Legal Alert

Mortgage Banking Update - September 19, 2019

September 19, 2019
In this issue:


Inside the Beltway – Housing Finance Reform Update

The U.S. Department of the Treasury and the Department of Housing released the much-anticipated housing finance reform plan to reduce the government’s role in housing and end government control of both Fannie Mae and Freddie Mac. The plan, which was released September 5, 2019, would gradually privatize the GSEs (government-sponsored enterprises) and retain a government backstop. While aspects of the proposal have been favorably received by industry groups for encouraging more competition with the GSEs, other groups, including Congressional Democrats, have expressed concerns that the proposals go too far in eliminating affordable housing for individuals that need the most assistance. Specifically, the proposal would eliminate the lower income lending mandate and instead purport to replace it with increased private competition.

Democrats and Republicans have been at odds on how to best overhaul the system, and that is reflected in the plan. It includes administrative reform recommendations, which would allow for incremental changes to housing policy as Congress works to find bipartisan agreement on legislation needed to overhaul other aspects of the system. While the Senate Banking Committee was quick to hold a hearing on the housing plan, it did not signal the potential for compromise. Instead, it highlighted the significant policy differences between the Senate Republicans and Democrats. The House Financial Services Committee has also announced the intention to hold its own hearing, and we expect an even more polarized debate there. We anticipate additional activity (legislative and administrative) over the remainder of this year. Based on the early returns on the plan, it is highly unlikely Congress will reach consensus on the larger issues this year.

- Sherry Harper Widicus and Timothy Jenkins

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Treasury Housing Reform Plan Supports Expiration of GSE Patch for Qualified Mortgages

The U.S. Department of Treasury recently issued the long-awaited Housing Reform Plan, and among various topics the Plan addresses the temporary qualified mortgage under the Regulation Z ability-to-repay rule for loans that are eligible for sale to Fannie Mae or Freddie Mac (the GSEs). The Department concurs with the position of the CFPB, set forth in its outstanding advance notice of proposed rulemaking on the ability-to-repay rule, that the temporary qualified mortgage, often referred to as the GSE patch, should expire as scheduled on January 10, 2021, or after a short extension of the sunset date.

In supporting the expiration of the GSE patch, the Department states:

  • The patch gives the GSEs a competitive advantage over portfolio lenders and other market participants to the extent that mortgage lenders face lower risk under the ability to repay rule for underwriting GSE-eligible loans, particularly for loans with debt-to-income (DTI) ratios above the 43 percent cap of the standard qualified mortgage.
  • The eligibility criteria of the GSEs include requirements unrelated to the borrower’s ability to repay, such as the maximum loan limits, which preclude lenders from relying on the patch for jumbo loans.
  • The patch gives the GSEs a quasi-regulatory role in defining ability-to-repay requirements that “while arguably appropriate on a temporary basis when the GSEs were in conservatorship, would be inappropriate if continued on a permanent basis or after the end of the GSE’s conservatorships.”

The Department also addresses Appendix Q to Regulation Z, which sets forth guidance on the determination of income and debt for purposes of the strict 43 percent DTI cap under the standard qualified mortgage. The Department echoes mortgage industry concerns that Appendix Q lacks sufficient clarity and detail and does not sufficiently address self-employed borrowers or borrowers with non-traditional sources of income. The Department addresses potential revisions to Appendix Q, but then states that “there is reason to doubt whether even a substantially revised Appendix Q could address most of the diverse income and debt verification scenarios while also providing mortgage lenders with the requisite bright line safe harbor. Enforcement proceedings or litigation challenging whether, in the case of any particular mortgage loan, the mortgage lender verified the borrower’s income and debt in compliance with the revised Appendix Q would inevitably raise fact-intensive inquiries that would themselves entail lengthy and expensive enforcement or judicial proceedings. The inevitability of these proceedings to simply determine the applicability of the safe harbor would in effect render the safe harbor essentially meaningless.”

