In This Issue:
- U.S. Supreme Court Seila Law Decision Throws Past CFPB Actions Into Question
- This Week’s Podcast: A Discussion of the U.S. Supreme Court’s Seila Law Decision and Its Implications
- CFPB Ratifies Most Pre-Seila Law Regulatory Actions
- HUD Addresses FHA COVID-19 Loss Mitigation Options
- Federal Agencies Propose Revisions to Interagency Q&As Regarding Flood Insurance
- SCOTUS Rules TCPA Exception for Automated Calls to Collect Government Debts Violates First Amendment but Leaves TCPA’s General Automated Call Restriction in Place
- SCOTUS Agrees to Decide When a Device is an Autodialer Under the TCPA
- VA Addresses CARES Act Forbearance Effect on VA Loan Eligibility
- Fannie Mae and Freddie Mac Further Extend Origination Guidance Based on COVID-19
- Fannie Mae and Freddie Mac Update COVID-19 Selling and Servicing FAQs
- CFPB Proposes to Implement Growth Act Escrow Exemption for Higher-Priced Mortgage Loans
- CFPB Publishes Spring 2020 Rulemaking Agenda
- The Mortgage Bankers Association, the American Land Title Association, and the National Association of Realtors Publish Model Remote Notarization Executive Order
- States Issue Work-From-Home Guidance for Mortgage Lenders
- OCC Previews Plans to Introduce Special Purpose National Bank Charter for Payment Companies
- CFPB Publishes Blog Post on Providing Adverse Action Notices When Using Artificial Intelligence/Machine Learning Models
- Did You Know?
U.S. Supreme Court Seila Law Decision Throws Past CFPB Actions Into Question
In Seila Law v. CFPB, the U.S. Supreme Court held that the structure of the CFPB, with a single-director who the President could not remove without cause, violates the separation of powers mandated by the U.S. Constitution. The decision allows the CFPB to continue to operate but effectively provides that the Director will henceforth be removable by the President at will.
The decision has a number of immediate consequences:
First, it is clear that the President has the authority and power to remove the incumbent CFPB Director and appoint a new director at will. This means that if Joe Biden is elected in 2020, he will not need to wait until the expiration of Director Kraninger’s current term in December 2023 to appoint a director more attuned to his regulatory philosophy.
Second, a principal argument made by the payday lending industry in its Texas federal court lawsuit challenging the CFPB’s Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans has now been conclusively established. Thus, Seila Law provides a strong argument for the industry in its lawsuit against the CFPB and an additional justification for the CFPB to rescind the mandatory underwriting provisions. While rescission of the mandatory underwriting provisions could still be challenged, the CFPB would have a powerful additional defense to any such challenge. Barring an injunction against a rescission of the mandatory underwriting provisions, any future CFPB director inclined to take a different approach to regulating the payday lending industry would almost certainly need to restart the rulemaking process anew.
Of course, in addition to its mandatory underwriting provisions, the Rule also contains payment provisions. In our view, expressed in previous blogs and in letters to the CFPB, these provisions also have serious shortcomings, although Director Kraninger has not (yet) sought to repeal or modify them. Seila Law throws these provisions into question as well. We submit that the safest (and best) course for the CFPB with respect to the payment provisions would be to first reconsider their necessity and advisability. If the CFPB continues to believe they are largely worthwhile, it should initiate a new rule-making to maximize the potential benefits and minimize burdens and technical problems.
Third, while the prepaid rule may be distinguishable from the Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans insofar as the prepaid rule has gone into effect and was adopted by former Acting Director Mulvaney, who was removable by the President without cause, the Seila Law decision has buttressed PayPal’s challenge to the prepaid card rule.
Other consequences of the decision are less clear. Unresolved questions include the following:
- Apart from the prepaid rule, are some or all rules previously adopted by the CFPB at risk or can they be preserved from invalidation by the “de facto officer” doctrine and/or potential ratification by Director Kraninger?
- What impact will the decision have with respect to ongoing rule-making, such as the CFPB’s proposed debt collection regulation?
- What impact will the decision have on the CID issued to Seila Law and other ongoing enforcement proceedings? Can (and will) Director Kraninger simply ratify prior actions taken by her and and/or her predecessors to avoid this issue?
- Can (and will) any financial services companies subject to existing CFPB consent orders and settlements now collaterally attack their consent orders?
- Does the Supreme Court’s decision to sever from the statute the unconstitutional requirement of for-cause termination suggest how it will address any severance questions in other unconstitutional statutes? For example, if the TCPA’s exemption of communications relating to government debt is held to be unconstitutional, which is the issue pending before the Supreme Court in the Barr case and which the litigants all but conceded was the case at oral argument, does Seila Law suggest that the Court is likely to sever the government debt exemption from the larger TCPA or will it require the Court to strike some or all of the statute to avoid further restricting commercial speech?
- How will the decision affect other independent U.S. Government agencies, if at all?
The dust has not yet cleared but consumer financial services and administrative law lawyers throughout the country are certainly pondering these issues.
- Jeremy T. Rosenblum
We are joined by Deepak Gupta, a renowned consumer advocate who has argued multiple cases before the Supreme Court. After reviewing the history of the controversy over the CFPB’s constitutionality, our discussion focuses on the decision’s potential impact on past, ongoing, and future CFPB rulemaking and enforcement activities, including what steps the CFPB may take to preserve or reverse its pre-Seila Law actions, and the decision’s potential significance for other agencies.
Click here to listen to the podcast.
- Presented by Alan S. Kaplinsky & Christopher J. Willis
CFPB Ratifies Most Pre-Seila Law Regulatory Actions
The CFPB has issued a ratification of “the large majority of its existing regulations” and certain other regulatory actions taken from January 4, 2012 through June 30, 2020 (Ratified Actions). The ratification, which was published in the Federal Register, was issued in response to the U.S. Supreme Court’s decision in Seila Law which held that the Dodd-Frank provision that only allows the President to remove the CFPB Director “for cause” violates the separation of powers in the U.S. Constitution.
In its discussion of the ratification, the Bureau states that while it is intended to avoid any doubt as to the validity of the Ratified Actions created by Seila Law, “this ratification is not a statement that the Ratified Actions would have been invalid absent this ratification.” Instead, according to the Bureau, the ratification was issued “out of an abundance of caution.”
The ratification relates back to the original date of each action that it ratifies and covers all of the following regulatory actions during the time period above with the two exceptions indicated:
- All rules and regulations (including amendments to Bureau regulations and regulations issued jointly with other agencies) published in the Federal Register except the Bureau’s 2017 final arbitration rule (which was overridden by Congress pursuant to a joint resolution under the Congressional Review Act that was signed by the President) and the Bureau’s 2017 final payday loan rule. The Bureau has rescinded the payday loan rule’s underwriting provisions and issued a separate document ratifying its payments provisions.
- Consumer information publications issued under Regulation X and Regulation Z
- All FCRA disclosure notices
- Approval under Regulation B of the final redesigned Uniform Residential Loan Application
- EFTA preemption determinations
- Concurrences with the federal banking agencies regarding real estate appraisals
With regard to ratification of other actions, the Bureau states:
The Bureau is considering whether ratifications of certain other legally significant actions by the Bureau, such as pending enforcement actions, are appropriate. Where that is the case, the Bureau is making such ratifications separately. On the other hand, the Bureau does not believe that it is necessary for this ratification to include various previous Bureau actions that have no legal consequences for the public, or enforcement actions that have been finally resolved.
While it was widely anticipated that the Bureau would move quickly to ratify its prior actions following the Supreme Court’s Seila Law decision, questions were raised by commentators about the ratification process, including whether the Bureau could use a “blanket” ratification covering multiple actions or whether the Administrative Procedure Act’s notice-and-comment procedures would apply. Perhaps anticipating those questions, the Bureau’s discussion includes the following statements:
- Director Kraninger “is familiar with the Ratified Actions and has also conducted a further evaluation of them for purposes of this ratification. Accordingly, the Director is making an informed decision to ratify them.” (The Bureau also notes that the Director’s decision to ratify the regulatory actions is reinforced by the significant reliance interests they have engendered, and that the ratification does not foreclose the Bureau from revisiting the Ratified Actions through rulemaking or other initiatives.)
