Mortgage Banking Update
In This Issue:
- Congress Extends National Flood Insurance Program for One Year
- This Week’s Podcast: A Close Look at the CFPB’s Mortgage-Related Exam Findings in Summer 2020 Supervisory Highlights
- FHFA Announces Fannie Mae and Freddie Mac Will Continue Purchasing Loans in a COVID-19 Forbearance
- HUD OIG Again Takes Issue With Mortgage Servicer Websites Addressing CARES Act
- Expansive Scope of California’s New Consumer Protection Regime Highlighted in Ballard Spahr Webinar
- Federal Banking Agencies Finalize and Clarify Appraisal Deferral Rule
- 11th Circuit Eliminates Incentive Awards for Class Action Plaintiffs
- NYC Department of Consumer Affairs Releases Glossary and Translations of Commonly Used Terms Just Before Expiration of Enforcement Grace Period
- CFPB, FTC, and Others Partner to Target Phantom and Abusive Debt Collection
- State Bank Regulators Launch Single-Exam Plan for Multistate Money Transmitters in Wake of OCC’s Payments Charter Proposal
- Rumor Has It That Publication of the CFPB’s Final Collection Rules Is Imminent
- Updated: States Issue Work-From-Home Guidance for Mortgage Lenders
- Did You Know?
- Looking Ahead
For the latest updates on the COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
In the Continuing Appropriations Act, 2021 and Other Extensions Act, which was signed into law on October 1, 2020, the National Flood Insurance Program (NFIP) was extended until September 30, 2021. Without the extension, the NFIP would have expired on September 30, 2020.
Mortgage origination and servicing continue to be a CFPB supervisory focus. We review the CFPB’s findings involving the following areas and discuss the findings’ compliance implications: redlining based on nonbank lenders’ advertising practices, improper consideration of applicants’ public assistance income in determining eligibility for mortgage modifications, and violations of servicing requirements relating to providing periodic statements to certain consumers in bankruptcy, force-placed insurance, escrow accounts, and servicing transfers.
Click here to listen to the podcast.
On September 24, 2020, the Federal Housing Finance Agency (FHFA) announced the extension of the purchase of loans in a COVID-19 forbearance by Fannie Mae and Freddie Mac through October 31, 2020. Additionally, FHFA announced that Fannie Mae and Freddie Mac will extend various loan origination flexibilities due to COVID-19 through October 31, 2020. As previously reported, in August 2020 FHFA announced the extension of the purchase of loans in a COVID-19 forbearance, and the extension of various loan origination flexibilities, through September 30, 2020.
As previously reported, in April 2020 the U.S. Department of Housing and Urban Development Office of Inspector General (HUD OIG) issued a statement criticizing how mortgage servicer websites were providing information on the CARES Act. The HUD OIG advised that it reviewed the websites of 30 mortgage servicers that together service approximately 90 percent of FHA loans, and found that “those websites provided incomplete, inconsistent, dated, and unclear guidance to borrowers related to their forbearance options under the CARES Act.”
In a statement dated September 30, 2020, the HUD OIG advised that it “found that despite virtually all of the top 30 servicers updating information on their websites on options available to borrowers during this COVID-19 emergency, some servicer websites continue to provide information that could mislead or confuse borrowers or provide little or no information to borrowers related to their forbearance options under the CARES Act.”
This past Friday, California Governor Newsom signed into law three bills that will significantly impact consumer financial service providers in the state. One of those bills is AB-1864, which contains the California Consumer Financial Protection Law (CCFPL). In addition to giving a new name to the state’s Department of Business Oversight, which is renamed the Department of Financial Protection and Innovation (DFPI), AB-1864 gives the renamed agency broad jurisdiction and sweeping new authorities that closely resemble those of the CFPB, leading many to label the renamed agency a “mini-CFPB.” The two other major bills signed by Governor Newsom are SB-908, which requires debt collectors to be licensed in California, and AB-376, which establishes a Student Loan Borrower Bill of Rights.
