Legal Alert

Mortgage Banking Update - December 17, 2020

December 17, 2020
In This Issue:


CFPB Finalizes Ability-to-Repay/Qualified Mortgage Rules

The CFPB recently issued a final rule amending Regulation Z ability to repay rule/qualified mortgage (QM) requirements to replace the strict 43% debt-to-income (DTI) ratio basis for the general QM with an annual percentage rate (APR) limit, while still requiring the consideration of the DTI ratio or residual income. The CFPB also issued a final rule that adds a new seasoned loan QM. The CFPB issued an executive summary of the final rules as well as an unofficial redline of the changes to Regulation Z made by the final rules.

Each rule will become effective for applications received by creditors on or after the date that is 60 days following the date when the final rule is published in the Federal Register. Additionally, the existing general QM based on a 43% DTI ratio, and the GSE Patch, will no longer be available for applications received on or after July 1, 2021. During the period beginning when the new general QM rule becomes effective until June 30, 2021, creditors will have the option of continuing to use the GSE Patch or existing general QM, or using the new general QM. As previously reported, in October 2020 the CFPB extended the January 10, 2021 sunset date for the GSE Patch to provide for the implementation of the final new general QM rule.

General QM

The final rule for the new general QM requires that a creditor consider and verify income or assets, debt obligations, alimony and child support, and consider DTI ratio or residual income. The final rule also imposes the standard product terms and points and fees limitations for QM loans. The main change made by the final rule is that it replaces the 43% DTI ratio limit under the current general QM with a requirement that the APR on the loan may not exceed the average prime offer rate (APOR) for a comparable transaction by:

  • For a first lien transaction with loan amount of $110,260 or more, 2.25 or more percentage points.
  • For a first lien transaction with loan amount of $66,156 or more and less than $110,260, 3.5 or more percentage points.
  • For a first lien transaction with loan amount of less than $66,156, 6.5 or more percentage points.
  • For a first lien transaction secured by a manufactured home with loan amount of less than $110,260, 6.5 or more percentage points.
  • For a junior lien transaction with a loan amount of $66,156 or more, 3.5 or more percentage points.
  • For a junior lien transaction with a loan amount of less than $66,156, 6.5 or more percentage points.

All of the dollar amounts are indexed for inflation. The dollar amounts are based on the original $100,000 and $60,000 amounts used for the points and fees calculation, and reflect the 2021 values after indexing for inflation. For first lien transactions of $110,260 or more, the 2.25 percentage point amount is an increase over the proposed 2.0 percentage point amount.

For adjustable rate mortgage loans, the final rule includes a special requirement for the calculation of the APR for purposes of comparing the APR to the APOR. Rather than using the standard method for calculating the APR on an adjustable rate mortgage loan for disclosure purposes, the creditor will be required to calculate the APR based on the highest interest rate that can apply during the five year period from the due date of the first scheduled payment on the loan. The industry opposed this approach, and noted that the creditor is required to assess repayment ability based on the payment that results from the maximum interest rate that can apply during the same five year period.

To qualify for the safe harbor, which is a conclusive presumption of compliance with the ability to repay rule, the APR could not exceed the APOR for a comparable transaction by (1) 1.5 percentage points or more for a first lien transaction or (2) 3.5 percentage points or more for a junior lien transaction. For adjustable rate loans, the special requirement to calculate the APR for QM purposes also would apply to determine whether the safe harbor or rebuttable presumption applies.

Under the existing general QM based on a maximum 43% DTI ratio, if the APR exceeds the APOR by 1.5 or 3.5 or more percentage points, as applicable, the loan is eligible for a rebuttable presumption of compliance instead of a safe harbor. The new general QM rule effectively limits the APR that allows a loan to qualify for the rebuttable presumption. For example, with first lien loans of $110,260 or more that satisfy the other requirements of the new general QM rule, loans with APRs less than 1.5 percentage points over the APOR qualify for the safe harbor, loans with APRs of 1.5 percentage points to less than 2.25 percentage points above the APOR qualify for the rebuttable presumption of compliance, and loans with APRs of 2.25 or more percentage points above the APOR are not QM loans.

