Legal Alert

Mortgage Banking Update

by Richard J. Andreano, Jr. and John D. Socknat
January 28, 2021

In This Issue:

For the latest updates on the Coronavirus COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center

Biden Administration Regulatory Freeze Will Impact CFPB Final Rules

On January 20, President Biden’s Chief of Staff Ronald Klain issued a memorandum to the heads of executive departments and agencies setting forth the terms of a regulatory freeze.

The memorandum requires the following subject to limited exceptions:

  • No rules can be issued or proposed until a department or agency head appointed by President Biden has reviewed and approved the rule.
  • A rule that has been sent to the Federal Register but not yet published must be immediately withdrawn from the Office of the Federal Register and approved by a department or agency head appointed by President Biden.
  • For a rule that has been issued or published in the Federal Register but has not yet become effective, a department or agency head should consider postponing the rule’s effective date for 60 days from January 20 for the purpose of reviewing any questions of fact, law, and policy raised by the rule. During this 60-day period, where appropriate and consistent with applicable law, consideration should be given to opening a 30-day comment period and petitions for reconsideration should be considered. In addition, where appropriate and consistent with applicable law and where necessary for review of questions of fact, law, and policy, consideration should be given to further delaying the rule beyond the 60-day period. After the 60-day delay in effective date:
    • No further action is needed for a rule that raises no substantial questions of fact, law, or policy.
    • For a rule that does raise a substantial question of fact, law, or policy, the agency should notify the OMB Director and take further action in consultation with the OMB Director.

CFPB rules. Since Mr. Klain’s memorandum is directed to “heads of executive departments and agencies,” it appears the memorandum is not intended to apply to heads of independent agencies. While the CFPB was created as an independent agency with a Director only removable by the President “for cause,” it now functions as an executive agency as a result of the U.S. Supreme Court’s Seila Law decision making the CFPB Director removable by the President at will. Accordingly, several CFPB rules are impacted by Mr. Klain’s memorandum as follows:

  • Because the following rules have been published in the Federal Register but not yet taken effect, Acting Director Uejio must consider whether to postpone the effective dates until March 22, 2021 in order to engage in a review of any questions of fact, law, and policy raised by the rules:
  • Because the following rules have not yet been published in the Federal Register, they must be immediately withdrawn from the Office of the Federal Register and reviewed and approved by Acting Director Uejio (or Director Chopra once confirmed and sworn in):
    • The final rule implementing the exemption in the Economic Growth, Regulatory Relief, and Consumer Protection Act from the requirement to maintain an escrow account in connection with a higher-priced mortgage loan (HPML) for insured depository institutions and insured credit unions (insured creditors) that meet certain conditions was issued on January 19, 2021. (The rule was expected to be published in the Federal Register in February 2021.)
    • The final rule on the role of supervisory guidance was issued on January 19, 2021. (We have published a separate blog post on the final rule.)

OCC rules. Mr. Klain’s memorandum does not appear intended to apply directly to the OCC since it is considered to be an independent agency. However, independent agencies could choose to comply voluntarily with the memorandum. Because the rules below have not yet been published in the Federal Register, the OCC may choose to withdraw them from the Office of the Federal Register for review and approval by an Acting Comptroller of the Currency appointed by President Biden (or a new Comptroller named by President Biden). (Acting Comptroller Brian Brooks left the OCC on January 14 and Chief Operating Officer Blake Paulson was named Acting Comptroller upon Mr. Brooks’ departure. President Biden has not yet named an Acting Comptroller to replace Mr. Paulson.)

Since Mr. Klain’s memorandum appears to be directed at rules already published in the Federal Register that would have taken effect before March 22, it may not impact already published final rules that are scheduled to take effect after that date, such as the CFPB’s Part I and Part II final debt collection rules scheduled to take effect on November 30, 2021. However, the CFPB and OCC under new leadership could move to reconsider and potentially rescind such rules through the regular rulemaking process. Other final rules not subject to the memorandum that might be reconsidered by new leadership include the OCC and FDIC final “Madden-fix” rules, the OCC final “true lender” rule, and the CFPB final small dollar loan rule. All of these rules are currently the subject of litigation. In addition, any final rules that are within the statutory time window could be subject to a challenge under the Congressional Review Act.

- Christopher J. Willis, John L. Culhane, Jr. & Richard J. Andreano, Jr.

