Legal Alert

Mortgage Banking Update - September 10, 2020

September 10, 2020
In This Issue:


Fannie Mae and Freddie Mac Extend Origination Flexibilities Due to COVID-19

As previously reported, the Federal Housing Finance Agency (FHFA) recently announced the extension of various Fannie Mae and Freddie Mac origination flexibilities due to COVID-19 to September 30, 2020. Fannie Mae, in updates to Lender Letter 2020-03, Lender Letter 2020-04 and Lender Letter 2020-06, and Freddie Mac, in Bulletin 2020-34 and Bulletin 2020-35, address the specific temporary origination policies that are extended to September 30, 2020.

Additionally, Fannie Mae, in Lender Letter 2020-12, and Freddie Mac, in Bulletin 2020-35, address the extension to December 1, 2020 of the effective date for the Adverse Market Refinance Fee. The extension of the effective date was previously announced by the FHFA.

- Mortgage Banking Group

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FHFA, HUD, and VA Announce Extension of Foreclosure Moratoriums Through December 31

On August 27, 2020, the Federal Housing Finance Agency (FHFA) announced the extension of the Fannie Mae and Freddie Mac moratorium on single-family foreclosures from August 31, 2020, to December 31, 2020. The moratorium on evictions from single-family homes owned by Fannie Mae or Freddie Mac also is extended until December 31, 2020. The announcement does not address evictions from multi-family properties subject to a Fannie Mae or Freddie Mac loan. Fannie Mae addresses the extension of the single-family foreclosure moratorium in an update to Lender Letter 2020-02 and advises that the moratorium does not apply to vacant or abandoned homes.

Also on August 27, 2020, the U.S. Department of Housing and Urban Development (HUD) in Mortgagee Letter 2020-27 extended the foreclosure and eviction moratorium for FHA insured single-family loans from August 31, 2020, to December 31, 2020. The FHA moratorium applies to all FHA Title II single-family forward and Home Equity Conversion (reverse) mortgage loans, except for FHA loans secured by vacant or abandoned properties. Deadlines for the first legal action and reasonable diligence timelines are extended by 90 days from the date of expiration of the moratorium.

In Circular 26-20-29 and Circular 26-20-30, each dated August 24, 2020, the U.S. Department of Veterans Affairs (VA) extended the eviction and foreclosure moratoriums, respectively, for properties secured by VA guaranteed loans from August 31, 2020, to December 31, 2020.

- Mortgage Banking Group

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FHA Extends Temporary Employment Verification and Appraisal Guidance Due to COVID-19

In Mortgagee Letter 2020-28 dated August 28, 2020, the U.S. Department of Housing and Urban Development announced the extension of FHA temporary guidance regarding employment verification and appraisals due to COVID-19. The temporary guidance originally was announced in Mortgage Letter 2020-05 that was issued in March 2020.

As previously reported, the temporary guidance was extended from the original expiration date of May 17, 2020, to June 30, 2020, and then again from June 30, 2020, to August 31, 2020. Based on the latest extension, the temporary appraisal guidance is effective immediately for appraisals with an effective date on or before October 31, 2020, and the temporary verification of employment guidance is effective immediately for cases closed on or before October 31, 2020.

- Mortgage Banking Group

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FHFA Announces Fannie Mae and Freddie Mac Will Continue Purchasing Loans in a COVID-19 Forbearance

As previously reported, Fannie Mae and Freddie Mac recently announced that there are no plans to extend the eligibility for purchase of loans in a COVID-19 forbearance for loans with note dates after August 31, 2020.

The Federal Housing Finance Administration (FHFA) recently announced that Fannie Mae and Freddie Mac will extend buying qualified loans in a COVID-19 forbearance until September 30, 2020. FHFA also announced that Fannie Mae and Freddie Mac will extend various loan origination flexibilities due to COVID-19 through September 30, 2020, as well.

