Mortgage Banking Update
In this issue:
- Inside the Beltway – Diversity and Inclusion in the Financial Services Sector
- SSN Identity Verification Tool Being Developed; Initial Enrollment Deadline July 31
- Court Enjoins HUD Attempt to Impose New Down Payment Assistance Requirements
- FHFA Reverses Position (Again) on Its Constitutionality
- Podcast: A Close Look at the Changes to the FDCPA Validation Notice in the CFPB’s Proposed Debt Collection Rules
- Movement on 2 California Bills Implicating the California Financing Law
- Ballard Spahr Creates Cross-Disciplinary Fintech Team
- Draft Legislation Seeks to ‘Keep Big Tech Out Of Finance’
- CFPB Issues Update to 2016 Advisory on Elder Financial Abuse
- NY Legislature Passes Bills to Extend Coverage of Plain Language Law and Prohibit Use of Social Network Information for Evaluating Creditworthiness
- Did You Know?
- Looking Ahead
The House Financial Services Committee continues briskly reporting out legislation targeted at the credit reporting system, housing, and diversity and inclusion in the financial services sector. Chairwoman Maxine Waters (D-CA) outlined an ambitious agenda at the beginning of the 116th Congress with these initiatives included on her list of priorities. While many of these bills may never be taken up in the Senate, at a minimum, they provide a benchmark for future negotiations. We should expect Ms. Waters to continue vigorously pursuing agenda items that focus on “fairness and policies to benefit consumers, investors, small businesses, and our economy.”
On July 11, 2019, the Committee passed 10 bills that reflect the Committee’s focus on the Chairwoman’s priorities. Three of these relate to diversity and inclusion. The following is a summary of these measures:
- H.R. 281, the Ensuring Diverse Leadership Act of 2019, is legislation requiring the Federal Reserve Bank to interview at least one individual reflective of gender diversity and one reflective of racial or ethnic diversity when appointing a regional bank president. The sponsor is Rep. Joyce Beatty (D-OH), Chairwoman of the Subcommittee on Diversity and Inclusion. This legislation received a bipartisan vote of 56–2.
- H.R. 1018, the Improving Corporate Governance through Diversity Act of 2019, is legislation requiring companies to annually disclose the voluntarily self-identified gender, race, ethnicity, and veteran status of their board directors, nominees, and senior executive officers. The sponsor is Rep. Gregory Meeks (D-NY), Chairman of the Subcommittee on Consumer Protection and Financial Institutions. This legislation received a bipartisan vote of 53–5.
- H.R. 3279, the Diversity in Corporate Leadership Act of 2019, is legislation requiring companies to disclose, in proxy or consent solicitation materials for an annual shareholders meeting, the gender, racial, and ethnic composition of their corporate boards and nominees for the board of directors. The sponsor is Rep. Carolyn Maloney (D-NY), Chair of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. This legislation received a bipartisan vote of 52–6.
In addition to the three bills summarized above, the Committee passed seven bills targeting changes to the laws governing credit reporting and housing. Note that the credit reporting and housing bills did not receive the same degree of bipartisan support.
The Social Security Administration (SSA) has announced the development of a portal that would allow financial institutions to join a planned real-time electronic system for verifying the identity of credit applicants. The new Consent Based Social Security Number (SSN) Verification (eCBSV) service will be an important tool in the fight against identity theft and other financial crimes.
SSA has traditionally been resistant to the idea that SSNs should serve as the nation’s universal personal identifier. However, the Economic Growth, Regulatory Relief and Consumer Protection Act, which was signed into law last year, directed the SSA to develop a database for accepting and comparing fraud data that is submitted electronically by financial institutions, or those financial institutions’ service providers, subsidiaries, affiliates, agents, subcontractors, or assignees.
Financial institutions must first obtain consumers’ signed consent to verify their identities, but under the eCBSV service, such signatures may be electronic, if compliant with ESIGN, rather than wet signatures. This will be a major shift away from the SSA’s prior time-consuming approach that required handwritten consent from consumers for financial institutions to confirm the consumers’ identities using SSA records.
