Legal Alert

Mortgage Banking Update - January 23, 2020

January 23, 2020
In this issue:


Inside the Beltway – Ringing in the Near Year With an Impeachment Trial

What legislative activity can we expect in 2020 in the area of housing finance reform? With the Senate kicking off the New Year with an impeachment trial, it is highly unlikely Congress will make much headway on housing reform in the foreseeable future. The trial started this week and is expected to last at least two weeks and maybe longer. Once it ends—most people anticipate an acquittal due to the GOP Senate majority, it will take some time for members to recover from the bruising partisan fight and turn their sights to more  normal business. In the midst of the turmoil, the country will turn its attention to the Democratic primary kicking off in Iowa on February 3. The heated primaries further cloud prospects of passage of anything besides must-pass legislation. Once Democrats and Republicans reach their nominating conventions in July, the prospect of any substantial bipartisan work being accomplished is close to zero. In sum, the congressional outlook is bleak.

In the meantime, we can expect the Trump administration to continue to lay the groundwork for the GSEs to exit government conservatorship and for Congress, particularly congressional Democrats, to counter with zealous oversight of the GSEs. We saw a glimpse of this activity at the end of 2019 when Mark Calabria, Director of the Federal Housing Finance Agency, announced the agency’s decision to reissue the proposed capital rule to establish a better framework for the GSEs to exit conservatorship. While there was much speculation that this would be the route Calabria would take, so far he has not. The proposed rule could be reissued as early as the first quarter of 2020.

As for congressional oversight, the Democrats on the Senate Banking Committee sent a letter to Treasury Secretary Steven Mnuchin and Director Calabria requesting details, including timing, on the process of ending the GSE conservatorships. The Democratic Senators wrote that they intend to provide proper oversight of the nation’s housing finance system, and underscored the need to know additional details about the administration’s plan. The House Financial Services Committee, chaired by Democrat Maxine Waters, is also expected to stay fully engaged on the issue.

More recently, Director Calabria publicly discussed the possibility of the GSEs operating under a consent decree once they exit government conservatorship, as a way to help ensure a smooth transition while the GSEs continue to build capital. It is not a typical start to a new year in Washington, and with that in mind, we will closely monitor Director Calabria and Secretary Mnuchin’s activities as they guide housing finance reform through the administration.

- Sherry Harper Widicus and Timothy Jenkins

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NYDFS Requires Regulated Institutions to Submit Plans Describing Preparations for LIBOR Transition by Feb. 7

The New York Department of Financial Services has sent a letter to the institutions that it regulates requiring each such institution, by February 7, 2020, to provide to DFS a description of its “plan to address its LIBOR cessation and transition risk.” (LIBOR is the acronym for the London Inter-Bank Offered Rate.)

The letter references the 2017 announcement by the United Kingdom’s Financial Conduct Authority (the regulator that oversees the LIBOR panel) that, by the end of 2021, it will discontinue the index. The letter also references the new index named the Secured Overnight Financing Rate (SOFR) created by the Federal Reserve Board of Governors and the Federal Reserve Bank of New York (FRBNY) in conjunction with the Treasury Department. The FRBNY began publishing the SOFR in April 2018 and the working group convened by the Federal Reserve Board and FRBNY to address the transition from LIBOR has recommended it as a replacement for LIBOR.

In the letter, the NYDFS discusses the types of transactions that will be impacted by the discontinuation of LIBOR, which include consumer loans and residential mortgage loans, and emphasizes the significant risks the discontinuation presents if not appropriately managed. It observes that the transition from LIBOR “requires a significant amount of work, which should have already commenced.” The NYDFS states that, due to such risks, it has issued the letter “to seek assurance that regulated institutions’ boards of directors, or the equivalent governing authorities, and senior management fully understand and have assessed the risks associated with LIBOR cessation, have developed an appropriate plan to manage them, and have initiated actions to facilitate transition.”