- Mortgage Banking Group

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New York City Department of Consumer Affairs Extends Enforcement Grace Period on Its New Limited English Proficiency Debt Collection Rules to October 1, 2020

As discussed in our June 12th and August 7th posts, The New York City Department of Consumer Affairs (“DCA”) issued new debt collection rules related to limited English proficiency servicing, which took effect June 27, 2020. Due to the COVID-19 crisis, the DCA provided the industry with a 60-day enforcement grace period until August 26, 2020. The DCA has now extended this enforcement grace period until October 1, 2020.

While this extension is helpful in providing debt collectors additional time to comply with these rules, many unanswered questions remain. The DCA previously noted in its August 7th guidance that it intends to modify the rules to align with the interpretations provided in its FAQs. We are still awaiting these modifications.

- Stefanie Jackman & Christine Emello

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CFPB Files Second Status Report With Court Regarding Section 1071 Implementation

The CFPB has filed its second status report with the California federal district court as required by the Stipulated Settlement Agreement in the lawsuit filed against the Bureau in May 2019 alleging wrongful delay in adopting regulations to implement Section 1071 of the Dodd-Frank Act.

Section 1071 amended the ECOA 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. Such data includes the race, sex, and ethnicity of the principal owners of the business. The Stipulated Settlement Agreement, which the court approved in February 2020, established a timetable for the Bureau to engage in Section 1071 rulemaking and required the Bureau to provide status reports to the plaintiffs and the court every 90 days until a Section 1071 final rule is issued.

The first two deadlines in the Stipulated Settlement Agreement relate to the SBREFA process. The Agreement provides that the Bureau will release a SBREFA outline of proposals under consideration and alternatives considered by September 15, 2020, and will convene a SBREFA panel by October 15, 2020, or as soon as practicable thereafter if panel members are not available to convene.

The Bureau provided the following information in the status report:

  • Bureau staff completed a draft of the SBREFA outline and provided the draft to the SBA and OIRA on August 11.
  • The Bureau officially notified the SBA and OIRA on August 10 regarding the convening of a SBREFA panel and in that notice, identified potential candidates to serve as small entity representatives who will consult with the SBREFA panel. The Bureau will finalize the selection of small entity representatives after it consults with the SBA and OIRA.
  • The Bureau believes it is on track to meet the first two deadlines in the Stipulated Settlement.
  • Under its current plan, the Bureau would publicly release the SBREFA outline and related materials on September 15, convene the SBREFA panel on October 15, and hold meetings with the panel and small entity representatives during the week of October 19. Based on that timeline, the deadline for completion of the SBREFA panel’s report would be December 14, 2020.

- Alan S. Kaplinsky

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CFPB Issues Additional Consent Orders for False and Misleading Mortgage Advertising

Since late July, the CFPB has issued seven consent orders against mortgage companies in which the CFPB asserts that the companies engaged in false and misleading advertising to service members and veterans. This advertising focus is familiar and similar to a series of enforcement actions by the CFPB in December 2016 in which it asserted companies engaged in deceptive advertising of reverse mortgage terms. The recent focus on alleged false and misleading advertising related to VA mortgages may be the result of efforts by the CFPB to fulfill its statutory obligation to “coordinate efforts among Federal and State agencies, as appropriate, regarding consumer protection measures relating to consumer financial products and services offered to, or used by, service members and their families.”

In November 2017, the CFPB and VA issued a joint warning order to veterans regarding unsolicited refinance offers that “appear official” and sound “too good to be true.” The CFPB and VA warned about several issues ultimately found by the CFPB in the seven consent orders issued since July 24, 2020, including offers to skip one or two payments, to receive an escrow refund, and to receive low interest rates without specific terms. Additionally, following the passage of The Protecting Veterans From Predatory Lending Act of 2018 (the “Act”), which was designed to protect veterans from “loan churning” or “serial refinancing,” the VA published policy guidance to advise lenders of program changes as a result of the Act in Circular 26-18-13. Most recently, the VA published Circular 26-20-16 to advise lenders of VA’s expectations of self-identification, review, cure and quarterly reporting of Interest Rate Reduction Refinancing Loans (“IRRRL”) loans that did not comply with the Act and VA policy.

