Mortgage Banking Update
In This Issue:
- HUD Updates COVID-19 Guidance for FHA Loans
- HUD Revises Effective Date for Recent Updates to FHA Loan COVID-19 Guidance
- Freddie Mac Updates COVID-19 Selling FAQs
- Fannie Mae Updates COVID-19 Selling FAQs
- Fannie Mae Updates COVID-19 Servicing FAQs
- Fannie Mae and Freddie Mac Extend the Purchase of Loans in a COVID-19 Forbearance
- Legislation Would Require Purchase and Insurance of COVID-19 Forbearance Loans Without Additional Conditions
- This Week’s Podcast: New York City’s Department of Consumer Affairs Adopts New Language Proficiency Requirements for Debt Collections: What You Need to Know
- CFPB Issues Request for Information on Expanding Access to Credit and Further Protecting Consumers From Credit Discrimination
- CFPB Holds Roundtable to Solicit Feedback on Serving LEP Consumers
- CFPB Updates HMDA FAQs
- CFPB Files Ratification With Ninth Circuit in Seila Law; Ninth Circuit Orders Supplemental Briefing on Ratification
- Three-State Attack on the OCC’s “Madden Fix” Rule
- Federal and State Banking Regulators Issue New Examination Procedures on Sampling Methodologies, UDAP/UDAAP, and CARES Act
- Sixth Circuit Widens Circuit Split Over TCPA Autodialer Definition
- All American Check Cashing Files Supplemental En Banc Brief With Fifth Circuit
- FFIEC Issues Joint Statement on Additional Loan Accommodations Related to COVID-19
- New York City Department of Consumer Affairs Issues Formal Guidance on Its New Limited English Proficiency Debt Collection Rules
- After Seila Law, Will Congress Change the CFPB’s Leadership Structure?
- CFPB Issues Consent Orders for False and Misleading Advertising for VA Mortgages
- Did You Know?
For the latest updates on the Coronavirus pandemic visit the Ballard Spahr Coronavirus Resource Center
The U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2020-23, dated July 28, 2020, to update COVID-19 national emergency guidance for FHA loans. The guidance addresses the verification of business operations for self-employed borrowers, the use of rental income for qualification purposes, and rehabilitation escrow accounts in connection with 203(k) loans. The guidance on the first two topics is effective for cases with note dates on or after July 28, 2020 through November 30, 2020. The guidance on 203(k) loans is effectively immediately for open escrow accounts through November 30, 2020.
Self-Employed Borrowers. When self-employment income is being used to qualify the borrower, within 10 calendars days before the date of the note the lender must verify and confirm that the business is open and operating by obtaining one of the following:
- Evidence of current work (executed contracts or signed invoices that indicate the business is operating on the day the lender verifies self-employment);
- Evidence of current business receipts within 10 days of the note date (payment for services performed);
- Lender certification that the business is open and operating (lender confirmed through a phone call or other means); or
- A business website demonstrating activity supporting current business operations (timely appointments for estimates or service can be scheduled).
Rental Income. When a borrower is qualifying using rental income, for each property generating rental income the mortgagee must:
- Reduce the effective income associated with the calculation of rental income by 25 percent; or
- Verify six months of principal, interest, tax, and insurance reserves (this option is applicable to forward mortgages only); or
- Verify the borrower has received the previous two months rental payments as evidenced by borrower’s bank statements showing the deposit. (This option is applicable only for borrowers with a history of rental income from the property).
Rehabilitation Escrow Accounts. FHA notes that under existing guidelines when the rehabilitation work is not completed within the specified rehabilitation period, the borrower may request an extension of time and submit adequate documentation to support the extension. The lender may grant an extension only if all mortgage payments are current. Further, if the mortgage is delinquent, the lender may refuse to make further releases of funds from the rehabilitation escrow account, and the project must stop if the mortgage is in payment default.
FHA advises that it is providing temporary flexibility to allow lenders to continue administering the rehabilitation escrow account, including the approval of extension requests and release of funds, which will allow the project to continue for mortgages when the borrower is in forbearance due to the impacts of COVID-19. The lender is still required to obtain:
- An explanation for the delay from the borrower, contractor, or consultant when reviewing extension requests; and
- A new estimated completion date.
HUD welcomes feedback from interested parties for a period of 30 calendar days from the date of the Mortgagee Letter.
As previously reported, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2020-23, dated July 28, 2020, to update COVID-19 national emergency guidance for FHA loans. The guidance addresses the verification of business operations for self-employed borrowers, the use of rental income for qualification purposes, and rehabilitation escrow accounts in connection with 203(k) loans. As originally announced, the guidance on the first two topics was effective for cases with note dates on or after July 28, 2020 through November 30, 2020. On July 29, 2020, HUD issued Mortgagee Letter 2020-24 to revise the effective date so that the guidance is now effective for case numbers assigned on or after August 12, 2020 through November 30, 2020. The originally announced effective date for the guidance on 203(k) loans remains the same—it became effective immediately for open escrow accounts through November 30, 2020.
On July 29, 2020, Freddie Mac updated its COVID-19 Selling FAQs. Topics addressed in the revised FAQs include tax return requirements, rental income documentation, appraisals, and credit obligations of the borrower other than mortgage debt that are in a COVID-19 forbearance or deferral.
On July 29, 2020, Fannie Mae updated its COVID-19 Selling FAQs. Topics addressed in the revised FAQs include rental income documentation, appraisals, construction-to-permanent loans, and credit obligations of the borrower other than mortgage debt, including obligations that are in a COVID-19 forbearance or deferral.
On August 3, 2020, Fannie Mae updated its COVID-19 servicing FAQs to add an FAQ regarding a COVID-19 forbearance plan with a period of less than 180 days. The FAQ says:
Q: If a servicer provides a COVID-19 related forbearance plan with an incremental period shorter than 180 days, and the servicer is unable to achieve QRPC prior to the expiration of such incremental period, can the servicer automatically extend the forbearance period?
A: Servicers are responsible for complying with the requirements of Lender Letter LL-2020-02, Impact of COVID-19 on Servicing and applicable law, including the CARES Act, when providing borrowers with an initial or extended forbearance plan.
Fannie Mae updated Lender Letter 2020-02 on July 15, 2020.
Fannie Mae and Freddie Mac previously announced that, subject to conditions, the agencies will purchase loans in a COVID-19 forbearance. Also, in June 2020, the agencies extended eligible loans to those with note dates through July 31, 2020. On July 31, 2020, Fannie Mae in an update to Lender Letter 2020-06 and Freddie Mac in Bulletin 2020-30 extended eligible loans to those with note dates through August 31, 2020.
They also updated the applicable delivery and settlement dates.
