significant focus of its interest is on how alternative data and modeling can expand credit access for credit invisibles, it is also interested in other potential direct or indirect benefits to consumers, “including enhanced creditworthiness predictions, more timely information about a consumer, lower costs, and operational improvements.”
- The Bureau identifies the following two “new focus areas for fair lending examinations or investigations:" (1) student loan origination—whether there is discrimination in policies and practices governing underwriting and pricing; and (2) debt collection and model use-whether there is discrimination in policies and practices governing auto servicing and credit card collections, including the use of models that predict recovery outcomes. (We recently released a podcast in which we discuss the opportunities and challenges created by the use of artificial intelligence models in consumer financial services, including the benefits of explainable AI and its implications for the consumer financial services industry, especially for applications where understanding the model’s reasons for returning a score or decision are necessary.)
- The Bureau also reports that its fair lending supervision work continued to focus on mortgage origination, mortgage servicing, and small business lending. With regard to small business lending, the Bureau focused on assessing whether (1) there is discrimination in application, underwriting, and pricing processes, (2) creditors are redlining, and (3) there are weaknesses in fair lending related compliance management systems. The Bureau identifies mortgage lending discrimination, including redlining, as the focus of its fair lending enforcement efforts. It states that at the end of 2018, it had a number of pending fair lending investigations into redlining and other areas involving a variety of consumer financial products.
- In its Spring 2019 rulemaking agenda, the Bureau restored Section 1071 rulemaking to current rulemaking status (where it had previously been before being reclassified as a long-term item), with January 2020 indicated as the date for pre-rule activity. In the fair lending report, the Bureau states that it will recommence its work on Section 1071 with a symposium on small business lending data collection and will announce details regarding the symposium on its website at a later time. (A lawsuit has been filed against the CFPB by two community groups and two individuals seeking a declaration that the CFPB’s delay in issuing regulations implementing Section 1071 of the Dodd-Frank Act violates the Administrative Procedure Act and requiring the CFPB to promptly issue such regulations.)
- The Bureau also references former Acting Director Mulvaney’s statement in May 2018 that the Bureau intended to reexamine the disparate impact doctrine in light of the U.S. Supreme Court’s Inclusive Communities decision and confirms its plans to hold a symposium on disparate impact and the ECOA.
Only a few months have passed since the U.S. Department of Housing and Urban Development filed a charge of discrimination against Facebook, alleging that the ad-targeting techniques used to determine which users would see advertising related to housing and housing-related service (like mortgage loans) were based on protected characteristics and “close proxies” for those characteristics, violating the Fair Housing Act. Now, the New York Department of Financial Services has opened a similar investigation in response to a request from the Governor of New York.
Although the HUD charge of discrimination is squarely aimed at Facebook itself – even alleging that Facebook used protected characteristics in targeting ads without advertisers’ knowledge – the statements surrounding the New York investigation focus on the conduct of advertisers who may have used protected characteristics to direct their ads. A quote from NYDFS Superintendent Linda Lacewell stated that “[t[he Department will investigate Facebook advertisers to examine these disturbing allegations and we are prepared to take whatever measures necessary to make certain that all financial services providers are in compliance with New York’s stringent statutory and regulatory consumer protections.”
While this emphasis on advertiser conduct differs from the HUD charge of discrimination, the NYDFS press release suggests that the investigation could also involve Facebook’s conduct. For example, the press release includes a quote from NY Lieutenant Governor Kathy Hocul in which she stated that “[w]e are taking action to fully uncover the deeply concerning allegations being made against Facebook.”
What is obvious, though, is that there seems to be a groundswell of regulatory concern about targeting of digital advertising based on protected characteristics under anti-discrimination laws, and especially targeting on the Facebook platform. Financial services companies need to be aware of the characteristics that they are consciously using to target advertisements, and also need to inquire of third parties about the factors that may be used to create “lookalike” campaigns or similar efforts to reach targeted groups of customers. As more regulatory investigations are announced, the danger level for financial institutions using targeted digital advertising only grows, and so does the need for transparency by advertising providers like Facebook. At the moment, this is still a very uncertain area of the law, with almost no regulatory guidance or precedent to guide financial institutions. The recent announcement by NYDFS tells us, though, that there is real risk in this uncertain area, so caution is most certainly needed.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (Growth Act) enacted last year includes a provision to protect veterans from loan churning by providing, among other requirements, that a loan to a veteran that refinances an existing loan is not eligible for guaranty by the Department of Veterans Affairs (VA) until the date that is the later of (1) the date that is 210 days after the date that the first monthly payment is made on the existing loan and (2) the date on which the sixth monthly payment is made on the existing loan.