On September 2, 2020, the CFPB announced the issuance of a consent order against Accelerate Mortgage, LLC (Accelerate), immediately following two announcements on September 1, 2020 regarding consent orders against Service 1st Mortgage, Inc. (Service 1st) and Hypotec, Inc. (Hypotec). Just one week prior, the fourth related consent order was announced by the CFPB on August 26, 2020 against, Inc. (PHLoans), previously known as Pacific Home Loans, Inc.

These follow consent orders discussed in previous blog posts against Go Direct Lenders, Inc. (Go Direct), and against Sovereign Lending Group, Inc. (Sovereign) and Prime Choice Funding, Inc. (Prime Choice).

The CFPB indicated in all of its announcements that the consent orders originated from a number of CFPB investigations into companies allegedly using deceptive direct mail campaigns to advertise VA-guaranteed mortgages. Like the companies involved in the first four consent orders, Accelerate, Service 1st, Hypotec, and PHLoans were all ordered to pay civil money penalties. Hypotec was assessed the smallest civil money penalty of all seven orders, at $50,000, while the amounts for Accelerate, Service 1st, and PHLoans are $225,000, $230,000, and $260,000, respectively.

The CFPB continues to find 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) in the advertising of VA-guaranteed mortgages to service members and veterans across this new series of consent orders. Its findings include “false, misleading and inaccurate representations” about credit terms and inadequate disclosures, the inability of consumers to obtain the advertised terms, and falsely representing an affiliation with the federal government.

The findings regarding actually available or false and misleading loan terms in advertisements cite the use of similar practices by the companies entering into the latest consent orders. For example, the CFPB found that Service 1st advertised mortgages with an interest rate and APR combination that it was not actually prepared to offer in 134,000 advertisements during 2018. Hypotec was found to have sent millions of advertisements with interest rate and APR combinations that on the date of the advertisement, and in the preceding 60 days, Hypotec was not prepared to offer. Similar to a finding in the Sovereign consent order, the CFPB found that PHLoans and Accelerate misled consumers regarding cash-out loans and corresponding payment amounts. The CFPB found that PHLoans advertised that a consumer could take $20,000 cash-out for “ONLY $95.68 PER MONTH” which the CFPB pointed out only accounted for the payment on the $20,000 and did not consider the payment amount of the existing loan that would be refinanced. The CFPB similarly found that Accelerate’s advertisement stated that a consumer could “access $20,000 for only $95.05 per month” with a VA mortgage.

New to the latest series of consent orders was a finding against Service 1st, Hypotec, and Accelerate that advertisements made false representations to consumers that their eligibility for VA-guaranteed mortgage loans was time limited. Service 1st and Hypotec were cited for identical false statements that implied a time limitation on the availability of VA loan programs. Over one million of Service 1st’s advertisements and 450,000 of Hypotec’s stated that “the Economic Stimulus Program will end soon. There is currently no plan to extend the Stimulus Program.” In over 56,000 advertisements, Accelerate was found to have misled consumers as to the expiration of VA refinance programs by stating “This VA Cash-Out program is available to Veterans like you! This offer is available to you through July 15, 2019.”

Additional new findings involved false or misleading statements about skipped payments and escrow refunds by Service 1st and Hypotec. Service 1st and Hypotec both distributed large numbers of advertisements with a statement that read “EST. ESCROW REFUND AMOUNT” along with a specific dollar amount. The CFPB found that the amount was calculated using a methodology that had no relationship to the actual escrow refund a consumer would get, and that the lenders frequently required consumers to fund a new escrow account when a new loan was originated. Service 1st sent almost one million advertisements claiming consumers could “skip” or “miss” two payments, but did not disclose specific timing requirements or that those two payments would be financed into the new mortgage loan.