For our webinar earlier this week, “California Ramps Up Its Consumer Financial Protection Laws: What You Need to Know,” we were joined by special guests Richard Cordray, former CFPB Director, and Bret Ladine, DFPI General Counsel. The webinar’s overall takeaway was that in addition to the authority to undertake an aggressive regulatory and enforcement agenda, the DFPI will have the resources needed to carry out such an agenda. According to Mr. Ladine, the DFPI is planning to add approximately 90 new staff members, including approximately 10 enforcement attorneys, to implement its new authorities and statutory obligations under AB-1864, and to make other strategic hires in areas that the DFPI considers of critical importance. He also indicated that more new staff members, in addition to the 90 to implement AB-1864, will be added to implement SB-908 and AB-376.
Alan Kaplinsky, Practice Leader of the firm’s Consumer Financial Services Group, moderated the webinar. Chris Willis, Practice Leader of Consumer Financial Services Litigation at Ballard Spahr, and Michael Guerrero, an associate in the Consumer Financial Services Group, discussed the key provisions of AB-1864. Also participating in the webinar were Stefanie Jackman, a partner in the Consumer Financial Services Group, and Heather Klein, an associate in the Group, who provided, respectively, overviews of SB-908 and AB-376.
Other highlights of the webinar include:
- Mr. Cordray, who worked with California lawmakers in drafting AB-1864, emphasized that the CCFPL’s broad coverage will result in DBO supervision of many markets and entities that are not currently subject to DBO oversight. He also indicated that other states would likely use AB-1864 as a template for creating agencies focused on consumer protection. He observed that because of the size of the California market for consumer financial services, the CCFPL is likely to have a significant nationwide impact on providers whether or not other states create similar mini-CFPBs.
- Mr. Ladine observed that as a result of the CCFPL’s enactment, the DFPI’s jurisdiction is no longer limited to entities that are or should be licensees and now extends to a broad universe of “covered persons” that includes unlicensed entities that are not required to be licensees.
- Chris Willis cautioned that in addition to having broad jurisdiction and new UDAAP authority, the DFPI’s extensive resources will enable it to aggressively use its jurisdiction and authority to impact markets that have not traditionally been regulated in California. Chris noted that a similar combination of broad jurisdiction, statutory powers, and ample resources allowed the CFPB to aggressively pursue a wide-ranging agenda.
- Michael Guerrero outlined the DFPI’s rulemaking, oversight, and enforcement authority. He also highlighted provisions of AB-1864 that extend the DFPI’s UDAAP authority to small business financing and permit the DFPI to enforce its UDAAP authority without first issuing regulations.
As announced during the webinar, because of the importance of these new laws, Ballard’s Consumer Financial Services Group will soon be creating a Resource Center on our blog, Consumer Finance Monitor, that will contain materials about the new laws, including the statutes and legislative analysis, proposed and final regulations, any written guidance or other materials issued by the DFPI, and information about our webinars and podcasts related to the new laws. The new Resource Center is intended to provide a single location where comprehensive information about the new laws can be found. We also plan to organize a team of experienced consumer financial services lawyers who will be available to answer questions about and provide other assistance in connection with the new laws.
As previously reported, the federal banking agencies announced an interim final rule in April 2020 due to COVID-19 that allows for appraisals and evaluations of homes and other real property to be obtained up to 120 days after closing. The federal banking agencies are the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Federal Reserve Board. The banking agencies recently issued a final version of the rule that clarifies what loans are excluded from the rule.