Companion bills were recently introduced in the U.S. House of Representatives (H.R. 6794) and the U.S. Senate (S. 4260) to create the Promoting Access to Credit for Homebuyers Act of 2020. The Act would require Fannie Mae and Freddie Mac to purchase, and FHA to insure, mortgage loans involving a COVID-19 forbearance, or a request or inquiry regarding such a forbearance, without additional conditions related to the forbearance, request, or inquiry.
As previously reported, Fannie Mae and Freddie Mac will purchase certain mortgage loans in a COVID-19 forbearance. However, one of the conditions is an additional pricing adjustment of five percent if the borrower is a first-time homebuyer and seven percent for other loans. And FHA will insure certain mortgage loans in a COVID-19 forbearance subject to conditions, including that the lender execute a two-year partial indemnification agreement.
The Act would apply to a borrower with a loan originated on or after February 1, 2020, who, with respect to a prior mortgage loan or their current mortgage loan:
- Entered into forbearance as a result of a financial hardship due, directly or indirectly, to the COVID-19 emergency;
- Requested forbearance as a result of a financial hardship due, directly or indirectly, to the COVID-19 emergency; or
- Inquired as to options related to forbearance as a result of a financial hardship due, directly or indirectly, to the COVID-19 emergency (a “covered borrower”).
With respect to a mortgage loan made to a covered borrower, during the period that begins five days after the Act became law and ends 60 days after the covered period (addressed below), Fannie Mae and Freddie Mac could not, solely due to the borrower being a covered borrower, establish a purchase requirement that would:
- Impose additional restrictions that are not applicable to similarly situated loans under which the borrower is not in forbearance;
- Charge a higher guarantee fee or loan level pricing adjustment, or otherwise alter pricing for such loans, relative to similarly situated loans under which the borrower is not in forbearance;
- Apply repurchase requirements to such loans that are more restrictive than repurchase requirements applicable to similarly situated loans under which the borrower is not in forbearance; or
- Require lender indemnification of such loans, solely due to the fact that the borrower is in forbearance.
Fannie Mae and Freddie Mac would still be able to establish additional requirements to ensure that a borrower has not lost his or her job or income prior to the closing of a mortgage loan. The covered period would be the period of time during which the borrower, with respect to a mortgage loan, may request a forbearance under the CARES Act.
With respect to a mortgage loan made to a covered borrower, during the period that begins five days after the Act became law and ends 60 days after the covered period (addressed above), FHA could not, solely due to the borrower being a covered borrower:
- Deny the provision of mortgage loan insurance;
- Implement additional premiums or otherwise alter pricing for such a loan;
- Require indemnification by the lender; or
- Establish additional restrictions on the borrower.
FHA would still be able to establish additional requirements to ensure that a borrower has not lost their job or income prior to the closing of a mortgage loan.
The Act also would impose reporting obligations on the Federal Housing Finance Agency (FHFA), Fannie Mae, Freddie Mac, HUD and the Government Accountability Office. In particular, FHFA could not increase guarantee fees, loan level pricing adjustments, or any other fees, or implement any restrictions on access to credit, unless FHFA provides 48-hour advance notice of such increase or restrictions to the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs. Along with the notice, FHFA would need to provide a detailed report of the policy rationale for the decision, including any and all data considered in making the decision.
Recent amendments to NYC’s debt collection rules impose new requirements relating to consumers’ language proficiency. Following an overview, we take a close look at the specific requirements and their applicability to first- and third-party collections, discuss the DCA’s authority, availability of federal preemption, and compliance challenges, and offer thoughts on best compliance practices.
Click here to listen to the podcast.
On July 28, 2020, the CFPB issued a request for information (“RFI”) seeking public input on how best to create a regulatory environment that expands access to credit and ensures consumers and communities are protected from discrimination in all aspects of credit transactions. The Bureau issued the RFI in lieu of a symposium it had planned to host this fall on Equal Credit Opportunity Act (“ECOA”) issues.
Concurrently, CFPB Director Kathleen Kraninger issued a blog post (entitled “The Bureau is taking action to build a more inclusive financial system”) explaining that the Bureau seeks to play a leading role in the national conversation about racial inequality by taking action concerning fair treatment and equitable access to credit. Toward that end, the CFPB is “taking steps to help create real and sustainable changes in our financial system so that African Americans and other minorities have equal opportunities to build wealth and close the economic divide.” According to Director Kraninger, issuance of the RFI – with the goal of establishing clear standards to help minorities – is the first step in that effort.
The information sought in the CFPB’s RFI is designed to help the Bureau explore ways to promote access to credit, identify opportunities to prevent credit discrimination, encourage responsible innovation, and address regulatory uncertainty. In particular, the Bureau seeks to explore “cutting-edge issues” at the intersection of fair lending and innovation and develop “viable solutions” to regulatory compliance challenges financial institutions face in complying with ECOA and Regulation B. Specifically, the CFPB seeks public comment on whether it should provide additional clarity or guidance on the following issues:
- The CFPB’s approach to disparate impact analysis under ECOA and Regulation B
- Ways in which creditors may be encouraged to provide assistance, products or services to limited English proficiency (“LEP”) borrowers
- How to facilitate greater usage of special purpose credit programs
- Suggestions to encourage the use of affirmative advertising to traditionally disadvantaged consumers and communities
- Recommendations for better meeting the credit needs of small businesses, particularly minority-owned and women-owned firms
- The CFPB’s interpretation of ECOA’s prohibition on discrimination on the basis of sex following the U.S. Supreme Court’s recent decision in Bostock v. Clayton County
- The scope of federal preemption of state law when it is inconsistent with ECOA and Regulation B
- Situations in which creditors seek to ascertain the continuance of public assistance benefits in underwriting decisions
- Credit underwriting when decisions are based in part on models using artificial intelligence or machine learning
- Adverse action notice requirements
In our view, these are appropriate questions for the CFPB to be asking the industry concerning both old and new issues presented by ECOA and Regulation B, and the industry would certainly benefit from more clarity from the Bureau concerning how to proceed concerning some of the issues. For example, few institutions have availed themselves of special purpose credit programs that have long been offered under Regulation B because of the uncertainty of how such programs will be treated by examiners post-implementation, so additional regulatory guidance or pre-clearance by the Bureau of special purpose credit programs may alleviate that concern. A more recent illustration is the increasing use of machine learning (“ML”) and artificial intelligence (“AI”) across a range of functions. Additional guidance from the CFPB would be useful in terms of how these innovative methodologies can be further leveraged in credit underwriting while not running afoul of ECOA and Regulation B. As the Bureau pointed out in its recent blog post concerning use of adverse action notices when using AI/ML, “industry uncertainty about how AI fits into the existing regulatory framework may be slowing its adoption, especially for credit underwriting.” Although we detect significant consumer advocate skepticism of AI/ML models, our view is that such models can be superior to traditional logistic regression models, and in fact produce results that are more tailored to individual consumers’ circumstances than traditional models can. So long as appropriate attention is paid to variable selection in the model development process, we do not believe there should be any inherent fair lending problem with the use of AI/ML models, and it would be extremely helpful for the Bureau to set forth “rules of the road” for how AI/ML models should be developed and validated to avoid fair lending concerns.