As it did in the first four consent orders, the CFPB found in the Service 1st, Accelerate, and Hypotec consent orders that advertisements either “directly or by implication” represented that the company was affiliated with the federal government. In the Service 1st and Hypotec consent orders, the CFPB found that, through the use of formatting and phrases, the advertisements were made to resemble something that came from, or was endorsed by, the VA. Hypotec and Service 1st were cited for using phrases like “IRRRL – Benefit Allotment,” “VA-1211 Benefit Allotment Notice,” “Form 21-0760 Eligibility Notification” or “Understanding your VA Benefit Statement.” Many of Service 1st’s advertisements notably included a disclaimer that Service 1st was not affiliated with the government, but because it was in fine print or did not appear on the first page, the disclaimer was found to be inadequate. In addition to misrepresentations that implied or made it appear that advertisements were originating from or on behalf of the VA, Accelerate’s advertisements were also found to have used formats, symbols, QR codes, or logos resembling those used by the Federal Deposit Insurance Corporation and the Internal Revenue Service.

The CFPB focus in this area reinforces the need for lenders to carefully review their advertisements to avoid a violation of the MAP Rule’s prohibition of lender misrepresentations about a government affiliation, and to also review their advertisements for potential violations that have been the basis of the CFPB consent orders. The characteristics of the advertisements cited by the CFPB in the seven consent orders issued over the past seven weeks as the basis for its findings that the advertisements misrepresented a government affiliation deserve close attention because they indicate that the CFPB takes an expansive view of what constitutes such a misrepresentation. In addition, lenders may want to consider avoiding the use of the various terms that the Hypotec consent order prohibits the lender from using in advertisements, such as “VA loan specialist.”

The full content of all seven consent orders can be viewed via the links below.

Accelerate Consent Order

Service 1st Consent Order

Hypotec Consent Order

PHLoans Consent Order

Go Direct Consent Order

Sovereign Consent Order

Prime Choice Consent Order

- Amanda E. Phillips & Richard J. Andreano, Jr.

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A Special Edition to Mark Episode 100 of Consumer Finance Monitor Podcast: How the CFPB has Changed Under the Trump Administration and Could Change Under a Biden Administration

We begin this special edition episode with a discussion of why we launched the podcast, topics we have covered and guests who have joined us, and our plans for future episodes. We then look at how the CFPB has changed since 2017 (and dispel some misconceptions) and share our expectations if Joe Biden becomes President. Topics discussed include the CFPB’s approach to enforcement and supervision (including possible new larger participant rules), the fate of the payday loan rule and ongoing rulemakings, possible candidates to serve as new Director, the CFPB’s position on new technologies, and lawmakers’ views on changing the CFPB’s leadership structure.

Click here to listen to the podcast.

- Presented by Alan S. Kaplinsky & Christopher J. Willis

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California Legislature Passes AB-1864 Setting the Stage for the “Department of Financial Protection and Innovation” and the California Consumer Financial Protection Law; Ballard Spahr to Hold Webinar on September 29

We previously wrote about California Governor Newsom’s 2020-2021 Budget and an accompanying trailer bill that would rename the Department of Business Oversight (“DBO”) and significantly increase its ability to oversee financial services providers in the state. The proposed law hit a roadblock in May when it was handed to the Legislature for further deliberation and review outside of the typical budgeting process. On August 31, the last day of the standard legislative session, the Legislature passed Assembly Bill 1864, an amended version of the trailer bill. AB-1864 largely tracks the language in the trailer bill with the addition of some new and important exemptions. If the bill is not vetoed by Governor Newsom before September 30, the bill will take effect on January 1, 2021. Governor Newsom is expected to sign the bill.

On September 29, 2020, from 3:00 p.m. to 4:30 p.m. ET, Ballard Spahr will hold a webinar on AB-1864. To register, click here.