- The APA’s notice-and-comment procedures do not apply by their terms to the ratification because the ratification is neither a “rule” or a “rule making” as defined by the APA.
- Even if APA notice-and-comment procedures were required for the ratification, they were already satisfied by the original rulemaking processes for the Ratified Actions.
- New notice-and-comment procedures would be “impracticable” and “contrary to the public interest” under the APA because of the Bureau’s belief that prompt ratification is important to avoid uncertainty about the status of the Ratified Actions after Seila Law. Such uncertainty, if not promptly addressed, “could have had a deleterious effect on the ongoing operations of the affected markets, given the significant role of the Ratified Actions in these markets.”
Director Kraninger’s limited approach to ratification differs from the all-encompassing approach taken by former Director Cordray. In August 2013, following his Senate confirmation, Mr. Cordray published a notice in the Federal Register that stated:
I believe that the actions I took during the period I was serving as a recess appointee were legally authorized and entirely proper. To avoid any possible uncertainty, however, I hereby affirm and ratify any and all actions I took during that period.
To refresh our readers’ memories, Mr. Corday was initially named Director by President Obama in a recess appointment. In January 2013, the D.C. Circuit ruled in Noel Canning that President Obama had exceeded his constitutional recess appointment authority when he filled three vacancies on the National Labor Relations Board during the same “recess” in which Mr. Cordray’s appointment was made. (The Supreme Court subsequently affirmed the D.C. Circuit’s judgment that the NLRB appointments were invalid.) Since the D.C. Circuit’s decision also called into question the validity of Mr. Cordray’s recess appointment, Mr. Corday was subsequently renominated by President Obama and, in July 2013, he was confirmed by the Senate as CFPB Director.
It is possible Director Kraninger limited her ratification to regulatory actions in order to give the Bureau additional time to review its pending enforcement matters on a case-by-case basis. In Seila Law, the Supreme Court remanded the case to the Ninth Circuit to consider the CFPB’s argument that the civil investigative demand challenged by Seila Law should still be enforced. In November 2016, the Ninth Circuit ruled in CFPB v Chance Edward Gordon that former Director Cordray’s invalid recess appointment did not render the enforcement action against the defendant invalid because his subsequent valid appointment coupled with his notice ratifying the actions he took as Director while serving as a recess appointee cured any initial constitutional deficiencies. The CFPB’s case-by-case review might include an evaluation of whether the Ninth Circuit will again be a favorable forum in which to assert a ratification argument.
As noted above, the discussion accompanying Director Kraninger’s ratification states that “the Bureau does not believe that it is necessary for this ratification to include…enforcement actions that have been finally resolved.” While the Bureau may be correct in its assessment, it could nevertheless face questions regarding the impact of Seila Law on settled or otherwise resolved enforcement matters, particularly given the limited body of case law dealing with ratification and related doctrines such as de facto officer and de facto validity.
- Alan S. Kaplinsky
HUD Addresses FHA COVID-19 Loss Mitigation Options
In Mortgagee Letter 2020-22, dated July 8, 2020, the U.S. Department of Housing and Urban Development (HUD) addresses the COVID-19 Loss Mitigation Options for FHA Title II single-family, forward mortgage loans. The Options are available to borrowers affected by the COVID-19 national emergency who were current or less than 30 days past due as of March 1, 2020. Servicers must offer eligible borrowers the COVID-19 Loss Mitigation Options no later than 90 days from the date of the Mortgagee Letter, but may begin offering the new options immediately.
The Mortgagee Letter updates the guidance in Mortgagee Letter 2020-06 and will be incorporated into HUD Handbook 4000.1. HUD notes that in Mortgagee Letter 2020-06 it announced the COVID-19 forbearance based on the CARES Act and the COVID-19 Standalone Partial Claim. HUD now is building on such measures by establishing the following COVID-19 Home Retention and Disposition Options:
- COVID-19 Owner-Occupant Loan Modification
- COVID-19 Combination Partial Claim and Loan Modification
- COVID-19 FHA-Home Affordable Mortgage Program (FHA-HAMP) Combination Loan Modification and Partial Claim with Reduced Documentation (which may include principal deferment and requires income documentation)
- COVID-19 Non-Occupant Loan Modification
- COVID-19 Pre-Foreclosure Sale (PFS)
- COVID-19 Deed-in-Lieu (DIL) of Foreclosure
The COVID-19 Home Retention options are intended to provide methods to reinstate a mortgage after the expiration of the COVID-19 forbearance period. The COVID-19 Standalone Partial Claim and the first three options listed above are available for eligible owner-occupant borrowers able to resume the monthly mortgage payment, or a modified payment. The COVID-19 Non-Occupant Loan Modification is available for eligible non-occupant borrowers able to resume the monthly mortgage payment, or a modified payment. The use of a COVID-19 Home Retention Option does not count against a borrower’s limit of one FHA-HAMP agreement within 24 months. The last two options—the Home Disposition Options—are available for eligible owner-occupant and non-occupant borrowers who are unable to reinstate the mortgage.
For eligible borrowers, servicers must complete a Loss Mitigation Option no later than 90 days from the earlier of the completion or expiration of the COVID-19 forbearance. For the Home Disposition Options, a signed Agreement to Participate (ATP) Agreement or signed DIL Agreement will meet this requirement.
For borrowers who are participating in a COVID-19 forbearance, servicers are granted an automatic 90-day extension of the first legal deadline date, from the earlier of the completion or expiration of the COVID-19 forbearance, to complete a Loss Mitigation Option or to commence or re-commence foreclosure.
Home Retention Loss Mitigation Options
A trial payment plan is not required for a borrower to be eligible for a COVID-19 Loss Mitigation Option.
COVID-19 Standalone Partial Claim. Borrowers who receive a COVID-19 forbearance must be evaluated for the COVID-19 Standalone Partial Claim no later than the end of the forbearance period. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower indicates that they have the ability to resume making on-time mortgage payments, and (3) the property is owner-occupied. The terms of the COVID-19 Standalone Partial Claim are that:
- The borrower’s accumulated late charges, fees and penalties are waived;
- The COVID-19 Standalone Partial Claim amount includes only arrearages that consist of principal, interest, taxes and insurance;
- The COVID-19 Standalone Partial Claim does not exceed the 30% maximum statutory value of all partial claims for an FHA insured mortgage; and
- The borrower may receive only one permanent COVID-19 Home Retention Option.
COVID-19 Owner-Occupant Loan Modification. For borrowers who do not qualify for a COVID-19 Standalone Partial Claim, the servicer must review the borrower for a COVID-19 Owner-Occupant Loan Modification, which modifies the rate and term of the mortgage at the end of a COVID-19 forbearance period. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower indicates that they have the ability to make the modified mortgage payment, and (3) the property is owner-occupied. The terms of the COVID-19 Owner-Occupant Loan Modification are that:
- All accumulated late charges, fees and penalties must be waived;
- Only arrearages for unpaid accrued interest and servicer advances for escrowed items may be capitalized;
- The COVID-19 Owner-Occupant Loan Modification must fully reinstate the mortgage;
- The modified mortgage, including adjustable rate mortgage loans, graduated payment mortgage loans, and growing equity mortgage loans, must be a fixed rate mortgage;
- The interest rate must be no more than the market rate, as defined by HUD;
- The term for the modified mortgage is 360 months, or less if requested by the borrower;
- The principal and interest payment may not increase, unless the borrower has exhausted the 30% maximum statutory value of all partial claims for an FHA insured mortgage;
- The FHA insured mortgage must remain in a first lien position and be legally enforceable (HUD does not provide model documents for a COVID-19 Loan Modification); and
- The borrower may receive only one permanent COVID-19 Home Retention Option.