SSA has set a deadline of July 31 for financial institutions to apply to join the eCBSV service during the initial enrollment period of the program. For the initial rollout, SSA will select a limited number of permitted entities based on the earliest date and time of the receipt by SSA of a fully completed application. The service will be made available to the selected applicants in June 2020. Thereafter, the number of users will be expanded within six months.
Any financial institution that submits a valid application prior to the close of the stated deadline but is not selected for the initial rollout, will have an opportunity to re-submit a full application and user agreement for the later expanded rollout. However, any financial institution that does not submit a valid application before the deadline, will not have the opportunity to apply for the expanded rollout in late 2020 and must wait until the next open enrollment period, which could be as long as a two-year wait. Financial institutions unable to participate in the new program must continue to rely on the existing paper-based system, which can delay credit decisions.
- Kim Phan
As previously reported, the U.S. Department of Housing and Urban Development issued Mortgagee Letter 2019-06 in April of 2019 to impose new documentation requirements for down payment assistance provided by government entities to be used in connection with Federal Housing Administration (FHA) insured loans. CBC Mortgage Agency, which is an instrumentality of the Cedar Band of Paiutes Indian American tribe, operates the Chenoa Fund down payment assistance program. The Agency challenged HUD’s action in the U.S. District Court for Utah. According to reports, Judge David Neffer recently granted a preliminary injunction preventing HUD from implementing the requirements.
The requirements originally were scheduled to go into effect for case numbers assigned on or after April 18, 2019, and HUD later extended the effective date to July 23, 2019, as a result of the lawsuit. At the least, the preliminary injunction will further delay HUD’s attempt to implement the new requirements.
In an interesting twist, the FHFA has informed the Fifth Circuit in Collins v. Mnuchin that despite having previously advised the en banc court that it would not defend the FHFA’s constitutionality, it has reconsidered its position under the leadership of its new director and will take the position going forward that the agency’s structure is constitutional. The en banc Fifth Circuit held oral argument in the case in January 2019.
The plaintiffs, shareholders of two of the housing government services enterprises (GSEs), are seeking to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs. A Fifth Circuit panel found that the FHFA is unconstitutionally structured because it is excessively insulated from Executive Branch oversight but determined that the appropriate remedy for the constitutional violation was to sever the provision of the Housing and Economic Recovery Act of 2008 (HERA) that only allows the President to remove the FHFA Director “for cause” while “leav[ing] intact the remainder of HERA and the FHFA’s past actions.” The plaintiffs sought a rehearing en banc to overturn the panel’s rulings that the FHFA acted within its statutory authority in entering into the amendment and that the FHFA’s unconstitutional structure did not impact the amendment’s validity. The FHFA also sought a rehearing en banc, principally seeking to overturn the panel’s determination that the plaintiffs had Article III standing to bring a constitutional challenge but also arguing that the panel’s constitutionality ruling was incorrect.
Following the appointment of Joseph Otting as Acting Director, however, the FHFA announced that it would not defend its constitutionality to the en banc court. In a supplemental brief filed before the oral argument, the FHFA stated that Mr. Otting had “reconsidered the issues presented in this case.” While continuing to take the position that the plaintiffs’ lack of standing made it unnecessary for the en banc court to reach the constitutionality issue, the FHFA indicated that to the extent the court found it necessary to do so, it would not defend the constitutionality of the HERA’s for cause removal provision and agreed with the Treasury Department’s position that the provision was unconstitutional because it infringes on the President’s executive authority.
In its letter informing the Fifth Circuit of its latest change in position, the FHFA indicated that Mark Calabria had become FHFA Director in April 2019 and that it “respectfully requests that, to the extent the Court finds it necessary to reach the constitutional issue, the Court uphold FHFA’s structure and otherwise affirm the judgment below as to the Third Amendment.”