Most significantly, the NYDFS states that it “requires that each regulated institution submit a response to the Department describing the institution’s plan to address its LIBOR cessation and transition risk” and lists five items that the plan should describe (emphasis added). The regulated institutions that must submit their plans consist of:

  • Depository institutions (including banks, credit unions and savings associations)
  • Non-depository institutions (including licensed lenders, sales finance companies and premium finance companies, mortgage companies, money transmitters and virtual currency companies)
  • Property insurance companies
  • Health insurance companies
  • Life insurance companies and pension funds

The five items that a plan should describe are:

  • Programs that would identify, measure, monitor and manage all financial and non-financial risks of transition
  • Processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties
  • Processes for communications with customers and counterparties
  • A process and plan for operational readiness, including related accounting, tax, and reporting aspects of such transition
  • The governance framework, including oversight by the board of directors, or the equivalent governing authority, of the regulated institution

Regulated institutions could face similar requirements from the CFPB, federal banking agencies, and/or regulators in other states. The significant risks presented by the transition from LIBOR include safety and soundness risks as well as legal, reputational, and operational risks. As a result, regardless of the need for institutions to provide information to their regulators regarding LIBOR transition plans, the transition demands careful consultation with counsel regarding how best to proceed. We have been working closely with clients to assist them with this process.

- Alan S. Kaplinsky & John L. Culhane, Jr.

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Seventh Circuit Holds Identification of Original and Current Creditor in Debt Collection Letter Did Not Violate FDCPA

The U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s judgment on the pleadings in favor of the defendants (a debt buyer and a collection agency) in a putative class action that alleged the defendants had violated the Fair Debt Collection Practices Act by sending the named plaintiff a collection letter identifying both the original creditor and the debt buyer.

In Dennis v. Niagara Credit Solutions, Inc., the collection letter sent by the collection agency identified the bank that originated the debt as the “original creditor” and the debt buyer that purchased the debt from the bank after the plaintiff’s default as the “current creditor.” The plaintiff claimed that listing two separate entities as “creditor” violated the FDCPA requirement to send the consumer a written notice containing “the name of the creditor to whom the debt is owed.” According to the plaintiff, listing two entities as the “creditor” when “one of them [was] a debt buyer, which would likely be unknown to the consumer—and not explaining the difference between those two creditors, then stating that the [collection agency] was authorized to make settlement offers on behalf of an unknown client—could very likely confuse a significant portion of consumers who received the letter as to whom the debt was then owed.”

The Seventh Circuit affirmed the district court’s entry of judgment on the pleadings in favor of the defendants. It agreed with the district court that the letter could have made the relationships among the parties clearer by spelling out that the debt buyer had purchased the debt from the bank and that the debt buyer was the collection agency’s client. Nevertheless, the Seventh Circuit held that the FDCPA “does not require such a detailed explanation of the transactions leading to the debt collector’s notice” and that “[r]ather, it requires clear identification of the current creditor, and this letter complied.”

- John L. Culhane, Jr.

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CA and NY Governors Propose Expansion of State Consumer Financial Protection Regimes

The governors of California and New York have both proposed to expand the authority of their respective state’s consumer financial services regulator. Both governors have framed their proposals as a response to what they describe as the CFPB’s “rollback” of its efforts to protect consumers.

California. Governor Newsom’s proposals are part of his 2020-2021 proposed budget. His proposals include the following key elements:

  • Enacting a new “California Consumer Protection Law” that would change the name of the Department of Business Oversight to the Department of Financial Protection and Innovation (DFPI) and give the DFPI expanded authority to administer the new law, such as by “expanding the Department’s authority to pursue unlicensed financial service providers not currently subject to regulatory oversight such as debt collectors, credit reporting agencies, and financial technology (fintech) companies, among others.”
  • The DFPI’s activities would include:
    • Offering services to empower and educate consumers, particularly older Americans, students, military service members, and recent immigrants
    • Licensing and examining new industries “that are current under-regulated”
    • Protecting consumers through enforcement against unfair, deceptive, or abusive activities
    • Establishing a new Financial Technology Innovation Office

The budget includes a $10.2 million financial protection fund and 44 positions in 2020-21, growing to $19.3 million and 90 positions in 2022-23, to establish and administer the new law.