The interim final rule provides that it does not apply to “transactions for acquisition, development, and construction of real estate.” In response to comments seeking clarification of the excluded transactions, the banking agencies in the final rule provide additional detail. The final rule specifies that the following transactions are excluded:
- Loans secured by real estate made to finance
- land development (such as the process of improving land – laying sewers, water pipes, etc.) preparatory to erecting new structures, or
- the on-site construction of industrial, commercial, residential, or farm buildings;
- Loans secured by vacant land (except land known to be used or usable for agricultural purposes);
- Loans secured by real estate to acquire and improve developed or undeveloped property; and
- Loans made under Title I or Title X of the National Housing Act that
- conform to the definition of “construction” as defined in the rule (see below), and
- are secured by real estate.
The final rule provides that the term “construction” includes not only construction of new structures, but also additions or alterations to existing structures and the demolition of existing structures to make way for new structures.
The final rule will be effective upon publication in the Federal Register and may be relied on for transactions closed on or before December 31, 2020, although the banking agencies may extend such date.
In a split decision, the 11th Circuit rejected a $6,000 incentive award for the named plaintiff in a TCPA class action. According to the majority in Johnson v. NPAS Solutions, LLC, U.S. Supreme Court precedent prohibits such awards—a holding that is bound to discourage class actions in the 11th Circuit. The decision is the most recent in a series of 11th Circuit rulings against TCPA plaintiffs.
The named plaintiff in Johnson alleged, on behalf of himself and a putative class, that defendant NPAS Solutions, LLC, violated the TCPA by using an automatic telephone dialing system to call cell phone numbers that had been reassigned to a non-consenting consumer. The case quickly settled, and the plaintiff moved to certify a settlement class. The district court granted preliminary approval, appointing the plaintiff as the class representative and his attorneys as class counsel. It also set a deadline for class members to object to the settlement that was nearly three weeks before the parties had to submit their petitions for fees and costs and their motion for final approval of the settlement.
One class member objected to the settlement, taking issue with, among other things, the proposed $6,000 incentive award for the named plaintiff (which the objector had learned about through the settlement notice). The parties thereafter moved for final approval of the settlement, requested attorney’s fees and costs, and opposed the objection, arguing that the settlement was fair. After holding a final fairness hearing, the district court sided with the parties and issued an order setting forth its fairness findings in a single, boilerplate sentence and awarding the named plaintiff a $6,000 incentive payment. (Remaining class members who submitted claims stood to receive only $79.) The order also stated, without explanation, that the objection “is OVERRULED.”
The objector appealed. Agreeing with the objector, the 11th Circuit held that the Supreme Court’s decisions in Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885), prohibit incentive awards. In Greenough (and reiterated a few years later in Pettus), the Supreme Court refused the plaintiff’s request for an award to compensate for his “personal services and private expenses” incurred in successfully bringing a claim on behalf of himself and other bondholders. According to the Supreme Court, such an award “would present too great of a temptation to parties to intermeddle in the management of valuable property or funds in which they have only the interest of creditors.” The Johnson majority concluded that an incentive award was “roughly analogous” to a payment for personal services barred in Greenough and, if anything, presented an even greater risk of intermeddling to the extent the award provides a “bounty” for bringing suit.
Notably, the 11th Circuit appears to be the only circuit to have applied Greenough and Pettus to bar incentive awards. While the 11th Circuit acknowledged that a contrary Second Circuit opinion had disregarded Greenough and Pettus as factually inapposite, it also explained that challenges to incentive awards are “few and far between” because the challenge must come from objectors, who have minimal incentives to assert a challenge. As a result, there are few opportunities for courts to consider the legal basis for an incentive award, which allows them to proliferate in class action settlements “as a product of inertia and inattention, not adherence to the law.”
The majority also rejected the dissenting judge’s view that Holmes v. Continental Can Co., 706 F.2d 1144 (11th Cir. 1983), required the court to consider simply whether the incentive award is fair. The majority countered that Holmes did not address a salary, bounty, or incentive award for a class representative; rather, it involved whether disparities in payments to the named plaintiffs were justified by the value of their unique, individual claims.