HUD defines the “market rate” as a rate that is no more than 25 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for 30-year fixed-rate conforming mortgages (U.S. average), rounded to the nearest one-eighth of 1 percent (0.125 percent), as of the date the loan modification is approved.
COVID-19 Combination Partial Claim and Loan Modification. The servicer must review an owner-occupant borrower for a COVID-19 Combination Partial Claim and Loan Modification if (1) the modified monthly mortgage payment will increase utilizing the COVID-19 Owner-Occupant Loan Modification, and (2) the borrower is unable to bring the mortgage current through the COVID-19 Standalone Partial Claim because (a) the total arrearage exceeds the available portion of the statutory maximum for partial claims and the available portion of the statutory maximum for the mortgage has not been fully exhausted, or (b) the borrower cannot resume their existing monthly mortgage payments with a COVID-19 Standalone Partial Claim. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower has not exceeded the 30% statutory maximum value of all partial claims for an FHA insured mortgage, (3) the borrower indicates that they have the ability to make the modified mortgage payment, and (4) the property is owner-occupied.
The terms of the COVID-19 Combination Partial Claim and Loan Modification are that:
- All accumulated late charges, fees and penalties must be waived;
- Only arrearages for unpaid accrued interest and servicer advances for escrowed items may be capitalized;
- The servicer must determine the maximum partial claim amount available that does not exceed the 30% maximum statutory value of all partial claims for an FHA insured mortgage, and must apply any remaining available partial claim amount toward the arrearage first, and then capitalize the remaining arrearage into the modified mortgage;
- The COVID-19 Combination Partial Claim and Loan Modification must fully reinstate the mortgage;
- The modified mortgage, including adjustable rate mortgage loans, graduated payment mortgage loans, and growing equity mortgage loans, must be a fixed rate mortgage;
- The interest rate must be no more than the market rate, as defined by HUD;
- The term for the modified mortgage is 360 months, or less if requested by the borrower;
- The total monthly mortgage payment may increase;
- The FHA insured mortgage must remain in a first lien position and be legally enforceable (HUD does not provide model documents for a COVID-19 Loan Modification); and
- The borrower may receive only one permanent COVID-19 Home Retention Option.
COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation. A borrower may provide income documentation to a servicer to be reviewed for an affordable monthly payment under a COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation, which may include a principal deferment. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower has not exhausted the 30% statutory maximum value of all partial claims for an FHA insured mortgage, (3) the borrower is not eligible for the COVID-19 Home Retention Options due to the following (a) the borrower is not eligible for the COVID-19 Standalone Partial Claim because the borrower indicates they are unable to resume the existing monthly mortgage payments after the COVID-19 forbearance or (b) the borrower is not eligible for the COVID-19 Combination Partial Claim and Loan Modification because the borrower indicates they are unable to make the modified monthly mortgage payment under the COVID-19 Combination Partial Claim and Loan Modification, and (4) the property is owner-occupied.
The servicer must review the borrower for an affordable monthly payment using the FHA-HAMP calculations in Step 5 of the Loss Mitigation Home Retention Waterfall Options. As noted, if required a principal deferment may be utilized. No portion of the partial claim may be used to bring the modified total monthly mortgage payment below the targeted payment. The following reduced income documentation requirements are acceptable for the review of the borrower:
- The borrower’s most recent pay stub for wage income reflecting year-to-date earnings; or
- The borrower’s most recent bank statement reflecting deposits of income amounts from applicable sources; or
- Other documentation (e.g., monthly statement of Social Security benefits, monthly pension statement) reflecting the amount of income.
COVID-19 Non-Occupant Loan Modification. At the expiration of a COVID-19 forbearance period, the servicer must review non-occupant borrowers for a COVID-19 Non-Occupant Loan Modification, which modifies the rate and term of the mortgage. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower indicates that they have the ability to make the modified mortgage payment, and (3) the property is not owner-occupied (the property can be used as rental property, a second home or a vacation home). The terms of the Non-Occupant Loan Modification are that:
- All accumulated late charges, fees and penalties must be waived;
- Only arrearages for unpaid accrued interest and servicer advances for escrowed items may be capitalized;
- The COVID-19 Non-Occupant Loan Modification must fully reinstate the mortgage;
- The modified mortgage, including adjustable rate mortgage loans, graduated payment mortgage loans, and growing equity mortgage loans, must be a fixed rate mortgage;
- The interest rate must be no more than the market rate, as defined by HUD;
- The term for the modified mortgage is 360 months, or less if requested by the borrower;
- The total monthly mortgage payment may increase;
- The FHA insured mortgage must remain in a first lien position and be legally enforceable (HUD does not provide model documents for a COVID-19 Loan Modification); and
- The borrower may receive only one permanent COVID-19 Home Retention Option.
The Mortgagee Letter also addresses the evaluation of borrowers for a COVID-19 Pre-Foreclosure Sale and COVID-19 Deed-in-Lieu of Foreclosure, and for standard Loss Mitigation Home Retention Options if the borrower does not qualify for the COVID-19 Home Retention or Home Deposition Options. Additionally, the Mortgagee Letter addresses documentation requirements for the Loss Mitigation Options, and reporting requirements for borrowers affected by the COVID-19 national emergency. HUD welcomes feedback on the Mortgagee Letter for 30 days from the date of the letter.
Federal Agencies Propose Revisions to Interagency Q&As Regarding Flood Insurance
Recently, federal agencies proposed revisions to the Interagency Questions and Answers Regarding Flood Insurance. The agencies are the Comptroller of the Currency, Farm Credit Administration, FDIC, Federal Reserve Board, and National Credit Union Administration.
The proposed revisions would (1) revise and reorganize the existing Q&As into new categories by subject to enhance clarity and understanding for users, and (2) introduce new Q&As on the escrow of flood insurance premiums, force placement of flood insurance, and the detached structures exemption. Once finalized, the new Q&As will supersede the 2009 and the 2011 Interagency Questions and Answers, and supplement other guidance or interpretations issued by the agencies relative to loans in areas having special flood hazards. The agencies also announced that they plan to issue separately for notice and comment another set of proposed Q&As relating to the private flood insurance rule adopted by the agencies in 2019. However, the current proposed Q&As address private flood insurance in certain contexts.
As proposed, the Q&As would be divided into the following 17 categories:
- Determining the Applicability of Flood Insurance Requirements for Certain Loans
- Exemptions from the Mandatory Flood Insurance Purchase Requirements
- Coverage – NFIP/Private Flood Insurance
- Required Use of Standard Flood Hazard Determination Form
- Flood Insurance Determination Fees
- Flood Zone Discrepancies
- Notice of Special Flood Hazards and Availability of Federal Disaster Relief
- Determining the Appropriate Amount of Flood Insurance Required
- Flood Insurance Requirements for Construction Loans
- Flood Insurance Requirements for Residential Condominiums and Cooperatives
- Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral Located in an Special Flood Hazard Area
- Requirement to Escrow Flood Insurance Premiums and Fees – General
- Requirement to Escrow Flood Insurance Premiums and Fees – Small Lender Exception
- Requirement to Escrow Flood Insurance Premiums and Fees – Loan Exceptions
- Force Placement of Flood Insurance
- Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights
- Mandatory Civil Money Penalties
Certain topics addressed by the proposed Q&As include the following:
NFIP Temporarily Unavailable. To address the potential for lapses in the authorization for the National Flood Insurance Program (NFIP), a proposed Q&A would provide that during a period when coverage under the NFIP is not available, such as due to a lapse in authorization or in appropriations, lenders may continue to make loans subject to the flood insurance requirements without requiring flood insurance coverage. However, lenders would need to continue to make flood zone determinations, provide timely, complete, and accurate notices to borrowers, and comply with other applicable parts of the flood insurance requirements.
