Mortgage Banking Update - January 8, 2020
In this issue:
- CCPA Compliance – It’s Not Too Late
- Georgia and Colorado Address MLO Temporary Authority to Operate
- IRS Issues Clarification Regarding Taxpayer First Act Disclosure of Information Provision
- Congress Agrees to Extend NFIP Through September 2020
- CFPB Publishes TRID Guides on Construction Loans
- Amicus Briefs Filed in Seila Law
- CFPB Issues Annual Report on TILA, EFTA, and CARD Act
- OCC and FDIC Issue Joint Proposal to Revise CRA Regulations; Ballard Spahr to Hold Jan. 29 Webinar
- Response From Community Groups to OCC/FDIC Joint CRA Proposal
- FTC Announces Improvements to Orders in Data Security Cases
- CA DBO Concludes Certain Point-of-Sale Financing Arrangements are Loans, Not Credit Sales
- This Week’s Podcast: A Discussion of Alternative Payments
- Did You Know?
The California Consumer Privacy Act (CCPA) went into effect on January 1, 2020. For companies within the scope of the CCPA, it’s not too late to start putting together a CCPA compliance program. The CCPA enforcement date is not until July 1, 2020. Thus, the California Attorney General is unable to bring enforcement actions against companies for violations of the CCPA for at least another six months. During that time, companies should be:
- Developing a detailed map of the data flows within a company to identify and track all the personal information in a company’s network
- Updating online and offline policies, procedures, and training materials to address CCPA obligations
- Responding to verifiable consumer requests to exercise their new CCPA rights, including the right to delete personal information
However, the CCPA represents a dramatic shift in how U.S. companies must handle the privacy of personal information going forward. Many other states, including New York, are expected to pass similar comprehensive privacy legislation. Most companies doing business with California residents are likely already required to comply with the CCPA requirements, but all companies should be thinking about whether they should begin incorporating some of the CCPA requirements in anticipation of other new state laws.
- Kim Phan
Following receipt and consideration of three written comments on proposed rules distributed on November 18, 2019, the Georgia Department of Banking and Finance adopted final rules on December 20, 2019, that establish additional disclosure, advertising, and record-keeping requirements applicable when MLOs (mortgage loan originators) operate under temporary authority.
The rules include:
- Disclosure Requirements - Effective April 1, 2020. Mortgage lenders or mortgage brokers sponsoring MLOs who are unlicensed but operating under 12 USC § 5117 must disclose in writing to each applicant that such MLO has temporary authority to operate. The disclosure must be made no later than the date the consumer signs an application or any disclosure, whichever event occurs first, and must include the language quoted below in at least 10-point, bold-faced type. The applicant must sign the disclosure, and the lender or broker, as applicable, must keep a copy of the signed disclosure.
“The Georgia Department of Banking and Finance requires that we inform you that our company is licensed but the mortgage loan originator responsible for your loan is not currently licensed by the Georgia Department of Banking and Finance. The mortgage loan originator has applied for a mortgage loan originator license with the Georgia Department of Banking and Finance. Federal law (12 U.S.C. § 5117) authorizes certain mortgage loan originators to operate on a temporary basis in the state of Georgia while their application is pending. The Georgia Department of Banking and Finance may grant or deny the license. Further, the Georgia Department of Banking and Finance may take administrative action against the mortgage loan originator that may prevent such individual from acting as a mortgage loan originator before your loan closes. In such case, our company could still act as your broker or lender.”
- Additional Disclosure Requirements - Effective January 9, 2020. A MLO “purporting to operate under temporary authority” is jointly responsible with the sponsor for ensuring that the above disclosure is provided. Such MLO must also indicate “TAO” or “temporary authority to operate” or a substantially similar designation next to the signature line on any document, application, or disclosure signed by the MLO in connection with the negotiation of terms, application for, or the offering of a residential mortgage loan.
- Advertising Requirements – Effective January 9, 2020. “In the event that a mortgage broker or lender sponsors a mortgage loan originator purporting to operate under the temporary authority requirements set forth in 12 U.S.C. § 5117, any advertisement by the mortgage broker or lender that mentions such mortgage loan originator’s ability to act as mortgage loan originator in Georgia shall clearly and conspicuously indicate that the individual has temporary authority to operate in Georgia. Any such advertisement must also clearly and conspicuously indicate that he individual is unlicensed, has submitted a license application to the Department, and the Department may grant or deny the license application.”