In addition to rejecting incentive awards, the majority held that the district court failed to follow Rule 23(h) when it required objections to be filed before the class representative and counsel were required to move for final settlement approval and fees. It also concluded that the district court failed to adequately explain its rulings, including its denial of the objection to the settlement.
The Johnson decision is the latest in a series of 11th Circuit rulings against TCPA plaintiffs, including Medley v. DISH Network, LLC (holding TCPA does not permit unilateral revocation of contractual consent), Glasser v. Hilton Grand Vacations Co., LLC (narrowly interpreting the definition of an automated telephone dialing system), and Salcedo v. Hanna (holding plaintiff lacked standing where he received only a single text message). Johnson’s holding, however, extends beyond the TCPA to limit incentives for class representatives generally. This far-reaching consequence, along with the opposing views of the Second Circuit and dissent, could lead to a rehearing en banc by the 11th Circuit or Supreme Court review.
The enforcement grace period for the New York City Department of Consumer Affairs’ (DCA) new debt collection rules, ended October 1, 2020.
Among the provisions of the new debt collection rules is the requirement for entities engaged in debt collection procedures to include a link to the DCA’s glossary and translations of commonly used terms in debt validation letters and/or on their public websites, along with a disclosure to consumers that a translation and description of commonly used debt collection terms is available in multiple languages on the DCA’s website. On September 29, the DCA released the glossary and translations of commonly-used terms on its website. The glossary can be found here: https://www1.nyc.gov/site/dca/consumers/Glossary-of-Common-Debt-Collection-Terms.page
Although the new rules only expressly require entities to provide a link to the DCA’s website, the best practice is to provide a link directly to the glossary to avoid any Fair Debt Collection Practices Act claims that it was misleading or deceptive to send consumers to the general DCA website. The industry also understands that to be what DCA wants from a compliance standpoint, notwithstanding the literal language of the rule.
On September 29, the CFPB, in partnership with the FTC and numerous federal and state law enforcement agencies, announced a nationwide effort addressing “phantom debt collection” and abusive and threatening debt collection practices. The initiative has been titled “Operation Corrupt Collector.”
Phantom debt collection (also known as fake debt collection) covers a range of practices, including attempts to collect on obligations that consumers never took out or received, as well as efforts to recover loans without authorization from the creditor. The FTC has been active in this space for some time, as evidenced by the CFPB’s most recent annual Fair Debt Collection Practices Act (FDCPA) report (which incorporates information from the FTC’s annual letter to the CFPB describing its FDCPA activities), but this latest initiative is something of a new area of focus for the CFPB. Both the FTC and CFPB, along with other agencies, share enforcement responsibilities under the FDCPA.
To date, this joint operation includes five cases filed by the FTC, two filed by the CFPB, as well as three cases brought by the U.S. Department of Justice and U.S. Postal Inspection Service. Additionally, the operation includes actions by authorities in the following states: Arizona, California, Colorado, Connecticut, Florida, Idaho, Illinois, Indiana, Massachusetts, New Mexico, North Carolina, North Dakota, New York, Ohio, South Carolina, and Washington.
In its press release, the CFPB highlighted its partnership with the New York Attorney General in actions against several companies. The FTC has similarly partnered with the New York Attorney General’s Office to crack down on phantom debt collection in the past.
The Conference of State Bank Supervisors (CSBS) recently announced plans to establish a program under which money transmitters licensed in multiple states will undergo a single comprehensive exam that seeks to satisfy all state examination requirements, beginning in 2021. Money transmitters, payments firms and cryptocurrency companies licensed in 40 or more states would be covered by the program, to be known as “MSB Networked Supervision.” Currently, there are 78 companies that meet this threshold. The launch of this program follows the “One Company, One Exam” pilot conducted in 2019-2020.