Private Flood Insurance Sufficiency. With regard to private flood insurance, one proposed Q&A would provide that some factors, among others, that a lender could consider in determining whether a private policy provides sufficient protection of a loan may include whether:
- A policy’s deductibles are reasonable based on the borrower’s financial condition;
- The insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force placement of flood insurance, if necessary;
- The terms and conditions of the policy with respect to payment per occurrence or per loss, and aggregate limits are adequate to protect the regulated lending institution’s interest in the collateral;
- The flood insurance policy complies with applicable state insurance laws; and
- The private insurance company has the financial solvency, strength, and ability to satisfy claims.
Effective Date of Flood Insurance. To provide guidance regarding when a flood insurance policy must be effective, a proposed Q&A would provide as follows:
- A lender should use the loan “closing date” to determine the date by which flood insurance must be in place for a designated loan. FEMA deems the “closing date” as the day the ownership of the property transfers to the new owner based on state law.
- “Wet funding” and “dry funding,” which varies by state, refer to when a mortgage is considered officially closed. In a “wet” settlement state, the signing of closing documents, funding, and transfer of title occur all on the same day. By contrast, in a “dry” settlement state, documents are signed on one date, but loan funding and/or transfer of title/recording occur on subsequent date(s). Therefore, in “dry” settlement states, the “closing date” is the date of property transfer, regardless of loan signing or funding date.
- It is also important to note that the application and premium payment for NFIP flood insurance must be provided at or prior to the closing date because this affects the FEMA flood insurance effective date and any resulting 30-day waiting period for new policies not made in connection with a triggering event. This application requirement applies for properties located in both dry and wet settlement states.
Detached Structures. Among several proposed Q&As on the detached structure exemption, one would provide that even if coverage is not required on a detached structure, because a flood hazard determination is often needed to identify the number and types of structures on the property, conducting a flood hazard determination remains necessary for the lender to be able to comply with the flood insurance requirements.
Other Q&As. Among other proposed Q&As, there are Q&As that would address:
- When a lender must require flood insurance in connection with a loan secured by a building in the course of construction.
- The agencies’ expectations regarding a lender’s obligation when there is a discrepancy between the flood determination form and the flood insurance policy.
- That a loan to a cooperative unit owner, secured by the owner’s share in the cooperative, is not a designated loan that is subject to the flood insurance requirements.
- That when a loan is secured by a building located in a special flood hazard area and also the contents of the building, flood insurance is required on the contents regardless of whether the security interest in the contents is perfected.
- That multi-family buildings or mixed-use properties are included in the definition of “residential improved real estate” and therefore are subject to the requirement to escrow for flood insurance premiums unless an exception applies.
- That when a junior lienholder determines that the primary lienholder does not have sufficient flood insurance coverage in place and is also not escrowing for flood insurance, the junior lienholder would need to ensure that adequate flood insurance is in place and also would need to escrow for that flood insurance.
- That construction-to-permanent loans that have a construction phase before the loan converts into permanent financing do not qualify for the 12-month exception from the flood insurance premium escrow requirement, even if one phase of the loan is for 12 months or less.
- That while a lender or servicer may send a force-placement of insurance notice to the borrower prior to the expiration date of the flood insurance policy as a courtesy, the lender or servicer is still required to send notice upon determining that the flood insurance policy actually has lapsed or is insufficient in meeting the statutory requirement.
- That a lender, or a servicer acting on its behalf, may force place insurance and charge the borrower for the cost of premiums and fees incurred by the lender or servicer in purchasing the flood insurance on the borrower’s behalf at any time starting from the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. The lender or servicer would not have to wait 45 days after providing the required notification to the borrower.
Comments on the proposed Q&As will be due 60 days after publication in the Federal Register.
- Richard J. Andreano, Jr.
On July 6, the U.S. Supreme Court ruled in Barr v. American Association of Political Consultants that the Telephone Consumer Protection Act’s exception from its automated call restriction for calls to collect government debts violates the First Amendment of the U.S. Constitution. The Court also decided that the proper remedy for the constitutional violation is to sever the exception from the remainder of the TCPA, thereby making calls to collect government debts subject to the TCPA’s automated call restriction and otherwise leaving the restriction in place for any other calls to which it now applies.
The TCPA generally prohibits sending calls to cellular telephones using an automatic telephone dialing system or that deliver an artificial or prerecorded voice. However, it includes an exception for emergency calls and calls made with the prior express consent of the called party. In 2015, Congress amended the TCPA to create another exception for calls “made solely to collect a debt owed to or guaranteed by the United States.”
As described by Justice Kavanaugh in his opinion announcing the Supreme Court’s decision, the plaintiffs in the case were “political and nonprofit organizations that want to make political robocalls to cell phones.” The plaintiffs argued that the government debt exception violated the First Amendment by favoring debt collection speech over political and other speech. As a remedy for the alleged constitutional violation, the plaintiffs asserted that the TCPA’s entire restriction on automated calls should be invalidated, not just the government debt exception.
A North Carolina federal district court rejected the plaintiffs’ constitutional challenge but the Fourth Circuit vacated the judgment and held that the TCPA’s government debt exception violated the First Amendment. Having concluded that the government debt exception was severable from the underlying automated call restriction, the Fourth Circuit invalidated and severed the exception.
In its petition for a writ of certiorari, the Government argued that because the TCPA exception is directed at communications concerning a discrete type of economic activity (i.e., collecting government debts) and not at the words used in the communications, the Fourth Circuit erred in concluding that the exception was an unconstitutional content-based restriction on speech. The plaintiffs supported the petition but argued that the Fourth Circuit did not go far enough in providing relief and should have invalidated the TCPA’s entire provision restricting automated calls.
Justice Kavanaugh was among the Supreme Court majority that agreed with the Fourth Circuit that the exception was a content-based restriction on speech that violated the First Amendment. He was also among the majority that agreed with the Fourth Circuit that the exception could be severed and the remainder of the law could function independently of the exception. Notably, in his opinion (one of four separate opinions), Justice Kavanaugh wrote: “Americans passionately disagree about many things. But they are largely united in their disdain for robocalls.”
The decision means that calls to collect debts owed or guaranteed by the federal government that are made to cellular phones using an automatic telephone dialing system or an artificial or prerecorded voice will now require the called party’s prior express consent. Accordingly, companies must make sure their operations are TCPA compliant when servicing or collecting government-owned or -guaranteed loans or other obligations, such as mortgage loans and student loans.
Given that the Supreme Court has not provided relief for industry from the TCPA’s automated call restriction, perhaps the FCC will ease industry’s compliance burden through the issuance of long-awaited guidance. 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, such as what constitutes an “automatic telephone dialing system” for purposes of the restriction and whether/how a party can revoke prior express consent to receive automated calls.
- Daniel JT McKenna & Stefanie Jackman
SCOTUS Agrees to Decide When a Device is an Autodialer Under the TCPA
Days after missing the opportunity in Barr v. American Association of Political Consultants to limit the improper impact of the Telephone Consumer Protection Act on legitimate businesses, the U.S. Supreme Court has agreed to tackle the most debated issue in TCPA litigation history. The U.S. Supreme Court has agreed to decide what qualifies as an automatic telephone dialing system (ATDS).
The TCPA defines an ATDS as “equipment which has the capacity—(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” The Ninth Circuit, first in Marks v. Crunch San Diego then in Duguid v. Facebook, Inc., interpreted this definition broadly to include equipment that can automatically dial phone numbers stored in a list. It held the equipment did not need to randomly or sequentially generates those numbers. That decision is at odds with holdings from the Third, Seventh, and Eleventh Circuits.
Yesterday, the Court granted Facebook’s petition for certiorari in Duguid v. Facebook, Inc. The Supreme Court granted certiorari to decide the second question presented in the petition. (The first question raised the First Amendment issue decided in Barr.) The second question asked:
Whether the definition of ATDS in the TCPA encompasses any device that can “store” and “automatically dial” telephone numbers, even if the device does not “use a random or sequential number generator.”
