Mortgage Banking Update
In This Issue:
- CFPB and CSBS Issue Joint Statement Regarding CARES Act Mortgage Loan Forbearances
- CFPB Proposes Regulation Z Changes to Address Discontinuation of LIBOR Index; Ballard Spahr to Hold July 14 Webinar
- HUD Issues Procedures for Endorsement of Mortgages in a COVID-19 Forbearance
- Fannie Mae Updates Guidance on the Limiting of Servicing Advance Obligations
- VA Temporarily Suspends Property Inspection Requirements for Loans With CARES Act Forbearance
- Ninth Circuit Rules TCPA Prior Express Consent for Autodialed Calls Must Come From Current Subscriber, not Intended Recipient
- New York Senate Bill Grants Expanded Forbearance Relief for Some New York Homeowners
- New York Senate Bill Amends Expanded Forbearance Relief Granted by Previous Bill
- Fannie Mae and Freddie Mac Update Selling FAQs to Address Loans in a COVID-19 Forbearance
- Fannie Mae and Freddie Mac Update COVID-19 Servicing Guidance
- Fannie Mae and Freddie Mac Extend COVID-19 Origination Guidance
- CFPB Issues Updated CHARM Booklet
- This Week’s Podcast: Consumer Protection – What’s Happening at the FTC (Part I), With Special Guests From the FTC
- New York City Amends Debt Collection Regulations to Include Language Proficiency Requirements
- Colorado State Court Rules Federal Interest Rate Preemption for State Bank Loans Does Not Extend to Non-Bank Assignees; Ballard Spahr to Hold June 19 webinar
- The OCC’s Final CRA Rule: What Changed From the Agency’s Proposed Rule?
- Seventh Circuit Rules Debt Collector Entitled to Summary Judgment Where Plaintiff Failed to Produce Evidence That Collection Letter Would be Misleading to “a Substantial Fraction of the Population”
- Updated – States Issue Work-From-Home Guidance for Mortgage Lenders
- Did You Know?
- Looking Ahead
For the latest updates on the Coronavirus pandemic visit the Ballard Spahr Coronavirus Resource Center
The Consumer Financial Protection Bureau (CFPB) and Conference of State Bank Supervisors (CSBS) recently issued a joint statement addressing mortgage loan forbearances under the CARES Act. It appears that the conduct of mortgage industry members regarding forbearances will be a focus of the CFPB and state banking regulators in examinations or otherwise.
In the statement, the CFPB and CSBS first summarize the forbearance provisions of the CARES Act and provide links to guidance that they and other agencies have issued. They then address the permissibility of certain specific actions.
Forbearance Period Shorter Than 180 Days. The CARES Act provides for an initial forbearance period of up to 180 days if a borrower requests a forbearance and affirms a financial hardship due, directly or indirectly, to the COVID-19 emergency. In the joint statement, the CFPB and CSBS refer to the required affirmation as an attestation. The CFPB and CSBS advise that servicers can grant a forbearance term of less than 180 days at the borrower’s request or with the borrower’s consent. Servicers must default to the forbearance term requested by the borrower, not to exceed 180 days, if the servicer and borrower cannot agree on a term, or communication with the requesting borrower is not possible. If the borrower agrees to an initial forbearance term of less than 180 days, the servicer must extend the term unless the borrower agrees to no extension, and no further attestation of financial hardship may be required. The CFPB and CSBS also caution as follows when a servicer implements a forbearance term of less than 180 days with the borrower’s consent: “[T]he servicer’s board of directors and management must provide the additional resources necessary to continue forbearance as required under the CARES Act. In order to be responsive to borrowers and to ensure compliance with law, management should assess its ability to adequately perform under shorter, incremental forbearance periods, including any supplemental systems or human resources needed.”
No Information or Proof From Borrower. The CFPB and CSBS confirm that a servicer may not require any information from a borrower supporting the request for a forbearance, and that borrowers do not need to prove a hardship. However, a servicer may work with a borrower to better understand their situation provided that “(i) borrowers are not misled about the requirements of, or dissuaded from proceeding with, a CARES Act forbearance if they have a COVID-related hardship and (ii) any information obtained from the borrower has no bearing on the servicer’s provision of a CARES Act forbearance.” Although not noted in the joint statement, Fannie Mae and Freddie Mac have developed scripts for discussing forbearance options with borrowers.
Borrower Entitled to Forbearance. For a borrower that meets the conditions for a CARES Act forbearance, the CFPB and CSBS make clear that a servicer may not determine that a borrower does not need a forbearance or limit the amount of the forbearance that is given, regardless of the delinquency status of the borrower.
No Steering of Borrowers Away From a Forbearance. The CFPB and CSBS note that some servicers are steering borrowers away from requesting a forbearance and state as follows: “The CARES Act dictates that forbearance must be granted upon request by an attesting borrower. Examiners will evaluate communications between borrowers and their servicers, including the servicer’s communication of repayment options for legal compliance or resulting consumer harm. A servicer that offers very limited repayment options when others are reasonably available could[,] depending on the facts and circumstances, be at risk of legal violation or causing consumer harm.”
No Discouraging Borrowers From Requesting a Forbearance. Finally, the CFPB and CSBS address the use of loan closing attestations that are designed to discourage borrowers that subsequently experience a COVID-19 related hardship from requesting forbearance: “Examiners will evaluate originator communications with borrowers for legal compliance or causing consumer harm. An originator that misleads a borrower concerning her rights under the CARES Act could, depending on the facts and circumstances, be at risk of committing a legal violation or causing consumer harm.”
CFPB Proposes Regulation Z Changes to Address Discontinuation of LIBOR Index; Ballard Spahr to Hold July 14 Webinar
The CFPB has proposed amendments to Regulation Z to address the discontinuation of the London Inter-Bank Offered Rate (LIBOR) that is currently used by many creditors as the index for calculating the interest rate on credit cards and other variable-rate consumer credit products. In 2017, the United Kingdom’s Financial Conduct Authority, the regulator that oversees the panel of banks on whose submissions LIBOR is based, announced that it would discontinue LIBOR sometime after 2021. Comments on the CFPB’s proposal are due no later than August 4, 2020.
The final rule would take effect on March 15, 2021, except for the revised change-in-term disclosure requirements for home equity lines of credit (which include reverse mortgages structured as open-end credit) (HELOCs) and credit cards that would apply as of October 21, 2021.
On July 14, 2020, from 12:00 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar, “The CFPB’s LIBOR Transition Proposal and Guidance: What You Need To Know.”