New York. Governor Cuomo’s proposals are part of his 2020 State of the State agenda. His proposals include the following key elements:

  • Enacting legislation that would: (1) make state law consistent with federal law by giving state regulators authority to bring enforcement actions for unfair, deceptive, or abusive acts or practices related to consumer financial products or services; (2) make all consumer products and services that are subject to CFPB enforcement authority also subject to state oversight by eliminating current exemptions; (3) increase maximum penalties under the Financial Services Law from $5,000 per violation to the greater of $5,000 or two times the damages or economic gain attributed to the violation; and (4) give the Department of Financial Services (DFS) explicit authority to collect restitution and damages.
  • Enacting legislation that would give the DFS authority to license and regulate debt collectors.
  • Enacting legislation to target robocalls that would (1) require telecommunication providers to block robocalls or be held responsible; (2) require telephone providers to fully implement STIR/SHAKEN protocols for call authentication as soon as possible; (3) make telecom companies that fail to use best efforts to stop robocalls subject to investigation and fines of up to $100,000 per day; and (4) double current maximum fines for violations of the state’s “Do Not Call” law from $11,000 to $22,000 per call.

- Alan S. Kaplinsky

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NYDFS Announces Creation of New Consumer Protection Task Force

The New York Department of Financial Services has announced the creation of a new Consumer Protection Task Force within the NYDFS.

According to the NYDFS press release, the Task Force “will further DFS’s mission to protect consumers as the federal government rolls back important consumer protections’” and one of its first priorities “will be to help DFS build support for and implement the extensive consumer protections proposals included in Governor Cuomo’s 2020 State of the State agenda.” Those proposals include making state law consistent with federal law by giving state regulators authority to bring enforcement actions for unfair, deceptive, or abusive acts or practices related to consumer financial products or services, expanding the consumer products and services subject to state oversight, and giving the NYDFS authority to license and regulate debt collectors.

Task force members are appointed by the NYDFS Superintendent for three-year terms and will serve without compensation. They will provide formal input on the Department’s consumer engagement, policy development, and research. The press release names 12 individuals who will serve as Task Force members, none of whom hold industry positions.

- Alan S. Kaplinsky

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CFPB Files Lawsuit Against Companies and Individuals Involved in Offering Student Debt Relief Services

The CFPB filed a complaint last week in a California federal district court against several companies and individuals involved in offering student loan debt relief services for allegedly obtaining consumer reports unlawfully, charging unlawful advance fees, and engaging in deceptive conduct. (Several companies and individuals are named only as “relief defendants” for having allegedly received funds traceable to the other defendants’ alleged violations.)

The Bureau alleges that the defendants obtained consumer reports in the form of prescreened lists on the pretense that they planned to use the reports to offer mortgage loans to consumers when, in fact, they used the reports to market debt relief services. The Bureau claims that the use of prescreened lists to market such services was not a permissible purpose and therefore violated the FCRA prohibition on obtaining a consumer report without a permissible purpose.

The Bureau also alleges that the defendants engaged in or substantially assisted the following additional violations:

  • Violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA) based on misrepresenting that by consolidating their loans, consumers would obtain interest rate reductions, their credit scores would improve, and the Department of Education would become their new servicer.
  • Violations of the TSR based on obtaining advance fees before the defendants had adjusted to terms of customers’ student loans and customers had made any payments toward their adjusted loans.
  • Violations of the CFPA based on the alleged FCRA and TSR violations.

The Bureau’s complaint seeks an injunction against the defendants, as well as damages, consumer redress, disgorgement, and civil money penalties.