In 2015, FCC Commissioner Pai recognized that “[t]he TCPA has become the poster child for lawsuit abuse.” In 2017, House Judiciary Committee Chairman Bob Goodlatte noted that much of this litigation arises “from a lack of clarity in the law’s application, which is being exploited by attorneys seeking big payouts.”
The Supreme Court will finally give legitimate businesses the much-needed clear guidance they deserve. And if the Court rejects the Ninth Circuit’s elimination of the random or sequential number generator requirement, it will also finally stem the tide of TCPA litigation and align the TCPA with its true purpose.
- Daniel JT McKenna
VA Addresses CARES Act Forbearance Effect on VA Loan Eligibility
In Loan Guaranty Circular 26-20-25, dated June 30, 2020, the U.S. Department of Veterans Affairs (VA) addresses the effect of a CARES Act forbearance, or some other COVID-19 credit relief, on the eligibility of a veteran for a VA purchase money or refinance loan. The guidance is effective immediately and applies to any loan closed on or after the date of the Circular, and will remain in place until further notice or when the Circular is rescinded.
The VA advises that while lenders should continue to follow all applicable authorities regarding VA loans, the “VA is temporarily waiving certain regulatory and policy requirements in an effort to help Veterans and the private sector close essential housing loans.”
Purchase Money and Cash-Out Refinance Loans
The VA states that while lenders must continue to follow VA underwriting standards generally, “lenders should not use a CARES Act forbearance as a reason to deny a Veteran a VA-guaranteed loan.” However, when a Veteran has obtained a CARES Act forbearance, the Veteran, through the lender, must provide reasons for the loan deficiency and information to establish that the cause of the delinquency has been corrected.
The VA will not consider a Veteran an unsatisfactory credit risk “based solely upon the fact that the Veteran received some type of credit forbearance or experienced some type of deferred payment during the COVID-19 national emergency.” The VA advises that while deferred payments may not be considered for credit risk purposes, the lender should consider the monthly obligation if the debt will remain active after the closing of the new VA loan.
Interest Rate Reduction Refinance Loan (IRRRL)
Although IRRRLs generally are not subject to standard VA underwriting requirements, if the loan being refinanced is more than 30 days past due, the Veteran must meet VA underwriting standards and the VA must provide prior approval for the IRRRL. The VA announces in the Circular that it will not require prior approval regardless of the delinquency status of the current loan if:
- The VA has already approved the lender to close loans on an automatic basis;
- The borrower has invoked a CARES Act forbearance relating to the loan being refinanced;
- The borrower has provided information to establish that the borrower is no longer experiencing a financial hardship caused by COVID-19; and
- The borrower qualifies for the IRRRL under specified VA credit standards (the standards set forth in 38 C.F.R. § 36.4340(c) through (j)).
When a borrower seeking an IRRRL has obtained a CARES Act forbearance on the loan being refinanced, for purposes of the maximum loan amount, the IRRRL may include the following:
- Any past due installment payments, including those a borrower deferred under a CARES Act forbearance;
- Allowable late charges, consistent with the note, the CARES Act, and all other applicable laws;
- The cost of any energy efficiency improvements;
- Allowable closing costs and discount points; and
- The VA funding fee.
With regard to the seasoning requirement for the current loan that applies when a Veteran is seeking an IRRRL, any periods of forbearance do not count toward the required seasoning. However, the mere fact that the current loan was subject to a CARES Act forbearance does not cause the loan to fail to meet the seasoning requirement. Pursuant to the Circular, a loan being refinanced is seasoned if both of the following conditions are met as of the date the borrower closes the refinance loan:
- The borrower has made at least six consecutive monthly payments on the loan being refinanced. For example, in a case where a borrower made five consecutive payments before invoking a CARES Act forbearance, such borrower would need to make six additional consecutive payments, post forbearance, in order to meet the seasoning requirement; and
- The date of closing for the refinance loan is 210 or more days after the first payment due date of the loan being refinanced.
With regard to the consideration of a Veteran for an IRRRL and the imposition of fees on the Veteran, the VA makes the following statement: “VA encourages lenders to carefully consider whether an IRRRL is in the best financial interest of a Veteran. VA strongly supports and encourages the fee waivers that many lenders have adopted, including the waiver of origination fees, discount points, and premium pricing offsets, for Veterans affected by COVID-19.”
- Mortgage Banking Group
Fannie Mae and Freddie Mac Further Extend Origination Guidance Based on COVID-19
On July 9, 2020, Fannie Mae in updates to Lender Letters 2020-03 and 2020-04 and Freddie Mac in Bulletin 2020-27 announced the further extension of origination guidance based on COVID-19 (the Freddie Mac action extends the guidance set forth in Bulletins 2020-5, 2020-8 and 2020-11). Previously, Fannie Mae and Freddie Mac announced the extension of the origination guidance to apply to applications received on or before July 31, 2020. The guidance now applies to applications received on or before August 31, 2020.
With regard to self-employed borrowers, Fannie Mae and Freddie Mac provide for further flexibility by permitting the confirmation that the business is open and operating to occur within 20 business days prior to the note date, instead of the previous 10 business day requirement. Fannie Mae also permits the confirmation to occur after closing, but prior to delivery.
- Mortgage Banking Group
Fannie Mae and Freddie Mac Update COVID-19 Selling and Servicing FAQs
On June 30 and July 1, 2020, Fannie Mae and Freddie Mac updated their COVID-19 selling FAQs and servicing FAQs, which can be accessed here: Fannie Mae selling FAQs and servicing FAQs; Freddie Mac selling FAQs and servicing FAQs.
Selling FAQs
In the selling FAQs, Fannie Mae and Freddie Mac address various issues, including assessment of self-employment income and variable or fluctuating income, and how to address a consumer with a gap in employment due to COVID-19.
With regard to the Paycheck Protection Program, Fannie Mae includes the following FAQs, and Freddie Mac has similar FAQs:
- If loan proceeds from a PPP are reflected in the business depository accounts, can these funds be used to support the business revenue reported on the year-to-date profit and loss statement?
- No. An SBA PPP or any other similar COVID-19 related loan or grant is not considered a source of business revenue.
- Is it acceptable to exclude the payroll and other expenses (e.g., utilities, business rent) covered by PPP loan proceeds when assessing current business cash flow?
- No. An SBA PPP or any other similar COVID-19 related loans are designed to provide short-term relief whereas the payroll, rent/mortgage payments and utilities are ongoing business expenses; therefore, those expenses must be considered in the analysis.
Fannie Mae also has this additional PPP FAQ:
- Can proceeds from an SBA PPP or any other similar COVID-19 related loans be considered business assets for the purpose of funding the transaction?
- No. Loan proceeds are not considered business assets for the purpose of qualifying the borrower and cannot be used to fund the down payment, closing costs or satisfy reserve requirements.
And Freddie Mae has this additional PPP FAQ:
- If the business rehired employees after receipt of PPP loan proceeds, but was operating at a reduced capacity due to factors such as state and/or local restrictions (e.g., restricted operations, social distancing, closure) and did not utilize the services of a certain number of these employees (e.g., placed on paid furlough), would those payroll expenses funded by the PPP proceeds be considered as ongoing?
- If the scenario described can be fully documented, in that the payroll was paid by PPP proceeds but the services were not used for a specified period of time, it may be possible to make a case for excluding only that portion of payroll expenses when comparing and using details from the YTD P&L statement, business account statements, and supplemental documentation to determine the current level of stable monthly income.
Servicing FAQs
Among other FAQs, Fannie Mae includes the following FAQ regarding a borrower in a COVID-19 payment deferral, and Freddie Mac has a similar FAQ:
After receiving a COVID-19 payment deferral, can the borrower make additional principal payments (i.e., a curtailment) to lower or pay off the deferred non-interest bearing balance prior to paying off the interest-bearing unpaid principal balance?