The key proposed Regulation Z amendments consist of the following:
Change in index. Regulation Z currently allows HELOC creditors and card issuers to change an index and margin used to set the APR on a variable-rate account under certain conditions when the original index “becomes unavailable” or “is no longer available.” Having made a preliminary determination that all parties would benefit if creditors and issuers could replace a LIBOR index before LIBOR becomes unavailable, the proposal includes a new provision that would allow HELOC creditors and issuers (subject to contractual limitations) to replace a LIBOR index with a replacement index on or after March 15, 2021. (The proposal includes the existing provision, with modification, that allows an index to be replaced when it becomes unavailable.) To do so, the APR calculated using the replacement index must be substantially similar to the APR calculated using the LIBOR index, based on the values of those indices on December 31, 2020. The replacement index must be one that is newly established with no history or an established index with a history. An established index with a history may only be used if the index’s historical fluctuations are substantially similar to those of the LIBOR index. The proposal includes the Bureau’s determinations that (1) the prime rate published in the Wall Street Journal has historical fluctuations substantially similar to the those of the 1- and 3-month U.S. Dollar LIBOR indices, and (2) the spread-adjusted indices based on the Secured Overnight Financing Rate (SOFR) recommended by the Alternative Reference Rates Committee to replace the 1-, 3-, and 6-month and 1-year U.S. Dollar LIBOR indices have historical fluctuations substantially similar to those of the 1-, 3-, and 6-month and 1-year U.S. Dollar LIBOR indices. (The Committee was convened by the Federal Reserve Board and the New York Fed to address the transition from LIBOR.)
Change-in-terms notices. Regulation Z currently does not require HELOC creditors or card issuers to provide a change-in-terms notice when the change involves a reduction of any component of a finance charge or other charge. The proposal would create an exception that requires creditors or issuers, on or after October 1, 2021, to provide a change-in-terms notice when the margin is reduced in conjunction with replacement of a LIBOR index. The change-in-terms notice must disclose the replacement index and new margin. Before October 1, 2021, a creditor or issuer has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index.
Rate increase reviews. Regulation Z currently requires a card issuer, when increasing the rate on a credit card account, to periodically review the increased rate. The proposal would create an exception from this requirement for rate increases that result from the replacement of a LIBOR index. It would also add a provision establishing conditions for how an issuer that was already subject to a periodic review requirement before transitioning from a LIBOR index can terminate that requirement.
Closed-end credit. Regulation Z currently provides that a transaction subject to new disclosures results if a creditor adds a variable-rate feature to closed-end credit product but that a variable-rate feature is not added when a creditor changes the index to one that is “comparable.” The proposal would add new commentary language that provides by way of example that a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction from the 1-, 3-, 6-month or 1-year U.S. Dollar LIBOR index to the spread-adjusted index based on the SOFR recommended by the Alternative Reference Rates Committee to replace the 1-, 3-, 6-month or 1-year U.S. Dollar LIBOR index, respectively, because the replacement index is a comparable index to the corresponding U.S. Dollar LIBOR index. (The new language does not refer to changing the index of a variable-rate transaction from the 1- or 3-month U.S. Dollar LIBOR index to the Wall Street Journal prime rate. However, by referring to a change from a LIBOR index to the spread-adjusted index based on the SOFR as an example of when a creditor does not add a variable-rate feature, the new language leaves open the possibility that a change in index from LIBOR to the WSJ prime rate would similarly not be considered the addition of a variable-rate feature because the Bureau considers the WSJ prime rate to be a comparable index to the corresponding LIBOR index.)
Other issuances. Contemporaneously with the proposed Regulation Z amendments, the CFPB also issued the following items:
- LIBOR Transition FAQs. The CFPB indicates that the FAQs “address regulatory questions where the existing rule is clear on the requirements and already provides necessary alternatives needed for the LIBOR transition.” Among the issues addressed by the FAQs are existing index requirements under Regulation D which implements the Alternative Mortgage Transaction Parity Act.
- Fast Facts: Proposed LIBOR Transition Rule
- Updated Consumer Handbook (CHARM Booklet) on Adjustable-Rate Mortgages. The updated handbook is discussed in a separate blog post.
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On June 4, 2020, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2020-16 to address the endorsement for FHA insurance of mortgage loans in a COVID-19 forbearance. The provisions in the Mortgagee Letter are effective for endorsements submitted on or after June 15, 2020 through November 20, 2020. The provisions apply to all FHA Title II single-family forward mortgage programs, except for non-FHA to FHA cash-out refinance loans.
The Mortgagee Letter provides that a lender may submit an eligible mortgage involving a borrower experiencing a financial hardship due, directly or indirectly, to COVID-19 who has requested or has been granted a forbearance agreement as a result of COVID-19 for insurance endorsement if:
- The borrower has requested forbearance, or the mortgage is subject to a forbearance agreement for one or more payments due to relief provided to borrowers impacted by COVID-19;
- At the time the forbearance was initiated the mortgage was current;
- At the time of the mortgage closing the mortgage satisfied all requirements for FHA insurance; and
- The lender executes a two-year partial indemnification agreement.
Instructions regarding the completion of the indemnification agreement may be found here. Lenders will be required to execute the indemnification agreement in connection with seeking the endorsement of a loan. Details on the submission of the agreement are set forth in the Mortgagee Letter.
FHA Connection (FHAC) is being modified to identify mortgages endorsed under the requirements of the Mortgagee Letter. Applications for insurance where the mortgage is subject to forbearance as indicated in FHAC will be issued a Severe Case warning.
For the required certification on form HUD 92900-A, if the lender is aware of a change in the borrower’s employment status due to COVID-19 after the closing of the loan, the lender may provide a separate addendum to the certification stating that “the executed Mortgagee’s Certification excludes certification of knowledge of the borrower’s employment status as provided in the Form HUD 92900-A, page 4, paragraph (a).”
Upon insurance endorsement, lenders must ensure that any previously provided forbearance complies with, or is converted to comply with, FHA requirements for a COVID-19 forbearance.
HUD welcomes feedback on the Mortgagee Letter from interested parties for 30 calendar days from June 4, 2020.
In a prior alert, we reported that in view of the ability of mortgage loan borrowers to obtain payment forbearances under the CARES Act, the Federal Housing Finance Agency (FHFA) limited the advance obligation of Fannie Mae servicers so that once a mortgage servicer has advanced four months of missed payments on a loan, it will have no further obligation to advance scheduled payments on the loan. In a subsequent alert, we addressed initial Fannie Mae guidance on the limitation, and noted that Fannie Mae would follow up with additional guidance. On June 10, 2020, in Lender Letter 2020-08, Fannie Mae provides the additional guidance. The policy changes are effective for August 2020 remittance activity based on July 2020 reporting activity.
Fannie Mae developed a new investor reporting process for the discontinuance of servicer delinquency advances on eligible scheduled/schedule remittance type mortgages. The process is referred to as the “Stop Delinquency Advance Process.” The Lender Letter includes a chart that details the eligibility criteria for the Stop Delinquency Advance Process.