Based on these concerns, the Department recommends that Congress and the CFPB consider alternative approaches to establishing bright line safe harbors for ability-to-repay rule compliance that do not rely on prescriptive underwriting requirements. One approach offered by the Department would be to conclusively deem a loan to be a qualified mortgage if it has financing costs below a specified threshold. The Department cites the Regulation Z high-cost loan provisions as precedent for this approach. The high-cost loan provisions provide for additional borrower protections and requirements for loans that meet the annual percentage rate, points and fees or prepayment fee triggers of the provisions. Another approach, which the Department notes could be in addition to the first approach, would be for a mortgage loan to conclusively become a qualified mortgage after a specified seasoning period.

The Department also states that after the ability-to-repay rule is revised by the CFPB, the Federal Housing Finance Administration should revisit the determination of which single-family mortgage loans should be eligible for acquisition by the GSEs.

- Richard J. Andreano, Jr.

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Leader of PA AG’s Consumer Financial Protection Unit Describes Active Agenda in Ballard Spahr Webinar

Nicholas Smyth, Assistant Director of the Pennsylvania Attorney General’s Bureau of Consumer Protection, was our guest speaker for a recent webinar. Formerly a CFPB enforcement attorney, Nick was appointed by PA Attorney General Josh Shapiro about two years ago to lead the new unit. Chris Willis, Practice Leader of Ballard Spahr’s Consumer Financial Services Litigation Group, joined Nick as a speaker. Alan Kaplinsky, who leads the firm’s Consumer Financial Services Group, moderated the webinar.

As Nick explained during the webinar, his appointment reflected AG Shapiro’s designation of consumer financial protection as a priority area and desire to expand the AG Office’s capacity to bring complex cases against financial companies. Nick reported that his unit currently has 20 attorneys and 32 investigators. Among the investigators’ responsibilities is the handling of the approximately 23,000 to 25,000 consumer complaints received each year by the AG’s Office. Nick also reported that since joining the unit, it has entered into nine Assurances of Voluntary Compliance, Pennsylvania consumers have received approximately $34 million in restitution, and companies have paid approximately $24 million in civil money penalties and payments to the PA Treasury.

Nick discussed the unit’s cooperation with federal regulators and other state regulators and its handling of various enforcement matters. He made clear that despite policy disagreements with the CFPB, there is ongoing, close cooperation between his unit and the CFPB on enforcement matters. He identified mortgage redlining, student loan servicing, and data security as priority areas for his unit.

Nick also discussed his unit’s position on the application of PA usury law when a PA resident travels to another state to obtain an auto title loan. He indicated that his unit is currently working on several matters involving claims that the interest rates charged on title loans made to PA residents who had traveled to Delaware to obtain the loans violated PA usury law. Nick explained that the grounds on which his unit is relying for its claim that PA usury law applies to such loans is that the loans are secured by liens on vehicles located in PA and the lenders repossess and resell such vehicles in PA. (Alan observed that this position is inconsistent with the Seventh Circuit’s 2010 decision in Midwest Title Loans, Inc. v. Mills, in which the court handed a major victory to Ballard’s client by holding that the Commerce Clause of the U.S. Constitution precluded Indiana from applying its usury law to auto title loans made in person in Illinois to Indiana residents. Ballard’s client also obtained a $440,000 payment from the State of Indiana to resolve its claim for attorneys’ fees as a “prevailing party” in a federal Civil Rights Act lawsuit that it brought.)

- Barbara S. Mishkin

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CFPB Updates HMDA Webinars and Issues New HMDA Webinar

The CFPB recently updated two prior Home Mortgage Disclosure Act (HMDA) webinars to reflect amendments to HMDA made by the Economic Growth, Regulatory Relief, and Consumer Protection Act, and the interpretive and procedural rule issued by the CFPB last year. We previously reported on the amendments and the interpretive and procedural rule.

The CFPB also issued a new HMDA Webinar that provides an overview of the data points not covered in the first two webinars.

The webinars, as well as slides and transcripts of the webinars, may be viewed here.

- Richard J. Andreano, Jr.

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En banc Fifth Circuit Decision Holding FHFA Structure Unconstitutional Could Presage Similar Fate for CFPB and Circuit Split

The en banc Fifth Circuit has ruled in Collins v. Mnuchin that the FHFA is unconstitutionally structured because it is excessively insulated from Executive Branch oversight and that the appropriate remedy for the constitutional violation is 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.”