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Biden Administration Orders Extensions of Student Loan and Mortgage Relief

In response to directions from the Biden Administration, the following actions have been taken:

Federal student loans. The Acting Secretary of Education has extended the following relief on ED-held federal student loans until September 30, 2021:

  • Suspension of loan payments
  • Suspension of collection efforts
  • Setting of interest rate at 0%

Foreclosures and Evictions. HUD has extended the foreclosure and eviction moratoriums for FHA-insured single-family loans from February 28, 2021 to March 31, 2021. Fannie Mae and Freddie Mac have extended the moratorium on single-family foreclosures from January 31, 2021 to February 28, 2021. The moratorium on evictions from single-family homes owned by Fannie Mae or Freddie Mac also is extended until February 28, 2021.

- John L. Culhane, Jr. & Richard J. Andreano, Jr.

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Biden Nominates Rohit Chopra to Serve as CFPB Director

The Biden Transition announced that Biden nominated Rohit Chopra to serve as CFPB Director.

Mr. Chopra currently serves as an FTC Commissioner, having been appointed by President Trump in 2018 to fill one of the Democratic seats on the FTC.

The nomination of Mr. Chopra as Director will return him to the CFPB, where he served as an Assistant Director from the time the CFPB was stood up in 2010 until his departure in 2015. In 2011, he was appointed by the Treasury Secretary to serve as the CFPB’s Private Education Loan Ombudsman. After leaving the CFPB and before becoming an FTC Commissioner, Mr. Chopra served as a senior fellow at the Consumer Federation of America.

As Ombudsman, Mr. Chopra was highly critical of private student loan servicing practices. Given the pandemic’s impact on many student loan borrowers and Mr. Chopra’s focus on the treatment of distressed borrowers while serving as Ombudsman, Mr. Chopra can be expected to renew his focus on student loan servicing when he returns to the CFPB as Director.

In addition, statements issued by Mr. Chopra through his tenure as FTC Commissioner signal that he will take a more aggressive approach than Director Kraninger in using the CFPB’s authorities to obtain monetary relief in enforcement actions and will pursue greater cooperation with the FTC in enforcement actions. Most recently, in connection with the FTC’s November 2020 settlement with Zoom Video Communications, Inc. to resolve allegations that Zoom had engaged in unfair and deceptive acts with regard to its video conferencing services, Mr. Chopra issued a dissenting statement in which he criticized the consent order for failing to provide any remediation for Zoom users or payment of any civil penalties by Zoom.

Also in November 2020, in connection with the FTC’s settlement of its first enforcement action targeting the practice of “debt parking,” Mr. Chopra criticized the FTC’s “go-it-alone debt collection enforcement strategy,” asserting that it “frequently leads to outcomes where victims receive only a miniscule percentage of their losses—or even nothing at all.” He urged the FTC to cooperate more closely with the CFPB in debt collection enforcement actions, noting that the CFPB’s authority to obtain civil monetary penalties would allow victims to qualify for monetary redress from the CFPB’s Civil Penalty Fund, even if the penalty in a case were only $1. (There will be a strong incentive for greater cooperation between the CFPB and FTC in enforcement actions should the U.S. Supreme Court rule that the FTC’s authority to seek injunctive relief under Section 13(b) of the FTC Act does not include the authority to seek monetary relief such as restitution. That issue is currently before the Supreme Court in AMG Capital Management, LLC v. FTC. Last week, the Supreme Court heard oral argument in the case and even Justices Breyer and Kagan expressed skepticism regarding the FTC’s position that Section 13(b) provides authority for monetary relief.)

Biden is expected to name someone to serve as Acting CFPB Director pending Mr. Chopra’s confirmation by the Senate. Under the Federal Vacancies Reform Act (5 U.S.C. 3345(a)), Mr. Biden can appoint a current CFPB employee to serve as Acting Director if “during the 365-day period preceding [Director Kraninger’s expected resignation]” the individual was employed by the CFPB “for not less than 90 days” and was paid at a rate “equal to or greater than the minimum rate of pay payable for a position at GS–15 of the General Schedule.”

- Christopher J. Willis & John L. Culhane, Jr.

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David Uejio Named Acting CFPB Director

Following Director Kraninger’s resignation, the White House announced that President Biden appointed David Uejio to serve as Acting CFPB Director.

Mr. Uejio currently serves as the Bureau’s Chief Strategy Officer. He has worked at the Bureau since 2012, previously having served as Acting Deputy Chief of Staff and Lead for Talent Acquisition. Since these positions primarily involve providing internal counseling to Bureau leadership, it appears Mr. Uejio has not previously had an outward-facing role at the Bureau.

