Mortgage Banking Update
In This Issue:
- CFPB Finalizes GSE Patch Extension
- CFPB Issues RESPA Section 8 FAQs and Rescinds 2015 Marketing Services Agreement Bulletin
- Fannie Mae and Freddie Mac Update COVID-19 and Payment Deferral Servicing Guidance
- Fannie Mae and Freddie Mac Extend Origination Flexibilities Due to COVID-19
- CFPB Issues Policy Statement on Applications for Early Termination of Administrative Consent Orders
- DFPI to Have Increased Authority to Seek Refunds and Other Remedies in Enforcement of California Financing Law as of January 1, 2021
- Ballard Spahr to Hold Comprehensive Year-End CLE Webcast Series – Consumer Financial Services in Turbulent Times
- Hundreds Comment on OCC Proposed “True Lender” Rule
- This Week’s Podcast: A Discussion of Recent Developments Involving Credit Reporting, With Special Guest Eric Ellman, Senior Vice President for Public Policy and Legal Affairs, Consumer Data Industry Association
- Potential Regulatory and Legislative Implications of a Blue Wave on Consumer Financial Services Highlighted in Ballard Spahr Webinar
- CFPB Releases HMDA 2021 Regulatory and Reporting Reference Chart
- Seila Law Files Supplemental Brief With Ninth Circuit
- Maine Federal District Court Rules FCRA Preempts 2019 Amendments to State’s Credit Reporting Law
- Did You Know?
- Looking Ahead
For the latest updates on the COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
The CFPB recently issued a final rule that amends the Regulation Z ability to repay/qualified mortgage rule by extending the sunset date for the qualified mortgage (QM) based on a loan meeting certain product requirements and being eligible for sale to Fannie Mae or Freddie Mac. The QM often is referred to as the “GSE Patch.” The final rule will be effective 60 days after publication in the Federal Register.
As previously reported, in June 2020 the CFPB issued two proposals—one to extend the January 10, 2021 sunset date for the GSE Patch and one to replace the current general QM based on a strict 43% debt-to-income (DTI) ratio with a general QM based on a loan pricing construct. The intent was to allow the mortgage industry to continue to rely on the GSE Patch, which is used for a significant number of originated mortgage loans, while the CFPB developed and implemented a new general QM. The current general QM is not viewed favorably by the mortgage industry because of the strict 43% DTI limit, and the need to follow the guidance in Appendix Q to Regulation Z. Appendix Q is commonly viewed as being too limited for the appropriate consideration of the income and debt included in a DTI ratio analysis.
An issue with the two proposals is that if adopted as proposed there would be a group of loans that could not qualify for the GSE Patch or the new general QM. The reason is that the GSE Patch would only apply to a mortgage loan consummated on or before the effective date of the final rule implementing the new general QM, and the new general QM would be available only for loan applications received by the creditor on or after the effective date of such rule. Thus, for an application taken before the effective date of such rule, but not consummated by the effective date, neither the GSE Patch nor the new general QM would be available. The CFPB addressed this issue in the final rule by providing that the GSE Patch is available for applications received by a creditor before the mandatory compliance date for the final rule implementing the new general QM.
The CFPB explains in the preamble to the final rule that it is using the term “mandatory compliance date” to refer to the date that current general QM will no longer be available, and does not mean to suggest that creditors must originate mortgages only under the new general QM. The CFPB also advises that it is using such term because it may decide to adopt “an optional early compliance period” that would permit creditors to begin to use the new general QM before the ability to use the current general QM ended on the mandatory compliance date. In the past, when amending Regulation Z the Federal Reserve Board often permitted creditors to implement the amendments on the effective date of the final rule, and required creditors to implement the amendments by a later mandatory compliance date. This approach provides flexibility that can improve operations and compliance. For example, after making adjustments to its loan origination system to comply with Regulation Z amendments, a creditor could test the system with a limited number of loans to assess if it was operating properly before implementing the changes on a company-wide basis.
With regard to the requirement that a creditor receive an application for a loan before the mandatory compliance date of the new general QM in order to rely on the GSE Patch, the final rule addresses what constitutes an “application.” For a loan subject to the TRID rule, the definition of “application” for TRID rule purposes applies. For TRID rule purposes, an “application” means the submission of the consumer’s name and income, the consumer’s social security number to obtain a credit report, the property address, an estimate of the property’s value, and the mortgage loan amount sought. For a loan that is not subject to the TRID rule, a creditor will have the option of using the TRID rule definition, or the general Regulation Z definition, of an “application.” The general definition is the submission of a consumer’s financial information for the purposes of obtaining an extension of credit.