- John L. Culhane, Jr.

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This Week’s Podcast: Update on the CFPB’s Proposed Debt Collection Rule

Our podcast looks at industry and consumer comments and perspectives on key issues, including the proposal’s potential implications for creditors collecting their own debts through UDAAP/UDAP and state collection laws, its approach to electronic communications and “meaningful attorney involvement,” and whether a final rule should address information transfers and file reviews or collecting time-barred debt. We also share our predictions for what a final rule will contain and suggestions for using the proposal to reduce risk in first-party collections.

Click here to listen to the podcast.

Presented by - Alan S. Kaplinsky, Christopher J. Willis, and Stefanie H. Jackman

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CFPB Seeking Applications for Membership on Advisory Groups

The CFPB has published a notice in the Federal Register announcing that it is seeking applications for membership on its Consumer Advisory Board, Community Bank Advisory Council, Credit Union Advisory Council, and Academic Research Council. For an applicant to be considered, the Bureau must receive his or her complete application packet by February 27, 2020.

Specifically, the Bureau is looking for:

  • Experts in consumer protection, community development, consumer finance, fair lending, and civil rights
  • Experts in consumer financial products or services, including consumer reporting, debt collections, and debt relief
  • Representatives of banks and credit unions that primarily serve underserved communities
  • Representatives of communities that have been significantly impacted by higher priced mortgage loans
  • Current employees of credit unions and community banks
  • Economic experts and academics with diverse points of view and who are recognized for their professional achievements and rigorous economic analysis

Last March, the Bureau announced a number of changes to its advisory group charters that became effective in FY 2020. Such changes included extending the membership terms for all groups from one-year terms to staggered two-year terms.

In its notice, the Bureau states that it plans to announce the selection of new members in late summer of this year.

- Barbara S. Mishkin

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Clement Files Brief in Seila Law Defending CFPB’s Constitutionality

Paul Clement, who was appointed amicus curiae by the U.S. Supreme Court to defend the Ninth Circuit’s ruling in Seila Law that the CFPB’s structure is constitutional, filed a brief with the Supreme Court this week in support of the ruling.

As an initial matter, Mr. Clement argues that the Court should deem the dispute over the Bureau’s constitutionality premature because Seila Law has not suffered an injury that is traceable to the constitutionality question. He argues further that even if there was a sufficient connection to satisfy Article III, “prudential considerations would counsel against deciding this most consequential of constitutional issues in this most artificial of postures.” (A similar jurisdiction argument was made in the amicus brief filed by Professor Alan B. Morrison of George Washington University Law School.)

With regard to traceability, Mr. Clement asserts that any connection to the CFPB’s issuance of the CID challenged by Seila Law or the Bureau’s decision to seek court enforcement of the CID has been “severed entirely” by subsequent events, namely that the CID was endorsed by Acting Director Mulvaney who was subject to at-will removal by the President and by Director Kraninger, a Senate-confirmed Director who agrees with the view that she is removable at will. According to Mr. Clement, “Director Kraninger retains the ability to drop this enforcement petition. That she has not done so despite her view that she serves at the pleasure of the President makes crystal clear that the enforcement action that forms the basis of petitioner’s injury has nothing to do with the constitutional issue it asks this Court to decide.”

With regard to prudential considerations, Mr. Clement asserts that “a contested removal is the proper context to address a dispute over the President’s removal authority.” He observes that “here, not only does the President have his own person in the job, but she understands herself to serve at the pleasure of the President. That is not the recipe for a ripe removal dispute.” In addition to asserting that the dispute is unripe, Mr. Clement calls it “entirely theoretical” because “the whole notion that petitioner is victimized by an officer wielding executive power yet insulated from presidential control has been overtaken by events.” Pointing to the Bureau’s change in position regarding its constitutionality, he asserts that “[w]hatever was true when this suit was first filed, the theory of the unitary executive appears alive and well in the Director’s office.”