Mr. Uejio will serve as Acting Director until Rohit Chopra, President Biden’s nominee for Director, is confirmed by the Senate and sworn in. It is very uncertain how long that process will take. Because he has been nominated to serve as Director, the Federal Vacancies Reform Act does not allow Mr. Chopra to serve as Acting Director.

- Alan S. Kaplinsky

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Ballard Spahr to Hold Feb. 2 Webinar on the CFPB Under Acting Director Uejio and Director Chopra, With Special Guest Richard Cordray

In one week, there were three major events at the CFPB: the resignation of Director Kraninger, President Biden’s nomination of Rohit Chopra to serve as the next Director, and President Biden’s appointment of David Uejio to serve as Acting Director.

On Tuesday, February 2, 2021, from 12:30 p.m. to 1:30 p.m. ET, Ballard’s Consumer Financial Services Group will hold a webinar, “The Times at the CFPB are A-Changing: Perspectives on the CFPB Under Acting Director Uejio and Director Chopra.” Joined by special guest former CFPB Director Richard Cordray, we will discuss changes that the CFPB is likely to undergo under Messrs. Chopra and Uejio’s leadership and how they will possibly approach the use of the CFPB’s regulatory, enforcement, and supervisory authorities. We will look at the actions and positions taken, and their implications, by Mr. Chopra while at the CFPB and FTC for his new role as CFPB Director to inform our discussion.

Click here to register.

- Barbara S. Mishkin

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CFPB Issues Statement on Providing Financial Products and Services to LEP Consumers

In a development welcomed by industry members, the CFPB published today a “Statement Regarding the Provision of Financial Products and Services to Consumers with Limited English Proficiency.” The Statement is intended to provide “compliance principles and guidelines to inform and assist financial institutions in their decision making related to serving LEP consumers.”

The Statement is divided into two sections. One section contains “guiding principles for serving LEP consumers.” These principles consist of the following:

  • The Bureau encourages financial institutions to better serve LEP consumers while ensuring compliance with relevant federal, state, and other legal requirements.
  • Financial institutions that wish to implement pilot programs or other phased approaches for offering LEP-consumer-focused products can consider doing so consistent with the Statement’s guidelines.
  • Financial institutions can consider developing a variety of compliance approaches related to providing products and services to LEP consumers consistent with the Statement’s guidelines.
  • Financial institutions can mitigate certain compliance risks by providing LEP consumers with “clear and timely” disclosures in non-English languages describing the “extent and limits” of any language services provided throughout the product lifecycle.
  • Financial institutions may wish to consider extending credit pursuant to a legally compliant special purpose credit program to increase credit access for certain underserved LEP consumers.

The second section of the Statement contains “guidelines for developing compliance solutions when serving LEP consumers.” The guidelines contain “key considerations and [compliance management system (CMS)] guidelines” that financial institutions can use “to mitigate ECOA, UDAAP, and other legal risks when making threshold determinations and other decisions related to serving LEP consumers in languages other than English.”

Key considerations relate to:

  • Language selection
  • Product and service selection
  • Language preference collection and tracking
  • Translated documents

Generally applicable CMS guidelines regarding components that can be included (or refined if existing) in a financial institution’s CMS to mitigate fair lending and other risks associated with providing products and services in non-English languages relate to:

  • Documentation of decisions
  • Monitoring
  • Fair lending testing
  • Third party vendor oversight

We are closely reviewing the Statement and will discuss it in greater detail and share our reactions in a subsequent blog post.

- Christopher J. Willis

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The CFPB’s New LEP Guidance: What Does It Tell Us?

As we recently reported, the CFPB released new guidance on January 13, 2021, in an effort to give industry participants more concrete guidance about how to tackle the sometimes-daunting issue of serving customers in non-English languages. Director Kraninger announced the guidance in a blog post of her own, and reached out with telephone calls to announce the release of the guidance. I was lucky enough to receive one of those calls, and enjoyed hearing from the Director about the goals of this new guidance– to increase the inclusion of non-English-speaking consumers in the consumer financial services market.

The Bureau’s new “Statement Regarding the Provision of Financial Products and Services to Consumers with Limited English Proficiency” (Statement) provides principles and guidelines to assist financial institutions in decision making concerning how best to serve Limited English Proficiency (LEP) consumers and to facilitate compliance with ECOA and UDAAP laws by providing “clear rules of the road.”