In the Loan Reporting Cycle in which an eligible loan becomes 120 days delinquent, Fannie Mae will place the loan in a Stop Delinquency Advance Status and place a Loan Stop Advance Status Type and a Loan Stop Advance Start Date on the loan. The Loan Stop Advance Start Date reflects the start date of the Stop Delinquency Advance Process, and is the date from which Fannie Mae will suspend drafting delinquency advances from servicers. Fannie Mae notes that for the initial implementation of the Stop Delinquency Advance Process, there may be eligible loans that are greater than 120 days delinquent and for which servicers have already made more than four months of delinquency advances. Fannie Mae advises that it will not settle-up with servicers on such loans at the time of the initial implementation. Rather, Fannie Mae will reimburse previous advances the earlier of (1) when the mortgage loan goes through a reclass (S/S Swap only) or (2) in accordance with existing reimbursement policies for workout options, including payment deferral.
For loans in a Loan Stop Advance status, servicers must continue to report mortgage loan activity in accordance with the Servicing Guide section C-4.3-01. Servicers must continue to calculate and report the scheduled principal and interest, the last paid installment date, and the actual unpaid principal balance each month. Fannie Mae notes that the scheduled principal and interest reflects the delinquency advance.
Fannie Mae also provides guidance regarding the receipt of a payment on a loan in the Stop Delinquency Advance Process, and exiting the Stop Delinquency Advance Process.
The U.S. Department of Veterans Affairs (VA) issued Loan Guaranty Circular 26-20-21 to announce the temporary suspension of property inspections for loans subject to a CARES Act forbearance.
VA regulations require that a property inspection be performed before the 60th day of delinquency, unless a repayment plan is in place. Under the temporary suspension, property inspections for loans with a CARES Act forbearance are not required if the loan is current or had not reached the 60th day of delinquency when the borrower requested a forbearance. However, inspections still are required for vacant or abandoned properties. The VA notes that through the temporary suspension it “seeks to reduce costly inspections that it believes do not provide enough value to meet the challenges in the current environment.”
Ninth Circuit Rules TCPA Prior Express Consent for Autodialed Calls Must Come From Current Subscriber, not Intended Recipient
The U.S. Court of Appeals for the Ninth Circuit has joined the Seventh and Eleventh Circuits in ruling that the “prior express consent” required by the Telephone Consumer Protection Act (TCPA) for autodialed calls to cellular phones must come from the current subscriber and not the intended recipient of the call.
In N.L. v Credit One Bank, N.A., the plaintiff received collection calls from the bank at his mother’s cellular phone number that had been reassigned to her from an individual who owed money to the bank on his credit card. That individual had given the bank his consent to be called at the reassigned number. The plaintiff sued the bank for the unwanted calls, asserting claims under the TCPA, California’s Rosenthal Act, and California common law for invasion of privacy.
The TCPA prohibits non-emergency autodialed calls to cellular phones unless made “with the prior express consent of the called party.” The bank had argued that the “called party” should be interpreted to mean the person who the bank intended to call rather than the person it actually called. Rejecting that position, the district court instructed the jury that the TCPA requires the consent of the current subscriber or the nonsubscriber who is a customary user of the called phone. The jury returned a verdict for the plaintiff on his TCPA claim, resulting in $500 in statutory damages for each of 189 collection calls, for a total of $94,500. While it also found for the plaintiff on his Rosenthal Act claim, the jury found for the bank on the plaintiff’s invasion of privacy claim.
In holding that the district court’s instruction complied with the TCPA, the Ninth Circuit relied on “the language of the TCPA itself.” Observing that the prohibition does not reference the “intended recipient” of the calls, the court stated that the bank’s argument “starts off in the backseat, for there is no obvious statutory text on which to ground an ‘intended recipient’ interpretation.” The court looked at other uses of the term “called party” in the TCPA and found that they “confirm[ed] that [the bank’s “intended recipient”] interpretation is not the best one.”
The Ninth Circuit also noted that the FCC has interpreted the term “called party” to mean the current subscriber rather than the intended recipient and that in ACA International v. FCC, the D.C. Circuit found that the Seventh and Eleventh Circuits’ decisions provided support for the FCC’s interpretation. In 2018, the FCC issued a notice announcing that it was seeking comments on several TCPA issues following the D. C. Circuit’s ACA International decision, including on how to interpret the term “called party” for calls to reassigned numbers.
On June 5, 2020, New York Senate Bill S8243C was delivered to Governor Andrew Cuomo and, if signed, will be effective immediately. The bill provides for expanded COVID-19 forbearance relief options dating back to March 7, 2020, and until “the date on which none of the provisions that closed or otherwise restricted public or private businesses or places of public accommodation, or required postponement or cancellation of all non-essential gatherings of individuals of any size for any reason” by Executive order as may be extended in the future, “in response to the COVID-19 pandemic continue to apply in the county of the mortgagor’s residence” (the “covered period”).
The forbearance relief is available to borrowers who reside in New York and whose primary residence, including shares of a cooperative unit, are encumbered by a home loan, as defined by New York law, originated or serviced by a New York regulated institution (qualified mortgagor). These relief options will not apply to mortgages made, insured, or securitized by any federal agency, the GSEs, or a federal home loan bank, or to “the rights and obligations of any lender, issuer, servicer or trustee of such obligations,” including servicers for GNMA. This carve out from coverage appears to be designed to exclude CARES Act covered loans from coverage by the New York legislation.
During the covered period, New York regulated institutions must make applications for forbearance “widely available” to any qualified mortgagor who “is in arrears or on a trial period plan, or who has applied for loss mitigation and demonstrates financial hardship.” The forbearance can be backdated to March 7, 2020, and shall be granted for a period of 180 days, with an option to extend for an additional 180 days.
The bill provides for three options to be made available with regard to any mortgage forbearance granted by a regulated institution to a qualified mortgagor pursuant to the bill, Executive Order 202.9, “or any other law, rule or regulation” as a result of financial hardship. Those options are:
1. To extend the term of the loan for the length of the forbearance period, waiving interest on the principal for the term of the forbearance and waiving any late fees accumulated as a result of the forbearance.
2. To have the arrears accumulated during the forbearance period payable on a monthly basis for the remaining term of the loan without being subject to penalties or late fees incurred as a result of the forbearance.
3. If the mortgagor is unable to make mortgage payments as a result of a demonstrated hardship, and a mutually acceptable loan modification cannot be reached, to defer the arrears accumulated during forbearance as a non-interest bearing balloon payment due and payable upon maturity of the mortgage, refinance of the mortgage, or upon sale of the property. Again, late fees accumulated as a result of the forbearance would be waived.
Regulated institutions are prohibited from negative reporting to any credit bureau resulting from a qualified mortgagor exercising any of the options outlined in the bill. Additionally, compliance with the provisions of the new bill are conditions “precedent to commencing a foreclosure action stemming from missed payments which would have otherwise been” subject to the legislation and violations may be used as a defense to foreclosure.
Compliance by servicers will be essential in both the short and long term. Failure to comply, in the short term could subject New York regulated institutions to regulatory and exam scrutiny, and in the long term, risk efficient and successfully foreclosure actions.