The final rule includes the proposed requirement that a creditor consider the consumer’s current or reasonably expected income or assets (other than the value of the security property), current debt obligations, alimony, and child support, and monthly DTI ratio or residual income. Also, as proposed, the final rule requires that the consideration of monthly DTI ratio or residual income be in accordance with section 1026.43(c)(7) of the ability to repay rule. The industry raised concern with this aspect of the proposal because that section addresses monthly DTI ratio and residual income requirements for a non-QM loan, and a Commentary provision for the section includes the following statement “an appropriate threshold for a consumer’s monthly debt-to-income ratio or monthly residual income is for the creditor to determine in making a reasonable and good faith determination of a consumer’s ability to repay.”

The industry noted that the requirement to consider monthly DTI ratio or residual income in accordance with section 1026.43(c)(7) appeared to impose a underwriting requirement without an objective standard regarding the adequacy of the DTI ratio or residual income, which would be contrary to the goal of a safe harbor. In the preamble to the final rule, the CFPB addresses this concern. The CFPB states that the requirement to follow section 1026.43(c)(7) is “only for purposes of calculating monthly DTI, residual income, and monthly payment on the covered loan” and that “[m]ore generally, the Bureau emphasizes that [the final rule] requires only that the creditor “consider” the specified factors. It does not permit a broader challenge that a loan is not a General QM because the creditor failed to make a reasonable and good-faith determination of the consumer’s ability to repay under § 1026.43(c)(1), as this would undermine the certainty of whether a loan is a General QM.”

The final rule also includes the proposed requirements that the creditor (1) verify the consumer’s current or reasonably expected income or assets (other than the value of the security property) using third-party records that provide reasonably reliable evidence of the consumer’s income or assets in accordance with section 1026.43(c)(4) of the ability to repay rule, and (2) verify the consumer’s debt obligations, alimony and child support using reasonably reliable third-party records in accordance with section 1026.43(c)(3) of the rule. The CFPB had proposed a safe harbor for the verification requirements that would be based on the creditor meeting standards in specified documents. Although the proposed rule did not identify specific documents, the CFPB noted in the preamble to the proposed rule that such documents could potentially include relevant provisions from Fannie Mae’s Single Family Selling Guide, Freddie Mac’s Single-Family Seller/Servicer Guide, FHA’s Single Family Housing Policy Handbook, the Department of Veterans Affairs (VA) Lenders Handbook, and the Field Office Handbook for the Direct Single Family Housing Program and Handbook for the Single Family Guaranteed Loan Program of the U.S. Department of Agriculture (USDA). The final rule includes the safe harbor, and references the verification standards in the following manuals:

  • Chapters B3-3 through B3-6 of the Fannie Mae Single Family Selling Guide, published June 3, 2020;
  • Sections 5102 through 5500 of the Freddie Mac Single-Family Seller/Servicer Guide, published June 10, 2020;
  • Sections II.A.1 and II.A.4-5 of the FHA’s Single Family Housing Policy Handbook, issued October 24, 2019;
  • Chapter 4 of the VA’s Lenders Handbook, revised February 22, 2019;
  • Chapter 4 of the USDA’s Field Office Handbook for the Direct Single Family Housing Program, revised March 15, 2019; and
  • Chapters 9 through 11 of the USDA’s Handbook for the Single Family Guaranteed Loan Program, revised March 19, 2020.

If a manual used by a creditor is revised, the safe harbor still applies as long as the revised manual is substantially similar. A creditor may use the verification standards in more than one of the manuals, such as by “mixing and matching” verification standards from the manuals.

As proposed, the final rule adds a Commentary provision to address unidentified funds. A creditor would not meet the verification requirements if it observes an inflow of funds into the consumer’s account without confirming that the funds are income. An example of such a situation is that a creditor would not meet the verification requirements when it observes an unidentified $5,000 deposit in the consumer’s account, but fails to take any measures to confirm or lacks any basis to conclude that the deposit represents the consumer’s personal income and not, for example, proceeds from the disbursement of a loan.