The CFPB did not amend the ability to repay/QM rule provision under which the GSE Patch sunsets if Fannie Mae and Freddie Mac exit conservatorship of the Federal Housing Finance Agency. Thus, in the unlikely event that Fannie Mae and Freddie Mac exit conservatorship before the final rule implementing the new general QM becomes effective, there would be a period with no GSE Patch and no revised general QM being available.
The CFPB recently issued Frequently Asked Questions (FAQs) addressing the referral fee and fee splitting prohibitions under Section 8 of the Real Estate Settlement Procedures Act (RESPA). The CFPB also rescinded its Compliance Bulletin 2015-05, RESPA Compliance and Marketing Services Agreements.
As previously reported, Bulletin 2015-05 is a good example of the adage “Be careful what you ask for, you may get it.” The CFPB issued Bulletin 2015-05 in response to requests from the residential mortgage settlement service industry for guidance on the legality of marketing service agreements (MSAs). In the Bulletin’s first paragraph, the CFPB set the tone for the Bulletin by stating that (1) while it has received numerous inquiries and whistleblower tips “describing the harm that can stem from the use of MSAs, [it] has not received similar input suggesting the use of those agreements benefits either consumers or industry,” and (2) based on the CFPB’s investigative efforts, “it appears that many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees.” The Bulletin did not provide guidance on how to structure a compliant MSA and instead simply summarized the CFPB’s concerns with MSAs. In rescinding the Bulletin, the CFPB states that the rescission “does not mean that MSAs are per se or presumptively legal” and that “as explained in the FAQs, whether a particular MSA violates RESPA Section 8 will depend on the specific facts and circumstances.”
In the FAQs, the CFPB addresses RESPA Section 8 in general, MSAs, and gifts and promotional arrangements. The FAQs distinguish a referral from marketing by providing that a referral includes a written or oral action directed to a person, whereas “a marketing service is not directed to a person; rather it is generally targeted at a wide audience. For example, placing advertisements for a settlement service provider in widely circulated media (e.g., a newspaper, a trade publication, or a website) is a marketing service.” The FAQs provide that “[w]hether a particular activity is a referral or a marketing service is a fact-specific question for purposes of the analysis under RESPA Section 8(a).”
Among other observations made by the Bureau regarding MSAs, the FAQs include the following:
- Entering into, performing services under, and making payments under MSAs are not, by themselves, prohibited acts under RESPA or Regulation X.
- The analysis under RESPA Section 8 depends on the facts and circumstances, including the details of the MSA and how it is both structured and implemented.
- If an MSA involves an agreement or understanding to refer business incident to or part of a settlement service in exchange for a fee, kickback, or thing of value, then the MSA or conduct under the MSA is prohibited.
- If the MSA serves as a method of splitting charges made or received for real estate settlement services in connection with a federally related mortgage loan, other than for services actually performed, the MSA or the conduct under the MSA is prohibited.
- If the MSA or conduct under the MSA “reflects an agreement for the payment for bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed, the MSA or the conduct is not prohibited.”
While the FAQs may not provide the level of detailed guidance sought by the industry, the FAQs do not take the decidedly negative tone toward MSAs found in Bulletin 2015-05, and that alone likely will be viewed by the industry as an improvement.
With regard to gifts, consistent with an informal position taken by the CFPB, and also by the U.S. Department of Housing and Urban Development when it had jurisdiction to regulate under, interpret and enforce RESPA, the FAQs provide that RESPA Section 8 does not prohibit a settlement service provider from giving a gift or incentive to a consumer for doing business with the provider. However, the FAQs also provide that giving an incentive to a consumer in exchange for the consumer “referring other business” to the provider is prohibited. Additionally, the FAQs indicate that providing gifts to referral sources in exchange for referrals is prohibited, and that “[t]here is no exception to RESPA Section 8 solely based on the value of the gift or promotion.” The latter point likely is intended to address the incorrect view that providing items of nominal value for the referral of settlement service business is permitted under RESPA.