- Record-keeping - Effective January 9, 2020. Required mortgage loan transaction journals must clearly identify if the MLO utilized temporary authority to operate at any point in the application or loan process. For MLOs that utilize temporary authority, the journal should also identify the final status of the MLO’s Georgia license application as one of the following: approved, withdrawn, or denied.
Colorado followed many other states and has adopted provisions permitting mortgage loan originators to act with temporary authority during certain transition periods, reconciling its law with the federal SAFE Act amendments. The Colorado amendments are incorporated into the regulations and are effective immediately.
- Stacey L. Valerio & Aileen Ng
The Taxpayer First Act adopted in the summer of 2019 includes the following provision that had an effective date of December 28, 2019:
“Persons designated by the taxpayer under this subsection to receive return information shall not use the information for any purpose other than the express purpose for which consent was granted and shall not disclose return information to any other person without the express permission of, or request by, the taxpayer.”
Industry representatives sought guidance from the Internal Revenue Service (IRS), as there was confusion regarding whether the consent requirements in the provision apply to loans originated before December 28, 2019, that are sold on or after such date. On December 19, 2019, the IRS posted guidance regarding the Act on its website that includes the following guidance on the application of the consent provision:
“This provision limits the redisclosure and use of return information in the case of taxpayers who have consented to the disclosure of their return information by the Internal Revenue Service to a third party under IRC section 6103(c). Section 2202 of the Taxpayer First Act applies only to disclosures made by the Internal Revenue Service after December 28, 2019, and any subsequent redisclosures and uses of such information disclosed by the Internal Revenue Service after December 28, 2019.”
The guidance should be helpful in addressing industry concerns regarding the application of the consent provision to existing loans.
As part of legislation to fund various federal government agencies after December 20, 2019, the House of Representatives and Senate agreed to extend the National Flood Insurance Program (NFIP) until September 30, 2020. President Trump is expected to sign the legislation.
Congress previously agreed to a short-term extension of the NFIP from November 21 to December 20, 2019. Broader, long-term reform of the NFIP remains elusive.
Although the 2017 amendments to the TRID rule, often referred to as TRID 2.0, added commentary to TRID provisions of Regulation Z and, particularly, Appendix D to Regulation Z, that addresses multiple advance construction loans, there has continued to be confusion in the industry on how to properly disclose construction-to-permanent, one-time-close loans, especially as a single transaction on the Loan Estimate and Closing Disclosure.
On December 18, 2019, the CFPB published two new TRID Guides related to construction and construction-to-permanent loans. One guide addresses the option for using separate Loan Estimates and separate Closing Disclosures for the construction and permanent phases, and the other for using a single Loan Estimate and single Closing Disclosure for both phases of the construction-to-permanent loan. The single disclosure approach often is referred to as using “combined disclosures.” The “Guide for separate construction and permanent phase disclosures” focuses on the Loan Terms, Projected Payments, Loan Costs and Adjustable Payments tables of the Loan Estimate and Closing Disclosure. Similarly, the “Guide for combined, one-transaction disclosures” focuses on the Loan Terms, Projected Payments, Loan Costs, Adjustable Payments, and Adjustable Interest Rate tables of the Loan Estimate and Closing Disclosure.
Both Guides include section-by-section instructions and illustrations for the applicable tables, with references back to the applicable sections of Regulation Z and the Regulation Z Commentary and Appendices. They also include specific loan scenario examples for most of the required disclosures in each of the tables. However, like the TRID Rule and Appendix D, the Guides do not address some of the more common construction-to-permanent loan products offered in the market today.
The guidance included in the new Guides is the most detailed and comprehensive on construction lending TRID disclosures from the CFPB, to date. The Guides may help to improve consistency in TRID disclosures for construction-to-permanent loans in the market, which would enable borrowers to more easily shop for and compare loan products between creditors. However, the Guides are also likely to spur new questions from the industry that will, hopefully, lead to the revision of the Guides to provide even further clarification.
- Amanda E. Phillips
The first round of amicus briefs have been filed with the U.S. Supreme Court in Seila Law. All of the amici that take a position on the Consumer Financial Protection Bureau’s constitutionality agree with the position taken by both Seila Law and the CFPB that the Bureau’s structure is unconstitutional. However, three of the amici take no position on constitutionality, with two of the amici addressing only the appropriate remedy if the Supreme Court concludes that the Bureau’s structure is unconstitutional and another of the amici addressing only the Supreme Court’s jurisdiction. While all of the amici that address constitutionality agree that the Bureau’s structure is unconstitutional, they take different positions on the appropriate remedy, with several amici arguing that because Title 10 of the Dodd-Frank Act cannot properly be severed, the appropriate remedy is for the Court to strike all of Title 10.