The final rule does not change the points and fees limits, or the items that are included in points and fees. The final rules also does not alter the existing separate QMs for loans that are defined as a QM by FHA, VA or USDA.

Seasoned Loan QM

As noted above, the seasoned loan QM rule becomes effective for applications received on or after the date that is 60 days following the date the final rule is published in the Federal Register. Only loans resulting from applications received by creditors on or after the effective date will be eligible to become seasoned QM loans.

Consistent with the proposed rule, under the final rule loans that meet the seasoned QM loan criteria will qualify for a safe harbor of compliance under the Regulation Z ability to repay rule, regardless of whether or not the loans are higher-priced mortgage loans. Currently under the ability to repay rule, loans that qualify as a QM loan based on one of the QM loan categories set forth in the rule are entitled to only a rebuttable presumption of compliance with the rule if they are higher-priced mortgage loans.

The basic requirements for loan to become a seasoned QM loan are:

  • The loan is a fixed rate, first lien loan with a term of no more than 30 years (step rate loans would not be considered fixed rate loans).
  • The loan provides for regular periodic payments that are substantially equal and will fully amortize the loan over its term, and the loan does not have an interest-only or negative amortization feature.
  • The total points and fees do not exceed the applicable limit for a QM loan.
  • The loan is not a high-cost loan under Regulation Z. This requirement was not in the proposed rule.
  • The creditor in underwriting the loan complies with the requirements under the new general QM rule to consider the consumer’s income or assets, debt obligations, alimony, child support and monthly DTI ratio or residual income, and to verify the consumer’s income or assets and debt obligations, alimony and child support. The proposed rule would have allowed the creditor to follow the consider and verify requirements of any other Regulation Z QM loan category.
  • Subject to exceptions for transfers required by supervisory action or in connection with a merger or entity acquisition, and an additional exception not included in the proposed rule (which is addressed below), the creditor may not sell, assign or otherwise transfer the legal title to the loan before the end of the 36-month seasoning period (calculated from the due date of the first periodic payment). The loan also could not at consummation be subject to a commitment to be acquired by another person, except for a transfer pursuant to the additional exception added to the final rule.
  • During the 36-month seasoning period the loan may have no more than two delinquencies of 30 or more days, and no delinquency of 60 or more days (if there is a delinquency of 30 or more days when the 36-month point is reached, the seasoning period is essentially extended as it would not end until there is no delinquency).

As noted, a loan that satisfies the requirements at the end of the 36-month seasoning period will become a seasoned QM loan entitled to the safe harbor of compliance. This will be the case for a loan that is a non-QM loan, a rebuttable presumption QM loan under another Regulation Z QM loan category, or even a safe harbor QM loan under another Regulation Z QM loan category. With regard to a loan that at the time is already a safe harbor QM loan, the CFPB commented that “a Seasoned QM definition will provide additional legal certainty by providing an alternative basis for a conclusive presumption of [ability to repay rule] compliance after the required seasoning period.”

The final rule includes an exception to the transfer restriction during the seasoning period that was not included in the proposed rule. A loan could be sold, assigned, or otherwise transferred once before the end of the seasoning period, but the loan could not be securitized as part of the sale, assignment or transfer, or at any other time, before the end of the seasoning period. The CFPB explains that a reason for adding the one time transfer exception is to support “a fundamental goal of . . . the Seasoned QM category . . . to encourage creditors to increase the origination of non-QM loans in a responsible manner.”

A temporary payment accommodation provided to a consumer due to financial hardship caused directly or indirectly by a presidentially declared emergency or major disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, or a presidentially declared pandemic-related national emergency under the National Emergencies Act, would not be considered a delinquency, provided that during or at the end of the accommodation the consumer brings the loan current according to the original terms, or there is a qualifying change to the loan. To be a qualifying change: (1) the change must end any pre-existing delinquency on the loan when the change takes effect, (2) the amount of interest charged over the full term of the loan may not increase as a result of the change, (3) the servicer may not charge any fee in connection with the change, and (4) the servicer must waive all existing late charges, penalties, stop payment fees, or similar charges promptly upon the consumer’s acceptance of the change. Although a seasoned QM loan must provide for substantially equal payments that fully amortize the loan, and must have a term of no more than 30 years, the final rule adds a clarification that a qualifying change could provide for a balloon payment or a lengthened loan term.