How best to serve LEP individuals is another topic that would benefit from additional Bureau guidance. The CFPB last issued meaningful LEP guidance in its Supervisory Highlights Fall 2016 edition, which appeared to open the door to the concept that it may be permissible for financial institutions to advertise and market their products in non-English languages without the entire product being originated and serviced in a foreign language (as some previous enforcement actions had implied). Importantly, the Bureau noted that in some examinations, it required financial institutions to provide “clear and timely disclosures to prospective consumers describing the extent and limits of any language services provided throughout the product lifecycle.” That statement appears to indicate that, from the CFPB’s perspective, a successful path to advertising and marketing in non-English languages is one that contains a clear disclosure concerning which parts of the product experience are and are not in a foreign language. Regulatory guidance clarifying that approach would be tremendously helpful to the financial services industry, especially to provide more concrete guidance about the content, location and timing of such disclosures. It is noteworthy that on July 29, the CFPB held an invitation-only virtual roundtable with consumer advocates and industry representatives, attended by Director Kathy Kraninger, to discuss potential guidance the CFPB may issue with respect to serving LEP customers. Chris was one of only two private sector attorneys who attended this roundtable, and he will be posting a separate blog about it soon.
On the other hand, it may be difficult for the CFPB to provide additional clarity on the subject of the disparate impact theory under ECOA. As background, the CFPB issued a bulletin in 2012 (Bulletin 2012-14, Fair Lending) confirming that it planned to apply a disparate impact test in exercising its supervisory and enforcement authority under ECOA and Regulation B. After Congress overrode the Bureau’s indirect auto finance bulletin in 2018 under the Congressional Review Act, there were statements by the Bureau that suggested an intention to re-evaluate the disparate impact doctrine. Although the CFPB last noted an ECOA disparate impact rulemaking in its Fall 2018 rulemaking agenda, that item was noticeably absent from the 2019 and 2020 agendas, so such a rule does not appear to be in the Bureau’s near-term plans. But the range of possible outcomes here is wide – from declaring that there is no disparate impact liability under ECOA at all (which is the result we believe most appropriate from the language in ECOA itself) to adopting something similar to HUD’s current proposed disparate impact rule under the Fair Housing Act, to adopting something more like the previous HUD rule. Moreover, this seems likely to be a matter of significant disagreement, so it will be interesting to see what the Bureau does in wading into this highly contentious subject.
Financial institutions that seek to submit comments to the CFPB concerning one or more of these issues should carefully parse through each set of questions to determine whether additional clarity provided by the Bureau may create benefits or burdens. It is advisable to conduct these analyses through legal counsel and/or trade groups.
The preamble to the RFI notes that the questions posed are not intended to be exhaustive, and that the CFPB welcomes “additional relevant comments” on these topics. Comments on the RFI will be accepted for 60 days after publication in the Federal Register.
On July 29, 2020, the CFPB hosted a roundtable discussion, attended by Director Kathy Kraninger and moderated by the Bureau’s Principal Deputy Director of Fair Lending, Frank Vespa-Papaleo, to hear feedback from consumer advocates and industry representatives on how the Bureau can facilitate greater access to financial products and services for consumers with limited English proficiency (LEP). Representatives of numerous consumer advocacy groups attended the meeting, as did representatives from several industry trade associations and bank and non-bank lenders. I was delighted to be invited to the roundtable as well, one of only two private law firm practitioners who represent the industry.
The Bureau did not make any substantive announcements during the roundtable, but it was evident from the Director’s presence and comments throughout the meeting that she is committed to making progress on this issue. The gathering of feedback, both through the roundtable and through the recently-announced request for information, make it clear that the Bureau is carefully considering what guidance it can provide, and what other actions it can take, to promote the availability of financial services to LEP consumers, both in terms of making products available to them in the first instance and with respect to the servicing of existing credit products.
Consumer advocates and the industry largely agree that there are opportunities to better serve LEP consumers, so that goal is shared between the two groups (which rarely occurs). Both parties desire more access to financial products and services for LEP customers, so this presents an opportunity for all interested parties to work cooperatively together to achieve this goal.
From the industry’s perspective, the biggest barrier to providing more LEP services is the uncertainty about potential UDAAP or fair lending issues that could arise from the planning and execution of strategies to provide services in non-English languages. The CFPB’s 2016 Supervisory Highlights guidance was a great step in helping to reassure industry with respect to some of these issues, and I believe that it directly led to a significant increase in the amount of non-English support provided by financial institutions, but the guidance is fairly general in nature, and leaves a large number of questions to be decided in the financial institution’s judgment. More specific and comprehensive UDAAP guidance that will allow financial services companies to serve LEP customers in limited ways while expanding their operational capabilities could be a path forward in offering non-English services that would build on the Bureau’s 2016 guidance and would further facilitate action by the industry.
I look forward to the Bureau’s continued efforts on this important issue.
The CFPB recently updated its Home Mortgage Disclosure Act (HMDA) FAQs to add two items regarding multiple data points.
In one FAQ, the CFPB confirms that a lender must report the credit score, debt-to-income (DTI) ratio and combined loan-to-value (CLTV) ratio if they were a factor relied on in making a credit decision, even if the data was not the dispositive factor. The CFPB provides an example of a requirement to report the consumer’s credit score when the score was relied on in making a credit decision, even if the lender denied the application because the application did not satisfy one or more underwriting requirements other than the credit score.
In the other FAQ, the CFPB advises that a lender must report the consumer’s income and the property value relied on in making a credit decision, even if they were not the dispositive factor. The CFPB explains the requirement to report the data is based on the income or property value being relied on in making the credit decision, and not whether the income or property value is a dispositive factor. The CFPB notes that under the HMDA rules, the relied-on standard applies to income and property value “in a similar way to credit score, DTI and CLTV.”
The CFPB has filed a declaration with the Ninth Circuit in which Director Kraninger stated that she has ratified the Bureau’s decisions to issue a civil investigative demand to Seila Law, deny Seila Law’s request to modify or set aside the CID, and file a petition in federal district court to enforce the CID.
The CFPB had previously argued in the Ninth Circuit that former Acting Director Mulvaney’s ratification of the CID had cured any constitutional deficiency. Having ruled that the CFPB’s structure is unconstitutional, the U.S. Supreme Court remanded the case to the Ninth Circuit to consider the CFPB’s ratification argument. In its letter to the Ninth Circuit transmitting Director Kraninger’s declaration, the CFPB asserted that either former Acting Director Mulvaney’s ratification alone or Director Kraninger’s ratification alone would be sufficient to cure the constitutional deficiency and “[t]he fact that the CID has now been approved by not one but two officials fully accountable to the President only confirms that it should be enforced.”