The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of All American Check Cashing from the district court’s ruling upholding the CFPB’s constitutionality. Oral argument was held in March 2019, and no decision has yet been issued. However, having asked the parties at oral argument whether it should hold its decision until the en banc court issued its decision in Collins, the Fifth Circuit panel could soon issue a decision in All American Check Cashing.

The en banc court reinstated the portion of the opinion of the Fifth Circuit panel in Collins which held that the FHFA’s structure is unconstitutional. In doing so, the en banc court observed that the panel had “distinguishe[d] the D.C. Circuit’s PHH decision.” The panel had stated that it was “mindful” of the D.C. Circuit’s en banc PHH decision finding the CFPB’s structure to be constitutional but that “salient distinctions between the agencies compel a contrary conclusion.” The panel had observed that, unlike the Federal Housing Finance Oversight Board that oversees the FHFA, the Financial Stability Oversight Council can directly control the CFPB’s actions because it holds veto power over the CFPB’s policies. It concluded that the absence of formal oversight of the FHFA by the Executive Branch, combined with the for-cause removal provision, made the FHFA’s structure unconstitutional.

In an opinion by a different majority than the majority that reinstated the panel’s constitutionality ruling, the en banc Fifth Circuit also ruled that the appropriate remedy for the constitutional violation was to sever the for-cause removal provision from HERA.

It is unclear whether the en banc decision in Collins will result in a similar fate for the CFPB. Two of the three judges on the All American Check Cashing panel, Judge Jerry Smith and Senior Judge Patrick Higginbotham, were appointed by President Reagan, and the third judge, Judge Stephen Higginson, was appointed by President Obama. Judge Higginbotham did not participate in the en banc Collins decision.

Judge Smith was part of the majority that reinstated the panel ruling that the FHFA is unconstitutional but joined a separate opinion that concluded the proper remedy was to invalidate the agreement that the shareholder plaintiffs were challenging. The separate opinion contained no discussion of severance. Judge Higginson wrote a dissent joined by three other judges that concluded that the FHFA is constitutional under existing precedent but agreed that given the constitutionality holding of the en banc court severing HERA’s for-cause removal provision was the appropriate remedy. His dissent includes a footnote that states “The majority opinion expresses no disagreement with the D.C. Circuit’s analysis affirming the constitutionality of the CFPB, instead identifying ‘salient distinctions’ between the CFPB and the FHFA. With that lack of disagreement, I quite agree.”

Given his apparent agreement with PHH, it is likely Judge Higginson will reject All American Check Cashing’s challenge to the CFPB’s constitutionality. It is difficult, however, to predict how Judge Smith would vote based on his participation in the en banc Collins decision. It is unclear whether by joining the majority opinion that reinstated the panel’s ruling that the FHFA is unconstitutional and noted its distinction of PHH, Judge Smith was expressing his agreement with PHH. While the panel indicated that it was “mindful” of PHH and did not express disagreement with PHH, it did not expressly indicate that it agreed with the D.C. Circuit’s conclusion regarding the CFPB’s constitutionality. In any event, given that the en banc court in Collins found severance of HERA’s for-cause removal provision to be the appropriate remedy, the Fifth Circuit panel in All American Check Cashing would likely rule that Dodd-Frank’s for-cause removal provision should similarly be severed should it find the CFPB’s structure to be unconstitutional.

A ruling by the Fifth Circuit panel that the CFPB’s structure is unconstitutional would create a circuit split, thereby potentially increasing the likelihood that the U.S. Supreme Court will 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. The DOJ’s response to the petition deadline with September 18.

- Alan S. Kaplinsky

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CFPB Finalizes Product Sandbox Proposal and Changes to Trial Disclosure, No-Action Letter Policies; Discloses Plans to Propose Interpretive Letter Program

The CFPB has finalized its proposed revisions to its Policy to Encourage Trial Disclosure Programs (TDP Policy) and policy on “no-action” letters (NAL Policy) and has also finalized its proposal to create a new “product sandbox” policy. In addition, the CFPB has announced the creation of the American Financial Innovation Network (ACFIN) to facilitate coordination between the CFPB, other federal regulators, and state regulators and the CFPB’s issuance of the first NAL under the revised NAL Policy. The final policies, which are scheduled to be published in the Federal Register, were applicable as of September 10, 2019.