AB-1864 is one of three recently-passed California bills that will impact consumer financial services providers in California. We will be publishing blog posts on the other two bills shortly. Those bills are SB-908, which will require debt collectors to be licensed beginning January 1, 2022, and AB-376, which includes the Student Loan Borrower Bill of Rights.

Below is a high-level overview of AB-1864.

DBO: New Name, Expanded Powers

When the bill becomes law, the DBO will be renamed the Department of Financial Protection and Innovation (“DFPI”) and the agency will gain the authority to enforce all California laws relating to “persons offering or providing consumer financial products or services in [the] state.” The name change will not affect the validity of any action or proceeding by or against the DBO or its predecessor commissioners and departments. Also, with respect to any entity that is licensed, registered, or subject to the agency’s oversight, the bill clarifies that the DFPI has the authority to, bring a civil action or other proceeding pursuant to 12 USC § 5552 to enforce the Consumer Financial Protection Act of 2010 (12 USC § 5481 et seq.) (the “CFPA”). This simply restates authority already given under the CFPA to enforce the CFPA or regulations issued under it for such entities.

California Consumer Financial Protection Law

AB-1864 also includes the California Consumer Financial Protection Law (“CCFPL”). Seeking to remedy the “financial victimization of economically vulnerable consumers” and thereby, among other things, preventing the “increased caseloads for safety net programs,” especially in reaction to the global COVID-19 pandemic, the CCFPL includes robust and sweeping consumer protections to be enforced by the DFPI. These include the oversight of “covered persons,” the ability to require such “covered persons” to register with the agency, and broad rulemaking and enforcement rights.

CCFPL Applicability – Important, And New, Exemptions

The CCFPL applies to “covered persons” – an expansive term including persons who engage in offering or providing “consumer financial products or services,” their service providers, and affiliates when acting as a service provider. This will include entities that are not currently subject to DBO oversight, and who previously were not subject to oversight by a primary regulator, notably debt collectors, credit reporting agencies, certain fintech companies – including some who offer point-of-sale financing – and some merchants who extend credit directly to consumers.

AB-1864, however, includes new, important, and somewhat expansive exemptions from the CCFPL provisions of the bill. Exempted from the CCFPL are persons acting under the authority of one of the following licenses, certificates, or charters issued by the DFPI:

  1. Escrow agents licensed under Division 6 of the Financial Code;
  2. Finance lenders, brokers, program administrators, and mortgage loan originators licensed under Division 9 of the Financial Code;
  3. Broker-dealers and investment advisers licensed under Division 1 of Title 4 of the Corporations Code;
  4. Residential mortgage lenders, mortgage servicers, and mortgage loan originators licensed under Division 20 of the Financial Code;
  5. Check sellers, bill payers, and prorates licensed under Division 3 of the Financial Code;
  6. Capital access companies licensed under Division 3 of Title 4 of the Corporations Code; and
  7. Any person licensed, chartered, or who have been issued a certificate under the Financial Institutions Law.

Organizations subject to oversight of the Farm Credit Administration when acting under such authority are also newly exempted.

As originally contemplated in Governor Newsom’s 2020-2021 Budget and the accompanying trailer bill, continuing to be exempt from the CCFPL’s provisions will be licensees of any California state agency to the extent the licensee is acting under the authority of such license and banks, bank holding companies, trust companies, savings and loan associations, savings and loan holding companies, and credit unions when such entities are acting under the authority of a license, certificate or charter under federal law or the laws of another state.

Deferred deposit lenders and student loan servicers licensed by the DFPI are notably not exempted from the CCFPL’s new provisions.