As noted in our alert on June 9, 2020, New York Senate Bill S8243C was delivered to the Governor on June 5, 2020. The same day, New York Senate Bill S8428 was also delivered to Governor Andrew Cuomo. If signed, Senate Bill S8243C will add a new Section 9-x of the Banking Law of New York and Part C of Senate Bill S8428 will amend that new section. Senate Bill S8243C will be effective immediately and Senate Bill S8428 will be effective “on the same date and in the same manner” as S8243C. These bills are legislative expansions on the previously issued Executive Order 202.0 and emergency regulation 3 NYCRR Part 199 related to COVID-19 financial hardship and mortgage loan forbearance options. Our March 26, 2020 alert summarizes the emergency regulation.
NY Senate Bill S8428 amends new Section 9-x of the Banking Law, established by Senate Bill S8243C, in several key ways.
First, it amends the definition of a “qualified mortgagor,” by removing the requirement that the individual reside in New York with their “principal dwelling” in New York, and replacing it with the requirement that the individual’s “primary residence” must be in New York. Additionally, the demonstration of a financial hardship as a result of COVID-19 during the covered period is moved into the definition of a qualified mortgagor.
The Senate Bill S8243C carve out from coverage that appears to be designed to exclude CARES Act covered loans from coverage by the New York legislation was also amended slightly. The original carve out from the relief options included mortgage loans “made, insured or securitized” by any federal agency, the GSEs, or a federal home loan bank, or to “the rights and obligations of any lender, issuer, servicer or trustee of such obligations,” including servicers for GNMA. Senate Bill S8428 modifies the carve out in two respects by adding (1) “a corporate governmental agency of the state constituted as a political subdivision and public benefit corporation” to the list of entities, and (2) loans “purchased” by any of the listed entities.
Senate Bill S8428 amends the grant of forbearance section of 9-x of the Banking Law to require “all monthly payments due” be included in the initial 180 day forbearance period and subjects the ability of a qualified mortgagor to obtain an additional forbearance period to demonstrating a continuing financial hardship. Additionally, if the qualified mortgagor had already received a forbearance pursuant to Executive Order 202.9, the total forbearance period would include the period of the forbearance already received under the Executive Order. The Senate Bill also removes the requirement that the mortgagor be in arrears, on a trial period plan or have applied for loss mitigation.
Senate Bill S8243C provided for three options to be made available with regard to any mortgage forbearance granted by a regulated institution to a qualified mortgagor pursuant to the bill, Executive Order 202.9, “or any other law, rule or regulation” as a result of financial hardship. Senate Bill S8428 adds a fourth option, to negotiate a “loan modification or other option that meets the changed circumstances of the qualified mortgagor.” Additionally, Senate Bill S8428 replaces the reference to “any other law, rule or regulation” with a reference to “3 NYCRR Part 199,” which are emergency rules adopted to implement Executive Order 202.9.
Finally, Senate Bill S8243C subjected the obligation of a regulated institution to include in the options offered to a qualified mortgagor an option to defer the arrearages in the form of an interest free balloon loan to the option being consistent with the safety and soundness of the institution, Senate Bill S8428 removes the safety and soundness element with respect to the option and adds an overall safety and soundness provision. Under the safety and soundness provision, the obligation of a regulated institution to grant forbearance relief is subject to the regulated institution “having sufficient capital and liquidity to meet its obligations and to operate in a safe and sound matter.” Should a regulated institution determine that it cannot offer relief and otherwise operate in a safe and sound manner, it must notify the New York Department of Financial Services within five business days, including specific information surrounding that determination. At the same time, the regulated institution must notify the qualified mortgagor that the application for relief was denied and provide a statement and contact information for complaints to the New York Department of Financial Services.
Although the scope of potentially covered loans is narrowed by Senate Bill S8428, should both bills be signed by the governor, compliance by servicers will remain essential in both the short and long term. Failure to comply, in the short term could subject New York regulated institutions to regulatory and exam scrutiny, and in the long term, pose risks to efficient and successful foreclosure actions.
In their original announcements, Fannie Mae and Freddie Mac indicated that, subject to specified requirements, beginning May 1, 2020, they would purchase loans for which the borrower was approved for a forbearance plan based on a COVID-19 related financial hardship that occurred after the note date. One of the conditions is that the seller pay a loan level price adjustment (LLPA) of 500 basis points for a first time homebuyer and 700 basis points for all other borrowers.
Fannie Mae and Freddie Mac address the result if a seller delivered a mortgage loan that did not meet the requirements for the sale of a loan in forbearance.
- If the loan meets all of the eligibility requirements, except that it was delivered or settled before May 1, 2020, the seller has the option to repurchase the loan or pay the loan level price adjustment.
- If the loan does not meet the note date, loan purpose, or pay history requirements and was delivered or settled prior to May 1, 2020, the seller must repurchase the loan.
- If the loan does not meet the note date, loan purpose, or pay history requirements and was delivered or settled on or after May 1, 2020, the seller must repurchase the loan
For loans in the first category, whichever election the seller makes applies to all loans in the category sold to either Fannie Mae or Freddie Mac. So a lender cannot choose (1) the LLPA option for one loan and the repurchase option for another loan, or (2) the LLPA option for loans sold to Fannie Mae and the repurchase option for loans sold to Freddie Mac (or vice versa). If a seller did not self-report a loan sold to Fannie Mae or Freddie Mac as being in forbearance based on a COVID-19 related financial hardship that occurred after the note date, and Fannie Mae or Freddie Mac discover that the loan is in the first category, the election made by the seller applies to such loan as well.
When a seller elects the repurchase option for a loan in the first category, the repurchase price will include the applicable premium recapture amount and indemnification for losses arising from investor claims for prepayment. When a seller elects the LLPA option for a loan in the first category and Fannie Mae or Freddie Mac find other significant defects with the loan, this could result in a repurchase request.
On June 10, 2020 Fannie Mae in Lender Letter 2020-09 and Freddie Mac in Bulletin 2020-21 announced the servicer incentive for their previously announced COVID-19 payment deferral, and temporary updates to other servicer incentives. Freddie Mac also provides guidance on Home Affordable Modification Program (HAMP) good standing for a COVID-19 impacted borrower, and late notices/payment reminder letters. Fannie Mae addresses these points in updates to Lender Letters 2020-02 and 2020-07.
The new incentive structure is effective July 1, 2020, with additional details specified in the guidance. For the COVID-19 payment deferral and standard payment deferral, the servicer incentive is $500. The incentive for a repayment plan is also $500, and Fannie Mae specifies various conditions. For a Flex Modification the servicer incentive is $1,000. Servicer total incentives per mortgage loan will be capped at $1,000. However, workout options in process before the effective date of the new incentives will not be subject to the cumulative incentive cap. Fannie Mae provides examples of the incentive cap in an Appendix to Lender Letter 2020-09. Fannie Mae also issued an updated version of Lender Letter 2020-05 to reflect the incentive fee for a payment deferral.