In the Statement, the CFPB notes its work on LEP issues over the past several years, which initially culminated in the Bureau’s November 2017 publication, Spotlight on serving limited English proficient consumers. The Bureau then held an LEP Consumer and Industry Roundtable in July 2020, in which I was fortunate to participate as one of two private sector attorneys. After the Roundtable, the CFPB issued a Request for Information on ECOA and Regulation B in August 2020, in which, among other things, the Bureau asked whether it should provide additional clarity concerning serving LEP consumers, and, if so, in what form. The Bureau notes that it received a “wide variety of responses” to that question from stakeholders – most saying “yes” and some suggesting the format of an APA rulemaking, guidance, translated notices and documents, or a required Language Access Plan. The CFPB ultimately decided to issue the Statement as regulatory guidance, however.

Having now had a chance to read the guidance carefully, the main takeaway from my standpoint is that the CFPB is giving the industry flexibility about how to handle LEP consumers. Consistent with the Bureau’s previous guidance on this topic, the Bureau is not mandating that any particular products or services be offered in non-English languages. Rather, the new guidance goes through a number of considerations associated with products and services being offered, and shows industry participants the options for dealing with those considerations. Notably, the guidance generally does not mandate a particular way of handling these issues, and acknowledges that different industry participants may reach different conclusions about what to do, and how to do it: “differences in financial institutions and the ways they choose to serve LEP consumers will likely require different compliance solutions.”

Here are some examples of the flexibility contained in the CFPB’s guidance:

  • It repeats the point, previously made by the Bureau in a 2016 issue of Supervisory Highlights, that UDAAP issues can be avoided by “providing LEP consumers with clear and timely disclosures in non-English languages describing the extent and limits of any language services provided throughout the product lifecycle.” This gives industry participants the option to advertise products in non-English languages without having to offer every aspect of the product experience in the non-English languages, so long as this is disclosed at the outset of the customer relationship. We blogged about the 2016 Supervisory Highlights discussion of LEP issues here.
  • With regard to selecting a non-English language, the Bureau states that an entity can rely on either information on the language preferences of its customers, or U.S. Census Bureau information.
  • With regard to product selection, the Bureau left institutions free to “consider a variety of factors, including the extent to which LEP consumers use particular products and the availability of non-English language services.” The Bureau did caution, however, against potential steering of LEP consumers into less-advantageous products.
  • In terms of selecting communications to be offered in non-English languages, the Bureau reinforced its previous guidance that priority should be given to “communications – whether verbal or written – that most significantly impact consumers,” such as “essential information about credit terms and conditions … or about borrower obligations and rights, including those related to delinquency and default servicing, loss mitigation and debt collection.” The Bureau also noted that institutions can consider “existing customer data on what services LEP consumers use most frequently.”
  • The Bureau clearly and explicitly noted that it would be permissible for financial institutions to collect and track consumers’ language preferences, so long as the information was not used for a discriminatory purpose.
  • With regard to translating documents, the Bureau made it clear that it was imposing no requirements in this area, leaving industry participants free to “assess whether and to what extent to provide translated documents to consumers.” The Bureau noted that any translations must be accurate, and encouraged the use of its LEP glossaries, and also noted that it plans to provide model translated documents in the future. Indeed, as part of its recently-finalized Debt Collection Rules, the Bureau stated that it planned to provide a Spanish-language model validation notice before the effective date of the rules in November 2021.
  • The Bureau specifically noted that an institution’s decisions about non-English language services could take into account factors such as “infrastructure, systems, or other operational limitations; [or] cost estimates.” This is, to us, a signal that the Bureau is taking a very real-world approach to industry decisions and constraints relating to non-English language support.
  • The Bureau also provided a blueprint for various compliance measures related to non-English language support, including items such as monitoring the quality of customer assistance provided; ensuring that non-English language support is equivalent in quality to that available in English; monitoring advertising to ensure that messaging is accurate and that protected groups are not excluded; and statistical analysis of underwriting and pricing to detect any disparities on the basis of a protected characteristic.

I see this Statement as a further extension of the guidance given by the Bureau on LEP consumers starting in 2016. The Bureau knows that the financial services industry wants to serve customers in non-English languages, and is trying to ease the uncertainties in doing so by providing a “road map” for industry to follow. The Bureau has avoided highly specific, prescriptive requirements for non-English support, and this leaves institutions with choices and judgments to make about how to offer products and services to LEP consumers. More importantly, however, it provides flexibility for each institution to make reasonable choices about this subject, taking all of the real-world factors into account. It is my belief that institutions should welcome this signal of encouragement.