If there is a temporary payment accommodation, the period of the accommodation does not count toward the 36-month seasoning period. The 36-month seasoning period requirement must be satisfied by the periods immediately before and after the accommodation period.

To address concerns that a creditor may attempt to take steps to help keep a loan current, the following funds are not considered in assessing whether a periodic payment is delinquent: (1) funds in escrow in connection with the loan, and (2) funds paid on behalf of the consumer by the creditor, servicer, or assignee of the covered transaction, or any other person acting on their behalf. A creditor will be permitted to ignore a partial payment for purposes of assessing delinquency if (1) the creditor chooses not to treat the payment as delinquent for purposes of any of the Regulation X servicing provisions, if applicable, (2) the payment is deficient by $50 or less, and (3) there are no more than three such deficient payments treated as not delinquent during the seasoning period.

- Richard J. Andreano, Jr.

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CFPB Sues Operator of Bad-Check Pretrial-Diversion Programs for Engaging in Unlawful Debt Collection Practices

In a new lawsuit filed in a Missouri federal district court, the CFPB alleges that BounceBack, Inc. violated the FDCPA and CFPA in connection with its operation of bad-check pretrial-diversion programs on behalf of more than 90 district attorneys’ offices throughout the United States. Such programs require the writer of a dishonored check to pay the debt and also enroll in, pay for, and complete a financial education course.

According to the allegations in the Bureau’s complaint, dishonored checks are submitted to BounceBack by merchants primarily through its affiliate, Check Connection, Inc. (CCI). After a merchant submits a dishonored check to CCI, CCI adds it to a list of dishonored checks by jurisdiction that is sent to the pertinent DA for review. In nearly all cases, BounceBack attempts to enroll the check writers in a pre-trial diversion program without receiving further direction from a DA to do so. BounceBack then sends letters to the check writers on DA letterhead in an effort to collect the outstanding debt and enroll them in a financial education course. The Bureau alleges that the letters tell the check writers that they could face criminal prosecution and conviction, but can avoid prosecution by paying the amount of the dishonored check, along with certain fees, and completing a financial education course. If the check writer pays these amounts, BounceBack sends the amount of the dishonored check to the merchant, pays a fee to the merchant and DA, and keeps the balance.

The FDCPA, at 15 U.S.C. 1692p, excludes an entity operating a bad-check diversion program through a contract with a DA from the definition of a “debt collector” if the operator satisfies certain requirements. Such requirements include:

  • The operator may only contact the check writer for purposes of participating in the program if there has been a determination by the DA “that probable cause of a bad check violation under State penal law exists, and that contact with the alleged offender for purposes of participation in the program is appropriate.”
  • The initial written communication sent by the operator must include a clear and conspicuous statement that contains certain information, including that if the check writer notifies the operator or DA in writing, not later than 30 days after being contacted for the first time that there is a dispute, the DA or an authorized employee of the DA must make a determination that there is probable cause to believe that a crime has been committed before further restitution efforts are pursued.

In the complaint, the CFPB alleges that BounceBack is a debt collector subject to the FDCPA because as a result of not complying with the foregoing requirements, it is not eligible for the exclusion provided by Section 1692p. The CFPB alleges the following FDCPA violations by BounceBack:

  • Violation of the FDCPA provisions prohibiting a debt collector from falsely representing that nonpayment of a debt will result in arrest or imprisonment or from threatening to take any action that cannot legally be taken or is not intended to be taken. The CFPB alleges that BounceBack represented to check writers that nonpayment of a debt would result in arrest in or imprisonment when, in fact, neither BounceBack nor the DAs intended to take such action.
  • Violation of the FDCPA provisions prohibiting the use of any written communication that simulates or is falsely represented to be a government document or the use of any business name other than the name of the collector’s business. The CFPB alleges BounceBack represented that written communications sent to check writers were issued by a state official or agency when, in fact, the communications were from BounceBack which used the names of the DAs in attempting to collect the debts.
  • Violation of the FDCPA provision prohibiting the use of any false representation or deceptive means to collect a debt. The CFPB alleges BounceBack falsely represented that the failure to pay a dishonored check and other amounts and complete the financial education course would lead to criminal prosecution when in fact it would not for the vast majority of check writers. It also alleges that BounceBack designed its collection letters to appear to come from DAs when in fact they did not.
  • Violation of the FDCPA provision prohibiting a debt collector from failing to include certain disclosures in the initial written communication. The CFPB alleges BounceBack did not include the required disclosures in its initial communications.
  • Violation of the FDCPA validation notice requirement. The CFPB alleges BounceBack failed to make the disclosures required to be included in the validation notice.

The CFPB also alleges that BounceBack engaged in the following deceptive acts or practices in violation of the CFPA UDAAP prohibition: (1) making false threats that non-payment of the amounts sought to be collected would result in prosecution, (2) falsely representing that failure to complete the financial education course would result in prosecution, and (3) sending letters that gave the false impression that they were sent by a DA. In addition, the CFPB alleges BounceBack’s FDCPA violations constituted violations of the CFPA.

The complaint seeks injunctive relief, as well as damages, consumer redress, disgorgement, and the imposition of a civil money penalty.

- Stefanie Jackman & John L. Culhane, Jr.

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States Issue Work-From-Home Guidance for Mortgage Lenders – Updated 12/01/2020

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.

Alabama  Memorandum 
Alaska Notice
Arkansas Interim Regulatory Guidance Extended
California Guidance
Colorado Bulletin
Connecticut Revised Memorandum
District of Columbia Order
Hawaii Interim Regulatory Guidance (NMLS link)
Idaho Temporary Regulatory Guidance Extended
Indiana Guidance (NMLS link)
Iowa Letter
Kansas Updated Guidance
Kentucky Guidance
Louisiana Declaration
Maryland Bulletin
Massachusetts E-mail (NMLS link)
Michigan Bulletin
Minnesota Letter (NMLS link)
Mississippi Interim Regulatory Guidance
Montana Guidance
Nebraska Guidance on Temporary Branch Relocations (NMLS link)

Application Form (NMLS link)

Nevada Extended Memorandum
New Hampshire Memorandum
New Jersey Bulletin Extended
New Mexico Updated Memorandum
North Dakota Press Release – Preparation for COVID-19 Response
Oklahoma Fifth Amended Interim Guidance
Ohio FAQ
Oregon Revised Bulletin No. DFR 2020-6
Pennsylvania Guidance
Rhode Island Revised Banking Bulletin 2020-1
South Carolina Interim Regulatory Guidance
South Dakota Updated Interim Regulatory Guidance (NMLS link)
Tennessee Interim Guidance
Texas Guidance
Utah Guidance (NMLS link)
Vermont Memorandum
Washington Interim Guidance Extended
West Virginia Emergency Announcement
Wisconsin Directive


- Mortgage Banking Group

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Federal Banking Agencies Warn of Safety and Soundness Risks in Statement Encouraging Transition From LIBOR as Soon as Possible

The FRB, FDIC, and OCC issued a “Statement on LIBOR Transition that encourages banks to transition away from the London Inter-Bank Offered Rate (LIBOR) as soon as possible, and in any event by December 31, 2021.

The agencies indicate that the LIBOR administrator has announced it will consult on its intention to cease publication of the one week and two month U.S. Dollar (USD) LIBOR settings immediately following LIBOR publication on December 31, 2021, and the remaining LIBOR settings immediately following the LIBOR publication on June 30, 2023.