- If the curtailment being applied is less than the interest-bearing UPB, the servicer must apply such curtailment to the interest-bearing UPB. If the principal curtailment is greater than or equal to the interest-bearing UPB, then the servicer must apply such curtailment in the following order:
- to the non-interest bearing balance, if any; and
- to the interest-bearing UPB.
Fannie Mae also includes the following FAQ regarding servicer incentives, and Freddie Mac has a similar FAQ:
- If the mortgage loan transfers to a new servicer after the previous servicer has received the full $1,000 in incentive fees under the cumulative incentive fee cap for retention workout options as set forth in Lender Letter LL-2020-09, Incentive Fees for Retention Workout Options, is the new servicer eligible to receive any incentive fees for completed repayment plans, payment deferrals, or Fannie Mae Flex Modifications?
- No. The transferee servicer is not eligible to receive any incentive fees for these retention workout options if the cumulative incentive fee cap has already been met due to workout options completed by the transferor servicer. Incentive fee eligibility is tied to the mortgage loan, not to the individual servicer.
And Fannie Mae includes the following FAQ regarding incentives:
- In Lender Letter LL-2020-09, Incentive Fees for Retention Workout Options, Fannie Mae introduced a $1,000 cumulative incentive fee cap for repayment plans, payment deferrals/COVID-19 payment deferrals, and Fannie Mae Flex Modifications, effective as of July 1, 2020. What incentive fee will the servicer receive for the completion of a Fannie Mae Extend Modification for Disaster Relief or a Fannie Mae Cap and Extend Modification for Disaster Relief?
- There are no changes to the incentive fees for completing a Fannie Mae Extend Modification for Disaster Relief or a Fannie Mae Cap and Extend Modification for Disaster Relief and the cap does not apply to incentive fees paid for these workout options. The servicer is eligible for the incentive fees for those workout options as set forth in the Servicing Guide and Lender Letter LL-2017-09R, Fannie Mae Extend Modification for Disaster Relief as long as the servicer meets the incentive fee eligibility criteria.
Freddie Mac confirms in an FAQ that the limited quality right party contact is allowed for all post forbearance options—reinstatement, repayment plan, COVID-19 payment deferral, and the Flex Modification.
CFPB Proposes to Implement Growth Act Escrow Exemption for Higher-Priced Mortgage Loans
As previously reported, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Growth Act), also known as S.2155, directs the CFPB to implement an exemption from the mandatory escrow account requirement for higher-priced mortgage loans (HPMLs) under the Truth in Lending Act (TILA) and Regulation Z for certain insured credit unions and insured depository institutions. The CFPB recently proposed amendments to Regulation Z pursuant to this directive. Consistent with recent practice, the CFPB also issued a non-official redline showing the changes that would be made to Regulation Z.
Currently Regulation Z provides an exemption to the escrow requirement for HPMLs that applies to a creditor that:
- Together with its affiliates that regularly extend first lien loans subject to the ability to repay rule (covered transactions), have total assets of less than $2.0 billion (the dollar amount is adjusted annually for inflation, and for 2020 is $2,202,000);
- Together with its affiliates that regularly extend first lien covered transactions, during the preceding calendar year or, for applications received before April 1 of the current year, during either of the two preceding calendar years, extended no more than 2,000 first lien covered transactions that were sold, assigned or otherwise transferred to another person;
- Does not, nor does its affiliate, maintain escrow accounts on mortgage loans, exclusive of escrow accounts established (a) for a first lien HPML for which the application was received on or after April 1, 2010 and before May 1, 2016, or (b) as an accommodation to a distressed consumer to assist the consumer in avoiding default or foreclosure; and
- During the preceding calendar year or, for applications received before April 1 of the current year, during either of the two preceding calendar years, extended a first lien covered transaction on property located in a “rural” or “underserved” area, as those terms are defined for purposes of the HPML rules. We recently reported on a CFPB interpretive rule addressing the manner in which underserved areas are determined.
A loan made by a lender that qualifies for the exemption would not be entitled to the exemption if at consummation the loan is subject to a commitment to be acquired by a party that does not meet the conditions of the exemption.
The proposal would implement a similar exemption for insured credit unions and insured depository institutions, with principal differences being that:
- The asset threshold would be $10 billion (and would be adjusted annually for inflation); and
- During the preceding calendar year or, for applications received before April 1 of the current year, during either of the two preceding calendar years, the credit union or depository institution and its affiliates could have extended no more than 1,000 covered transactions secured by a first lien on a principal dwelling.
Additionally, the exclusion from the condition that the creditor and its affiliate not maintain escrow accounts on mortgage loans for accounts established for a first lien HPML for which the application was received on or after April 1, 2010 and before May 1, 2016, would be revised by replacing the May 1, 2016 date with a date that is 90 days after the final rule is published in the Federal Register. This time period would also apply to the current exemption.
Comments on the proposal will be due 30 days after publication in the Federal Register.
- Richard J. Andreano, Jr.
CFPB Publishes Spring 2020 Rulemaking Agenda
The CFPB has published its Spring 2020 rulemaking agenda as part of the Spring 2020 Unified Agenda of Federal Regulatory and Deregulatory Actions. It represents the CFPB’s third rulemaking agenda under Director Kraninger’s leadership. The agenda’s preamble indicates that the information in the agenda is current as of March 5, 2020 and identifies the regulatory matters that the Bureau “reasonably anticipates having under consideration during the period from May 1, 2020 to April 30, 2021.”
The Bureau issued a proposed debt collection rule in May 2019. In the preamble to the rulemaking agenda, the Bureau states that it expects to issue a final debt collection rule in October 2020. In February 2020, the Bureau issued a supplemental proposal that would require debt collectors to make specified disclosures when collecting time-barred debts and has extended the proposal’s comment deadline until August 4, 2020. The Bureau indicates in the preamble that it plans to finalize the supplemental proposal “at a later date” (thus ending conjecture as to whether the Bureau intends to finalize the two proposals at the same time).
The new agenda provides outdated information regarding when the Bureau can be expected to finalize its February 2019 proposal to rescind the ability to repay provisions of its final payday/auto title/high-rate installment loan rule. The proposal was not mentioned in the Bureau’s blog post about the new agenda and the agenda estimated a June 2020 date for issuing a final rule. In the preamble to the new agenda, the Bureau states that in response to stakeholder input, it “is now evaluating what, if any, other actions to take with respect to the application of the payments provisions of the [final rule] to the short-term, longer-term balloon-payment, and certain high cost installment loans covered by those provisions. These actions could include, but are not limited to, updated compliance aids, policy statements, or other guidance.”
The Bureau recently took action on the following items listed in the agenda:
- Higher-Priced Mortgage Loan Escrow Exemption. The Economic Growth, Regulatory Relief, and Consumer Protection Act directs the CFPB to implement an exemption from the mandatory escrow account requirement for higher-priced mortgage loans under the Truth in Lending Act and Regulation Z for certain insured credit unions and insured depository institutions. The CFPB recently proposed amendments to Regulation Z pursuant to this directive.
- Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z). The CFPB recently proposed a temporary extension of the qualified mortgage (QM) criteria that is based on a loan being eligible for sale to Fannie Mae or Freddie Mac (often referred to as the “GSE Patch”). The CFPB also proposed to replace the strict 43% debt-to-income (DTI) ratio basis for the general QM with an approach tied to the loan’s annual percentage rate that would still require the consideration of the DTI ratio or residual income.
- Amendments to Regulation Z to Facilitate Transition from LIBOR. The CFPB recently 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. (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.” Click here for more information and to register.)
Other items listed in the agenda on which the CFPB expects to take action this year include:
- Business Lending Data (Regulation B). Section 1071 amended the ECOA, subject to rules adopted by the Bureau, to require financial institutions to collect and report certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. The agenda estimates that in anticipation of convening a SBREFA panel, the Bureau will issue a SBREFA outline in September 2020. (Pursuant to the Stipulated Settlement Agreement in the lawsuit filed against the Bureau in May 2019 alleging wrongful delay in adopting regulations to implement Section 1071, the Bureau is required to release the outline by September 15 and convene a panel by October 15. However, in its first status report filed with the California federal district court, the Bureau stated that while it believes it is on track to meet the September 15 and October 15 deadlines, the COVID-19 pandemic may “introduce uncertainty with respect to the Bureau’s future ability to meet these deadlines.”)