The amici include the following:
- Consumer Bankers Association: CBA takes no position on the Bureau’s constitutionality. It argues that the Court should sever all of Title 10, not just the for-cause removal provision, and stay its judgment for six months to give Congress time to enact a permissible structure.
- Alan B. Morrison, George Washington University Law School: Professor Morrison argues that because there is no actual controversy between the parties, the Court should dismiss the certiorari petition for lack of jurisdiction or as improvidently granted.
- The Buckeye Institute: The Institute argues that the Court should not conduct a severance analysis and can provide complete relief to Seila Law by invalidating the CID issued by the Bureau.
- Chamber of Commerce: The Chamber argues that the Court should declare the Dodd-Frank Act’s for-cause removal provision invalid and reverse the Ninth Circuit’s judgment so as to deny the Bureau’s petition to enforce the CID. The Bureau should be allowed to continue to operate with a Director who is removable by the President at will, with Congress to decide “whether [it] would wish that [result].” According to the Chamber, “Congress is best positioned to address whether and how to revise the Bureau’s structure.”
- Mortgage Bankers Association: The MBA takes no position on the Bureau’s constitutionality. It argues that if the Court finds the Bureau’s structure is unconstitutional, the Court should sever the for-cause removal provision from the Dodd-Frank Act.
- Credit Union National Association: CUNA argues that the Bureau’s structure is unconstitutional and that the Court should strike all of Title 10, vacate the lower court decision enforcing the Bureau’s CID, and stay its mandate for “a short period [to] allow the political branches time to respond to the Court’s decision and reconstitute the Bureau.”
We expect a second round of amicus briefs in support of the Bureau’s constitutionality to be filed after Paul Clement, the amicus curiae appointed by the Supreme Court to defend the Ninth Circuit’s judgment upholding the Bureau’s constitutionality, files his brief. His brief must be filed by January 15.
The CFPB has issued its annual report on TILA, EFTA, and the CARD Act. It covers activity in 2016 and 2017. The report provides brief summaries of the 2016 and 2017 enforcement actions brought by the CFPB and other federal agencies with relevant enforcement authority and provides data on reimbursements required as a result of enforcement actions brought during these periods.
The report also identifies the most frequently cited violations of Regulation Z and Regulation E across the agencies that are FFIEC members. In both reporting periods, the most frequently cited Regulation Z violations included the failure to disclose, or to accurately disclose, the finance charge on closed-end credit, and the most frequently cited Regulation E violations included the failure to comply with the investigation and timeframe requirements for resolving errors in electronic fund transfers.
The OCC and FDIC have issued a joint proposal to revise their regulations implementing the Community Reinvestment Act (CRA). Although the Federal Reserve, OCC, and FDIC are the primary CRA regulators, the Fed did not join the proposal and presumably will issue a separate proposal. Comments on the proposal will be due no later than 60 days after it is published in the Federal Register.
On January 29, 2020, from 12 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar, “The FDIC’s and OCC’s Proposed CRA Reform: What You Need to Know.” Click here to register.
In their joint press release announcing the proposal, the OCC and FDIC stated that the proposal is intended to address the dramatic changes that have occurred in the banking industry since the CRA’s enactment in 1977 and the last round of extensive regulatory revisions in 1995. According to the agencies, “the current CRA framework has not kept pace with such changes” and the proposals “are intended to address digital banking changes and to further encourage lending to low- and moderate- income borrowers living in underserved communities, such as rural areas and tribal lands far removed from urban centers where bank branches are concentrated.” The key areas and issues addressed by the proposals are described below.