With regard to promotional activity, the FAQs address the Regulation X exemption from the RESPA Section 8 referral fee and fee splitting prohibitions for normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement service business. Consistent with the guidance on MSAs, the FAQs provide that whether a particular item or activity meets the conditions for the Regulation X normal promotional and educational activities exemption depends on the facts and circumstances. The FAQs emphasize that to qualify for the exemption, an item or activity must satisfy the conditions that it is not conditioned on the referral of business, and that it does not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement service business. The FAQs set forth fact patterns that are more likely to satisfy the exemption, and then address “slight changes to these fact patterns” that may constitute a RESPA Section 8 violation.
On October 14, 2020, Fannie Mae issued updates to Lender Letter 2020-02, Lender Letter 2020-05, and Lender Letter 2020-07, and Freddie Mac issued Bulletin 2020-39, regarding COVID-19 and payment deferral servicing guidance.
In Lender Letter 2020-02, Fannie Mae clarifies servicer requirements related to disbursing insurance loss proceeds for borrowers impacted by COVID-19. Fannie Mae also clarifies that if a mortgage loan was previously modified pursuant to a Fannie Mae Home Affordable Modification Program (HAMP) modification, the borrower will not lose any future HAMP “pay for performance” incentives if the borrower immediately reinstates the mortgage loan upon expiration of the COVID-19 related forbearance plan, or transitions directly from a COVID-19 related forbearance plan to a repayment plan.
In Lender Letter 2020-07, Fannie Mae addresses its COVID-19 payment deferral program and advises that if the mortgage loan was previously modified pursuant to a HAMP modification under which the borrower remains in “good standing,” and the borrower was on a COVID-19 related forbearance plan immediately preceding the COVID-19 payment deferral or had a COVID-19 related hardship immediately preceding the COVID-19 payment deferral, then the borrower will remain eligible to receive any future HAMP “pay for performance” incentives upon acceptance of the COVID-19 payment deferral. Freddie Mac provides similar guidance in Bulletin 2020-39.
Fannie Mae also advises, as does Freddie Mac in Bulletin 2020-39, that if a mortgage loan was originated after March 1, 2020, the effective date of the National Emergency Declaration related to COVID-19, and otherwise meets all criteria to receive a COVID-19 payment deferral, then the servicer must evaluate the borrower for a COVID-19 payment deferral and, if eligible, offer the COVID-19 payment deferral.
In contrast to the guidance provided in connection with a COVID-19 payment deferral, in Lender Letter 2020-05 Fannie Mae addresses its standard payment deferral program and advises that if the borrower’s mortgage loan previously received a HAMP modification and the borrower remains in “good standing,” then the servicer must inform the borrower that a payment deferral will result in the mortgage loan’s withdrawal from HAMP, and the borrower will lose any future HAMP “pay for performance” incentives he or she might otherwise have received. Freddie Mac provides similar guidance in Bulletin 2020-39.
On October 19, 2020, Fannie Mae in updates to Lender Letter 2020-03 and Lender Letter 2020-04, as well as Freddie Mac in Bulletin 2020-40, extended certain loan origination flexibilities due to COVID-19 from October 31, 2020, to November 30, 2020.
The flexibilities relate to alternative appraisals on purchase and rate and term refinance loans, alternative methods for documenting income and verifying employment before closing, and the expanded use of powers of attorney to assist with loan closings.
The CFPB has issued a “Statement of Policy on Applications for Early Termination of Consent Orders.” The statement is applicable as of today.
The policy statement outlines the application process for an entity seeking the early termination of an administrative consent order and the standards that the Bureau will use when evaluating such applications. Administrative consent orders typically have a five-year term. The Bureau emphasizes that early termination will only be appropriate in “exceptional circumstances” and that the policy statement, which is not binding on the Bureau, is intended to facilitate early terminations when exceptional circumstances exist.
For the Bureau to grant an application for the early termination of a consent order, an entity must demonstrate, and the Bureau must determine in its sole discretion, that the entity (1) meets all of the eligibility criteria set forth in the Policy Statement, (2) has complied with all of the consent order’s terms and conditions, and (3) has a compliance management system (CMS) for the institutional product line (IPL) or compliance area for which the consent order was issued that is “satisfactory” or merits the equivalent of a “2” rating under the Uniform Interagency Compliance Rating System (Compliance Rating System).
Eligibility. To be eligible for early termination, an entity:
- Must be subject to an administrative consent order. The policy statement does not apply to court-approved consent orders or court orders entered as result of litigation.
- Must be other than an individual.
- Must not be within the first year after entry of the consent order and must have fully implemented all compliance and redress plans required under the consent order at least six months before applying.