CCFPL: New Registration Requirements

The DFPI is permitted to prescribe regulations requiring any covered person to submit a registration, pay a fee to the agency, submit background checks for certain key personnel, and obtain a bond or satisfy other financial standing requirements. Registration fees may be “scaled based on the size or market participation of the entity” and covered persons may be required to register via the Nationwide Multistate Licensing System and Registry (“NMLS”). The DFPI may also issue rules requiring registrants to submit annual or other special reports to the agency. Any DFPI rules requiring registration will sunset on January 1 of the fourth year following the year registration was initially required; however, the legislature may extend such requirements after holding public hearings to obtain input on the desirability or feasibility of extending, revising, or terminating such requirements. We note that Governor Newsom’s 2020-20201 Budget largely contemplates future funding of the DFPI to come from these registration fees.

These registration requirements will not apply to persons who are licensed by the DFPI and who are acting pursuant to such license, who are licensed or registered with another agency unless the person is offering or providing a financial product or service that is not regulated by such agency, nor will they apply to covered persons who are licensed by the DFPI or a federal agency and engage in deposit-taking activities unless the person is offering or providing a financial product or service that is not regulated by the such agency.

CCFPL: New Rulemaking and Enforcement Authority

The DFPI will have new rulemaking and enforcement authority over “covered persons” relating to unlawful, unfair, deceptive, or abusive acts and practices (“UDAAP”). The DFPI may also issue and enforce rules defining UDAAPs as they relate to “commercial financing,” as that term is defined in Cal. Fin. Code 22800(d), or financial products and services offered or provided to small business recipients, nonprofits, and family farms. And, as to entities that are required to submit registrations, the DFPI will have broad rulemaking authority to prescribe rules “to facilitate oversight . . . and assessment and detection of risks to consumers.”

The DFPI is also tasked with the issuance of rules relating to consumer complaints and inquiries. These rules may require covered persons to provide timely responses to consumer complaints submitted to the DFPI. Such responses will need to identify steps that have been taken to respond to the consumer complaint or inquiry, include responses received by the covered person from the consumer, and identify follow-up actions taken or intended to be taken by the covered person. Consumer reporting agencies under the Fair Credit Reporting Act are exempted from these requirements.

The DFPI may also issue rules (1) ensuring features of consumer financial products or services are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances, and (2) clarifying the applicability of state credit cost limitations, including rate and fee caps. Rules clarifying the applicability of credit costs limitations may not establish a new usury rate for any product, unless the agency has been granted separate, independent authority to set such rates.

The DFPI may bring civil or administrative actions seeking rescission or reformation of contracts, refunds of money or returns of real property, restitution, disgorgement, payment of damages, public notifications of violations, limitations on activities or functions of violators, and monetary penalties. In any such action, the DFPI may seek penalties that range from the greater of $2,500 for each act or omission that is the subject of the action or $5,000 for each day during which the violation continues, up to, for knowing violations, the lesser of one-percent of the person’s total assets, $1,000,000 for each day during which the violation continues, or $25,000 for each act or omission that is the subject of the action.

Additional Aspects of the CCFPL

The CCFPL requires the DFPI to establish a “Financial Technology Innovation Office.” It also includes an anti-retaliation provision that prohibits covered persons and service providers from retaliating against an employee for, among other things, objecting to or refusing to participate in any activity, policy, practice or assigned task if the employee reasonably believes it to be in violation of any law, rule, order, standard, or prohibition subject to the jurisdiction of the DFPI. The CCFPL requires the DFPI’s Commissioner to report to the Legislature annually. The report will include (1) a summary of enforcement actions in prior year; (2) a review of business models in use among covered persons; (3) a review of proposed regulations; (4) details on activities conducted by the Financial Technology Innovation Office; (5) a summary of the DFPI’s outreach and education efforts; and (6) any other request by the Legislature.


In addition to a new name, the DBO will be gaining authority over significantly more California financial services providers, the ability to enforce consumer finance laws that previously did not have a primary regulator, and a substantially increased rulemaking authority. We may have to wait and see how aggressive the DFPI is in exercising its new UDAAP rulemaking and enforcement authority, but we note that its authority is expansive. And, while the newly created exemptions to the CCFPL may provide some with a sense of solace, we caution that Governor Newsom’s 2020-2021 Budget has provided the DFPI with funding to significantly ramp-up its operations and hiring. We will continue to track these developments as they occur.