The CSBS announcement explains that each exam will be led by one state overseeing a group of examiners sourced from across the country, and posits “…this exam protocol will enable states to fine tune a risk-based approach to each company’s operations.” Given this structure, one concern might be whether covered companies may find themselves subject to significant differences in interpretation of state and federal laws and regulations, depending on which state is leading an exam.
This initiative could be viewed as an effort by the CSBS to compete with the potential OCC national payments charter recently discussed by Acting Comptroller Brian Brooks. The OCC payments charter, which, according to a Politico report, Acting Comptroller Brooks has said the OCC has the authority to offer now without additional rulemaking, has been the subject of attacks from bank trade associations and state banking regulators.
However, the CSBS single-exam approach for multistate money transmitters, payments, and cryptocurrency companies would not eliminate other substantial burdens imposed by varying state licensing requirements, such as those pertaining to initial filing and documentation, ongoing reporting, governance requirements, fees, bonds, and other state-specific requirements. A similar single-exam plan for the mortgage industry initiated by the CSBS in conjunction with the American Association of Residential Mortgage Regulators (AARMR) has demonstrated that this approach does not alleviate separate and sometimes contemporaneous single-state exams, as there are states that will not, or are not permitted to, join in compacts for such joint state examinations. Further, the 40-state threshold means numerous multistate money transmitters and payments companies will not be covered, likely defeating the goal of driving efficiency in state banking supervision, and furthering the possibility of discrepancies in interpretation of laws and regulations.
The CSBS announcement hints at further efforts forthcoming to drive “harmonization and streamlining of state supervision across the board.” Earlier in the year, the CSBS released a report tracking its progress on initiatives to streamline state licensing and supervision of financial technology companies, informed by recommendations of the CSBS Fintech Industry Advisory Panel.
While the CFPB has maintained for over a year that the final rules will be published by the end of October, it appears that we may not have to wait that long. We are hearing from multiple, independent sources that the CFPB is likely to publish its final collections rules by October 16, and possibly, as early as this week. Once published, our team will be working to review and analyze the final rules and will hold a webinar on October 20 to examine their impact on the industry. Stay tuned – there will likely be a lot to cover. From the final call attempt and contact parameters, to analyzing how – if at all – the rules evolved from the NPRM in May 2019, it is sure to be a busy and insightful second half of October! To register for our October 20 webinar, click here.
In response to the COVID-19 pandemic, state mortgage regulators are daily issuing guidance (1) about whether work from home arrangements are permissible under their existing licensing requirements and/or (2) are granting temporary permission for licensable activity to occur from unlicensed locations (including employee homes) under specified conditions. Below we identify the states that have issued guidance specifically on this topic. Please note that the scope, duration, conditions and requirements set by the states differ – some even require approval – so please carefully review the state’s guidance set forth at the hyperlink. This is a rapidly changing area so check back regularly for updates and changes.
State Regulators Add Customer Complaint Management to SES Platform
The Conference of State Bank Supervisors (CSBS) recently announced that state financial regulators are now able to enter and process customer complaints electronically within the State Examination System (SES) technology platform. The new functionality will also make available summaries of all complaints to any state regulator using the complaints system. Companies that are licensed or registered through the Nationwide Multistate Licensing System (NMLS) will receive the SES Consumer Complaints enrollment information when their state regulator is ready to utilize the new system. Once enrolled, companies will work with their regulator inside the system to resolve consumer complaints.
In addition, there are future plans for the SES platform to include a consumer-facing portal where consumers of any state or territory can file a complaint about any financial institution under state oversight. The system will then route the complaint to the appropriate state agency for resolution.
For more information, registration for the CSBS’ SES Consumer Complaints Industry Webinar today, October 8, is available here.
A Ballard Spahr webinar
October 22, 2020, 12:00 PM – 1:00 PM ET
Online Only | November 9-10, 2020
Speaker: Meredith S. Dante
Speaker: Richard J. Andreano, Jr.
Practising Law Institute’s 25th Annual Consumer Financial Services Institute
December 7-8, 2020
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