Activities that qualify for CRA credit
- Clarification and expansion of activities. Under the current rules, the activities that qualify for CRA consideration generally fall into two categories: retail banking activities and community development (CD) activities. To clarify which activities qualify for CRA credit, the proposal includes “qualifying activities criteria” that identify “the types of activities that meet the credit needs of banks’ communities and, thus, would be considered qualifying activities.” Such criteria cover “many activities that currently qualify for CRA consideration and include additional activities that meet the credit needs of economically disadvantaged individuals and areas in banks’ communities.” For example, expansions to the retail loan criteria include home mortgage loans and consumer loans provided in Indian country and small business loans of $2 million or less. A CD activity is an activity that “provides financing for or supports” specified types of programs, projects, services, facilities, or other needs. The proposal interprets the phrase “provides financing for or supports” broadly “to include all lending, investment, and service activities that are related to CD qualifying activities criteria.” Expansions to qualifying CD activities include adding a criterion for 1. activities that help finance or support another bank’s CD loans, CD investments, or CD services, 2. essential community facilities, such as schools and hospitals, that benefit or serve low- and middle-income (LMI) individuals, LMI census tracts, or other targeted areas of need, 3. essential infrastructure that benefits or serves LMI individuals, LMI census tracts, or other targeted areas of need, and 4. financial literacy programs or education or homebuyer counseling that benefits individuals of all income levels. The proposal removes the requirement that a distressed area or an underserved area be nonmetropolitan areas so that urban areas are included.
- Qualifying activities list. The proposal provides that the agencies would maintain a publicly-available, non-exhaustive, illustrative list of qualifying activities that meet the criteria, as well as examples of activities that the agencies, in response to specific inquiries, have determined do not meet the criteria. The proposal establishes a process for a bank to submit a form through the agency’s website to seek agency confirmation that an activity is a qualifying activity.
Delineation of assessment areas: The current method for delineating a bank’s assessment areas is focused on the areas surrounding brick and mortar locations. Consistent with current rules, the proposal requires banks (except for military banks) to serve the communities where they have a physical presence and surrounding geographies where they originated or purchased a substantial portion of their loans. To recognize the increasing number of banks that operate primarily through the Internet or otherwise serve customers not located near the bank’s physical locations, the proposal also requires a bank with a significant portion of its retail domestic deposits outside of its facility-based assessment areas, such as 50 percent or more, to delineate additional assessment areas wherever it has a concentration of retail domestic deposits. Banks receive CRA credit for qualifying activities conducted in their facility-based and deposit-based assessment areas at the assessment area level and bank level, consistent with the proposal’s performance standards. Banks can also receive CRA credit for qualifying activities conducted outside of their assessment areas at the bank level.
Measuring CRA performance: Under the proposal, small banks continue to be evaluated under the current small bank performance standards. New general performance standards are used to evaluate other banks’ CRA activities and the CRA activities of small banks that opt into those standards. The proposal also includes a strategic plan option for all banks. This option is intended to address the unique needs of banks with business models that could not be effectively evaluated under the objective framework reflected in the general performance standards or the small bank performance standards, such as banks that do not have retail domestic deposits or small banks that do not originate retail loans.
The new general performance standards assess two components of a bank’s CRA performance: 1. the distribution (i.e. number) of qualifying loans to LMI individuals, small farms, small businesses, and LMI geographies, and 2. the impact of the bank’s qualifying activities, measured by the value of such activities relative to the bank’s retail domestic deposits. Under the proposal, both components are compared to specific benchmarks and thresholds that are established prior to the start of a bank’s evaluation period based, in part, on the agencies’ analysis of historical data. Banks must also meet a minimum CD lending and investment requirement in each assessment area and at the bank level to achieve a satisfactory or outstanding rating.
Presumptive ratings are determined at the assessment area and bank levels. The proposal uses the word “presumptive” to describe the ratings resulting from the benchmark comparisons because the rating can be adjusted based on considerations of performance context and discriminatory or other illegal credit practices. Performance context refers to information about a bank that relates to its capacity to engage in qualifying activities and the demand for, and the bank’s opportunity to engage in, qualifying activities in the communities served by the bank. The proposal includes performance context factors that the agencies would consider in determining a bank’s ratings in each assessment area and at the bank level.
Data collection, recordkeeping, and reporting: The current CRA framework requires banks to collect and report a variety of data but generally exempts small banks. It also does not require data to be collected and reported on all CRA activity. The proposal includes separate data collection and reporting requirements for banks subject to the general performance standards and for banks subject to the small bank performance standards. Banks subject to the general performance standards are required to collect and report data on certain CRA activities not subject to current data collection and reporting requirements. The proposal requires such banks to collect and report data not only related to qualifying CRA activities but also on certain non-qualifying activities, retail domestic deposits, and assessment areas. The banks must use this data to make the calculations necessary to determine their ratings based on the proposal’s performance standards. While the proposal generally exempts banks evaluated under the small bank performance standards from most data collection requirements, they are required to collect and maintain information on retail domestic deposits based on the depositor’s physical address, which will be used by the agencies to validate the banks’ deposit-area assessment area delineations.