- Role of Supervisory Guidance. In September 2018, the CFPB, together with the Federal Reserve, FDIC, NCUA, and OCC, issued an Interagency Statement Clarifying the Role of Supervisory Guidance. The agenda estimated issuance of a proposed rule to codify the guidance in June 2020.
- Property Assessed Clean Energy Financing. In March 2019, the CFPB issued an Advance Notice of Proposed Rulemaking to extend Truth in Lending Act ability-to-repay requirements to PACE transactions. The agenda estimates pre-rule activity in October 2020.
- Home Mortgage Disclosure Act (Regulation C). The HMDA amendments adopted by the CFPB in October 2015 revised certain pre-existing data points, added data points set forth in Dodd-Frank, and included additional data points based on discretionary authority in Dodd-Frank permitting the CFPB to mandate reporting of other information. The October 2015 amendments also expanded the scope of reportable loans by requiring the reporting of dwelling-secured business or commercial purpose loans that meet the definition of a home purchase, refinancing, or home improvement transaction. In May 2019, the Bureau issued an Advance Notice of Proposed Rulemaking seeking comment on whether to make changes to the revised or new data points, and the coverage of business or commercial-purpose loans that are made to a non-natural person and secured by a multi-family dwelling. The agenda estimates issuance of a Notice of Proposed Rulemaking in September 2020.
- Public Release of Home Mortgage Disclosure Act Data. In December 2018, the CFPB announced final policy guidance regarding the application-level HMDA data that will be made available to the public. The agenda estimates issuance of a Notice of Proposed Rulemaking on the public disclosure of HMDA data in September 2020.
- Amendments to FIRREA Concerning Appraisals (Automated Valuation Models). The Bureau is participating in interagency rulemaking with the Federal Reserve, OCC, FDIC, NCUA and FHFA to develop regulations to implement the amendments made by the Dodd-Frank Act to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) concerning appraisals. The FIRREA amendments require implementing regulations for quality control standards for automated valuation models. The agenda estimates that the agencies will issue a Notice of Proposed Rulemaking in December 2020.
The Bureau’s long-term regulatory agenda items, which have no estimated dates for further action, include the following:
- Abusive Acts and Practices. In January 2020, the CFPB issued a policy statement to clarify the Dodd-Frank Act’s abusiveness standard. The agenda indicates that in issuing the policy statement, “the Bureau did not foreclose the possibility of engaging in a future rulemaking to further define the abusiveness standard.”
- Artificial Intelligence. In February 2017, the CFPB issued a request for information concerning the use of alternative data and modeling techniques in the credit process. In the agenda, the Bureau states that as it “continues to monitor developments concerning AI, the Bureau will evaluate whether rulemaking, a policy statement, or other Bureau action may be appropriate.”
Other long-term items include changes to loan originator compensation requirements in Regulation Z, consumer access to financial records, and the application of E-Sign Act requirements in the context of certain Bureau regulations.
Finally, the preamble to the agenda indicates that pursuant to Dodd-Frank Section 1022(d), which requires the Bureau to conduct an assessment of each significant rule or order it adopts under a Federal consumer financial law and publish a report of each assessment not later than 5 years after the rule’s or order’s effective date, the Bureau is now conducting an assessment of its Integrated Mortgage Disclosures Rule. The Bureau states in its blog post about the agenda that it will issue its assessment report no later than October 2020.
The preamble also indicates that the Bureau conducted its first review pursuant to section 610 of the Regulatory Flexibility Act, which requires the Bureau to consider the effect on small entities of certain rules it promulgates. That review looked at the impact of the Bureau’s 2009 overdraft rule on small banks and credit unions. The preamble states that “after considering the statutory review factors, including a review of public comment, the Bureau has determined that the rule should continue without change. The Bureau believes that there is a continued need for this rule, which does not overlap with other Federal or State rules and which likely preserves a valuable consumer choice.”
Now that the U.S. Supreme Court has ruled in Seila Law that the Dodd-Frank Act provision allowing the President to remove the Bureau’s Director only “for cause” is unconstitutional and the appropriate remedy is to sever that provision, a Democratic President, if elected in 2020, will be able to remove Director Kraninger without cause. As a result, the Bureau’s rulemaking priorities could change significantly in 2021 from those reflected in the new agenda. (We also expect that Director Kraninger will soon ratify all existing CFPB regulations that the Bureau still supports.)
- Alan S. Kaplinsky
On July 1, 2020, the Mortgage Bankers Association (MBA) announced cooperation with the American Land Title Association (ALTA) and the National Association of Realtors (NAR) in the development of a model remote notarization executive order. Citing the patchwork activity across the country in reaction to the COVID-19 pandemic emergency and inconsistency across the executive orders, emergency legislation and existing legislation, the trade groups’ stated goal in publishing the order is to help ensure that new remote ink signed notarization (RIN) authorization language is crafted to provide the most legal certainty in real estate transactions.
MBA, ALTA, and NAR have been active in supporting Remote Online Notarization (RON) enabling statutes prior to the COVID-19 pandemic and still believe that passing RON in the remaining states without RON legislation is the ideal path. They also understand that there is an immediate need to safely close real estate transactions while they, and others, continue to pursue permanent RON legislation.
The model order includes enabling language for both RIN and RON on a temporary, emergency basis and includes several provisions common to orders put in place over the past several months. Some of these include a method for transmitting a RIN signed document between the signing party and the notary, audio-video recording requirements, and a 10-year retention period for the recording. Sample language to provide for an additional fee for remote notarizations is included, as well as language to help facilitate the recording of electronically signed and electronically notarized documents, including a sample notarial certificate of electronic documents.
Identifying the signing individual is key to a proper notarial act, and the method to facilitate that in a remote RIN or RON notarization under emergency orders adopted over the past several months has varied widely. The model order includes options for both technology enabled, identity proofing and the presentation of a government-issued identification credential remotely. Drafter’s notes point out that although the remote presentation of a government ID may be necessary on a temporary basis during the COVID-19 crisis, more secure identity validation is strongly encouraged for permanent RON enabling legislation.
Reciprocity language in the model order gives the same force and effect to a notarial act performed by a notary public commissioned under the laws of another state as a notarial act performed by a notary of the state adopting the order, including a notarial act “performed by a notary public commissioned under the laws of another state … for a remotely located individual who appears before the notary public by using communication technology.” While the order includes a limitation that requires the notary to be located within the state in which the order is issued, it does not include similar limiting language on the location of the signing party. This means that the language in the model order may potentially allow for remote notarizations to occur across state boundaries, if the state in which the notary is located does not restrict its notaries to perform remote notarizations for singing parties only in that state.
As existing emergency RIN and RON orders expire, the use of this proposed model order from the industry could provide more predictability and uniformity of procedures across the country for mortgage lenders and title companies, alike. This predictability will further enable the mortgage and real estate markets to continue to function safely for the duration of the pandemic and provide a method for remote notarization until permanent RON legislation can be enacted or implemented in states without an active RON statute.
States Issue Work-From-Home Guidance for Mortgage Lenders
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.
OCC Previews Plans to Introduce Special Purpose National Bank Charter for Payment Companies
In recent interviews including a podcast with the ABA Banking Journal reported by Forbes, Acting Comptroller of the Currency Brian Brooks previewed the OCC’s plans to introduce another special purpose national bank charter that would give payment companies a nationwide servicing platform and federal preemption of state laws regarding licensing and regulation of money transmitters and payment services providers. As envisioned, the payments charter would replace the state-by-state money transmitter licensing approach currently used by many non-bank payment processors and FinTechs. More detailed information about the new OCC payments charter will be forthcoming in the near future, possibly by this fall, according to Acting Comptroller Brooks.