- Christopher J. Willis

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CFPB’s Taskforce on Federal Consumer Financial Law Releases Report

The CFPB’s Taskforce on Federal Consumer Financial Law released its report making recommendations on how to improve consumer protection in the financial marketplace.

The CFPB created the Taskforce in October 2019 to examine ways to harmonize and modernize federal consumer financial laws. The Taskforce was charged with examining the existing legal and regulatory environment for consumers and financial services providers and making recommendations to the Bureau’s leadership for improving consumer financial laws and regulations.

The report consists of two volumes. Volume I (798 pages) contains a historical and economic overview of consumer finance, covers the key principles guiding federal consumer financial law and policy, and discusses particular topics that the Taskforce considers important to the Bureau’s work. Volume II (100 pages) contains the Taskforce’s specific recommendations (which number 102) for improving and strengthening the application of financial laws and regulations. The Taskforce report reflects the unanimous views of its five members.

The Taskforce identified the following three “overarching principles” as animating its drafting of the report:

  • Consumer protection policy should be particularly attentive to the consequences for inclusion and access by previously underserved communities. To that end, facilitation of competition, innovation, and consumer choice in the marketplace should be an essential element of consumer protection policy.
  • The focus of consumer protection policy should be avoiding harms to consumers rather than attempting to specify how providers should design and market their products.
  • Modernization of the existing regulatory framework is needed to allow it to adapt more nimbly to changes in technology and consumer preferences, respond to new opportunities and consumer threats, and address future crises (such as the 2008 financial crisis and the COVID-19 pandemic).

Key Taskforce recommendations include the following:

  • Alternative data. The Bureau, Congress, and other federal and state regulators should (1) identify and eliminate unnecessary and undue restrictions on the ability of consumer reporting agencies to report certain types of alternative data (payment and cash-flow data), including through the Bureau clarifying the FCRA’s application to data aggregators and the use of alternative data, and (2) exercise caution in restricting the use of nonfinancial alternative data.
  • Bureau reorganization. The Bureau should reorganize its internal structure so that it is primarily organized around markets instead of tools (i.e. enforcement, rulemaking and supervision). For example, the Bureau could have units dedicated to credit cards, mortgages, small dollar loans, fintech, and third party service providers (such as debt collectors and mortgage servicers), with each unit having enforcement, rulemaking, and supervision responsibilities. Tools such as research, consumer education, and consumer complaints might remain Bureau-wide, but the staff in each of these areas would be expected to develop expertise in working with each of the market-based units.
  • Credit reporting. The Bureau should engage in rulemaking to (1) clarify the obligations of CRAs and furnishers with respect to disputes under the FCRA, (2) codify the FTC’s FCRA interpretations (and assess whether any interpretations require updates or revisions), and (3) update and revise the FCRA’s summary of consumers rights, notice to furnishers of information to CRAs, and notice to users of consumer reports. Congress should adopt FCRA class action damages limits in order to bring the FCRA civil liability provision in line with other consumer protections statutes such as the TILA and ECOA.
  • Deposit accounts. To expand access to payments systems by unbanked and underbanked consumers and ensure consistent treatment of similar products, the Bureau should apply the same Regulation E rules to prepaid cards and debit cards by requiring issuers of both types of cards to provide the same Regulation E overdraft opt-in ability and “just-in-time” fee disclosures and allow issuers to apply new funds first to overdraft fees and negative balances.
  • Disclosures. Disclosures mandated by Congress and the Bureau should consist only of the minimum information consumers need to make an informed decision and to verify they have received the product terms promises. The Bureau should only issue disclosure-related rules guided by research into what information is important to consumers and should use this research to re-think its overall approach to disclosures. As appropriate, based on research, the Bureau should make recommendations to Congress for disclosure reform and should also reform the disclosures that the Bureau has discretion to require. The Bureau should develop a foreign language disclosure scheme that allows financial institutions to reach out into underbanked/unbanked consumer communities without forcing the financial institutions to maintain an underlying foreign language infrastructure. (In her remarks given during the CFPB event announcing the report’s release, Director Kraninger indicated that a new CFPB development was imminent regarding limited English proficiency consumers.)
  • Electronic signatures and document requirements. Congress should (1) eliminate the E-Sign Act’s antiquated requirements, including the required disclosures regarding necessary hardware and software and the requirement for a consumer’s consent to be in a manner that reasonably demonstrates that the consumer can access information in the electronic records, and (2) more generally, consider revising the consent process to allow consent by either a simple statement of consent to conduct the transaction electronically or an inference from the transaction’s circumstances. Pending Congressional action, the Bureau should (1) provide guidance as to what constitutes a “reasonable demonstration” that a consumer can access information in the electronic records, and (2) enable electronic disclosures to consumers by reviewing its rules that require information to be provided “in writing” and consider amending such rules, when possible under the relevant law, to allow electronic disclosure.
  • Enforcement. The Bureau should (1) issue a policy statement on the concept of consumer harm, (2) adopt a public statement on how it will determine appropriate consumer restitution and civil penalties in matters, with the Bureau’s objectives to relate principally to the magnitude of consumer harm and to be adjusted as needed to further deterrence, (3) issue “Enforcement Highlights” to provide guidance on the factors the Bureau might consider in deciding not to bring an enforcement action, (3) adopt the 1998 FFIEC Interagency Policy Regarding Assessment of Civil Money Penalties which sets forth 13 relevant factors that the federal banking agencies should consider in assessing civil penalties, and (4) adopt and publish a civil penalty matrix based on the factors in the 1998 FFIEC Interagency Policy and consistent with the matrices of the federal banking regulators, together with public guidance to enforcement staff on how to apply the matrix factors. Congress should reconcile the civil penalty and redress authorities of the federal banking regulators, the Bureau, and the FTC, including giving the FTC statutory authority to obtain consumer restitution for any unfair or deceptive practice that is dishonest or fraudulent and giving the Bureau and federal banking regulators civil penalty authority for unfair or deceptive acts and practices that are also dishonest or fraudulent or that violate another statute or regulation.
  • Equal access to credit. The Bureau should (1) conduct research on whether the ECOA should be amended to include disability as a prohibited basis, (2) modernize Regulation B in various areas such eliminating the ban on questions about plans for childbearing, the prohibition on considering whether an applicant has a telephone listing in the applicant’s name, and the requirement for a creditor to consider the credit history of accounts in a spouse’s name for which the applicant is not contractually liable but is authorized to use, (3) issue a rule that sets forth the standard it will apply to disparate impact and how it will apply that standard, (4)(a) address any future concerns about credit discrimination in pricing by auto dealers through its ECOA enforcement powers with auto dealerships under its jurisdiction rather than through enforcement against banks and other creditors that take assignments of financing contracts, and (b) when evaluating an auto dealer’s ECOA compliance, take into account the legitimate non-discriminatory reasons a dealer may vary the APR over the assignee’s wholesale buy rate, the requirements of a manufacturer’s promotional rate offering, the additional time and effort needed to find financing for some applicants, and similar non-discriminatory business reasons.
  • Fintech regulation. Congress should authorize the Bureau to issue licenses to non-depository institutions that provide lending, money transmission, or payment services. Licenses should provide that these institutions are governed by the regulations of their home states, even when providing services to consumers in other states. The Bureau should consider the benefits and costs of preempting state law in some specific cases in which the potential for conflict can impede the provision of valuable products and services. Alternatively, Congress should clarify that the OCC has authority to issue charters to such non-depository institutions.
  • Supervision. The Bureau should (1) consider conducting automated or data-based examinations whenever possible, (2) focus its supervisory activity on an institution’s compliance with consumer protection laws and base and institution’s exam rating on the outcome of its compliance management system (CMS) rather than the quality of its CMS, (3) unless otherwise necessitated by laws that require the presence of a CMS, limit CMS considerations to risk assessments in setting exam scope and focus, (4) change its supervisory appeal process to increase fairness and consistency, (5) revisit its larger participant rules to assess the cost and benefits of the rules in conducting effective supervision and promoting consumer protection. Congress should grant the Bureau explicit authority to examine institutions for Military Lending Act compliance.
  • Small dollar credit. States should be cautious when setting interest rate caps when regulating small dollar loans and carefully consider the negative impact on credit availability when considering further regulations. Preferably, interest rate caps should be eliminated entirely. More generally, states should reconsider, update, or eliminate usury laws as appropriate, recognizing the high costs such laws impose by denying valuable services to consumers who need them.
  • Regulatory principles. The Bureau should rely on principles-based regulations that protect consumers from harm while promoting access, inclusion, innovation, and competition, rather than detailed and specific regulations that can become quickly outdated, impose more costs than necessary, and foreclosure innovative new approaches to protecting consumers.
  • Competition. With regard to licensing, (1) the Bureau should research the effect of state licensure laws for covered entities and whether the burden and time for licensing approval creates unwarranted barriers to entry, and (2) states should consider eliminating or streamlining licensing requirements for financial services providers to avoid anticompetitive barriers to entry. With regard to RESPA settlement service packaging, the Bureau should remove regulatory barriers to allow guaranteed prices on packages of settlement services