In March 2019, a Fifth Circuit panel heard oral argument in All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality. At the oral argument, both parties were asked whether the panel should hold its decision until the en banc court issued its decision in Collins v. Mnuchin.
The CFPB, which defended its constitutionality in All American Check Cashing, may be unable to do so in the U.S. Supreme Court should the court grant the petition for a writ of certiorari filed by Seila Law seeking review of the Ninth Circuit’s ruling that the CFPB’s structure is constitutional. While the DOJ opposed the certiorari petition filed last year 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 despite agreeing with SNB that the CFPB’s structure is unconstitutional. Its opposition was based on its view that the case was “a poor vehicle to consider the [constitutionality] question.”
Pursuant to Dodd-Frank Section 1054(e), the CFPB would need the DOJ’s consent to represent itself in the Supreme Court in Seila Law. The DOJ’s position regarding SNB’s certiorari petition makes it seem unlikely that the DOJ will oppose Seila Law’s petition. The more likely scenario would seem to be that the DOJ will agree with Seila Law that the Supreme Court should grant the petition and rule that the 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.
In this podcast, we look at the changes to the FDCPA validation notice that the CFPB’s proposed debt collection rules would make and discuss compliance challenges and other issues raised by the changes, including the requirement to itemize the debt, the dispute “tear-off” form, the option to provide Spanish and other foreign language translations of the notice, and electronic delivery of the notice.
Click here to listen to the podcast.
There was movement recently on two California bills that we have been tracking closely and could substantially alter the lending and brokering landscape under the California Financing Law (CFL).
On July 9, AB-539, which proposes to cap interest rates at 36 percent plus the federal funds rate on CFL loans of $2,500 to $10,000, passed the Senate Committee on Judiciary and was sent to the Appropriations Committee, where we believe the bill will be heard around the end of August. If the bill passes the Appropriations Committee, it will move to the Senate Floor.
On July 10, AB-642 failed to pass in the Senate Banking and Finance Committee. Minor amendments were made to the bill on July 11, and the bill was re-referred to the Banking and Finance Committee, which is on recess until August 12. September 13 is the last day for a bill to be passed in 2019. No date has been set for the rehearing, and we are under the impression that the bill is unlikely to advance this year.
AB-642 is described by its drafter as an attempt to modernize the CFL to add a regulatory framework designed to protect people who use lead generators to obtain installment loans. It would expand the scope of activities that constitute “brokering” under the CFL, which would then trigger licensing, disclosure, and other substantive requirements. The bill would prohibit the payment of certain referral fees, require brokers to affirmatively obtain express consent from a prospective borrower to act as such person’s broker, and would make entities falling under the newly expanded definition of broker subject to supervision by the California Department of Business Oversight.
As readers of our blog know, our Consumer Financial Services Group has been at the forefront of legal developments involving new technologies. To align with the work that we’ve been doing in the financial technology space and to even better serve our clients in meeting the legal challenges in this rapidly developing landscape, Ballard Spahr has created a cross-disciplinary Fintech team that brings together the firm’s consumer financial services attorneys with lawyers focused on privacy and data security, intellectual property, blockchain and cryptocurrencies, and emerging companies and their investors. Our Banking and Financial Services and Retail industry groups add further depth and specialized knowledge.
Together, the team provides comprehensive counsel to the Fintech industry—helping clients of all sizes and sophistication with the development, commercialization, and maintenance of technology-driven financial products and services, including all types of lending programs, mobile applications, and payment products and systems.
Should a dispute arise, our litigators have a demonstrated record of success defending financial institutions and technology providers across the United States in class actions, government investigations and enforcement proceedings, arbitrations, and other complex litigation. James Kim—co-leader of the team—was a senior enforcement attorney at the CFPB, where he worked closely with other regulators and oversaw the Bureau’s first enforcement actions involving mobile payment systems.
Click here for more information about the team and its experience in providing regulatory guidance, advice on product development and transactions, and handling litigation.