- Must not be subject to a consent order that bans the entity’s participation in a particular industry, involves violations of an earlier Bureau order, or as to which there has been a criminal action related to the violations found in the consent order.
- Must not have made a prior request for early termination (absent extraordinary circumstances).
Compliance with consent order. The entity must demonstrate full compliance with the consent order, including that, when required, it has corrected violations of federal consumer financial law; paid redress, civil money penalties, or other monetary relief; adopted appropriate policies and procedures to ensure future compliance; submitted adequate reports; and maintained required records. The Bureau generally intends to complete its compliance review within six months of receiving a complete application.
Satisfactory compliance. The entity must demonstrate that its CMS for the IPL or compliance area at issue under the consent order is “satisfactory” or merits the equivalent of a “2” rating under the Compliance Rating System by submitting evidence that it has satisfied the elements of such a rating. If applicable, an entity should reference prior supervisory conclusions from a Bureau examination and any supervisory rating or conclusion from a state or other federal regulator during the pendency of the consent order as to the entity’s CMS for the IPL or compliance area at issue.
We would expect that, even without the policy statement, the CFPB would give due consideration to requests for early termination of an administrative consent order. Nevertheless, we view it as a positive step for the CFPB to make clear its standards for early termination (particularly since we are not aware of any other agencies that have issued similar policies). At the same time, we are disappointed that the policy statement takes an entirely “hands off” approach to court-approved consent orders. While such consent orders can only be terminated early by court order, the CFPB could urge a court to terminate a consent order under circumstances where the CFPB would be willing to grant a request for early termination of a comparable administrative consent order. For that reason, we would encourage the CFPB to consider expanding the policy statement to apply to court-approved consent orders.
We have recently focused on the DFPI’s expanded authorities under California Consumer Protection Law, the Debt Collection Licensing Act, and the Student Borrower Bill of Rights. In addition to these blockbuster bills, this legislative session included a short bill impacting the DFPI’s enforcement authority under the California Financing Law (“CFL”), which has also been signed into law by Governor Newsom.
Under existing law, as part of its enforcement efforts, the DFPI is permitted to require attendance of witnesses and examine under oath all persons whose testimony it requires relative to loans, assessment contracts, or business regulated by the CFL. Beginning January 1, 2021, this authority is expanded so that the DFPI may require attendance of witnesses and examine under oath any person whose testimony relates to activities and businesses regulated by the CFL. The bill notes that this amendment “expands the crime of perjury.”
The new law will also expand the DFPI’s authority when seeking relief on behalf of consumers from persons engaging in unlicensed finance lender, broker, PACE program administrator or mortgage loan originator activities. Under existing law, the DFPI may order unlicensed persons to desist and refrain from engaging in the business requiring a license or from otherwise violating the CFL. Currently, the DFPI can only obtain ancillary relief for consumers stemming from this type of violation if it files a civil action or if it enters into a consent order. Under the new law, the DFPI will gain the authority to include a claim for ancillary remedies with the order to desist and refrain. The ancillary remedies may include, without limitation, refunds, restitution or disgorgement, or damages on behalf of persons injured.
Also, currently, when issuing a citation for a violation of the CFL in lieu of other administrative discipline, the DFPI may issue an order to desist and refrain and assess an administrative fine of $2,500. Such a citation is not to be reported as disciplinary action by the DFPI. Under the new law, the DFPI will gain the authority to seek the same ancillary remedies noted above when it issues such a citation. Additionally, the DFPI will no longer be prohibited from reporting the citation as a disciplinary action.
We will continue to track developments relating to the DFPI as it exercises its increased authorities under the various laws passed this year.
Ballard Spahr’s Consumer Financial Services Group is pleased to announce that it will hold a special live CLE webcast series, “Consumer Financial Services in Turbulent Times,” through the end of this year.
The webcasts will feature discussions among members of Ballard Spahr and esteemed guest speakers about timely and relevant topics in the wake of the Presidential election and the continuance of the pandemic. Topics will include credit card and payments regulation, fair lending, Fintech developments, enforcement developments, student and mortgage lending and servicing issues, debt collection, Community Reinvestment Act rules, and anti-money laundering.
More information, including how to register, will be available in the coming weeks. The series is complimentary and CLE credit will be available in jurisdictions other than Pennsylvania, New Jersey, and Nevada.