Following the issuance of the Taskforce’s report, Acting Comptroller of the Currency Brian Brooks issued a statement in which he appeared to take issue with the Taskforce’s recommendation that the Bureau should be given authority to issue licenses to non-depository institutions that provide lending, money transmission, or payment services. Mr. Brooks stated:

Under the law, the agency that grants national charters to companies engaged in lending, payments, or deposit-taking is the Office of the Comptroller of the Currency (OCC), which has the responsibility for prudential supervision to ensure these chartered institutions operate in a safe, sound, and fair manner. In its wisdom, Congress in the Dodd-Frank Act separated chartering and prudential supervision from consumer protection enforcement, assigning chartering authority to the OCC and specific consumer protection enforcement authority to the CFPB. The additional protections implemented following the last financial crisis put two cops on the beat and separated those responsibilities so neither would be compromised in service to the other. That dynamic should be preserved so that the CFPB continues to enforce compliance with enumerated financial consumer protection laws for the financial companies designated by the Dodd-Frank Act, while at the same time avoiding the creation of a prudential supervision gap that could lead to serious safety and soundness risks.

The CFPB’s creation of the Taskforce has been challenged in a lawsuit filed in June 2020 in Massachusetts federal district court by the National Association of Consumer Advocates, U.S. Public Interest Research Group, and Professor Kathleen Engel. In addition to a declaration that the creation and establishment of the Taskforce is unlawful, the relief sought by the complaint includes an injunction barring the Bureau from relying on or using any Taskforce recommendations or advice. The CFPB has filed a motion for partial dismissal of the complaint.

Within minutes of its release, the Taskforce’s report met with criticism from consumer advocacy groups, including the plaintiffs in the lawsuit, who released a statement in which they called the Taskforce an “illegal advisory group” and asserted that the report “recommends changes to consumer protections that will prove harmful to Americans struggling to weather the economic fallout of the ongoing pandemic.”

Given the imminent change in Administrations, there is considerable uncertainty as to what the ultimate impact of the Taskforce’s recommendations will be.

- Christopher J. Willis & John L. Culhane, Jr.

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This Week’s Podcast: A Look at the Recommendations of the CFPB’s Taskforce on Federal Consumer Financial Law, With Professor Todd Zywicki, Taskforce Chairman: Part I

In Part I of our two-part podcast, after discussing the Taskforce’s goals and background, we look at the recommendations in the Taskforce’s report concerning artificial intelligence, limited English proficiency consumers, and fair lending, share our reactions to the recommendations, and consider the recommendations’ practical implications for the consumer finance industry.

Ballard Spahr attorney Alan Kaplinsky hosts the conversation with Professor Zywicki and Chris Willis, Co-Chair of Ballard Spahr’s Consumer Financial Services Practice Group.

Click here to listen to the podcast.

- Alan S. Kaplinsky & Christopher J. Willis

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California Dept. of Financial Protection and Innovation Announces Plans to Exercise Expanded Powers Under Consumer Financial Protection Law

The California Consumer Financial Protection Law (CCFPL) became effective on January 1, 2021. The CCFPL gives the California Department of Financial Protection and Innovation (DFPI) (the new name given to the state’s Department of Business Oversight) broad jurisdiction and sweeping new authorities that closely resemble those of the CFPB. As a result, the DFPI has been labeled a “mini-CFPB.”

In its January 2021 monthly bulletin, the DFPI stated that, with the CCFPL now in effect, the DFPI will begin exercising its “expanded powers to better protect consumers from unlawful, unfair, deceptive, and abusive practices.” The CCFPL gives the DFPI new rulemaking and enforcement authority over “covered persons” relating to unlawful, unfair, deceptive, or abusive acts and practices and defines the term “covered persons” expansively to include entities that previously were not subject to DBO oversight or oversight by a primary regulator, such as debt collectors, credit reporting agencies, certain fintech companies – including some who offer point-of-sale financing – and some merchants who extend credit directly to consumers. The DFPI also, as a matter of state law, can now enforce the Dodd-Frank Act’s UDAAP provisions against any person offering or providing consumer financial products or services in the state, notwithstanding the CCFPL’s applicability to such persons. (California’s newly-enacted Debt Collection Licensing Act will require by 2022 the licensure of persons who engage in the business of collecting, on behalf of themselves or others, debts arising from consumer credit transactions with consumers who reside in California. Such persons could include debt buyers, first-party and third-party collectors.)