Acting Comptroller Brooks said the OCC envisions a two-phase roll-out of the new charter. The agency would first offer “Payments Charter 1.0”, which he likened to a basic national money-transmitter license. That version would be followed about 18 months later by “Payments Charter 2.0”, which would include the added feature of direct access to the Federal Reserve’s payments system, giving the payments company the ability to clear payments through the Federal Reserve System directly rather than through a correspondent bank, clearinghouse or financial institution. Acting Comptroller Brooks noted the OCC would work to ensure alignment with the Federal Reserve on the legal bases allowing Fed access by companies holding this special-purpose charter.
Acting Comptroller Brooks indicated that the core insight propelling development of the payments charter is the realization that consumers increasingly may not want to receive all financial services from a single source. He explained that while banks have traditionally provided three fundamental banking functions – deposit taking, lending, and payments – the evolving needs of financial services customers may call for a different approach. (In a recent online event, Acting Comptroller Brooks indicated the term “payments” is functionally equivalent to the more traditional formulation of “paying checks” when referring to this key banking activity.) Acting Comptroller Brooks pointed out that while “the bundle [of three key banking services] will always have value” in the context of many banks’ business models, in some cases companies may be more successful, and better serve their customers, by focusing on just one of these functions.
According to Acting Comptroller Brooks, a national payments charter would align with the OCC’s role, which is to create and support national financial services platforms. The proposed payments charter would bring entities that offer payment processing services, but do not take deposits or make loans, into the national banking system overseen by the OCC. Even without the direct access to the Federal Reserve’s payments system that Payments Charter 2.0 would add, the initial Payments Charter 1.0 would carry the significant advantage of federal preemption of state money transmitter licensing and related laws, and the element of OCC supervision would bolster customer confidence. And, the ability to provide payments services on a nationwide basis under a single national licensing regime, rather than dealing with licensing and other requirements on a state-by-state basis, would confer significant financial, operational, and other business benefits. Further, this charter, like the proposed OCC FinTech charter, may be attractive to entities that own payment processing companies but also engage in activities not permitted for bank holding companies.
Acting Comptroller Brooks cited other elements the OCC is considering as it formulates the new charter, including what a chartered entity’s community support and financial inclusion responsibilities should be and how best to establish safety and soundness requirements for companies that generally do not bear credit risk as it is traditionally viewed.
The proposed payments charter as described by Acting Comptroller Brooks would cover a narrower scope of services than the OCC’s previously proposed special purpose national bank charter for non-depository FinTech companies, and would not include nationwide lending authority. Therefore, the payments charter would not raise the controversial issue of interest rate exportation. Still, there may be opposition to the OCC payments charter from state banking regulators and licensing authorities as well as consumer groups who also opposed the OCC FinTech charter. In May 2019, a New York federal district court denied the OCC’s motion to dismiss a lawsuit filed by the New York Department of Financial Services (DFS) seeking to block the OCC’s issuance of the FinTech charter. The district court found that the term “business of banking” as used in the National Bank Act requires the receipt of deposits as an aspect of such business, and with the OCC’s and DFS’s consent, entered a final judgment in favor of the DFS, enabling the OCC to file an appeal. The OCC has appealed the decision to the Second Circuit; pending resolution of this appeal, it is reasonable to anticipate that an OCC payments charter may face a legal challenge based on the district court’s decision.
Further, bi-partisan support for this new charter would be required to avoid having the plan derailed by a regime change following the 2020 presidential election.
- Mindy Harris
The CFPB recently published a blog post titled, “Innovation spotlight: Providing adverse action notices when using AI/ML models.”
The blog post primarily recycles information from the Bureau’s annual fair lending report issued in May 2020. The Bureau indicates that artificial intelligence (AI) and a subset of AI, machine learning (ML), is an area of innovation that it is monitoring. It notes that “industry uncertainty about how AI fits into the existing regulatory framework may be slowing its adoption, especially for credit underwriting.” The Bureau observes that “one important issue is how complex AI models address the adverse action notice requirements in the [ECOA] and the [FCRA]” and that “there may be questions about how institutions can comply with these requirements if the reasons driving an AI decision are based on complex interrelationships.”
As it did in the fair lending report, the Bureau comments that “the existing regulatory framework has built-in flexibility that can be compatible with AI algorithms” and repeats the two examples of such flexibility given in the report: (1) the absence of a requirement for a creditor, when giving specific reasons for adverse action, to describe how or why a disclosed factor adversely affected an application, or, for credit scoring systems, how the factor relates to creditworthiness, and (2) the absence of a requirement for a creditor to use any particular list of reasons.
The Bureau again encourages entities to consider using its new innovation policies (e.g. No-Action Letter and Trial Disclosure Policies) to address potential compliance issues. It also states that it intends “to leverage experiences gained through the innovation policies to inform policy,” and indicates that such experiences “may ultimately be used to help support an amendment to a regulation or its Official Interpretation.”
In connection with encouraging entities to use its innovation policies, the Bureau identifies three areas that it is “particularly interested in exploring”:
- Methodologies for determining the principal reasons for an adverse action
- Accuracy of explainability methods, particularly as applied to deep learning and other complex ensemble methods
- How to convey the principal reasons in a manner that accurately reflects the factors used in the model and is understandable to consumers, including how to describe varied and alternative data sources, or their interrelationships, in an adverse action reason
In May 2020, we held a webinar, “Consumer Protection: What’s Happening at the FTC,” in which leaders of Ballard Spahr’s Consumer Financial Services Group were joined by special guest speakers Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, and Malini Mithal, Associate Director of the FTC’s Division of Financial Practices. In the webinar, Mr. Smith discussed his recent blog post about the of AI and algorithms, including the challenges that the use of AI and algorithms create for providing ECOA and FCRA adverse action notices. We have released a two-part podcast based on the webinar. Click on the following links to listen to Part I and Part II.
- Alan S. Kaplinsky
Missouri Amends SAFE Act Licensing Requirements
The Missouri SAFE Act was recently amended to clarify provisions relating to: (1) prelicensing education requirements for mortgage loan originators (MLOs); (2) fingerprinting requirements for persons with control or certain financial relationships with an applicant for the Mortgage Company License, which is required for residential mortgage loan brokers; and (3) waiver of the in-state office requirement for residential mortgage loan brokers.
Regarding the prelicensing education requirements for MLOs, the amendment states that a prelicensing education course completed by an individual does not satisfy the requirement if the course precedes an application by a certain time period established by the NMLS. On fingerprinting requirements for applicants for the Mortgage Company License, individuals that control, directly or indirectly, the election of 25% or more of members of the board of directors, directors, and influencers of managements are required to complete the fingerprinting process, in addition to the typical “control persons” that own or control, directly or indirectly, 10% or more of the applicant.
Finally, the amendment included an additional basis that would allow the in-state office requirement to be waived for residential mortgage loan brokers. In addition to the original basis applicable to persons providing mortgage loan servicing, a waiver will also be permitted for any person that is exclusively engaged in the business of loan processing or underwriting.
The amendments are effective on August 28, 2020.
South Dakota Adds Mortgage Branch Registration to NMLS
NMLS is now receiving new application filings for the South Dakota Mortgage Branch Registration. This license is required for any branch that, for valuable consideration, originates, sells, or services mortgages, or holds itself out as being able to do so. The Mortgage Branch Registration should only be applied for by a company that also holds or is applying for the Mortgage Lender License, Non-Residential Mortgage Lender License, or Mortgage Brokerage License.
All licensed mortgage companies are required to register branch locations by December 31, 2021.
NMLS Makes Available Temporary Authority Resource: List of State Implementation Legislation and Rulemakings
NMLS has created a new resource to track state legislation or rules that authorize mortgage loan originators to act with Temporary Authority during certain transition periods. This resource is available on the NMLS Temporary Authority to Operate webpage here.
- Aileen Ng
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