We recently published a blog about the OCC’s proposed rule “National Banks and Federal Savings Associations as Lenders” (the “Proposed Rule”), which would clarify that a bank (or savings association) is properly regarded as the “true lender” when, as of the date of origination, it is named as the lender in a loan agreement or funds the loan. We also published a separate blog discussing a comment submitted to the OCC by Ballard Spahr in support of the Proposed Rule.
We have now reviewed a sampling of the numerous comments filed with respect to the Proposed Rule. Many strongly support the bright-line approach of the Proposed Rule; others are supportive but provide suggestions and request adjustments, others request added elements, and still others adamantly oppose the Proposed Rule, and in some cases, oppose any form of “true lender” rule.
The comment period for the Proposed Rule closed on September 3, 2020. The comments can be viewed on the Regulations.gov website, which is reporting the filing of over 700 comments on the Proposed Rule (with 548 having been posted as of the date of this blog). In contrast, “only” 63 comments were received last year on the OCC’s now final Valid-When-Made (“Madden-fix”) rule. The high number of comments on the new Proposed Rule likely is attributable in part to the submission of hundreds of identical or similar form comments and e-mails disparaging the Proposed Rule and in part, we think, to the greater importance of the “true lender” issue than the Madden issue, which is relatively easier to address through careful loan program structuring.
Comments supporting the Proposed Rule recognize that, coupled with the OCC’s recently adopted Madden-fix rule, it would eliminate confusion, uncertainty and legal risk for banks and their counterparties and increase financial inclusion and nationwide availability of credit on reasonable terms. They note the importance of access to credit at this time, particularly in the face of the economic crisis caused by COVID-19. Supporters point out the Proposed Rule would result in strong and consistent supervision of bank-fintech partnerships across the country, ensuring fairness and compliance with applicable laws, and note the Proposed Rule would keep the costs of credit down and encourage innovation.
The Independent Community Bankers of America, a trade association representing community banks, endorses the clear, unambiguous standard set forth in the Proposed Rule. Other supporters explained that the Proposed Rule would make better borrowing alternatives available to more consumers. For example, the Marketplace Lending Association, a trade association for banks and companies that cap rates at 36% per annum on their loans, wrote: “without access to affordable credit, consumers will be in danger of being ensnared in high cost or predatory debt traps.”
Supporting comments cite the OCC’s clear authority to adopt the Proposed Rule and the alignment of the Proposed Rule with the OCC’s congressionally established responsibilities to assure the safety and soundness of banks, compliance with laws and regulations, fair access to financial services, and fair treatment of customers by the institutions and other persons subject to its jurisdiction. The Receivables Management Association observed that the OCC is ideally situated to understand the nuances of the credit industry, and the importance of efficiency on the industry’s ability to provide affordable credit to fuel economic and job growth.
An academician at the Mercatus Center at George Mason University said, “The OCC’s proposal is fair, is economically sound, and protects consumers, and the OCC should finalize it. In doing so, the OCC can help restore clarity and certainty to credit markets, strengthen banks’ ability to enter into partnerships, and improve access to credit to the benefit of banks, their nonbank partners, consumers, and society more broadly.”
While many comments supported the Proposed Rule without revision, other generally supportive comments suggested that elements should be added to the final rule or should be addressed in Supplementary Information. For example, the Marketplace Lending Association (“MLA”) “strongly supports” the proposal, believes it is an important compliment to the Madden-fix regulation and recognizes that Federal law does not give the OCC the authority to establish interest caps for particular types of loans. Still, the MLA proposes that the OCC should provide guidance to the effect that APRs above 36% constitute a “red flag” triggering scrutiny.
Avant, LLC, a fintech that recently settled the State of Colorado’s challenge to its lending program, expressed strong support for the “simple and straightforward” bright-line test proposed by the OCC. It noted that the Proposed Rule would eliminate the need for the fact-intensive multi-factor analyses that many courts have used to determine the true lender when applying a “predominant economic interest” test. According to Avant, this test can lead to myriad outcomes and continues to create uncertainty, thereby making credit unavailable to consumers who need it the most. However, Avant noted the recent settlement of the Colorado litigation and suggested it would be beneficial for the OCC to consider the “safe harbor” included in the Colorado settlement as it looks to further define bank partnership standards. According to Avant, this would promote credit availability while deterring abusive lending programs.