Both Fannie Mae and Freddie Mac provide an updated version of the COVID-19 payment deferral agreement—Fannie Mae through a link in updated Lender Letter 2020-07 and Freddie Mac in an attachment to Bulletin 2020-21.
With regard to HAMP, Fannie Mae advises that if the mortgage loan was previously modified pursuant to a HAMP modification under which the borrower remains in “good standing,” then the mortgage loan will not lose good standing and the borrower will not lose any “pay for performance” incentives in the following circumstances:
- The borrower was on a COVID-19 related forbearance plan immediately preceding the COVID-19 payment deferral; or
- The borrower has a COVID-19 related hardship and the mortgage loan is fewer than 90 days delinquent.
Freddie Mac summarizes the HAMP good standing guidance that it provided in Bulletin 2020-16, and then advises it is further clarifying that if a borrower with a COVID-19 related hardship was not on a forbearance plan, but is fewer than 90 days delinquent and has not lost good standing upon entering into a COVID-19 payment deferral, the borrower will retain good standing.
Fannie Mae and Freddie Mac advise that servicers are authorized not to send a payment reminder notice to the borrower during an active forbearance plan term, and that this authorization applies to active forbearance plans without regard to whether the borrower’s monthly payment is reduced or suspended during the forbearance plan term. The Freddie Mac guidance also specifically refers to late notices.
In Bulletin 2020-21, Freddie Mac notes that it is updating Workout Prospector® to modify how it calculates delinquent interest for the processing of the payment deferral and the Flex Modification in the automated fields. While Freddie Mac is in the process of updating Workout Prospector to reflect the edits, it reminds servicers to in the meantime adjust the automated fields to adhere to applicable law. Freddie Mac also addresses continued solicitation requirements for a Flex Modification.
Eligibility for Sale of Loans in a COVID-19 Forbearance. In April 2020, Fannie Mae and Freddie Mac announced the temporary eligibility for sale of mortgage loans in a COVID-19 forbearance. The temporary eligibility applied to loans with a note date on or after February 1, 2020, and on or before May 31, 2020. In May 2020, Fannie Mae and Freddie Mac extended the eligible note date until June 30, 2020, and Freddie Mac subsequently modified the guidance on an unrelated point. In the recent announcements, Fannie Mae and Freddie Mac extend the eligible note date until July 31, 2020. They also updated the applicable delivery and settlement dates.
Credit Underwriting Policies. Various temporary origination policies based on COVID-19 – including age of documentation requirements, employment verification, requirements for borrowers using self-employment income, requirements for borrowers using market-based assets, and the ability to use powers of attorney for closings – are extended by Fannie Mae and Freddie Mac to apply through July 31, 2020 (the prior date was June 30, 2020). The policies previously were announced by Fannie Mae in Lender Letters 2020-03 and 2020-06 (and updates to the Lender Letters), and by Freddie Mac in Bulletins 2020-5 and 2020-8. Information on the prior announcements are available here, here, and here.
Appraisals. With regard to the previously announced temporary appraisal flexibility in view of the difficulty of performing appraisals based on COVID-19, Fannie Mae and Freddie Mac extend the availability of such flexibility to apply to notes with application dates on or before July 31, 2020 (the prior date was June 30, 2020).
The CFPB recently announced the availability of an updated Consumer Handbook on Adjustable Rate Mortgages, often referred to as the “CHARM booklet.” The Federal Register notice regarding the public availability of the updated booklet is available here.
The biggest difference in the updated booklet is its size. The prior version issued in 2014 is 41 pages, while the updated version is a slender 13 pages. The CFPB explains that the booklet was updated “so that it aligns with the Bureau’s educational efforts, to be more concise, and to improve readability and usability.” The format of the updated booklet is designed to have the same look and feel as the Your Home Loan Toolkit guide, which the CFPB updated in connection with the TILA/RESPA Integrated Disclosure (TRID) rule.
The updated booklet reflects the Loan Estimate under the TRID rule, with a focus on interest rate and payment adjustment disclosures for an adjustable rate mortgage loan. References to LIBOR were removed from the booklet, and there are no references to the Secured Overnight Financing Rate, the likely replacement index for LIBOR for many lenders.
Creditors may elect to continue to provide the prior version of the CHARM booklet until their supply is exhausted, and then should use the updated version. Alternatively, creditors may opt to begin to use the updated version immediately.
This Week’s Podcast: Consumer Protection – What’s Happening at the FTC (Part I), With Special Guests From the FTC
In Part I of our two-part podcast, we discuss the following topics with Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, and Malini Mithal, Associate Director of the FTC’s Division of Financial Practices: the FTC’s response to COVID-19, important recent FTC enforcement actions and priorities going forward, Director Smith’s recent blog post on using artificial intelligence and algorithms, and recent FTC activity involving fintech and small business lending.
Click here to listen to the podcast.
New debt collection rules creating requirements relating to consumers’ language proficiency are set to take effect in New York City on June 27, 2020. The new rules amend NYC’s existing debt collection regulations applicable to creditors collecting their own debts as well as third-party collection agencies. Accordingly, the new rules appear to have implications for creditors and debt collectors alike with respect to any collection activities involving NYC consumers.
Specifically, the new rules require “debt collectors” (defined to include both creditors and collection agencies) to request, record, and retain, to the extent reasonably possible, a record of the language preference of each consumer from whom the debt collector attempts to collect a debt. Failure to request and record this information after the institution of debt collection procedures will be considered an unfair or unconscionable means to collect or attempt to collect a debt under the rules. The rules also require debt collection agencies to furnish a report at least annually to the Department of Consumer Affairs (DCA) identifying (1) by language, the number of consumer accounts on which an employee of the collector attempted to collect a debt in a language other than English, and (2) the number of employees that attempted to collect on such accounts. This reporting requirement appears to apply only to third-party debt collection agencies (and not creditors), as defined under NYC’s collection regulations.
Regarding language access services, the new rules require debt collectors (again, both creditors and collection agencies) to include in any initial collection notice and on any public-facing websites maintained by the debt collector, information regarding the availability of any language access services provided by the debt collector and a statement that a translation and description of commonly-used debt collection terms is available in multiple languages on the DCA’s website. Additionally, the new rules prohibit debt collectors from (1) providing false, inaccurate, or incomplete translations of any communication to a consumer in the course of attempting to collect a debt when the debt collector provides translation services, and (2) misrepresenting or omitting a consumer’s language preference when returning, selling, or referring for litigation any consumer account, where the debt collector is aware of such preference.
The DCA announced that it was proposing the rule changes in a March 5, 2020 press release, at which time it also announced the opening of a comment period that would expire on April 10, 2020. The press release also announced that a hearing on the proposed rule changes would take place on April 10, 2020. No comments were received and given that NYC was in the midst of a complete lock down in April due to the COVID-19 pandemic, it is unclear if anyone attended the hearing.