In a letter to the Ninth Circuit responding to the CFPB’s letter, Seila Law asserted that it “believes that the CFPB’s purported ratifications—by former Acting Director Mulvaney and current Director Kraninger—are inadequate to cure the CID’s deficiencies. Seila Law seeks the opportunity to fully brief these legal issues so that they can be resolved by this Court consistent with the directive from the Supreme Court on remand.”
On July 31, the Ninth Circuit entered an order directing the parties “to file supplemental briefs addressing whether the civil investigative demand was validly ratified.” The CFPB’s brief must be filed by August 30, and Seila Law’s brief must be filed no later than 30 days after the CFPB’s supplemental brief is filed. The Ninth Circuit indicated in its order that it will notify the parties if it wishes to schedule oral argument.
The CFPB has also filed ratification declarations in RD Legal Funding and All American Check Cashing, two other circuit court cases involving a challenge to the Bureau’s constitutionality that were put “on hold” pending the Supreme Court’s decision in Seila Law. On July 10, the CFPB filed a declaration with the Second Circuit in RD Legal Funding in which Director Kraninger stated that she has ratified the Bureau’s decisions to file the enforcement action against RD Legal and to appeal from the district court’s dismissal of the action. On July 17, the CFPB filed a declaration with the Fifth Circuit in which Director Kraninger stated that she has ratified the Bureau’s enforcement action against All American Check Cashing.
As previously reported, the OCC recently adopted a final rule (the “Madden fix”) designed to resolve the legal uncertainty created by the Second Circuit’s decision in Madden v. Midland Funding, which held that a non-bank that purchased charged-off loans from a national bank could not charge the same rate of interest on the loans that the national bank charged under Section 85 of the National Bank Act (NBA). The Madden fix codifies the position of the Office of the Comptroller of the Currency (OCC) under Section 85 and 12 U.S.C. §1463(g) (a near-identical provision of the Home Owners’ Loan Act (HOLA)) that the assignee of a loan made by a national bank or federal savings association may charge the same interest rate that the bank or savings association is authorized to charge under federal law. It amends 12 CFR part 7 and part 160 to add, respectively, Section 7.4001(e) and Section 160.110(d), which provide:
Interest on a loan that is permissible under [12 U.S.C. 85] [12 U.S.C §1463(g)(1)] shall not be affected by the sale, assignment, or other transfer of the loan.
In a lengthy complaint filed on July 29, 2020, the States of California, Illinois and New York sued the OCC to set aside the “Madden fix,” claiming that it is “arbitrary, capricious, an abuse of discretion, or otherwise contrary to law,” “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right,” and taken “without observance of procedure required by law.” The AGs’ central allegations are:
- The plain language of Section 85 and 12 U.S.C. §1463 applies only to interest that a national bank or federal savings association may charge. Allegedly, the OCC’s rule represents an expansion of the NBA’s and HOLA’s preemption of state law interest rate caps by extending the preemption to all entities that purchase loans originated by national banks or federal savings associations. As such, the rule transforms the preemptive authority that Congress granted to national banks and federal savings associations “into a salable asset, available to any buyers willing to pay [a national bank or federal savings association] for the privilege of charging interest in excess of state law.”
- Madden did not create legal uncertainty because no federal court of appeals has ever held that Section 85’s interest rate preemption extends to loan purchasers and Madden has not resulted in a disruption of lending.
- “Valid-when-made” is a theory “concocted” by the OCC that conflicts with the plain text of Section 85 and 12 U.S.C §1463. In this regard, the complaint dismisses as factually distinguishable two “archaic” Supreme Court cases that broadly stated that “a contract, which, in its inception, is unaffected by usury, can never be invalidated by any subsequent usurious transaction.”
- The Madden fix language has been added to regulations using the work “preemption” in their titles but the OCC did not follow the requirements in 12 U.S.C §25b that apply to preemption determinations.
- The OCC did not give meaningful consideration to the rule’s facilitation of “rent-a-charter” schemes by predatory lenders.
- The OCC’s claim that the ability of national banks and federal savings associations to transfer loans to non-banks is an important source of liquidity is contrary to evidence in the administrative record and not supported by studies cited by the OCC.
It is clear that a tremendous amount of work and thought went into this complaint. Nevertheless, we believe that it suffers from a number of serious flaws, including the following:
- The complaint repeatedly states that the Madden fix conflicts with the plain language of Sections 85 and 1463(g)(1) but at most makes out the case that these statutes do not directly address the question of whether the usury authority provided by these statutes carries over loan assignees.
- The complaint states: “At most, ordinary application of state law to non-banks could reduce the price that non-bank purchasers might be willing to pay national banks for their loans.” This attempt to dismiss pricing impacts as insignificant simply doesn’t hold water.
- In claiming that no appellate court has concluded that Section 85 carries over loan purchasers, the complaint ignores the Eighth Circuit decision in Krispin.
- In attacking the OCC’s supposed failure to follow the special preemption determination rules adopted by the Dodd-Frank Act, the complaint ignores the distinction drawn by the Supreme Court in its Smiley decision, referenced by the OCC in the preamble to the rule, between interpretations regarding Section 85’s substantive scope and preemption determinations.
In comments on the complaint, the Attorneys General of New York and California also claim that the OCC’s Madden fix is motivated by political partisanship. Those claims do not account for the fact that then-Comptroller Thomas Curry, in the Obama administration, took the same position as to Madden in an amicus brief to the U.S. Supreme Court:
A national bank’s power to charge the interest rate authorized by Section 85 includes the power to transfer a loan, including the agreed-upon interest-rate term, to an entity other than a national bank.
* * *
A national bank’s federal right to charge interest up to the rate allowed by Section 85 would be significantly impaired if the national bank’s assignee could not continue to charge that rate.
We will closely follow developments in this case, as well as developments regarding the OCC’s proposed rule addressing “true lender” issues.
Recently, the federal banking regulators issued four new sets of examination procedures. The OCC issued two significant examination booklets on sampling methodologies and UDAP/UDAAP, and the federal banking regulators, together with state financial regulators, issued interagency exam guidance for assessing safety and soundness of financial institutions in light of the ongoing impact of the COVID-19 pandemic. The Federal Reserve Board (“FRB”) also issued examiner guidance on the credit reporting and mortgage servicing provisions of the new federal CARES Act.
On May 26, 2020, the OCC issued a significantly revised Sampling Methodologies booklet to be included in the Comptroller’s Handbook. The booklet rescinds and replaces the OCC’s prior version, which was last updated over 20 years ago (August 1998), and replaces the Office of Thrift Supervision (“OTS”) Examination Handbook Section 209 (Sampling). The booklet, which contains substantial revisions, discusses the differences between statistical and judgmental sampling and explains the OCC’s approach to statistical sampling methodologies. Revisions include: (a) significantly greater discussion of judgmental sampling; (b) separate descriptions of judgmental sampling and statistical sampling; (c) direction concerning how the examiner should document sampling; (d) the elimination of specific examination objections; and (e) the replacement of blank sample worksheets with specific examination examples. The new booklet applies to supervisory activities beginning on or after June 15, 2020.