Cross River Bank, another settling party in the Colorado true lender litigation, also expressed the belief that the settlement’s framework can serve as a nationwide model to promote responsible access to affordable credit for those families most in need. While the Bank supports the OCC’s proposed criteria, it urges the OCC to develop a system that effectively weeds out predatory and abusive lending practices and proffers recommendations for criteria that should be added either in the rule or through supervisory standards.
Other comments, while generally supportive, express concerns about coverage or other issues.
We would characterize the reaction of some of the leading trade groups as lukewarm. The American Bankers Association supports the idea of the OCC making a “true lender” rule but thinks the Proposed Rule is too broad. It offers to work with the OCC and other agencies to create a better rule. The U.S. Chamber of Commerce supports the OCC’s efforts to remove ambiguity in the definition of a “true lender” but also thinks the suggested two-pronged test is too broad. It specifically asks the OCC to clarify that a “loan” does not include a retail installment contract and “funding” does not refer to warehouse funding. The Consumer Bankers Association supports the Proposed Rule but suggests additional considerations to add strength, and, like the Chamber, advocates carve-outs for indirect auto lending and mortgage warehouse lending. Likewise, the Mortgage Bankers Association generally supports the Proposed Rule but asks the OCC to add language to ensure warehouse lenders are not “true lenders.” By the same token, the American Financial Services Association said the OCC should clarify that “funding a loan” under the Proposed Rule excludes banks purchasing retail installment contracts (RICs) from automobile dealerships.
Many comments opposing the Proposed Rule were filed by banks, state authorities, special interest groups, academics and others. These comments reflected common themes, including assertions that: (1) the OCC lacks authority to adopt the Proposed Rule; (2) the Proposed Rule would deprive states of authority to regulate non-bank lenders; (3) the Proposed Rule would go beyond the preemption authority granted by the NBA; (4) the Proposed Rule is “arbitrary and capricious”; (5) the Proposed Rule’s adoption process violates the APA; (6) the Proposed Rule would support predatory lending and “rent-a-bank” schemes and therefore would be harmful to consumers and small businesses; and (7) the Proposed Rule might have an anti-competitive effect on other state-licensed non-bank lenders. Many comments advocated for positions beyond the scope of the Proposed Rule, proposing that the OCC adopt national consumer lending rate caps at 21% or 36%, or asking the OCC to reconsider the previously adopted Madden-fix rule.
A 78-page comment opposing the rule jointly submitted by the Center for Responsible Lending, the National Consumer Law Center and several others makes many of the same points these groups originally made in opposing the OCC’s Madden-fix rule. Likewise, an opposing comment submitted by Professor Adam Levitin restates many of the same arguments made in his earlier comment on the OCC’s Madden-fix Rule.
Unsurprisingly, the New York Department of Financial Services, which is participating in lawsuits attacking the OCC and FDIC Madden-fix rules, also submitted a comment opposing the Proposed Rule, saying the rule would sanction “rent-a-charter” schemes and would allow unregulated nonbank lenders to “exploit the bank’s ability to issue loans without regard to state usury caps” and “launder loans through banks as an end-run around consumer-protective state usury limits.” The comment includes a not-so-veiled litigation threat: “If the OCC acts outside the scope of its authority and finalizes this rule, NYDFS will take all appropriate steps necessary to protect consumers and small businesses in New York.”
Comments on the Proposed Rule submitted by members of Congress and State AGs predictably followed party lines. A letter highly critical of the Proposed Rule was signed by 24 of the 25 Democratic State AGs (all except the Delaware AG) – and no Republican AGs. The letter expressed the opinion that the OCC’s proposed bright-line true lender rule would enable increased predatory lending, payday lending and “rent-a-bank schemes.” The Democratic AGs also opine that the proposed two-pronged standard will produce contradictory results and that the OCC failed to comply with Dodd-Frank and the APA. These AGs ask that the Proposed Rule be withdrawn in its entirety.
Also, a letter opposing the Proposed Rule was sent two weeks after the close of the comment period by eight Democratic Senators (including Elizabeth Warren and six other members of the Senate Banking, Housing and Urban Affairs Committee). The letter criticizes the OCC for a “pre-financial crisis approach” in “broadly applying federal preemption to undermine state consumer protection laws.” It claims that the Proposed Rule does not meet the preemption requirements of Dodd-Frank and questions why the OCC has abandoned its Bush-era opposition to “rent-a-bank schemes”.