- Michael R. Guerrero

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This Week’s Podcast: A Look at COVID-19’s Impact on Credit Reporting, Credit Scoring, and Underwriting

We are joined by Kelly Cochran, formerly with the CFPB and now Deputy Director of FinRegLab, a non-profit focused on the use of data and technology in financial services. We examine credit reporting, credit scoring, and underwriting issues arising from the pandemic and CARES Act requirements, including the use of comment codes by furnishers and the treatment of forbearance-related information by creditors, and that are likely to arise in the transition from short-term forbearances to long-term arrangements. We also consider the potential benefits and risks of proposals to block the reporting or use of negative credit information. (Please note that this podcast was recorded before a new federal moratorium on some evictions through the end of 2020 was announced.)

Click here to listen to the podcast.

- Presented by Alan S. Kaplinsky & Christopher J. Willis

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CFPB Files Supplemental Briefs in Seila Law and All American Check Cashing

Last week, the CFPB filed its supplemental brief with the Ninth Circuit in Seila Law and its supplemental en banc brief with the Fifth Circuit in All American Check Cashing. The CFPB argues in both briefs that ratification of its actions by both former Acting Director Mulvaney and Director Kraninger cured any initial constitutional deficiency.

Seila Law. In its Seila Law decision, after ruling that the CFPB’s structure was unconstitutional because its Director could only be removed by the President “for cause,” the U.S. Supreme Court remanded the case to the Ninth Circuit to consider the CFPB’s ratification argument. Because it had ruled that the CFPB’s leadership structure was constitutional, the Ninth Circuit had not previously considered the CFPB’s argument that former Acting Director Mulvaney’s ratification of the CID issued to Seila Law cured any constitutional deficiency. Following the Supreme Court’s Seila Law decision, the CFPB filed a declaration with the Ninth Circuit in which Director Kraninger stated that she had ratified the Bureau’s decisions to issue the CID, to deny Seila Law’s request to modify or set aside the CID, and to file a petition in federal district court to enforce the CID.

In its supplemental brief, the Bureau argues that the CID should be enforced because a valid ratification cures an initial defect in an agency action, including the filing of an enforcement action, and the CID’s issuance to Seila Law was “formally and expressly ratified by two Bureau officials removable at will by the President.” In support of its ratification argument, the CFPB cites the Ninth Circuit’s decision in CFPB v. Gordon that involved former Director Cordray’s ratification of the CFPB’s enforcement action against Gordon after his recess appointment was called into question by the U.S. Supreme Court’s Canning decision and he was reappointed and confirmed by the Senate. The CFPB also cites the D.C. Circuit’s decision in FEC v. Legi-Tech, Inc. that involved the ratification of an enforcement action by the Federal Election Commission after the correction of a constitutional flaw in its membership structure. (In its supplemental en banc brief filed in All American Check Cashing discussed below, the CFPB also cites Gordon and Legi-Tech in support of its ratification argument.)

The CFPB also asserts that should the Ninth Circuit set aside the CID, its ruling could “depending on the Court’s reasoning, be used to raise doubts about the validity of other actions the Bureau has taken over the past decade and that a fully accountable Director has now also ratified. These actions include, for example, regulations governing the nation’s multitrillion-dollar mortgage market.”

All American Check Cashing. In March 2020 (when Seila Law was still awaiting decision by the Supreme Court), 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. All American filed its supplemental en banc brief last month.

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. In July 2020, following the Supreme Court’s Seila Law decision, the CFPB filed a declaration with the Fifth Circuit in which Director Kraninger stated that she had ratified the Bureau’s enforcement action against All American.