Banks are advised that new contracts entered into before December 31, 2021 should either use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation. The agencies warn that the failure to prepare for disruptions to USD LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks’ safety and soundness by creating consumer protection, litigation, and reputational risks. In light of such risks, the agencies also warn that they will consider a bank as having created safety and soundness risks by entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021 and “will examine bank practices accordingly.” (The agencies note that if the LIBOR administrator extends the publication of USD LIBOR beyond December 31, 2021, there may be limited circumstances in which it is appropriate for a bank to enter into new USD LIBOR contracts after December 31, 2021.)

Last month, the agencies issued a statement indicating that they were not endorsing a specific replacement rate for LIBOR for loans and advising banks that they could use any replacement rate that the bank determines to be appropriate for its funding model and customer needs.

- John L. Culhane, Jr.

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This Week’s Podcast: The CFPB’s Leadership in a Biden Administration: What Do We Expect?

After looking at the differing approaches of the former and current CFPB Directors to using the CFPB’s authorities, we look ahead to how the CFPB’s leadership is expected to change in a Biden Administration. Topics discussed include how the choice of a new Director will be made (including the impact of the Georgia Senate runoff elections), who can serve as Acting Director pending a new Director’s confirmation, and what approach a new Director will take to using the CFPB’s authorities and how it will differ most from the current Director’s approach.

Click here to listen to the podcast.

- Alan S. Kaplinsky, Christopher J. Willis & James Kim

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CFPB Finalizes Advisory Opinions Policy and Issues Two Advisory Opinions

The CFPB has issued its final Advisory Opinions Policy, which allows stakeholders to request interpretive guidance “to resolve regulatory uncertainty.” While advisory opinions (AO) may address uncertainty in both statutes and regulations, the Bureau states in the Policy that it “will focus primarily on clarifying ambiguities in its regulations.” The Policy was accompanied by the release of two AOs, one dealing with earned wage access (EWA) products and the other dealing with certain education loan products that refinance or consolidate a borrower’s pre-existing federal, or federal and private, education loans.

AO Policy. The final Policy, which as published in the Federal Register indicates that it was applicable beginning November 30, 2020, supersedes the Bureau’s pilot AO program launched in June 2020. The final Policy adopts the Bureau’s June 2020 proposal without any significant changes. It provides for the submission of requests for an AO to the Bureau by email and for the publication of AOs in the Federal Register and on the Bureau’s website.

Key features of the Policy include:

  • A request for an AO must identify the person or entity seeking the AO or any person or entity submitting the request on behalf of a third party. Third parties such as trade associations and law firms can submit requests for AOs on behalf of clients or members without identifying those entities.
  • A request must concern actual facts or a course of action that the requestor or third party is engaged in or considering engaging in.
  • AOs will be interpretive rules under the Administrative Procedure Act.
  • The Bureau will use the following factors in deciding whether to address an issue through an AO:
    • The issue has been noted in Bureau exams as one that might benefit from additional regulatory clarity
    • The issue is one of substantive importance or impact or one whose clarification would provide significant benefit
    • The issue concerns an ambiguity that the Bureau has not previously addressed through an interpretive rule or other authoritative source
  • The following factors will weigh strongly in favor of a presumption that an AO is not appropriate:
    • The issue is the subject of an ongoing Bureau investigation or enforcement action or the subject of an ongoing or planned rulemaking
    • The issue is better suited for notice-and-comment rulemaking
    • The issue could be addressed more effectively through a Compliance Aid or the Bureau’s regulatory inquiries function
    • Clear Bureau or court precedent on the issue is already publicly available
  • Secondary factors used by the Bureau to evaluate requests for AOs will include alignment with the Bureau’s statutory objectives (such as identifying and addressing outdated, unnecessary, or unduly burdensome regulations), size of the benefit offered to consumers by resolution of the interpretive issue, known impact on the actions of other regulators, and the impact on Bureau resources.
  • Where a statute or regulation establishes a general standard “that can only be applied through highly fact-intensive analysis” (such as the Dodd-Frank UDAAP prohibition), the Bureau does not intend to replace that analysis “with a bright-line standard that eliminates all of the required analysis.” However, “there may be times when the Bureau is able to offer advisory opinions that provide additional clarity on the meaning of such standards.”