While not mentioned in the CFPB’s press release or Director Kraninger’s remarks about the final policies, the Bureau states in the Supplementary Information to the final sandbox policy that it “intends to separately propose an interpretive letter program as soon as practical.” The Bureau expresses its agreement with commenters on its sandbox proposal “that the present lack of an interpretive letter or advisory opinion program represents a gap in the Bureau’s plans for providing compliance assistance to stakeholders under the Federal consumer financial laws.” It indicates that because it did not propose such a program in the sandbox proposal and there would be significant public interest in the structure of such a program, the Bureau believes it would be appropriate to seek public comment before establishing such a program.

Each of the final policies encourages potential applicants to contact the CFPB’s Office of Innovation for “an informal, preliminary discussion” of a contemplated proposal before submitting a formal application. In the Supplementary Information to the NAL Policy, the CFPB states that during these informal discussions, it intends to discuss which of its policies is best suited for the product or service that is the subject of an application.

Product Sandbox. While the CFPB’s proposal referred to a “Product Sandbox,” the final policy is renamed the “Policy on the Compliance Assistance Sandbox“ (CAS Policy). Key differences between the Bureau’s proposal and the CAS Policy include:

  • The proposal provided that an approved sandbox applicant would receive relief consisting of (1) approvals, as applicable, under the provisions of the TILA, ECOA, and EFTA that provide a safe harbor from liability under such laws in federal or state enforcement actions and private lawsuits for actions taken or omitted in good faith in conformity with Bureau approvals, and (2) exemptions granted by Bureau order (i) from statutory or regulatory provisions as to which the Bureau has statutory authority to issue exemptions by order (such as provisions of the ECOA, HOEPA, and FDIA), or (ii) from regulatory provisions as to which the Bureau has general authority to issue exemptions. The CAS Policy does not provide for exemptions. An approved sandbox applicant will only receive an approval under one or more of the three statutory safe harbors. While the Bureau states in the Supplementary Information that it concluded the statutory exemptions by order did not need to be included in the CAS Policy, it believes regulatory exemptions would be an important component of the CAS Policy and “will at a later date issue a proposal to establish a program by order through a separate notice-and-comment rulemaking.”
  • The CAS Policy provides that an approval will state that “subject to good faith compliance with specified terms and conditions, the Bureau concludes that for the reasons stated therein that offering or providing the described aspects of the product or service complies with the Federal consumer financial law identified therein.” The Bureau states in the Supplementary Information that “the compliance assistance available under the Policy, however, concerns Federal consumer financial law, not State law, and the Bureau does not foresee that such assistance would preempt State law.” This would appear to mean that an approved sandbox applicant would remain at risk for claims by state regulators or private actions alleging violations of state law based on non-compliance with federal law requirements that are incorporated into or tracked by state law.
  • The Bureau states in the Supplementary Information that the CAS Policy refers to termination of an approval rather than revocation “because the effect of approvals for the period that they are provided by the Bureau cannot be revoked.”
  • The CAS Policy revises the structure of third party applications (e.g. trade associations) to allow a third party to apply for a “template” approval. Such approval would be “non-operative, meaning that no party can rely on it to trigger the statutory safe harbor.” Entities could then use the template to apply for compliance assistance under substantially the same terms as those contemplated in the template, and the Bureau will evaluate each application on an individual basis.

NAL Policy. The NAL Policy, initially issued in 2016, sets forth the CFPB’s standards and procedures for issuing NALs. Key differences between the Bureau’s proposal and the final NAL Policy include:

  • The Bureau states in the Supplementary Information that the NAL Policy is not intended to be limited to new or emerging products.
  • In response to comments from consumer groups that NALs might be viewed as official interpretations to which courts will defer, the NAL Policy provides that an NAL will include a statement that it “does not purport to express any legal conclusions regarding the meaning or application of the laws and/or regulations within the scope of the letter.”
  • The NAL Policy revises the structure of third party applications by adopting the “template” approval approach used in the CAS Policy and addresses how the CFPB will handle NAL applications involving products or services that are substantially similar to those that are the subject of an existing NAL.