On June 29, 2020, the OCC issued a new “Unfair or Deceptive Acts or Practices and Unfair, Deceptive, or Abusive Acts or Practices” booklet to be included in the Comptroller’s Handbook. The booklet contains examination procedures regarding supervision of OCC-regulated banks and savings associations related to Section 5 of the Federal Trade Commission Act (“UDAP”) and Sections 1031 and 1036 of the Dodd-Frank Act (“UDAAP”). Among other things, the examination procedures instruct examiners on how to assess the effectiveness of a bank’s compliance management system in managing UDAP and UDAAP risks, and provides red flags and risk indicators that can be used to identify acts or practices that may raise UDAP/UDAAP concerns. OCC Bulletin 2020-65 transmitting the new booklet indicates that it rescinds two prior OTS booklets on UDAP and UDAAP.
On June 23, 2020, the federal banking regulators (FDIC, OCC, FRB and NCUA) and state bank and credit union regulators jointly issued interagency examination guidance to assess the safety and soundness of financial institutions affected by the coronavirus crisis. The examination guidance is designed to promote consistency and flexibility in the supervision and examination of federal- and state-chartered financial institutions affected by COVID-19 both during and after the pandemic. The interagency guidance instructs examiners to consider the unique, evolving, and potentially long-term nature of the issues confronting institutions due to the coronavirus crisis and to exercise appropriate flexibility in their supervisory response. In conducting examinations, examiners are instructed to consider whether management has managed risk appropriately, including taking appropriate actions in response to stresses caused by COVID-19 impacts.
On July 7, 2020, the FRB’s Consumer and Community Affairs Division issued examination procedures that relate to the credit reporting and mortgage servicing provisions of the CARES Act of 2020. In Community Affairs Letter (CA 20-11) transmitting the exam procedures, the FRB notes that, consistent with its prior statements, it will take into account the “unique circumstances impacting borrowers and institutions” resulting from the COVID-19 pandemic. The FRB expects that supervisory feedback for institutions will be focused on identifying issues, correcting deficiencies, and ensuring appropriate remediation to consumers. The agency does not expect to bring a consumer compliance public enforcement action against an institution, provided that the institution made good faith efforts to comply with consumer protection laws and responded to any needed corrective action.
In Allan v. Pa. Higher Educ. Assistance Agency, the U.S. Court of Appeals for the Sixth Circuit held that the Telephone Consumer Protection Act’s (TCPA) statutory definition of an automatic telephone dialing system (“ATDS”) includes telephone equipment that can automatically dial phone numbers stored in a list, rather than just phone numbers that the equipment randomly or sequentially generates.
The decision widens a circuit split, with the Sixth Circuit agreeing with the Ninth and Second Circuits’ broad reading of the ATDS definition and rejecting the narrower reading adopted by the Third, Seventh, and Eleventh Circuits. Fortunately, the Supreme Court is poised to resolve this circuit split as it recently agreed to decide what constitutes an ATDS by granting Facebook’s petition for certiorari in Duguid v. Facebook, Inc.
In Allan, the plaintiffs sued the Pennsylvania Higher Education Assistance Agency (PHEAA) claiming that PHEAA violated the TCPA by placing debt collection calls to plaintiffs’ cell phones after they revoked consent. PHEAA placed calls to plaintiffs using an Avaya Proactive Contact system, which creates a calling list based on a stored list of numbers – the numbers are not “randomly generated.” The district court granted summary judgment to the plaintiffs adopting the Ninth Circuit’s analysis that calls made by a system that stores telephone numbers to be called and automatically dials those numbers, qualifies as an ATDS.
The question on appeal was whether, as a matter of statutory interpretation, the Avaya autodialer system that PHEAA used to make the calls qualifies as an ATDS.
The TCPA defines ATDS as “equipment which has the capacity –
- to store or produce telephone numbers to be called, using a random or sequential number generator; and
- to dial such numbers.”
47 U.S.C. § 227(a)(1). The Sixth Circuit reviewed each potential interpretation of the statutory definition. First, the Court recognized that the phrase “using a random or sequential number generator” could apply both to “store” and “produce,” and acknowledged that this reading follows proper grammar. However, the Court ultimately held that this definition “is too labored and problematic to carry the day,” because it is “hard to see how a number generator could be used to “store” telephone numbers, even if it can as a technical matter.” As a second option, the Court of Appeals recognized that the phrase “using a random or sequential number generator” could apply only to “produce.” However, it admitted that this alternative interpretation is problematic because the transitive verb “to store” lacks a direct object and would require adding the phrase “telephone numbers to be called” after “store” to make grammatical sense.
Adopting the reasoning of the Ninth Circuit, the Court held that the statutory definition itself is ambiguous and looked to the other provisions of the statute as guide for its interpretation. Specifically, the Sixth Circuit looked to two exceptions carved out in the statute: (1) prior express consent and (2) calls made pursuant to the collection of a debt owed to or guaranteed to the United States. The Sixth Circuit reasoned that consented-to calls and calls made to collect on a debt are calls made to known recipients and these calls are dialed from a stored list of numbers because they were made to known numbers, not random numbers. While the Supreme Court recently declared the second exception unconstitutional and severed that exception, the Sixth Circuit reasoned that the now-defunct exception implies that the autodialer ban covers stored-number systems.
In reaching its holding, the Court also looked at the legislative history of the TCPA and concluded that Congress “intended to crack down on automated calls themselves—not just the technology making them possible at the time.” It also addressed the potential concern that smart phones could be considered an ATDS under its broad interpretation, the Court cited ACA Int’l and noted that simply because a device has a theoretical capacity to store and dial numbers from a list is not enough to make it an ATDS. Instead, a smartphone must actually be used in that manner and the standard, non-automatic message or call would not create TCPA liability.
Allan now joins the Second and Ninth Circuit as magnets for TCPA litigation. It further demonstrates the need for uniformity as to the statutory definition of an ATDS. The Avaya telephone system that Allan held constitutes an ATDS is the same Avaya telephone system that the Eleventh Circuit held does not qualify as an ATDS. In Glasser v. Hilton Grand Vacations Co., LLC, the Eleventh Circuit addressed a consolidated appeal of two district court cases concerning the statutory definition of an ATDS. PHEAA was a defendant in one of those district court cases on appeal and PHEAA employed the same Avaya telephone system that was used in Allan. PHEAA is now faced with inconsistent opinions from two Circuit Courts. This means that a call that PHEAA places to a debtor in Michigan, Ohio, West Virginia, Kentucky, or Tennessee may have different legal ramifications than a call PHEAA places to a debtor in Alabama, Florida or Georgia.