On June 11, 2020, several industry trade associations, including Receivables Management Association International, National Creditors Bar Association, New York State Creditors Bar Association, ACA International, and New York State Collectors Association, sent a letter to DCA Commissioner Salas expressing concern about the new rules. The letter objects to the timing of the publication and adoption of the rules given the global pandemic and requests that the DCA postpone the effective date of the rules until three months after the publication of a final rule following an abbreviated reopened comment period to solicit industry and public comments.
The letter also enumerates several areas of concern that require clarification, including:
- Can English be inferred to be a consumer’s preferred language if the debt collector is able to have a conversation in English and the consumer is responding in English?
- If the consumer has more than one language preference, which should be recorded?
- How would a debt collector be able to record a language preference for a consumer who responds to the debt collector’s request for their language preference in a language the debt collector does not speak?
- Will the annual reports be made public on the DCA’s website?
- What is the standard for determining whether a translation is “false, inaccurate, or partial”?
- Does the prohibition against false, inaccurate, or partial translations apply only to communications originally made in English, or does it apply when the communication is in another language in the first instance?
- Regarding the disclosures on public websites, what is considered “clearly and conspicuously”?
In addition to the concerns raised in the trade associations’ letter, it is also unclear whether debt collectors must offer language access support under these new rules, and if so, to what extent. The new rules related to the disclosure of language access services and prohibitions of certain conduct related to those services do not specify whether those services are required. Nor do the rules make clear whether and to what extent collections can continue after a debt collector learns that a consumer has a language preference other than English if the debt collector does not offer services in that language. Can collections continue? Or will the DCA take the position that doing so is unfair or misleading in some way? Is the debt collector’s required disclosure relating to the language resources provided by the DCA sufficient to allow collections to continue?
Hopefully, the DCA will offer further guidance on these (and the many other) questions that arise as a result of the new rules in order to enable those engaged in collection efforts involving NYC consumers to ensure they are able to do so in a compliant way.
Colorado State Court Rules Federal Interest Rate Preemption for State Bank Loans Does Not Extend to Non-Bank Assignees; Ballard Spahr to Hold June 19 webinar
A Colorado state district court has ruled that a non-bank assignee of loans made by a state bank cannot charge the same interest rate that the state bank assignor can charge under Section 27(a) of the Federal Deposit Insurance Act (12 U.S.C. § 1831d(a)).
The ruling in Martha Fulford, Administrator, Uniform Consumer Credit Code v. Marlette Funding, LLC et al, arises from an enforcement action filed in 2017 by Colorado’s UCCC Administrator challenging a bank-model lending program involving a New Jersey state-chartered bank. The Administrator asserted that the bank was not the “true lender” for loans originated in the program and that, under the Second Circuit’s decision in Madden v. Midland Funding, the bank’s power to export interest rates under federal law did not follow the loans it assigned to its non-bank partner. For these reasons, the Administrator contended that the loans were subject to Colorado usury laws despite the fact that state interest rate limits on state bank loans are preempted by Section 27. The case was removed to federal court by the non-bank partner and subsequently remanded. (An identical enforcement action filed by the Administrator in connection with another bank-model lending program is still pending.)
In ruling on the Administrator’s Motion for Determination of Law on Statutory Interpretation of Section 27, the Colorado court noted that the Administrator had previously filed a Motion for Partial Summary Judgment in which she maintained her argument that the bank was not the “true lender” and that the non-bank partner was the originating lender. However, for purposes of her Motion for Determination of Law, the Administrator argued that even if the bank was the “true lender,” it could not transfer its interest rate authority under Section 27 to the non-bank partner.
Section 27, which applies to state banks, is patterned after Section 85 of the National Bank Act, which applies to national banks. Sections 27 and 85 allow banks to export to out-of-state borrowers the interest rate permitted by the state in which they are located to the state’s most favored lender, regardless of any contrary laws of the borrowers’ states.
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. In the Colorado case, the court noted that Section 27 only refers to banks but makes no reference to non-bank entities. It found the Second Circuit’s analysis of Section 85 in Madden “to be persuasive and applicable to this matter and analysis of Section 27.” It rejected the argument that Section 27 should be construed in light of the valid-when-made doctrine because, in the court’s view, “Section 27 is clear that it applies to banks, and therefore, resort to interpretive rules of statutory construction is unnecessary.” Its “analysis” was cursory.
Although the Colorado court’s decision was issued on June 9, the decision shows no awareness that several days earlier, on May 29, the OCC had issued a final rule that rejects the Second Circuit’s analysis in Madden and codifies the OCC’s interpretation of Section 85 that the assignee of a loan made by a national bank can charge the same interest rate that the bank is authorized to charge under federal law. Rather, the decision acknowledges that both the OCC and FDIC had issued proposals rejecting Madden. It stated: “While the Court accepts that these federal agencies are entitled to some deference, the fact is that the rule proposals are not yet law and the Court is not obligated to follow those proposals.” (The FDIC has not yet acted on its proposal.)
Conceivably, the Colorado court would have ruled differently had it been aware of the final OCC rule (if, indeed, it was really unaware). Nevertheless, it is surprising that the Colorado court was willing to ignore the views of the OCC and FDIC expressed in their proposals, given that they are the agencies charged with interpreting the relevant federal law provisions. Under the Supreme Court’s leading Chevron decision, agency views are entitled to deference when a statute is ambiguous or silent on an issue. Indeed, the U. S. Supreme Court previously held, in Smiley v. Citibank, 517 U.S. 735 (1996), that an OCC regulation interpreting Section 85 is entitled to deference.
The OCC’s final rule and the FDIC’s proposal rest on the agencies’ considered judgment that the authority of a bank to make and transfer loans carries with it the right of the assignee to charge a usury-exempted rate pursuant to Section 85 or Section 27. In addition, contrary to the view expressed by the Colorado court, the valid-when-made doctrine does have a role in the proper interpretation of Section 85 and Section 27. As both agencies have noted, the doctrine, which provides that a loan that is non-usurious at origination does not subsequently become usurious when assigned, is a tenet of common law that informs how Section 85 and Section 27 should reasonably be interpreted.
On July 20, 2020, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “The OCC’s Final Rule to Undo Madden: An Analysis and A Look Ahead.” Click here for information about topics to be discussed (which will also include the Colorado decision) and to register.
On May 20, 2020, the OCC issued a final rule to “strengthen and modernize” its existing Community Reinvestment Act (“CRA”) regulations. According to the agency’s press release, the final rule is designed to increase CRA-related lending, investment and services in low- and moderate-income (“LMI”) communities where there is significant need for credit, responsible lending, and greater access to banking services. This is the first in a series of five blog posts about the final rule and related topics that we will publish in the next few weeks.
On June 22, 2020, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “The OCC Issues Final CRA Rule – What Changed and What’s Next?” In the webinar, we will be joined by special guest Kenneth H. Thomas, Ph.D., of Community Development Fund Advisors. Click here for more information and to register.