TDP Policy. The TDP Policy, initially adopted in October 2013, sets forth the Bureau’s standards and procedures for granting waivers to individual companies, on a case-by-case basis, of federal disclosure requirements to allow those companies to test trial disclosures. The TDP Policy relies on the Bureau’s authority under Dodd-Frank Section 1032(e) to permit providers of consumer financial services and products “to conduct a trial program that is limited in time and scope, subject to specified standards and procedures, for the purpose of providing trial disclosures to consumers.” Key differences between the Bureau’s proposal and the final TDP Policy include:

  • A waiver will include a statement that “subject to good faith, substantial compliance with the [waiver document], the Bureau deems the [waiver] recipient to be in compliance with, or exempt from, described Federal disclosure requirements and that as result of this action, there is no predicate under the described Federal disclosure requirements for a private suit or Federal or State enforcement or supervisory action based on the recipient’s permitted use of the trial disclosures in question within the scope of the waiver.” In response to industry concerns about the ability of a state AG to use Dodd-Frank Section 1042 to bring a UDAAP action against the recipient of a waiver, the Bureau states in the Supplementary Information that “there would be no basis for such a title X UDAAP action predicated on a violation of the Federal disclosure requirements within the scope of the waiver.” According to the Bureau, a state AG “would have to show, despite the consumer protections built into the Policy and despite the Bureau’s issuance of a waiver under the Policy, which the Bureau would not issue if it believed the relevant conduct was unfair, deceptive, or abusive, the applicable elements of its title X UDAAP action had been established.” The Bureau states further that it intends to coordinate with Federal and State regulators to attempt to secure their support for a trial disclosure program, or at least a commitment not to initiate enforcement actions predicated on permitted use of trial disclosures. It nevertheless appears that in addition to enforcement and private actions alleging violations of state law based on non-compliance with federal disclosure requirements that are incorporated into or tracked by state law, a waiver recipient would remain at risk of a UDAAP action by a state AG.
  • The TDP Policy provides that the Bureau will consider requests from applicants to extend waiver protection to identified or described agents.
  • The TDP Policy provides that if a waiver is terminated, the recipient’s use of the trial disclosures prior to the termination cannot be the basis for a retroactive action.
  • The Bureau states in the Supplementary Information that the TDP Policy “does not exclude applications involving disclosures associated with long-established products or applications that describe a new method for providing disclosures.”
  • The TDP Policy revises the structure of third party applications (e.g. trade associations) to allow a third party to apply for a “template” approval. Like a template approval under the CAS Policy, a template approval would be “non-operative,” meaning that it does not provide permission to any party to conduct a trial disclosure program. Entities could then use the template to apply for a waiver based on the template, and the Bureau will evaluate each application on an individual basis.

ACFIN. The ACFIN charter states that the ACFIN “is a network of Federal and State officials and regulators with authority over markets for consumer financial products and services” that may include state attorneys general, state financial regulators, and federal financial regulators. In addition to the CFPB, the initial members are Attorneys General of Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee, and Utah. The network’s objectives are to establish coordination among members to facilitate innovation, minimize regulatory burdens and bolster regulatory certainty for consumer financial products and services, and to keep pace with changes in markets for such products and services to help ensure they are free from fraud, discrimination, and deceptive practices. To accomplish those objectives, members seek to cooperate with each other through the coordination of the innovation-rated policies, procedures and activities “with the opportunity to also coordinate on no-action letters, or sandbox trials if desired” and sharing information, as appropriate, related to innovation in markets for consumer financial products and services.

First NAL under new policy. The CFPB’s first NAL under the new NAL Policy was issued in response to a request by the Department of Housing and Urban Development (HUD) on behalf of more than 1,600 housing counseling agencies (HCAs) that participate in HUD’s housing counseling program. HUD had raised concerns to the Bureau about HCAs and lenders not entering into agreements that would fund counseling services due to uncertainty about the application of the Real Estate Settlement Procedures Act (RESPA). As described by the Bureau, the NAL “essentially states that the Bureau will not take supervisory or enforcement action under RESPA against HUD-certified HCAs that have entered into certain fee-for-service arrangements with lenders for pre-purchase housing counseling services.”