The House recently passed H.R. 1988 to amend the loan seasoning requirement to provide that a loan to a veteran that refinances an existing loan is not eligible for guaranty by the VA until the date that is the later of (1) the date on which the borrower has made at least six consecutive monthly payments on the existing loan, and (2) the date that is 210 days after the first payment due date of the existing loan. By measuring the 210-day period from the due date of the first payment, and not the date that the first payment is actually made, the legislation provides for greater certainty in assessing if the seasoning requirement is satisfied. The Senate previously passed a companion bill in June.
As previously reported, the Growth Act also includes a corresponding provision that prohibits the inclusion of a VA loan in a Ginnie Mae securitization unless the original loan seasoning requirement is satisfied. The requirement became effective upon the adoption of the Growth Act, which resulted in a number of VA loans that had already been made becoming ineligible for inclusion in a Ginnie Mae securitization. The recent legislation removes the loan seasoning requirement with regard to Ginnie Mae, thus removing the bar to the inclusion of the existing loans in a Ginnie Mae securitization.
Alaska Expands Mortgage Licensing Exemptions
As a result of a new Alaska law, HB 104, the following are exempted from mortgage loan originator requirements in the state:
- Employees of federal, state, or local government agencies.
- Retroactive to July 1, 2008: a seller (including a natural person, estate, trust, corporation or another entity) that offers or negotiates the terms of a residential mortgage loan for the sale of residential property owned by the seller if (A) the loan is secured by a dwelling on the property; (B) the seller self-finances the loan; (C) during any 12-month period, the seller finances five or fewer sales under this exemption; (D) in the ordinary course of a business of the seller, the seller has not constructed the dwelling that secures the loan on the property or acted as a contractor for the construction of the dwelling that secures the loan on the property; (E) the loan has an interest rate that is fixed for the full term of the loan; (F) the loan does not have a payment schedule that results in negative amortization or does not allow or impose a prepayment penalty; and (G) the seller determines that the purchaser or potential purchaser has a reasonable ability to repay the loan. The provision also imposes confidentiality obligations on the seller relating to the purchaser’s or potential purchaser’s credit, salary, tax and other financial information obtained for the purposes of determining the ability to repay.
Effective January 1, 2020, the following exemptions will also apply:
- Bona fide nonprofit organizations” will be exempt from mortgage lender and mortgage broker licensure. To qualify, the department must determine that the organization (1) has and maintains 501(c)(3) tax-exempt status; (2) promotes affordable housing or provides home ownership education or similar services; (3) conducts its activities in a manner that serves a public or charitable (not commercial) purpose by offering mortgages that are not readily available from other lenders; (4) receives funding, receives revenue, and charges fees in a manner that does not provide an incentive for the organization or its employees to act other than in the best interests of its clients; (5) compensates its employees in a manner that does not provide an incentive to its employees to act other than in the best interests of its clients; (6) provides or identifies for a borrower residential mortgage loans with terms favorable to the borrower and comparable to mortgage loans and housing assistance provided under government housing assistance programs. Terms that are favorable to the borrower are terms that are consistent with mortgage loan origination for a public or charitable purpose, rather than in a commercial context, and provide for interest rates that are less than the current market rate; and (7) meets other standards that the department determines are appropriate. The department shall establish further procedures relating to qualification determinations, the duration of such determination, applicable fees, examination requirements, procedures for denials and for taking of other administrative actions against a bona fide nonprofit organization by regulation. The department may also establish further rules regarding the information that is required to support qualification determinations.
- Employees of bona fide nonprofit organizations will likewise be exempt from mortgage loan originator licensure when acting as a mortgage loan originator only with respect to duties to the bona fide nonprofit organization and the residential mortgage loans have terms that are favorable to the borrower by being consistent with mortgage loan origination for a public or charitable purpose rather than in a commercial context.
California MBA Legal Issues Committee Webinar | July 12, 2019, 11:00 a.m. (PT)
Speaker: Richard J. Andreano, Jr.
GLBA Safeguard Rule - FTC Proposed Amendments
RESPRO 2019 Fall Seminar | Charleston, S.C. | September 11-12, 2019
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