Mr. Clement argues in the alternative that if the Supreme Court does reach the constitutionality question, it should hold that the Dodd-Frank Act’s “for cause” removal provision is constitutional. He argues that the Constitution gives Congress substantial discretion to structure and organize executive branch departments and agencies, which includes the authority to limit the President’s discretion to remove certain officers. He contends that Supreme Court precedent supports the Bureau’s constitutionality, stating that “every time this Court has confronted a provision that leaves the removal authority with the President, but imposes modest limits on his discretion, the Court has upheld the provision either unanimously or nearly so.”

Responding to the CFPB’s and Seila Law’s attempt to distinguish the Supreme Court’s decision in Humphrey’s Executor that upheld a for-cause removal restriction on members of a multimember agency, Mr. Clement argues that “[n]ot only is that purported distinction unconvincing…but it cuts the wrong way and confirms that the CFPA is constitutional, a fortiori, in light of Humphrey’s Executor. If it is unconstitutional to impose for-cause removal restrictions on one officer exercising executive power, imposing those restrictions on five officers exercising executive power would seem five times worse.” While acknowledging that “Congress has also frequently assigned certain specialized responsibilities to multimember commissions, often with specific partisan-balance requirements,” he asserts that “there is not so much as a hint that Congress chose the multimember and partisan-balance format in an effort to grant the President greater control. To the contrary, the same impetus that caused Congress to want to impose modest removal restrictions to insulate a particular function from unfettered Presidential control led Congress to go further in the direction of insulation by layering multimember and partisan-balance requirements on top of removal restrictions.” (emphasis included).

He also argues that the Court should not overrule Humphrey’s Executor as urged by the CFPB and Seila Law. He calls the case “the cornerstone of the constitutionality of roughly a third of our modern federal government” and asserts that, together with its progeny, it “provide[s] a perfectly workable standard: So long as Congress leaves removal authority with the President, and does not attempt to assign it elsewhere, it may impose modest restrictions on his authority.” He claims that this “basic distinction is easy to apply and harmonizes all of this Court’s removal decisions.”

Mr. Clement concludes his brief by arguing that should the Court have “grave constitutional doubts” about the for-cause removal provision’s constitutionality, it “can and should construe the provision to resolve that doubt in favor of preserving it.” Observing that the “gravamen of the parties’ challenge is that the inefficiency-neglect-or malfeasance standard imposes too much of a restriction on the President’s removal authority,” he asserts that unless “even the slightest restriction on the President’s removal authority crosses some implicit constitutional line,” the standard “can be interpreted to impose only a permissible degree of restraint.” He adds that “in an actual contested removal, the President would be entitled to substantial deference in identifying inefficiency, neglect, or malfeasance.”

Mr. Clement acknowledges that “it is difficult to pinpoint the precise construction of the [removal] standard that would avoid the constitutional issue in this case,” but claims “that is because no Director has been removed for any reason, and the current Director believes she serves at the pleasure of the President.” He asserts that if a CFPB Director is removed some day for a reason that the President deems sufficient but the Director deems insufficient, “there would be ample flexibility in the ‘very broad’ inefficiency-neglect-malfeasance standard to avoid any constitutional difficulty.”

- Alan S. Kaplinsky

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Did You Know?

2020 NMLS Annual Conference & Training: Reminder to Submit Agenda Items to NMLS Ombudsman

For the upcoming 2020 NMLS Annual Conference & Training taking place February 18-21 in San Francisco, individuals are reminded to submit discussion items to the NMLS Ombudsman by Friday, January 24, to be addressed during an open meeting with the NMLS Ombudsman. Conference registration is not required to attend the open meeting; however, individuals who submit requests must attend the meeting to present their issue. Agenda items can be submitted by contacting Additional information on the 2020 NMLS Annual Conference is available here.

- Aileen Ng

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Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

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.

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