- Alan S. Kaplinsky

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Fifth Circuit Panel in All American Check Cashing Asks Parties to Brief Impact of en banc Fifth Circuit Decision Holding FHFA Structure Unconstitutional

The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of All American Check Cashing from the district court’s ruling upholding the CFPB’s constitutionality. Oral argument was held in March 2019, and no decision has yet been issued.

At oral argument, the panel asked the parties whether it should hold its decision until the en banc court issued its decision in Collins v. Mnuchin, the case involving the FHFA’s constitutionality. The en banc Fifth Circuit issued its decision in Collins, ruling that the FHFA is unconstitutionally structured because it is excessively insulated from Executive Branch oversight and that the appropriate remedy for the constitutional violation is to sever the provision of the Housing and Economic Recovery Act of 2008 that only allows the President to remove the FHFA Director “for cause.”

The Fifth Circuit then sent a letter to the parties in All American Check Cashing directing them to file letter briefs addressing “What action this court should take in light of [the en banc decision in Collins.]” The briefs (not to exceed 10 pages) must be filed by October 10, and reply letter briefs (not to exceed 3 pages) must be filed by October 24.

- Alan S. Kaplinsky

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OCC and FDIC File Joint Amicus Brief Urging Colorado Federal District Court to Reject Madden

The OCC and FDIC have filed a joint amicus brief in a Colorado federal district court arguing that the court should affirm the decision of a bankruptcy court holding that a non-bank loan assignee could charge the same interest rate the bank assignor could charge under Section 27(a) of the Federal Deposit Insurance Act, 12 U.S.C. § 1831d(a), despite the Second Circuit’s decision in Madden v. Midland Funding (which we have criticized).

The loan in question was made by Bank of Lake Mills, a Wisconsin state-chartered bank, to CMS Facilities Maintenance, Inc. (CMS), a Colorado-based corporation. It carried an interest rate just over 120 percent per annum. In addition to personal property of CMS, the loan was secured by a deed of trust on real property owned by Yosemite Management, LLC (Yosemite).

About two months after the loan was made, the Bank assigned the loan to World Business Lender, LLC (the “Assignee”). The Promissory Note provided that it was “governed by federal law applicable to an FDIC insured institution and to the extent not preempted by federal law, the laws of the State of Wisconsin without regard to conflict of law rules.”

Yosemite subsequently sold the real property to Rent-Rite Superkegs West, Ltd. (the “Debtor”), which subsequently filed for bankruptcy relief. The Assignee filed a proof of claim asserting an in rem claim against the real property. The Debtor filed a complaint in the bankruptcy court seeking to disallow the Assignee’s claim on the grounds that the interest rate on the loan was usurious under Colorado law. While Wisconsin law permits loans to corporations at any interest rate, Colorado law prohibits interest rates above 45 percent. The Assignee argued that Section 27(a) governed the permissible interest rate on the loan but the Debtor argued that the loan was subject to Colorado usury law.

The bankruptcy court agreed with the Assignee that: (1) pursuant to Section 27(a), the Bank could charge the contract rate because such rate was permissible under Wisconsin law; and (2) as a consequence of the “valid-when-made rule,” the Assignee could also charge that rate. Even though it was not cited by the Debtor in support of its position, the bankruptcy court specifically noted its disagreement with Madden. In Madden, the Second Circuit ruled that a purchaser of charged-off debts from a national bank was not entitled to the benefits of the preemption of state usury laws under Section 85 of the National Bank Act, the law upon which Section 27(a) was modeled.

The amicus brief filed by the OCC and FDIC presents a compelling argument in favor of the assignability of an originating bank’s rate authority under federal banking law when it assigns the underlying loan. The brief first argues that, under the longstanding “valid-when-made rule,” an interest rate that is non-usurious when the loan is made remains non-usurious despite assignment of the loan. In support of this argument, described by the U.S. Supreme Court as a “cardinal rule” of American law, the brief cites U.S. Supreme Court cases and other federal authority dating to 1828, cases from a dozen states and even English cases and commentary from the late 18th and early 19th Centuries. It goes on to argue that, under another well-settled rule, an assignee steps into the “shoes of the assignor” and succeeds to all the assignor’s rights in the contract, including the right to receive the interest permitted by Section 27(a). Again, the brief cites considerable authority for this proposition.