Our thoughts: It is unfortunate that the Federal Reserve did not join the FDIC and OCC in the proposed rulemaking, which could result in different compliance frameworks for Fed-member state banks and for non-member banks and national banks. We also find perplexing the 50 percent – 5 percent threshold for delineating an assessment area. A depository institution may source a significant portion of its deposits from an area and be unable to include CRA activities in that area in demonstrating compliance with the CRA because over 50 percent of its deposits come from areas tied to its physical locations. Finally, although the industry will benefit from clarification of activities that qualify for CRA credit, the emphasis on not only the number of qualifying loans, but also the dollar amount of those loans relative to deposits may have unintended consequences. For example, the industry may see increased competition for high dollar CRA projects even if the projects benefit fewer LMI individuals.
- Scott A. Coleman & John A. Kimble
While banks, community groups, and regulators all seem to agree that there is a need to reform the Community Reinvestment Act (the CRA), which was signed into law by Jimmy Carter back in 1977 and hasn’t received a major update since the Clinton administration, there is significant disagreement over whether or not the recently proposed changes represent a path forward toward modernization and simplicity or a path backward toward discrimination and exclusion. The regulators themselves can’t even find their way to agreement. The Notice of Proposed Rulemaking was issued only by the OCC and the FDIC. Notably absent was the Federal Reserve, which did not join in on the proposal or offer a counter-proposal. If the OCC and FDIC move forward without agreement from the Federal Reserve, different banks could be faced with wildly different CRA regimes.
The reaction from community groups has been mostly negative with critiques focusing on three different aspects of the proposal: the new presumptive ratings, the inclusion of opportunity zones and the expansion of small business qualification, and the ability to neglect certain assessment areas and still receive a passing grade.
The proposed rulemaking would create presumptive ratings that banks could determine themselves by looking at the amount of CRA-eligible activities as compared to the amount of deposits. If CRA-eligible activities total 11 percent or more of deposits, the presumptive rating is “outstanding.” At least 6 percent would be “satisfactory,” and at least 3 percent would be “needs to improve.” Regulators would still have the discretion to alter these ratings based on the facts on the ground. Those who are supportive of the proposal argue that this improves clarity for banks, but community groups are concerned that these new target percentages will allow banks to do just enough to get the rating that they desire without putting in any effort beyond that.
While the opening summary of the proposed rulemaking suggests that these revisions “could encourage banks to provide billions more each year in CRA-qualified lending, investment, and services,” critics are arguing that this would only be achieved by lowering the bar for CRA qualification. Banks would be incentivized to invest in opportunity zones, which are communities the federal government has identified as needing economic development and job creation, but banks would be less restricted in the type of investment that they make in those opportunity zones. Multiple community groups have argued that banks could receive CRA credit for building a sports stadium as long as it was constructed in an opportunity zone. Along the same lines, under the proposed regulations, more businesses would qualify as small businesses because of an increase in the revenue threshold, and more loans would qualify as small business loans because of an increase in the loan size threshold.
Community groups also argue that the effort by the OCC and FDIC to modernize the CRA to take into account digital banking by allowing for CRA credit from outside of traditional assessment areas would enable banks to receive a passing grade on their overall CRA rating, even if they received a failing grade in as many as 50 percent of their assessment areas. Their stated fear is that banks could now safely ignore the areas that they’ve wanted to ignore since the signing of the CRA into law more than 40 years ago.
We believe the presumptive ratings are more likely to spur additional CRA activities by depository institutions than limit those activities. As to expanding the list of CRA-eligible activities, the concern of community groups as to the inclusion of opportunity zones is understandable as institutions might focus on opportunity zones rather than more traditional activities. By contrast, we believe that an increase in the size of a loan that can be considered as a small business loan is necessary to counter inflation. Finally, we disagree with the concern of community groups that the modernization of the CRA to consider digital banking will allow banks to ignore significant portions of their assessment areas. We believe the intent of the CRA is to cause depository institutions to service the needs of low- and middle-income residents in areas where they source their deposits, and the focus should not in 2020 and thereafter only be where institutions have main offices, branches and ATMs.