The OCC acted alone in issuing the final CRA rule without waiting to achieve consensus with the FDIC, the agency with which the OCC had jointly issued the proposed rule. It is possible that Comptroller Joseph Otting wanted to see the final rule issued before he stepped down from his position just one week later. In her public statement concerning the OCC’s final CRA rule, FDIC Chairman Jelena McWilliams appeared to indicate she did not want to add to state nonmember banks’ regulatory burdens during COVID-19 by adopting a final CRA rule at this time.
The preamble to the OCC’s final rule states that covered banks “conduct a majority of all CRA activity in the United States.” Specifically, the final CRA rule applies to all national banks and savings associations supervised by the OCC, including federal and state-chartered savings associations, and uninsured federal branches of foreign banks.
The OCC’s proposed rule was generally designed to encourage banks to conduct more CRA activities in the communities they serve, including LMI areas, by clarifying and expanding the lending, investment and service tests. Suggested improvements generally fell into four categories in the proposal: (1) clarifying which bank activities qualify for positive CRA consideration; (2) redefining how banks delineate assessment areas in which they are evaluated based on changes to banking business models over the past 25 years; (3) evaluating bank CRA performance more objectively; and (4) providing more transparent and timely reporting. Importantly, the preamble to the final rule states the OCC’s goal, which is consistent with what the banking industry has sought in CRA reform for decades:
By moving from a system that is primarily subjective to one that is primarily objective and that increases clarity for all banks, CRA ratings will be more reliable, reproducible, and comparable over time. Under the agency’s final rule, the same facts and circumstances will be evaluated in a similar manner regardless of the particular region or particular examiner. CRA activities will be treated in a consistent manner from bank to bank.
The OCC received over 7,500 comment letters in response to its notice of proposed rulemaking (85 Fed. Reg. 1204, Jan. 9, 2020). Based on comments from stakeholders, the OCC made many modifications to the proposed rule. Set forth below are six changes from the proposed rule to the final rule that we would like to highlight:
- Clarifying the importance of the quantity and quality of activities as well as their value.
- The final rule contains an illustrative list of qualifying activities and a process for confirming that a particular activity meets the qualifying activities criteria, which the OCC believes will help improve consistent treatment of qualifying activities by examiners.
- Based on public comments, the OCC made changes to its proposed qualifying activities criteria to emphasize LMI activities in appropriate circumstances and to correct the “inadvertent exclusion” in the proposal of certain activities that qualify for CRA credit under the current framework. An example is clarifying that, under the final rule, “community development investments” will receive the same CRA consideration as “qualified investments” receive under the current rule. Equity equivalent investments that meet the definition of a “community development investment” and one of the qualifying activities criteria will also receive CRA credit as a qualifying investment under the final rule because they add value to LMI communities. Another example is to continue to include consumer loans provided to LMI individuals to incentivize banks to offer such products but removing credit cards and overdraft products from the definition of “consumer loan” to reduce information gathering burden.
- Increasing credit for mortgage origination to promote availability of affordable housing in low- and moderate-income areas.
- In response to public comments, the OCC agreed that CRA credit for affordable housing should remain focused on LMI individual and families and that the proposed inclusion of middle-income rental housing in the affordable housing criterion could divert critical resources from LMI communities. Therefore, the final rule does not include middle-income rental housing in high-cost areas components of the affordable housing criterion or the definition of high-cost area.
- The proposed rule defined home mortgage loans with reference to call reports but generally limited CRA credit to home mortgage loans made to LMI individuals and families to give proper emphasis to LMI lending activities. Specifically, the proposed qualifying activities criteria included home mortgage loans to LMI individuals and families and Indian country borrowers. Although the OCC adopted the qualifying criteria related to home mortgage loans as proposed, it added a geographic distribution test of home mortgage loans in response to public comments to promote lending in LMI census tracts. The OCC also revised its examples in the CRA illustrative list of qualifying activities to clarify that FHA-guaranteed loans to LMI individuals or families will qualify for CRA consideration.
- Clarifying credit for athletic facilities to ensure they benefit and support low and moderate-income communities.
- The proposed rule included an example on the CRA illustrative list of an investment in a qualified opportunity fund established to finance improvements to an athletic stadium in an opportunity zone that is also an LMI census tract. The example proved to be controversial, with commenters expressing concern that the proposal would create a new incentive by giving banks CRA credit for financing athletic facilities. In response to these comments, the OCC noted that banks have received CRA credit for decades by financing athletic facilities that increase opportunities for economically disadvantaged individuals and areas. Nonetheless, the OCC replaced the stadium example with an example that better reflects the type of athletic facilities that have been approved for CRA credit historically. In addition, the agency clarified that it will continue to review and give CRA credit for athletic facilities based on the facts and circumstances of specific projects, either in the context of a CRA evaluation or a request for confirmation that such lending is a qualified activity.
- Deferring establishment of thresholds for grading banks’ CRA performance until the OCC assesses improved data required by the final rule.
- Under the proposed rule, the OCC would have established empirical benchmarks for the average CRA evaluation measure associated with each rating category, thresholds for passing the retail lending distribution tests, and a two percent minimum for community development activities as a percentage of retail domestic deposits. Commenters found these standards unclear and inadequate. The OCC explained that the proposed performance standards were based on analyses of currently available historical data and its use of assumptions to estimate how banks would have performed from 2011-2017 under the proposed framework. However, the agency conceded that the existing data was limited and indicated that it would gather more data and conduct further analysis to calibrate the performance standards for each of the three components of the CRA framework.
- As a result, the final rule does not contain benchmarks for the CRA evaluation measures, a specific community development minimum, or thresholds for the retail lending distribution tests. The OCC intends to issue a near-term notice of proposed rulemaking to solicit public comment on these performance standards and then set specific benchmarks, thresholds and minimums.
- Preserving the intermediate small bank assessment category and raising the small bank asset size threshold.
- The proposed rule had eliminated the intermediate small bank assessment category and created a small bank asset threshold of $500 million. Any bank above $500 million in total assets would have been evaluated under the large bank assessment category. The final rule includes a $600 million threshold for small banks and retains the intermediate small bank category of the current rule for institutions between $600 million and $2.5 billion in total assets.
- Giving CRA credit to legally binding commitments to lend (such as standby letters of credit) that provide credit enhancement for qualifying activities based on the dollar value of the commitment and giving credit for retail loans sold.
- The proposed rule did not provide an institution with CRA credit for legally binding (but unfunded) commitments to lend that otherwise met community reinvestment criteria. The final rule gives credit, for example, to unfunded standby letters of credit issued in connection with a LMI housing development project. Further, except for retail loans sold within 90 days of origination, the proposed rule generally quantified qualifying activities based on average month-end on-balance sheet values. This meant that to receive credit for a qualifying residential mortgage loan, a bank would have had to hold the loan for more than 90 days. The final rule provides that retail loan originations sold at any time within 365 days will receive credit for 100 percent of the origination value. For example, a $100,000 mortgage loan held for 90 days before being sold on the secondary market would receive $100,000 credit for a 12-month period rather than a $25,000 credit for its on-balance sheet period.