In March 2020, the Fifth Circuit, on its own motion, entered an order vacating the panel’s ruling in All American Check Cashing that the CFPB’s structure was constitutional and granting rehearing en banc. On June 30, the Fifth Circuit tentatively calendared the case for en banc oral argument during the week of September 21, 2020 and ordered the parties to file supplemental briefs. All American filed its supplemental en banc brief at the end of last week.
The underlying case is an enforcement action filed by the CFPB against All American in 2016 in a Mississippi federal district court for alleged violations of the CFPA’s UDAAP prohibition. In March 2018, the district court denied All American’s motion for judgment on the pleadings based on the Bureau’s unconstitutionality and ruled that the CFPB’s structure was constitutional. In opposing All American’s motion to certify the case for interlocutory appeal, the CFPB argued that a notice of ratification of the action by former Acting Director Mulvaney cured any constitutional defect and mooted the constitutional issue. The district court did not rule on the CFPB’s ratification argument and in March 2018 granted All American’s motion for interlocutory appeal which the Fifth Circuit agreed to hear.
With the U.S. Supreme Court having ruled in Seila Law that the Bureau’s structure is unconstitutional, the en banc Fifth Circuit can be expected to reverse the panel’s ruling upholding the Bureau’s constitutionality. Having ruled that the CFPB’s structure was constitutional, the panel did not reach the CFPB’s ratification argument. On July 17, the CFPB filed a declaration with the Fifth Circuit in which Director Kraninger stated that she has ratified the Bureau’s enforcement action against All American. Accordingly, the ratification issue could now be decided by the en banc Fifth Circuit.
In its supplemental brief, All American argues that dismissal of the Bureau’s enforcement action is the proper remedy for the constitutional violation. According to All American, if a court declares an agency unconstitutional without giving meaningful relief to the prevailing challenger, the Constitution’s structural separation of powers guarantee would become meaningless because victims of constitutional violations would have no incentive to challenge such violations.
As an independent grounds for dismissal of the enforcement action, All American argues that the district court lacked jurisdiction to hear the action. According to All American, because of the CFPB’s defective structure, the CFPB was not lawfully vested with executive power when it filed the enforcement action. As a result, it lacked standing to sue and the district court never had subject matter jurisdiction over the action.
All American also argues that the ratification of the enforcement action by Director Kraninger and former Acting Director Mulvaney does not remedy the constitutional defect for the following principal reasons:
- Unlike an action tainted by an appointment defect that involves an agent’s authority, an action taken by a structurally defective agency cannot be ratified.
- Even if the ratification doctrine applies, U.S. Supreme Court precedent requires that two conditions must be satisfied for a valid ratification: the party ratifying an act must have been able (1) to do the act ratified at the time the act was done, and (2) to also do the act at the time of ratification.
- The first condition cannot be satisfied because, as a result of the constitutional defect, the CFPB had no authority to bring the enforcement action at the time it was filed nor did it have standing to bring the action.
- The second condition cannot be satisfied because the CFPB’s purported ratification (whether by Director Kraninger or former Acting Director Mulvaney) occurred after the expiration of the relevant 3-year CFPA statute of limitations.
- The CFPB’s prosecution of the enforcement action after the Supreme Court’s Seila Law decision remains unconstitutional because the Bureau’s funding structure violates the U.S. Constitution’s Appropriations Clause in Article I by insulating the Bureau from congressional oversight, a problem made worse by the decision because the Bureau is now an executive agency “subject to full control by a President unconstrained by Congress’s appropriations power.”
On August 3, 2020, the Federal Financial Institutions Examination Council (“FFIEC”) issued a joint statement to provide prudent risk management and consumer protection principles for financial institutions to consider when working with borrowers as consumer and business loans near the end of initial loan accommodation periods during the coronavirus pandemic. The guidance notes that the principles outlined in the joint statement apply to both commercial and retail loan accommodations and are consistent with the Interagency Guidelines Establishing Standards for Safety and Soundness. Furthermore, the principles are intended to be tailored to a financial institution’s size, complexity and loan portfolio risk profile, as well as the industry and business focus of its customers or members.
The joint statement recognizes the significant adverse impact that the COVID-19 crisis has had on consumers, businesses, financial institutions, and the U.S. economy. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) provided several forms of financial relief to businesses and individual borrowers, and some states and localities have provided similar credit accommodations. Many financial institutions have also offered voluntary credit accommodations to borrowers.
The FFIEC members reiterate their prior guidance, the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (revised) dated April 7, 2020 (“Interagency Statement on Loan Modifications”), that encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual loan payment obligations because of COVID-19. Specifically, that guidance stated that loan accommodations are generally viewed as positive actions that can mitigate adverse impacts on borrowers.
The joint statement notes that while some borrowers will be able to resume contractual payments at the end of an accommodation, others may be unable to do so due to continuing financial challenges. The FFIEC members encourage financial institutions to consider prudent accommodation options that are based on an understanding of the borrower’s credit risk, consistent with applicable laws and regulations, and designed to ease cash flow pressures on affected borrowers while improving their capacity to service debt and facilitating a financial institution’s ability to collect on its loans. Such arrangements may mitigate long-term borrower financial impacts by avoiding delinquencies or other adverse consequences.
FFIEC members encourage financial institutions to observe several risk management and consumer protection principles to work with borrowers in a safe and sound manner as loans near the end of accommodation periods, as described below. Importantly, the guidance recommends that financial institutions should ensure that clear, accurate and timely information is provided to both borrowers and guarantors regarding any accommodation.
- Prudent risk management practices: Such practices include identifying, measuring, and monitoring credit risk for loans that receive accommodations. Monitoring and assessing the terms of loan accommodations on an ongoing basis enables financial institutions to recognize any credit deterioration and loss exposure in a timely manner. The guidance also recommends effective management reporting to ensure that the management team fully understands the scope of loans that received an accommodation, the types of initial and any additional accommodations provided, when the accommodation periods end, and credit risk for higher-risk segments of the institution’s loan portfolio.
- Well-structured and sustainable accommodations: The guidance recommends that a financial institution’s determination of whether to consider additional accommodation options for a borrower should be based on a comprehensive review of how the hardship has affected the financial condition and current and future performance of the borrower. Additional accommodations should be well-designed and consistently applied to mitigate losses both for the borrower and the financial institution while helping the borrower resume structured, affordable and sustainable repayment of amounts contractually due over a reasonable period of time.
- Consumer protection: The guidance encourages financial institutions to provide consumers with available options for repaying any missed payments at the end of their accommodation to avoid delinquencies or other adverse consequences. Financial institutions are also encouraged, where appropriate, to provide consumers with options for making prudent changes to credit product terms to support sustainable and affordable long-term payments. The guidance also recommends several effective approaches to consumer protection risk management.