On July 15, the Democratic majority of the House Financial Services Committee introduced draft legislation, titled “Keep Big Tech Out Of Finance Act,” targeting Libra, Facebook’s contemplated new digital currency. As a follow up, during her July 17 opening statement before testimony from a Facebook executive, Chairwoman Maxine Waters expressed serious concerns about Libra and asked Facebook to put it on hold.
The draft bill would prohibit large technology companies that “predominately engage in the business of offering to the public an online marketplace, an exchange, or a platform for connecting third parties [defined as ‘large platform utilities’]” from “establish[ing], maintain[ing], or operat[ing] a digital asset that is intended to be widely used as medium of exchange, unit of account, store of value, or any other similar function . . . .” See Section 2(b)(1). It would also empower federal financial regulators to assess fines up to $1 million per day for violations of the statute.
The draft bill goes much further, however, than banning large tech companies from offering digital currencies. It also prohibits large platform utilities from being “affiliated” with financial institutions (see Section 2(a)), with “affiliate” having the meaning set forth in the Bank Holding Company Act:
[T]he term “affiliate” means any company that controls, is controlled by, or is under common control with another company.
12 U.S.C § 1841(k). Because large technology companies cannot be, or affiliated with, financial institutions, the draft bill would block them from acquiring banks, getting bank charters, taking deposits, operating exchanges, or acting as investment firms. The definition of “financial institutions” in the draft bill also includes state-licensed money services businesses. See Section 2(f)(8)(P). So the draft legislation appears to prohibit many existing digital wallets and payment products offered by large technology companies (subject to a one-year, wind-down grace period for existing offerings). The same penalties of $1 million per day would apply to prohibited affiliations.
Republicans are expected to oppose the draft bill, but there has been bi-partisan skepticism about and, at times, opposition to Libra and the concept of tech companies offering digital currencies. We believe the opposition foreshadows other efforts to regulate large technology companies and their offering of financial services.
The CFPB has issued an update to its 2016 advisory that contained recommendations for banks and credit unions on how to prevent, recognize, report, and respond to financial exploitation of older Americans.
The 2016 advisory’s recommendations addressed six categories, one of which was the reporting of suspected elder financial exploitation (EFE) to relevant federal, state, and local authorities. This category is the focus of the update, which “reiterates key recommendations regarding reporting from the [2016 advisory] because many financial institutions remain unsure of whether to report suspected financial exploitation due to privacy concerns.”
Specifically, in the update, the CFPB “reiterates its 2016 recommendation that financial institutions report suspected EFE to all appropriate local, state, or federal responders, regardless of whether reporting is mandatory or voluntary under state or federal law.” As did the 2016 advisory, the update references the guidance issued in 2013 by the CFPB and seven other financial regulators to clarify that financial institutions are generally able to report suspected EFE to the appropriate authorities without violating federal privacy laws. In addition to reiterating key recommendations in the 2016 advisory, the update “provides new information on reporting based on federal and state legislative changes.”
The information in the update includes the following:
- The CFPB notes that when its 2016 advisory was issued, about half of the states required financial institutions or a subset of financial professionals to report suspected EFE to adult protective services (APS), law enforcement, or both. The update includes a chart identifying mandatory state EFE reporting requirements and notes that since the 2016 advisory was issued, Ohio adopted such a requirement.
- The CFPB notes that several states include depository institutions among the institutions and qualified individuals that are allowed by state law to delay disbursement of funds when there is suspected EFE. The update includes a chart identifying state statutes that authorize transaction holds related to EFE
- The CFPB discusses the federal Senior Safe Act which became effective in June 2018 and provides that financial institutions are not liable for disclosing suspected EFE to covered agencies if the institution has trained its employees on identifying EFE. It also discusses the CFPB’s 2019 analysis of Suspicious Activity Reports (SARs) and reiterates its 2016 recommendation that financial institutions file SARs when they suspect EFE.