The final rule is effective on October 1, 2020. All banks subject to the general performance standards (banks over $2.5 billion in assets) must comply by January 1, 2023, and all small and intermediate banks must comply with the rules’ assessment areas, data collection and recordkeeping requirements (as applicable) by January 1, 2024. Until the compliance date is reached, banks must continue to comply with parts 25 and 195 of the OCC’s regulations (12 C.F.R. parts 25 and 195) that are in effect on September 30, 2020.
The OCC’s “go it alone” approach will certainly set up a dichotomy among the prudential regulators’ CRA rules going forward, and it remains to be seen when (or if) the FDIC will finalize its proposed CRA rule. Our next blog post will address differences among the OCC’s final rule, the FDIC’s proposed rule, and the Federal Reserve’s existing regulations.
Seventh Circuit Rules Debt Collector Entitled to Summary Judgment Where Plaintiff Failed to Produce Evidence That Collection Letter Would be Misleading to “a Substantial Fraction of the Population”
In a recent decision, Johnson v. Enhanced Recovery Company, LLC, the U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s grant of summary judgment in favor of a debt collector based on the plaintiff’s failure to present any evidence beyond her own “speculation” that a debt collection letter was misleading in violation of the FDCPA.
The debt collector had sent the plaintiff a series of collection letters regarding her delinquent debt with her wireless phone carrier. The second letter contained a statement that her “delinquent account may be reported to the national credit bureaus,” three payment options for settling the debt, and a statement that paying the offered settlement amount would stop collection activity. In her lawsuit, the plaintiff alleged the second letter was misleading in violation of FDCPA Section 1692e because (1) the statement that her delinquent account “may be reported” to the national credit bureaus implied future reporting, and by the time she received the letter, the collector had already reported the account, and (2) the statement that paying the offered settlement amount would stop collection activity amounted to a promise by the collector that if she took advantage of the first settlement option and paid by the date indicated, then the collector would not report her debt to the credit bureaus.
The district court denied the collector’s motion to dismiss, noting that whether a communication is misleading is ordinarily a question of fact and, because the plaintiff’s interpretation was plausible, dismissal would be premature. After class certification, however, the district court granted summary judgment for the collector based on the plaintiff’s failure to produce evidence that the language in question would be confusing or misleading to a significant portion of the population.
In affirming the district court’s grant of summary judgment for the collector, the Seventh Circuit evaluated whether the disputed language was misleading from the standpoint of an “unsophisticated debtor.” According to the Seventh Circuit, such a debtor is someone who “is ‘uninformed, naïve,’ and ‘trusting,’ but does possess ‘rudimentary knowledge about the financial world,’ and ‘is wise enough to read collection notices with added care.’…In short, ‘[t]he [FDCPA] protects the unsophisticated debtor, but not the irrational one.’”
The Seventh Circuit then proceeded to apply this standard “by asking whether the disputed language ‘could well confuse a substantial number of recipients.’” It viewed the case as falling into the category of Section 1692e cases “where the debt collection language is not deceptive or misleading on its face but could be construed so as to be confusing or misleading to the unsophisticated consumer.” To prevail in such cases, a plaintiff must produce “extrinsic evidence, such as consumer surveys, tending to show that unsophisticated consumers are in fact confused or misled by the challenged language.”
The plaintiff had argued that no further evidence was needed when a communication has two possible readings, one of which is misleading (i.e., while the phrase “may be reported” could mean the collector has the ability to report the debt, it could also refer to the future possibility that her debt could be reported which, according to the plaintiff was misleading because her debt had already been reported). To support her position, the plaintiff cited cases from other circuits using the “least sophisticated debtor” standard. The Seventh Circuit responded by noting that because it had specifically rejected this standard to assess whether a communication is confusing under the FDCPA, a letter had to be confusing to “‘a significant fraction of the population’” to satisfy the “unsophisticated consumer” standard.
The plaintiff’s next argument was that she did not have to present extrinsic evidence of confusion because the letter’s ambiguity itself was evidence of confusion. In response to this argument, the Seventh Circuit stated that while such a showing might be enough to avoid dismissal for failure to state a claim, the plaintiff had to do more at the summary judgment stage than simply propose a potentially misleading interpretation of the collector’s letter. Specifically, the plaintiff had the burden to show “that language not misleading on its face yet that could plausibly be read in a misleading or deceptive manner would in fact mislead a ‘significant fraction’ of the population.”
In the Seventh Circuit’s view, the plaintiff had not met this burden because she had not produced evidence “beyond her own say so demonstrating the likelihood that an unsophisticated debtor would conclude [that the collector would not report the debt if she paid by the date indicated in the first settlement option].” As a result, the plaintiff “had failed to create a genuine issue as to whether a significant fraction of the population would reach such a conclusion after reading the [second] letter.” Accordingly, the Seventh Circuit ruled that summary judgment for the collector was appropriate because, under Seventh Circuit case law, a plaintiff’s “‘mere speculation’” that a collection letter is misleading is insufficient to survive a debt collector’s summary judgment motion.
In response to the COVID-19 pandemic, state mortgage regulators are daily issuing guidance (1) about whether work from home arrangements are permissible under their existing licensing requirements and/or (2) are granting temporary permission for licenseable activity to occur from unlicensed locations (including employee homes) under specified conditions. Below we identify the states that have issued guidance specifically on this topic. Please note that the scope, duration, conditions and requirements set by the states differ – some even require approval – so please carefully review the state’s guidance set forth at the hyperlink. This is a rapidly changing area so check back regularly for updates and changes.
Mississippi Re-Enacts S.A.F.E. Mortgage Act
Mississippi recently re-enacted the state’s S.A.F.E Mortgage Act, which includes extending and clarifying the time period during which mortgage lenders and mortgage brokers are required to maintain their books, accounts, and records from three years to five years from the final disposition of the loan application.
The reenactment also clarified the type of estimate of costs required to be included in a licensee’s individual borrower files. Instead of the prior “good-faith estimate,” the provision is amended to read “loan estimate” as one such documentation required to be maintained in the licensee’s records.
The re-enacted Mississippi S.A.F.E. Mortgage Act is effective on July 1, 2020.
Applications for New York Reverse Mortgage Lending Dual Authority and Reverse Mortgage (HECM) Lending Authority Now Available on NMLS
The Nationwide Multistate Licensing System & Registry (NMLS) is now accepting new application filings for the following two licenses regulated by the New York State Department of Financial Services (NYDFS): Reverse Mortgage Lending Dual Authority and Reverse Mortgage (HECM) Lending Authority.
The Reverse Mortgage Lending Dual Authority authorizes New York-licensed mortgage bankers to make both proprietary reverse mortgage loans and reverse mortgage loans on 1-4 family residential property under the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM) program.
The Reverse Mortgage (HECM) Lending Authority authorizes New York-licensed mortgage bankers to make only reverse mortgage loans on 1-4 family residential property under the FHA’s HECM program.
Virtual Conference, Online | June 23-24, 2020
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