AO on EWA Products. EWA products provide employees with access to earned but as yet unpaid wages. As described in the AO, such products typically involve an EWA provider enabling employees to request a certain amount of accrued wages, disbursing the requested amounts to employees prior to payday, and later recouping the funds through payroll deduction or bank account debits on the subsequent payday.

The AO addresses whether an EWA program with the characteristics set forth in the AO is covered by Regulation Z. Such characteristics include the absence of any requirement by the provider for an employee to pay any charges or fees in connection with the transactions associated with the EWA program and no assessment by the provider of the credit risk of individual employees. The AO sets forth the Bureau’s legal analysis on which it bases its conclusion that the EWA program does not involve the offering or extension of “credit” within the scope of Regulation Z.

The Bureau could have determined that the EWA program set forth in the AO was not covered by Regulation Z without analyzing the meaning of “credit” under Regulation Z and instead by relying on the absence of a finance charge and the single payment structure. In the AO, the CFPB describes EWA products as “an innovative way for employees to meet short-term liquidity needs that arise between paychecks without turning to more costly alternatives like traditional payday loans.” While noting that the AO has no application to any circumstances other than an EWA program meeting all of the characteristics set forth in the AO, the CFPB suggests it could have value to other providers. More specifically, the CFPB observes that there may be EWA programs with nominal processing fees that nonetheless do not involve the offering or extension of “credit” under Regulation Z and advises that providers of such programs can request clarification about a specific fee structure. By not relying on the absence of a finance charge and single payment structure for its conclusion that the EWA program was not covered by Regulation Z, the CFPB may have been seeking to promote the development of EWA programs by leaving the door open for programs that do have fees to also be outside the scope of Regulation Z because they do not involve “credit.”

AO on Private Education Loan Refinancing or Consolidation Products. The AO addresses whether private education loan consolidation products that satisfy and replace multiple federal, or federal and private education loans, and private education loan refinance products that satisfy and replace a single federal or private education loan are “private education loans” for purposes of the disclosure and other requirements applicable to “private education loans” under TILA and Regulation Z. The AO sets forth the Bureau’s legal analysis on which it bases its conclusion that such private education loan refinance or consolidation products are covered under the term “private education loan” in TILA and Regulation Z and therefore subject to TILA and Regulation Z’s requirements in subpart F.

- John L. Culhane, Jr. & James Kim

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FDIC Questions Its Authority to Issue “True Lender” Rule

PLI held its two-day 25th Annual Consumer Financial Services Institute, which I co-chaired. During the morning session of the first day, I co-moderated two consecutive panel discussions titled “Federal Regulators Speak,” with the first panel featuring CFPB and FTC representatives and the second panel featuring OCC and FDIC representatives. The FDIC representative on the second panel was Leonard Chanin, Deputy to the FDIC Chairman.

After the OCC representative discussed the OCC’s “Madden-fix“ and “true lender“ rules, I asked Leonard why the FDIC has not yet issued its own “true lender” rule. Leonard responded that unlike the OCC which has statutory authority to determine when a loan is made by a national bank or federal savings association, the FDIC does not have similar authority under the Federal Deposit Insurance Act to determine when a loan is made by a state bank. According to Leonard, while the FDIC might be able to fill in certain “gaps,” state law controls when a loan is made by a state bank and the FDIC cannot preempt state law on this issue. Leonard contrasted the FDIC’s authority to issue its own “Madden-fix” regulation under Section 27 of the FDIA from its lack of authority under Section 27 to issue a “true lender” regulation.

While the FDIC may be willing to revisit the view expressed by Leonard, his remarks clearly dash any hopes that a “true lender” rule would be forthcoming from the FDIC in the near future. Without a bright-line standard similar to the OCC’s true lender standard for determining when a state bank is the lender in lending programs involving substantial assistance from a fintech or other non-bank company, state banks and non-banks involved in such programs continue to face the risk of true lender recharacterization by courts applying widely diverging, fact-intensive tests. As a result, when structuring such programs, state banks and non-banks need to be mindful of the relevant case law and consult with knowledgeable counsel so that they are best-positioned to defend against threats of true lender recharacterization.