To our mind, however, the brief concludes with its strongest argument—that the “banks’ authority to assign their usury-exempted rates was inherent in their authority to make loans at those rates.” In support, it quotes a Senate report addressing another usury exemption, applicable to residential mortgage loans by specified lenders, which was enacted at the same time as Section 27(a): “[L]oans originated under this usury exemption will not be subject to claims of usury even if they are later sold to an investor who is not exempt under this section.” The brief argues that, in light of the “disastrous” consequences to banks of limits on loan assignability, a bank’s right to charge the interest permitted by its home state would be “hollow” and “stunted” if a loan assignee could not charge the same interest as its bank assignor.

This is not the first time the OCC has taken issue with Madden. Indeed, the OCC and Solicitor General previously criticized Madden in connection with Midland Funding’s unsuccessful certiorari petition to the Supreme Court. The new brief, however, is far more detailed and powerful. After reading the brief, it is hard to disagree with its ultimate conclusion that Madden “is not just wrong: it is unfathomable.”

With this brief, the OCC and FDIC have done a great service to the proper development of the law on an issue of critical importance to the national banking system. We look forward to further contributions of this type in other cases raising similar issues.

- Jeremy T. Rosenblum

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Consumer Financial Protection Bureau Files Complaint Alleging Defendants Engaged in Unlawful Conduct in Connection with Mortgage Assistance Relief Services

On September 6, 2019, the Bureau filed a complaint in federal court in the Central District of California against Certified Forensic Loan Auditors, LLC (CFLA) and Andrew Lehman (Lehman) in connection with their offering, advertising, marketing, and selling of purported financial advisory and mortgage assistance relief services, and against Michael Carrigan (Carrigan), who was CFLA’s sole auditor during the relevant time period. Among the services offered were securitization audits, which included legal conclusions and recommendations, and litigation documents, which were templates of pleadings to be filed in connection with a homeowner’s response to a foreclosure proceeding. According to the complaint, CFLA and Lehman charged and collected $1,495 from consumers before producing and delivering one of these packages of documents, and they had sold more than 2,000 securitization audits since 2014.

The Bureau alleges that CFLA and Lehman promoted these materials on its website, in marketing e-mails, and on marketing telephone calls with representations that the securitization audits would stop foreclosure and keep homeowners in their homes, as well as claims that the documents were prepared by the “Nation’s Most Well Respected Attorneys in the Foreclosure Defense Industry.” According to the complaint, CFLA and Lehman made no effort to determine whether the audits and litigation documents actually led to the advertised outcomes and, in fact, knew that the audits were meritless.

The Bureau alleges that CFLA and Lehman violated Regulation O, which governs mortgage assistance relief services, by taking payment before consumers executed a written agreement with their loan holder or servicer that contained any offer of relief obtained by CFLA and Lehman, and by misrepresenting the benefits, performance, or efficacy of their services. Additionally, the Bureau alleges the defendants violated the Consumer Financial Protection Act by misrepresenting the expertise of those involved in preparing the materials, by taking advantage of consumers’ inability to understand the material risks, costs, and conditions of the services CFLA and Lehman were selling, and by providing financial services that were not in conformity with federal consumer financial law. Allegations against Carrigan include knowingly or recklessly providing substantial assistance to CFLA and Lehman in their violations of the CFPA and Regulation O.

The Bureau and Carrigan agreed to a stipulated final judgment and order that would permanently restrain Carrigan from, either directly or by assisting others, providing, advertising, marketing, promoting, offering for sale, selling, or producing any mortgage assistance relief service or financial product or service. Additionally, the stipulated order imposes a $493,403.04 civil money penalty, which will be suspended other than $5000 because of Carrigan’s limited ability to pay. The suit against CFLA and Lehman is still pending in federal court in the Central District of California.

- John A. Kimble

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Washington DFI Extends SCRA Interest Rate Cap to Servicemember Spouses

In its recently published Summer 2019 Newsletter, the Washington State Department of Financial Institutions (“DFI”) reported that it had interpreted the Servicemembers Civil Relief Act (“SCRA”) broadly to apply the SCRA’s 6 percent interest rate cap to a loan agreement entered into only by a servicemember’s spouse. Generally, the SCRA provides for a 6 percent interest rate cap during the period of military service for non-mortgage obligations and liabilities “incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service[.]” Washington has enacted its own version of the SCRA—the Washington Service Members’ Civil Relief Act (“WSCRA”), which incorporates the federal SCRA and provides additional protections to servicemembers who are residents of Washington.