By contrast, all 26 House Financial Services Committee Republicans wrote the OCC and the FDIC in support of the rulemaking. This letter expresses concerns that “the uncertainty surrounding this issue … casts doubt on loans made under the bank-fintech partnership model and could reduce the availability of credit in affected areas, as was the case in states impacted by the Madden decision which deviated from valid when made.” The letter further states:
As you well know, third-party loan originations are subject to the same supervisory scrutiny as a bank-originated loan when there is a bank-fintech relationship . . . [W]e believe the OCC and FDIC have the obligation and the necessary statutory authority to promulgate rules to clarify which entity is the “true lender” under the National Bank Act and the Federal Deposit Insurance Act, respectively. Clarity on this issue would be timely now that the valid when made question has been settled and would foster a robust, competitive, nationwide lending marketplace. The need for consumers and small businesses to have access to these lines of credit is only exacerbated by the COVID-19 pandemic and the associated economic slowdown.
We hope that the OCC will sift through the multitude of comments, identify constructive and helpful input, and move forward to finalize its Proposed Rule in a form that will enhance the ability of the industry to provide affordable credit to American consumers with appropriate protections and guidelines under the supervision of the OCC. Ultimately, however, the fate of the OCC true lender rule, like much in our lives, will probably depend on the outcome of the upcoming elections.
This Week’s Podcast: A Discussion of Recent Developments Involving Credit Reporting, With Special Guest Eric Ellman, Senior Vice President for Public Policy and Legal Affairs, Consumer Data Industry Association
Topics discussed include: CFPB plans to conduct a new study on credit reporting accuracy; FTC efforts to address unlawful practices by credit repair companies and abuse of identity theft reports; FTC focus on FCRA Red Flags Rule enforcement and how companies can avoid FTC scrutiny; considerations for companies in approaching CARES Act compliance through suppression or reporting accounts in accommodation; and assessment of rationales for creating a public credit bureau.
Click here to listen to the podcast.
For our recent webinar, “What a Blue Wave in the November 2020 Elections Could Mean for the Consumer Financial Services Industry,” we were joined by special guest Isaac Boltansky, Director of Policy Research at Compass Point Research & Trading. The webinar examined the potential implications for the consumer financial services industry should Joe Biden win the Presidency and Democrats win control of the Senate while retaining control of the House.
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 Tim Jenkins, Leader of the firm’s Government Relations practice, discussed, respectively, how a blue wave could impact the regulatory agendas of the CFPB and other agencies and the legislative agenda of the next Congress.
Key takeaways regarding the implications of a blue wave scenario include the following:
- Chris Willis commented that the CFPB’s approach to the exercise of its authorities is likely to reflect criticism by Democrats that the CFPB has been lax in its approach to industry under Director Kraninger’s leadership. (In Chris’s view, such criticism is unfounded.) More specifically, in contrast to the CFPB’s current approach of handling more matters in supervision, there will likely be more enforcement cases involving larger dollar amounts and a more aggressive focus on fair lending.
- Chris also raised the possibility that the Madden-fix rules adopted by the OCC and FDIC and the OCC’s proposed true lender rule could be reversed or eroded and that there could be less interest in moving forward with special purpose national bank charters for fintechs or payments companies.
- Chris indicated that state attorneys general and regulators, many of whom have taken on a more active role during the Trump Administration to fill a perceived gap in enforcement by the CFPB, will likely remain very active and receive significant support from the CFPB.
- Tim Jenkins commented that in addition to legislation targeted at providing COVID-related relief, a Democratic-controlled Congress is likely to advance legislation dealing with FCRA reform (e.g. reporting of medical debts and servicemember debts, credit reports used for employment purposes, dispute resolution, free credit scores), interest rate limits, and debt collection. Other possible areas of legislative activity identified by Tim were arbitration and student loans.
- Isaac Boltansky commented that the CFPB will likely renew its focus on overdrafts and payday lending, including by reopening a rulemaking on small-dollar loans with the goal of restoring an ability-to-repay standard.
- Isaac indicated that he also expects to see more regulatory or legislative focus on bank-non-bank partnerships. While he also expects there will be many “headlines” about efforts to enact a federal interest rate cap, he believes such efforts are unlikely to prevail. He also believes such efforts will fuel efforts on the state level to enact interest rate caps.