The proposed changes will continue to be the object of discussion and debate over the coming months. Congresswoman Maxine Waters has summoned Joseph Otting, a former bank CEO and current Comptroller of the Currency, to appear before her House Financial Services Committee on January 29. On that same day, from 12 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar, “The FDIC’s and OCC’s Proposed CRA Reform: What You Need to Know.” Click here to register.
- John A. Kimble
Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, announced the following three major improvements that have been made to FTC orders in data security cases:
- Specificity: To counter past criticisms that FTC orders to implement comprehensive information security programs were too vague, FTC orders will now require specific security safeguards that address specific allegations in the complaint brought against each company.
- Third-party assessor accountability: FTC orders will now give the FTC authority to approve (and re-approve every two years) the third-party assessors that are tasked with reviewing comprehensive data security programs. Assessors can no longer be a rubber stamp, but must provide the FTC with documents supporting conclusions reached in any assessment, so that the FTC can investigate compliance with and enforce its orders.
- Executive responsibility: Copying other legal regimes, such as the New York Department of Financial Services Cybersecurity Regulations, FTC orders will now require companies to present to their Boards about their written information security program every year, so that senior officers can provide annual certifications of compliance to the FTC. (Director Smith stated that he believes that holding individuals personally accountable under oath is an effective compliance mechanism to incentivize high-level oversight of, and appropriate attention to, data security.)
In his announcement, Director Smith referenced several FTC 2019 data security orders that reflect these improvements. Companies that find themselves subject to FTC investigation should be mindful of and prepared for the evolving nature of the FTC’s data security orders in the areas involved in these orders.
- Kim Phan
On December 30, 2019, the California Department of Business Oversight (DBO) announced two actions regarding companies offering unregulated, point-of-sale financing to California residents. In the first action, the DBO denied the application of Sezzle Inc. for a lender’s license under the California Financing Law (CFL). According to the DBO in its Statement of Issues, license denial was warranted because Sezzle had engaged in unlicensed point-of-sale lending. In a parallel second action, the DBO issued a legal opinion advising another, unnamed company that its point-of-sale products also constitute “loans” and require a CFL license to be offered in California.
We question both actions. As to the Sezzle license denial, our criticisms include but are not limited to the following:
- The DBO found that Sezzle’s customers and merchants do not enter into contracts with each other that are assigned to Sezzle. There are two problems with this finding: 1. if the finding is correct, it would justify by itself the conclusion that the transactions are loans rather than credit sales (and avoid the need for further analysis), and 2. for residents of California and three other states, the Sezzle User Agreement (at least in its current form) provides that the credit will be through retail installment contracts assigned by Sezzle’s merchants to Sezzle. Thus, as a factual matter the DBO’s finding is open to question.
- The DBO stated that at least one Sezzle merchant allows Sezzle financings in amounts as low as $35 and that, on these financings, the effective APR would be approximately 600 percent if Sezzle charged all applicable fees. In fact, the User Agreement provided, consistent with Sezzle’s advertising, that consumers making payments on time would be charged no interest and no fees—not effective triple-digit APRs. We note that this is not a case involving hidden merchant upcharges on credit transactions. Indeed, the DBO explicitly acknowledged that Sezzle prohibits its merchants from charging a higher credit sale price. Accordingly, this product appears to be consumer-friendly and not unfair, deceptive or abusive in any way.
- In light of the absence of a clear violation of law or any apparent consumer harm, the denial of a CFL license seems unduly harsh.
We think the legal opinion is equally flawed. It points to a number of “relevant factors” in determining whether a transaction is a credit sale or a loan but fails to provide a cogent explanation why these factors mandate characterization of the transactions as loans under California law:
- The intent of the parties: The opinion says a relevant factor is whether the parties intended the arrangement to be a loan and cites Milana v. Credit Disc. Co., 27 Cal. 2d 335 (1945). Milana did not involve a credit sale to a consumer and instead involved a purchase of receivables where the seller had to repurchase from the buyer any receivables that went into default and had to unconditionally guaranty that the buyer would collect all of the receivables it purchased. The transaction in Milana clearly evidenced an attempt to evade usury laws. However, the DBO apparently thought this factor militated in favor of loan classification despite its acknowledgement that the “products are not presented to customers at checkout as loans.”