In this case, the servicemember’s spouse received a loan offer in the form of a negotiable check in her maiden name, which after deposited, resulted in a loan that included interest in excess of 6 percent. After the servicemember commenced active military service, he provided notice and documentation of his active duty service to the creditor and requested interest rate forgiveness for his spouse’s loan pursuant to the SCRA. However, the creditor refused the request, reasoning that the loan was not taken out “jointly” because the servicemember’s name was not on the loan documents. The DFI disagreed, stating that because Washington is a community property state, debts incurred during the marriage are presumed to be community debt. To establish the debt was not community debt, the creditor would have been required to present clear and convincing evidence that the debt was not incurred for community benefit. In other words, because the loan benefitted both spouses, it was subject to the 6 percent interest rate cap afforded by the SCRA. Had the spouse obtained the loan for purely personal purposes, such as for her own business, the result here might have been different.

Although the DFI’s ruling is at odds with the plain language of the SCRA, the outcome is not surprising. As we have repeatedly observed, the SCRA will be applied broadly by regulators to protect servicemembers and their dependents. Accordingly, lenders should generally apply the interest rate cap to loans contracted for by servicemember spouses in Washington and should consider taking the same approach in all community property states. The exception would be for loans taken out by spouses that do not in any way benefit the marital community.

- Meredith J. Risati

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Did You Know?

CSBS Publishes Latest Policy Paper in Series Examining Nonbank Supervision

The Conference of State Bank Supervisors (CSBS) published the latest policy paper in its series examining the nonbank financial services industry and its supervision. In its press release, CSBS summarized the key findings from the September 16, 2019, policy paper, entitled, “Overview of Nonbank Mortgage.” The summary said:

  • Since the financial crisis, outstanding U.S. residential mortgage debt has remained stable, hovering around $10 trillion, while home equity has swung back into positive territory at roughly $16 trillion.
  • The current mortgage market relies almost exclusively on backing from the federal government, with funding and guarantees from federally supported entities (Fannie Mae, Freddie Mac and Ginnie Mae/FHA/VA) accountable for almost all new home loans.
  • With roughly two-thirds market share, nonbank financial services companies are now the primary source of mortgage originations, a departure from prior eras in housing finance, and they represent a growing source of mortgage servicing as well.
  • Compared to depositories, nonbanks present different kinds of risk to financial regulators, such as greater dependence on third parties for mortgage liquidity, lower operating capital, and lack of asset diversification.
  • State financial regulators oversee the mortgage industry through their statutory powers to license and supervise mortgage companies and, where necessary, take enforcement actions against bad actors.

The policy paper is available here.

NMLS Resource Center Launches a ‘Temporary Authority to Operate’ Page

The NMLS Resource Center created a web page focused on Temporary Authority to Operate. The page features Frequently Asked Questions, a demonstration on how to obtain temporary authority to operate on the NMLS, links to NMLS policies applicable to temporary authority, information about upcoming events (there will be a live webinar prior to November 24), and additional tips and resources. The page also includes links to relevant statutory authority and news articles.

- Stacey L. Valerio

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Looking Ahead


Washington, D.C. | September 22-24, 2019

Applied Compliance Track: LO Comp Dos and Don’ts

Speaker: Richard J. Andreano, Jr.

The Coming Rules on Data Privacy and Security

Speaker: Kim Phan

TCPA Developments and Compliance Challengers

Speaker: Daniel JT McKenna

Servicing Compliance

Speaker: Reid F. Herlihy

State Legislative and Regulatory Policy Update

Speaker: Stacey L. Valerio

Compliance Super Session

Speaker: John D. Socknat


San Diego, CA | November 20, 2019

RESIDENTIAL TRACK: Loan Originator Compensation


RESIDENTIAL TRACK: Financial Management and Accounting – Unplugged Session I

Speaker: Richard J. Andreano, Jr.

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