- Accounting and regulatory reporting: The guidance advises financial institutions to follow applicable accounting and regulatory reporting requirements for all loan modifications as the term “modification” is used in generally accepted accounting principles (GAAP) and regulatory reporting instructions, which includes maintenance of appropriate allowances for loan and lease losses (ALLL) and allowances for credit losses (ACL), as applicable. The guidance also advises financial institutions to consult Section 4013 of the CARES Act (Temporary Relief from Troubled Debt Restructurings) and the Interagency Statement on Loan Modifications.
- Internal control systems: Controls should include quality assurance, credit risk review, operational risk management, compliance risk management, and internal audit functions that are commensurate with the size, complexity and risk of a financial institution’s activities. Targeted testing of the process for managing each stage of the accommodation is also advisable. The guidance notes that if these functions are outsourced, a financial institution remains responsible for oversight of the service provider.
As discussed in our June 12th post, the New York City Department of Consumer Affairs (“DCA”) issued new debt collection rules related to limited English proficiency servicing. These rules took effect June 27, 2020, but due to the COVID-19 crisis, DCA provided the industry with a 60-day enforcement grace period until August 26, 2020.
After discussions with industry trade groups requesting clarifications on the new rules, DCA agreed to issue formal guidance answering Frequently Asked Questions (“FAQs”). This formal guidance was released today, August 6, 2020. Specifically the FAQs clarify the following:
- Applicability of the rules: The new rules apply to anyone required to obtain a debt collection agency license and certain provisions also apply to creditors as well. The provisions applicable to creditors are laid out in detail in the guidance. Additionally, the guidance clarifies that the rules do not apply to litigation activities that only a licensed attorney can perform.
- Language access services: “Language access services” means any service available in a language other than English. Debt collectors are permitted to provide some language access services and not others. The new rules do not require debt collectors to offer any language access services but provide that if a collector does not offer any such services, that must be disclosed in its initial validation notice and on its public website.
- Annual reports: Annual reports must be maintained in the debt collection agency’s records and produced to DCA upon request. The annual report form is available at nyc.gov/BusinessToolbox.
- Recording language preference: Debt collectors are never permitted to infer the language preference of a consumer. Debt collectors are not required to request a consumer’s language preference in each communication with the consumer. Collectors must make reasonable attempts to obtain and record the language preference, but if a consumer declines to provide it, the obligation can be satisfied by recording the non-response.
- Legally required notices: A debt collector must confirm the identity of the consumer and provide any legally required notices before requesting the consumer’s language preference. If the collector has language access services that enable them to communicate in the consumer’s preferred language, the collector must offer those services and repeat all notices in that language.
- Debt collectors involved in numerous business activities: If a collector is engaged in numerous business activities, it is only required to include the two required statements of 6 RCNY § 5-77(h) on its websites that relate to the collection of debts after debt collection procedures have begun.
The DCA notes in its guidance that it intends to modify the new rules to align with the interpretations provided in its FAQs. While this guidance is helpful in clarifying some of the questions these new rules raise, many questions still remain and unfortunately, DCA declined to provide any model disclosures in the FAQs relating to how to disclose the nature of what, if any, language access services are provided, to the dismay of many.
In the wake of the U.S. Supreme Court’s June 29, 2020 decision in Seila Law LLC v. Consumer Financial Protection Bureau, which held that the CFPB’s leadership structure violates the separation of powers mandated by the U.S. Constitution and made the Bureau’s Director removable by the President at will, many are urging Congress to further reform the Bureau’s leadership structure, possibly by replacing the CFPB Director with a five-member commission. Proponents of Congressional action to further address CFPB leadership include CFPB Director Kathy Kraninger, Republican members of the House Financial Services Committee, sponsors of legislation introduced in Congress, and many trade associations.
A bill introduced in the U.S. Senate on June 17, 2020 would re-name the CFPB the “Financial Product Safety Commission”, and change its leadership to a five-member commission. The Financial Product Safety Commission Act of 2020 was introduced by U.S. Senator Deb Fischer (R-Neb.), who since 2013 has introduced successive versions of legislation seeking to reform the CFPB’s leadership structure.
A companion bill, H.R. 6116, the Consumer Financial Protection Commission Act, was introduced in the U.S. House of Representatives by Representative Blaine Luetkemeyer (R-MO) in March 2020.
Propelled by the U.S. Supreme Court’s Seila Law decision, the sponsors of the CFPB restructuring bills are urging Congress to move forward and adopt the bills. Both Senator Fischer and Representative Luetkemeyer issued statements on June 29, 2020 calling for the passage of their respective bills.
Also on June 29, trade associations including the Consumer Bankers Association, the Credit Union National Association, and the American Bankers Association issued statements calling for Congress to pass legislation creating a bipartisan commission to lead the CFPB.
S. 3990 and H.R. 6116 both provide that the five commissioners of a re-named consumer financial products watchdog agency, the “Financial Product Safety Commission” (per S. 3990) or the “Consumer Financial Protection Commission” (per H.R. 6116), would be appointed by the President, confirmed by the Senate, and serve staggered five-year terms. One commissioner would be appointed by the President to serve as Chair. No more than three commissioners could be members of the same political party. Until all five commissioners and the Chair are appointed, the current CFPB Director would serve as Chair of the Commission. The President could remove a commissioner for “inefficiency, neglect of duty, or malfeasance in office”. The proposed legislation also would establish quorum requirements, the authority of the Chair, and limitations on that authority.
Earlier this year, numerous trade associations joined in letters to Representative Luetkemeyer and Senator Fischer supporting the bills, citing the benefits of the proposed restructure including a more stable and balanced regulatory environment and prevention of executive and political interference in the supervision and regulation of financial institutions.
The letters also point out that the original version of the Dodd-Frank Wall Street Reform and Consumer Protection Act adopted by the U.S. House of Representatives in 2010 provided that the CFPB would be led by a bipartisan five-member commission. However, as ultimately enacted, Congress placed the CFPB under the leadership of a single Director insulated from at-will removal.
In an opinion published in on-line newsletter The Hill on July 27, 2020, Senator Fischer again called on Congress to adopt her bill replacing the CFPB’s single Director with a five-member commission. She noted that while the Seila Law decision was a “win when it comes to separation of powers”, she urged that further action is needed in order for the CFPB to be the independent agency envisioned by its original architects: “Beyond questions of constitutionality and prudence, the CFPB’s current single-directorship model means that the agency’s extensive regulatory, investigative, and enforcement actions are subject to change with every presidential election, creating a whiplash effect. The agency is simply too powerful for this to be sustainable…”.
On July 30, 2020, as reported in the American Banker, CFPB Director Kathy Kraninger told the House Financial Services Committee she would welcome action by Congress to address the CFPB’s leadership structure. During the hearing, Republican members of the Committee made statements supporting the idea of a bipartisan commission to lead the CFPB.