- Whether the merchant and third party are closely related or have a preexisting relationship: The DBO cites Glaire v. La Lanne-Paris Health Spa, 12 Cal. 3d 915 (1974) for the assertion that a close relationship between the finance company and its merchants, memorialized by a contract that exists before the customer begins a purchase, is indicative of a loan rather than a credit sale. Glaire seems inapposite since it involved two interlocking corporations with common ownership and control and a situation where there were few “cash sales” and the vast majority of the transactions were financed before being sold at a substantial undisclosed discount. Regarding this factor, the DBO fails to address that 1. the leading California and most recent recharacterization case included in its opinion, Boerner v. Colwell Co., 21 Cal.3d 37 (1978), refused to recharacterize credit sales as loans despite the existence of a close preexisting relationship between the seller and the finance company and 2. virtually all credit sale financing programs involve such relationships. Whether the third party assumes the contract at the point of sale or later: The DBO suggests that the seller’s discounted sale of credit sale contracts at the point of sale is indicative of transactions properly classified as loans. However, Glaire, the sole case the DBO cites in support of this conclusion, was inapposite for the reasons discussed above. Additionally, the DBO’s attempt to distinguish Boerner “because the question in that case was whether the usury laws applied” (i.e., whether the transaction was a loan or a credit sale) is weak. Boerner contemplated transactions with contemporaneous assignments to the company underwriting the credit and nonetheless found them to be credit sales rather than loans.
- Whether the third party underwrites the transaction in the manner of underwriting a loan: The DBO states that when a third party provides the contract and evaluates the creditworthiness of the customer, such conduct indicates the transaction is a loan. It only cites a 1946 Attorney General Opinion but acknowledges that the California Supreme Court subsequently reached a contrary result in Boerner. Whether the transaction would be regulated under another law: Finally, the DBO states that the application of another statutory scheme to the transactions would be a factor weighing in favor of finding the transactions to fall outside the CFL. We take some comfort that the new DBO guidance is likely limited to transactions that would not otherwise be subject to California credit sale laws. However, we note that, once again, the DBO position is in tension with Boerner, where the California Supreme Court did not find it significant that the subject transactions were exempt from both California credit sale and usury laws. Rather than using the unregulated nature of the conduct as a justification for treating the transactions as loans subject to California usury laws, the Court concluded that that the Legislature is free to regulate in this area if it wishes. The DBO also fails to acknowledge that the California Supreme Court held similarly in an even more recent case. Sw. Concrete Prods. v. Gosh Constr. Corp., 51 Cal. 3d 701, 707 (1990) (“[The transaction] is exempt from the usury laws because it was a bona fide credit sale. This is true regardless of whether the Unruh Act applies to the transaction.”)
In summary, the DBO has gone out of its way to classify as loans consumer-friendly transactions structured as credit sales. In doing so, it has injected unnecessary uncertainty into a previously settled area of the law. We hope that the DBO will reconsider its actions or that Sezzle will appeal and overturn the DBO’s license denial.
- Jeremy T. Rosenblum & Michael R. Guerrero
In this podcast, we examine the features of different forms of alternative payments, factors driving consumer demand, contractual and other issues in business transactions involving such payments, including the role of gateways and payment aggregators.
Presented by - Alan S. Kaplinsky, Christopher J. Willis, & Christopher D. Ford
Click here to listen to the podcast.
NMLS Reinstatement Period Now Open Through February 29
The NMLS Reinstatement Period began on January 2, 2020, and will end on February 29, 2020. This period allows individuals and companies that failed to renew their licenses by December 31 to request renewal. However, not all state agencies allow reinstatement. Additional information about relevant deadlines, late fees, and which state agencies participate in reinstatement are available on the State Licensing Annual Renewal webpage of the NMLS Resource Center.
New Jersey Mortgage Servicer License Applies to Holders of Mortgage Servicing Rights
The New Jersey Department of Banking and Insurance recently issued a bulletin to provide guidance relating to the licensing and registration of mortgage servicers under the New Jersey Mortgage Servicers Licensing Act. The bulletin states that all holders of mortgage servicing rights, including holders of master servicing rights, are subject to the Act and are required to obtain a Mortgage Servicer License.
Beginning on January 13, 2020, the Department will begin accepting applications for the Mortgage Servicer License through the NMLS. All mortgage servicers that are not exempt from licensure and that are currently conducting mortgage servicing business in New Jersey must submit an application by April 13, 2020.
Additionally, all entities licensed under the New Jersey Residential Mortgage Lending Act (RMLA) that are currently conducting mortgage servicing business in New Jersey must submit the RMLA-Licensed Mortgage Servicer Registration through the NMLS by April 13, 2020.
- Aileen Ng
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