It should also be noted that while the view expressed by Leonard might lead one to believe that it is preferable for a non-bank to partner with a national bank in lending programs instead of a state bank, there is still great uncertainty as to the viability of the OCC’s “true lender” rule. More specifically, an override of the rule by Congress under the Congressional Review Act is possible. Another possibility is that the Biden Administration will replace Acting Comptroller Brian Brooks with an (Acting) Comptroller who will initiate a rulemaking to repeal or significantly amend the OCC’s “true lender” rule.

- Alan S. Kaplinsky

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CFPB Ombudsman’s Office Issues Annual Report

The CFPB Ombudsman’s Office recently released its FY2020 annual report. The Ombudsman’s Office is intended to serve as an independent, impartial, and confidential resource that assists consumers, financial entities, consumer or trade groups, and others in informally resolving process issues with the CFPB.

In the annual report, the Ombudsman provides examples of the Office’s work in FY2020 and discusses the types of internal and external engagement in which the Office has participated during that period. The report includes a discussion of a new beta test that the Ombudsman’s Office conducted for a post-examination survey of companies supervised by the CFPB. In a blog post about the report, the Ombudsman stated that following completion of the report, the Office concluded its beta test evaluation and determined that the Office will conduct a post-examination survey of supervised entities as a new initiative going forward.

In addition to individual inquiries, the Ombudsman reviews systemic issues that may affect consumers or financial entities nationwide, in a particular region, or with a certain process. In FY2020, the Ombudsman reviewed the following two issues as systemic issues:

  • Small business lending discrimination complaints. In April 2020, the CFPB published a blog post informing small business owners who believe they were discriminated against based on race, sex, or another protected category that they could submit a lending discrimination complaint online to the CFPB. Based on research it conducted, the Ombudsman determined that there was an opportunity for the CFPB to set expectations and further clarify its processes for receipt and analysis of small business complaints on various topics. The Ombudsman indicates that the CFPB is exploring options to set clear expectations for small businesses.
  • Information the CFPB provides during and at the conclusion of exams. The Ombudsman identified the following factors that arise either from the supervision process or from the relationship between the enforcement process and the supervision process as contributing to a company perceiving that examination results are less favorable than what it anticipated:
  • The examination team and SEFL at CFPB headquarters differ on final examination determinations and on a result that differs from what the company understood during the soft close.
  • There is extended timing between the end of an examination and the company’s receipt of examination results and companies may not be aware of the extended timing or potential outcomes.
  • The phrasing and terminology in written communications may not be fully understood by the company.

Other factors contributing to this perception identified by the Ombudsman arise from the intersection of the supervision and enforcement processes. The Ombudsman noted that there is limited information in plain language about the enforcement process for companies and limited information about the transition from the supervision process to the enforcement process. It observed that it is not within examiners’ purview to discuss the enforcement h they can refer companies regarding the enforcement process that may be easily understood. The final steps of an examination, such as examination results or use of the appeals process, may be less clear to a company when the CFPB starts enforcement activity before the examination’s conclusion. The Ombudsman concluded that overall some companies do not have clarity about the impact on their examinations once the Office of Enforcement becomes involved. The Ombudsman has recommended that the CFPB make available to examiners and companies additional information on the enforcement process that includes how supervision intersects with enforcement.

The report also includes updates on previous systemic reviews involving how non-consumers contact the CFPB by phone and consumer complaints referred to the CFPB by other agencies.

- John L. Culhane, Jr.

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Did You Know?

2021 NMLS Virtual Annual Conference & Training Registration

Registration for the 2021 NMLS Annual Conference & Training is now open. The virtual event will be held February 23-26, 2021. Similar to the in-person conference experience, online attendees will be able to choose from concurrent breakout sessions, listen to roundtable discussions with industry experts, and network with peers. The registration deadline is February 19, 2021.

- Aileen Ng

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Looking Ahead

California MBA Legal Issues and Regulatory Compliance Conference

What Will New QM Look Like?

Online Only | January 12-13, 2021

Speaker: Richard J. Andreano, Jr.


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