In its supplemental en banc brief, the CFPB makes the following principal arguments:

  • Because a valid ratification cures an initial defect in an agency action, the CFPB’s constitutional deficiency and any purported injury suffered by All American as a result of such deficiency was cured by the ratification of the enforcement action by both Acting Director Mulvaney and Director Kraninger.
  • In response to All American’s argument that the Bureau had no authority to bring the enforcement action at the time it was filed because of its unconstitutionality, the Bureau argues that the CFPA’s removal provision did not affect the operation of the remainder of the CFPA, including the CFPA provisions that authorize the Bureau to bring enforcement actions.
  • In response to All American’s argument that Director Kraninger’s purported ratification was ineffective because it occurred after the expiration of the relevant 3-year CFPA statute of limitations, the Bureau argues that (1) only the date on which it filed the enforcement action is relevant for whether the SOL had run, and (2) even if the SOL had run by the date of Director Kraninger’s ratification, it should be equitably tolled because the Bureau pursued its rights diligently by filing its lawsuit in 2016.
  • In response to All American’s argument that an action taken by a structurally defective agency cannot be ratified, the CFPB argues that dismissal of the enforcement action after its ratification by both Acting Director Mulvaney and Director Kraninger (both removable by the President at will) would erode Presidential authority and, if ratification is not permitted, major regulatory disruption would result.
  • In response to All American’s argument that the Bureau lacked standing to file the enforcement action, the Bureau argues that an Article II violation does not implicate the limits on a federal court’s powers in Article III.
  • In response to All American’s argument that 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, the Bureau argues that its funding is not unconstitutionally shielded from Congress because (1) Congress exercised its power under the Appropriations Clause when it enacted the CFPA provision authorizing the Bureau to obtain a capped amount of funding annually from the Federal Reserve, and (2) Congress, at any time, could change the source of the Bureau’s funding or eliminate the Bureau’s funding entirely.

- Alan S. Kaplinsky

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Did You Know?

Montana Adopts Provisions Extending Deadlines for Mortgage Licensing Requirements

Due to COVID-19 related closures, the Montana Department of Administration (the Department) adopted temporary provisions extending the deadlines required for mortgage servicers when submitting quarterly activity reports as well as for applicants responding to requests for additional information when applying for initial mortgage licenses.

Mortgage servicers are currently required to submit quarterly reports regarding mortgage servicing activity 45 days after the end of each quarter. The amendment now extends this due date by 30 days to allow reports to be submitted within a total of 75 days after the four quarters that end June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2020.

The second extension applies to the period when an initial mortgage license application (for a mortgage lender, mortgage broker, mortgage servicer, or mortgage loan originator) is considered to be abandoned. The current regulation provides that an application for initial licensure is deemed abandoned if the applicant fails to provide the documents or information requested by the Department within 60 days of notification to the applicant of the deficiencies. This period is now extended by 60 days to allow such information to be submitted within a total of 120 days.

Both extensions are effective immediately and will expire on June 1, 2021.

NMLS Policy Guidebook Updates

The NMLS Resource Center has published an updated version of the NMLS Policy Guidebook, which was last updated on September 3, 2020.

The updates pertain to Criminal Background Checks, which clarify that: (i) fingerprints in NMLS must be no older than 3 years old to process a new criminal background check request; (ii) fingerprints must be submitted within 180 days of submitting the individual MU2 form; and (iii) international applicants must request fingerprint packages to be sent in a traceable manner (e.g., overnight delivery) to their current physical or mailing international address or their employer’s address and must provide a mailing label for the delivery.

- Aileen Ng

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Looking Ahead

Recent CFPB Developments and Future Expectations

A Ballard Spahr Webinar

September 15, 2020, 12:00 PM – 1:30 PM ET

Speakers: Alan. S. Kaplinsky, Richard J. Andreano, Jr., Jeremy T. Rosenblum, Christopher J. Willis, Stefanie H. Jackman, James Kim & Lori Sommerfield

Practising Law Institute Seminar

Practising Law Institute’s 25th Annual Consumer Financial Services Institute

December 7-8, 2020

Speakers: Alan Kaplinsky, Christopher J. Willis


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