- In the 2016 advisory, the CFPB recommended that financial institutions expedite documentation requests and provide financial records at no charge to APS, law enforcement, or other investigatory agencies in EFE cases. The update discusses state laws that require or permit financial institutions to produce records relevant to suspected EFE to APS, law enforcement, or investigatory agencies when requested and contains a chart identifying state statutes involving the disclosure of financial records related to EFE.
When the 2016 advisory was issued, the CFPB indicated its recommendations were not issued as “guidance” or otherwise framed as requirements but represented the CFPB’s expectations for “best practices.” In the update, the CFPB continues to refer to the recommendations as “voluntary best practices to assist financial institutions” and states that they all “remain vital today.”
Elder financial abuse prevention can be viewed to fall within a financial institution’s general obligation to limit unauthorized use of customer accounts as well as its general privacy and data security responsibilities. As a result, a financial institution that fails to implement a robust elder financial abuse prevention program risks becoming the target of a CFPB enforcement action for engaging in unfair, deceptive, or abusive acts or practices. In addition, given that the CFPB’s new leadership has identified EFE as a priority area, it would not be surprising if CFPB examiners, when examining banks and credit unions subject to CFPB supervision, look at such institutions’ programs for preventing EFE and use the CFPB’s recommendations in evaluating the programs.
Two bills relevant to consumer finance have been passed by the New York Assembly and Senate and are awaiting Governor Cuomo’s signature.
The first bill, S3704, would amend New York’s plain language requirement to extend its application to consumer contracts involving up to $250,000. The requirement currently does not apply to consumer contracts involving more than $100,000. The law covers residential leases; leases of personal property to be used primarily for personal, family, or household purposes; or agreements to which a consumer is a party and the money, property, or service which is the subject of the transaction is primarily for personal, family or household purposes. Agreements for covered transactions must be written in a clear and coherent manner using words with common and every day meanings and appropriately divided and captioned by its various sections. Violations of the law can result in actual damages plus a $50 penalty, with the total class action penalty limited to $10,000.
The second bill, S2302, would prohibit consumer reporting agencies from using information about the members of a consumer’s social network or reporting creditworthiness information about their social network. It would define the term “members of a consumer’s social network” as “a group of individuals authorized by a consumer to be part of his or her social media communications and network.” It would provide that a consumer reporting agency cannot “collect, evaluate, report, or maintain [in a consumer’s file] the credit worthiness, credit standing or credit capacity of members of the consumer’s social network for purposes of determining the credit worthiness of the consumer; the average credit worthiness, credit standing or credit capacity of the consumer’s social network; or any group score that is not the consumer’s own credit worthiness, credit standing or credit capacity.”
South Dakota Adds Non-Residential Mortgage Lender Licenses to NMLS
South Dakota added its Non-Residential Mortgage Lender License to NMLS on July 15, 2019. The transition for existing licensees is optional but highly encouraged by South Dakota. The transition checklist is available on NMLS, and also available here.
State of Washington Issues Notice Temporarily Waiving Certain Fees Under the Consumer Loan Act (CLA)
On July 8, 2019, the Department of Financial Institutions, Division of Consumer Services notified licensees that after review and analysis of its budget, it was implementing temporary fee waivers, as follows:
- Hourly fees on CLA exams are temporarily waived for the period of July 1, 2019, through June 30, 2020 (excluding travel expenses).
- Annual assessments on the following categories of loans are temporarily waived for 2019 calendar year activity:
- Residential mortgage loans in portfolio on 12/31/18;
- Residential mortgage loans brokered in 2019; and
- Residential mortgage loans purchased in 2019.
- Residential mortgage loans made during 2019 will continue to be assessed; the assessment is due in March 2020.
- MLO renewal fees for 2020 are reduced from $155 to $75 for the 2020 calendar year.
The notice may be accessed here.
GLBA Safeguard Rule - FTC Proposed Amendments
RESPRO 2019 Fall Seminar | Charleston, S.C. | September 11-12, 2019
MBA’s Regulatory Compliance Conference 2019
Washington, D.C. | September 22-24, 2019
Speaker: Richard J. Andreano, Jr.
Speaker: Kim Phan
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.