While the narrow scope of the current bills might make them better candidates for adoption than previous bills such as 2016’s CHOICE Act, that not only would have changed the CFPB’s leadership but also introduced a broad array of controversial provisions, we still think it is unlikely that the current bills would be supported by Democratic lawmakers. Republican support for the current bills seems to be growing, but it is doubtful that the bills will gain traction this year. In addition, while we continue to share industry’s preference for the CFPB to be led by a commission, the Supreme Court’s Seila Law decision calls into question whether insulation from at-will removal would be deemed appropriate even for a bi-partisan five-person leadership structure. Although the Supreme Court did not overrule its 1935 decision in Humphrey’s Executor v. United States, which upheld the constitutionality of the for-cause removal protection afforded to the FTC’s five commissioners, it narrowly read that decision to create an exception to the President’s unrestricted removal power only for “multimember expert agencies that do not wield substantial executive power.” The Court contrasted “the New Deal-era FTC upheld [in Humphrey’s Executor]” with the CFPB, highlighting the CFPB Director’s authority to “promulgate binding rules fleshing out 19 federal statutes, including a broad [UDAAP prohibition]”, “unilaterally issue final decisions awarding legal and equitable relief in administrative adjudications”, and “seek daunting monetary penalties on behalf of the United States in federal court.”
On July 24, 2020, the CFPB announced the issuance of consent orders against Sovereign Lending Group, Inc. (Sovereign) and Prime Choice Funding, Inc. (Prime Choice). The CFPB indicated in their announcement that these consent orders originated from a number of investigations by the CFPB into companies allegedly using deceptive direct mail campaigns to advertise VA guaranteed mortgages. Both consent orders provide for civil money penalties, with Sovereign ordered to pay $460,000 and Prime Choice ordered to pay $645,000.
Both consent orders assert violations of Regulation Z and the Mortgage Acts and Practices—Advertising Rule (the “MAP Rule” or Regulation N), and Title X of the Dodd-Frank Act (the Consumer Financial Protection Act) for Sovereign’s and Prime Choice’s advertising of VA mortgages to service members and veterans dating back to January 1, 2016. Major themes of the asserted violations in both orders include (1) “false, misleading and inaccurate representations” about credit terms and inadequate disclosures, (2) the inability of consumers to obtain the advertised terms, and (3) falsely representing affiliation with the government.
The CFPB cites several examples of asserted false, misleading and inaccurate representations of costs and terms. In the Prime Choice consent order, the CFPB asserts that an advertisement sent to 84,000 consumers misrepresented and under-disclosed the APR on an advertised ARM loan because it did not take into account the fully indexed rate, required discount points for the disclosed interest rate, or origination charges. The CFPB asserts that by under-disclosing the APR based on the actual loan terms, Prime Choice did not disclose terms actually available to the consumers.
With regard to Sovereign, the CFPB asserts that a mailer sent to 87,000 consumers included a statement that read “Take $27,909 CASH-OUT FOR ONLY $113.94 PER MONTH!” The CFPB asserts that this statement was inaccurate and misleading because the advertised payment was calculated on the cash-out portion of $27,909, and did not consider the payment amount covering the refinance of any existing loan that would be paid off, which would result in a payment higher than $113.94 per month.
With regard to both lenders, the CFPB also asserts that advertisements from both lenders were often missing additional terms triggered by the disclosure of a rate or payment that are required under Regulation Z. By way of example, in the Sovereign consent order the CFPB asserts that an advertisement stated the amount of a payment that would apply to the first five years of the loan, but failed to disclose the amount of each payment and number and period of the payments during the remaining adjustable rate period, years 6 through 30, of the loan, as required by Regulation Z.
The CFPB asserts that numerous advertisements by both Sovereign and Prime Choice were cited for misrepresenting the consumers’ likelihood of actually obtaining or qualifying for the advertised mortgage, such as by stating that a consumer had been “pre-selected” or had “prequalified” when, in fact, the consumer had not been prescreened based on credit score or other credit data. Another example of asserted misleading statements related to the consumer’s ability to qualify cited by the CFPB were Sovereign advertisements that included statements of “Low FICO Score OK” but then included in fine print that terms advertised assumed credit scores of at least 740.
Finally, in both consent orders the CFPB asserts that advertisements from Sovereign and Prime Choice either “directly or by implication” represented that the companies were affiliated with the government. Advertisements from both Sovereign and Prime Choice were cited by the CFPB for their formatting and use of text boxes and form numbers that the CFPB asserts resemble IRS forms. Additionally, the CFPB asserts that certain Sovereign advertisements sent to consumers with VA loans were “published on light green paper that is similar to light green paper that the VA has used for Certificates of Eligibility” along with “reference numbers” that were similar to those used on Certificates of Eligibility.
The specific characteristics of the advertisements that the CFPB asserts constituted a misrepresentation about affiliation with the government or a government agency were not as clear as an attempt to suggest a government affiliation than we have seen in other advertisements addressed in prior matters. This suggests that lenders should be diligent in their review of their advertisements with regard to the MAP Rule prohibition against a lender misrepresenting an affiliation with a government entity. Lenders also should review their advertisements with regard to the other assertions made by the CFPB in the consent orders.
The full content of the consent orders can be viewed via the links below.
New York Adopts Final Reverse Mortgage Regulations
The New York Department of Financial Services (NYDFS) recently adopted the final regulations relating to reverse mortgage loans. As we previously reported, the NYDFS had adopted emergency regulations, which became effective on March 5, 2020, requiring any person or entity making reverse mortgage loans to be licensed as a mortgage banker (unless exempt) and to apply and be granted approval to make reverse mortgage loans by the Superintendent. Other requirements addressed advertising restrictions, enhanced disclosures, housing counselling, and maintenance of the real property securing the reverse mortgage loan, among others.
In this final promulgation, the NYDFS now adopts the same regulation with non-substantive changes. Of note, however, the NYDFS added a transitional provision which states that for 120 days including and following March 5, 2020, mortgagees either originating or servicing home equity conversion mortgages under HUD’s FHA program shall not be in violation if they complied with the previous regulation that was in effect prior to March 5, 2020.
The final regulations became effective on July 29, 2020.
Upcoming NMLS Ombudsman Virtual Meeting
The NMLS Ombudsman Meeting is scheduled for Wednesday, September 9, 2020, from 3:30 p.m. to 5:30 p.m. ET. For information about registering for the event and to view the agenda, please click here.
Note that there will not be a live, open forum discussion. Questions for panelists and commentary will be taken via the Q&A function during the presentation. The meeting will be recorded and posted on the NMLS Resource Center after the event.
NMLS Policy Guidebook Update
The NMLS Policy Guidebook was recently updated on August 4, 2020.
The only change made in this update is that for Multi-Series LLCs, NMLS requires each entity under a series LLC to have its own unique EIN for licensing purposes.
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