- In Isaac’s view, Senator Elizabeth Warren is likely to play a key role in selecting the leadership of the CFPB and other financial regulatory agencies and that the individuals she selects will take aggressive and innovative approaches, resulting in immediate change at the agencies. He also noted that while a blue wave will result in an immediate change in the CFPB’s and OCC’s leadership, there will be staggered changes in the leadership of the FDIC, FTC, and Federal Reserve Board because commissioners and board members have staggered terms.
The CFPB recently released a regulatory and reporting overview reference chart for Home Mortgage Disclosure Act (HMDA) data to be collected in 2021. The CFPB notes that the chart is intended to be used as a reference tool for data points required to be collected, recorded, and reported under the HMDA rules, set forth in Regulation C, as amended through April 16, 2020.
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, Seila Law makes the following principal arguments:
- The appropriate remedy is to deny the CFPB’s petition to enforce the CID. As a result of the CFPB’s structural constitutional defect, the CFPB lacked the authority to issue and enforce the CID and its actions in doing so are void.
- The CFPB’s purported ratifications of the CID by former Acting Director Mulvaney and Director Kraninger are invalid. Under U.S. Supreme Court precedent, for a valid ratification to occur, the party ratifying must be able to do the act ratified both at the time the act was done and at the time of ratification. The CFPB cannot satisfy either requirement because:
- As principal, the CFPB did not have the authority to issue the CID at the time it was issued. As a result, ratification is unavailable to its agent, the CFPB Director.
- The CFPB could not issue the CID at the time of Director Kraninger’s ratification. Since the applicable three-year statute of limitations for bringing any action against Seila Law for the alleged violations to which the CID relates had expired by the date of Director Kraninger’s ratification, the CID serves no valid purpose and the ratification is ineffective.
Briefing now appears to be complete and the case docket indicates that the court will notify the parties if it wishes to schedule oral argument.
A Maine federal district court ruled that that two 2019 amendments to Maine’s credit reporting law are preempted by the federal Fair Credit Reporting Act and granted the motion for judgment filed by the plaintiff, the Consumer Data Industry Association (CDIA).
One of the amendments prohibited a consumer reporting agency (CRA) from reporting medical debt on a consumer’s credit report until a delinquency was at least 180 days old. Once a CRA received “reasonable evidence” that a medical debt had been settled or paid in full, the CRA could not report the debt and had to “remove or suppress” it from the consumer report.
The second amendment required a CRA to reinvestigate a debt if the consumer provided documentation that the debt was the result of “economic abuse.” If the CRA found that the debt was the result of such abuse, it had to remove any reference to the debt from the consumer report. “Economic abuse” was defined to mean “causing or attempting to cause an individual to be financially dependent by maintaining control over the individual’s financial resources” and included “unauthorized or coerced use of credit or property” and “stealing from or defrauding of money or assets.”
The district court concluded that the Maine amendments were preempted under the FCRA’s express preemption provision (15 U.S.C. 1681t(b)(1)(E)) which preempts state law “with respect to any subject matter regulated under…[15 U.S.C. 1681c], relating to information contained in consumer reports.” 15 U.S.C. 1681c, which is titled “Requirements relating to information contained in consumer reports,” includes a list of information that must be excluded from consumer reports (i.e. obsolete information) and also requires certain information to be included in consumer reports. The district court agreed with the CDIA that the phrase “relating to information contained in consumer reports” should be read broadly to encompass any state law that regulates what information must or may not be included in a consumer report.
Montana Reduces Renewal Licensing Fees Due to COVID-19
The Montana Department of Administration recently amended its regulations relating to licensing renewal fees for all mortgage industry license types to reduce the renewal fees by two-thirds for the 2021 renewal period due to the pandemic’s impact on the mortgage industry.
Licensees are required to submit their renewal applications by December 1 each year to ensure issuance of the license to qualified renewal applicants. In the notice of proposed amendment, the Department states that the amount was chosen to balance the need to offer short-term relief to those affected by the pandemic with the Department’s long-term need to generate sufficient revenue to cover the cost of its administration.
The amendments are effective immediately.
If You Think the CFPB Stepped Back From Supervision and Enforcement, You’re Not Paying Attention
Online Only | November 5, 2020
Moderator: Kim Phan
Online Only | November 9-10, 2020
Speaker: Meredith S. Dante
Speaker: Richard J. Andreano, Jr.
WHF/WHFF Partner Series
Webinar | November 12, 2020
Speaker: Richard J. Andreano, Jr.
Practising Law Institute’s 25th Annual Consumer Financial Services Institute
December 7-8, 2020
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