In the bulletin, the DFPI outlines its plans to implement the CCFPL and exercise its expanded powers. Its plans include:

  • “Beginning immediately, the DFPI will review and investigate consumer complaints against previously unregulated financial products and services, including debt collectors, credit repair and consumer credit reporting agencies, debt relief companies, rent to own contractors, private school financing, and more.”
  • The DFPI is “preparing to open a new Office of Financial Technology Innovation that will engage with new industries and consumer advocates to encourage consumer friendly innovation and job creation in California. This expansion will allow department representatives to work proactively with entrepreneurs and create a regulatory framework for responsible, emerging financial products.” (The CCFPL requires the DFPI to establish such an office.)
  • The DFPI is “in the process of standing up a new Division of Consumer Financial Protection that will feature a market monitoring and research arm to keep up with emerging financial products. Consumer outreach to target vulnerable populations, such as students, new Californians, military servicemembers and senior citizens will be expanded.”

To enable the DFPI to carry out its plans, the DFPI is expected to significantly expand its staffing this year. In our September 2020 webinar, “California Ramps Up Its Consumer Financial Protection Laws: What You Need to Know,” special guest Bret Ladine, DFPI General Counsel, indicated that 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 the CCFPL.

- Michael R. Guerrero

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OCC Issues Final Fair Access Rule

The OCC has issued a final rule establishing standards that a bank must follow in fulfilling its obligation to provide fair access to financial services. The final rule is effective on April 1, 2021.

The final rule was issued on the same day that Acting Comptroller of the Currency Brian Brooks stepped down at the OCC. Critics of the OCC’s proposal included banking trade groups as well as consumer advocates. Given that the proposal was characterized by Democratic lawmakers as an effort to force banks to lend to gun manufacturers and fossil energy companies, and given opposition within the banking industry, the final rule may face an uphill battle under the Congressional Review Act or reconsideration by a new Comptroller of the Currency appointed by President-elect Biden.

The final rule adopts the OCC’s proposal with two changes:

  • Language is added in the final rule to clarify that a bank can decline to provide a person with access to a financial service if doing so is necessary for the bank to comply with another provision of law, such as laws on credit, capital, liquidity, and interest rate risk.
  • One of the criteria for fair access in the proposal was that a bank could not deny any person a financial service offered by the bank when the denial’s effect would be to prevent, limit, or otherwise disadvantage the person (1) from entering or competing in a market or business segment; or (2) in a way that benefitted another person or business activity in which the bank had a financial interest. The OCC eliminated this criterion from the final rule “[t]o focus the rule on the fairness of the covered banks’ decision-making processes and utilization of prudent risk management principles, as well as to facilitate the OCC’s administration of this rule.”

The OCC indicated that it received approximately 35,700 comments on the proposal (which includes approximately 28,000 form letters collected by a single organization). Its discussion of the comments in the Supplementary Information includes the following noteworthy items:

  • The OCC rejected comments stating that the proposal represented a change in OCC policy that, among other things, requires banks to evaluate reputation risk. According to the OCC, the final rule is not a change in policy and instead codifies existing guidance dating to at least 2014 and provides additional information on how to operationalize such guidance. The OCC stated that the rule “clarifies that the OCC expects banks to apply quantitative, impartial risk-based standards in evaluating individual customers, including when considering reputation risk, qualitative factors, and a borrower’s industry. It is not sufficient to evaluate these characteristics solely on a subjective basis.” Or, as put simply by the OCC, under the final rule, “banks are free to provide or deny financial services to any individual customer–but first, they must do their homework and be able to show the work.”
  • In response to comments that the proposal could have adverse effects on the environment or enrich the gun industry, the OCC stated that nothing in the rule prevents a bank from considering financial risks caused by environmental issues. By way of example, the OCC indicated that a lender with collateral in areas experiencing increased frequencies of wildfires, or a lender with real estate exposure in hurricane-prone areas, will be expected to account for such risks in making risk management decisions. However, in deciding whether to provide financial services to a person, including a person whose activities affect the environment or a participant in the firearms industry, a bank must base its decision “on an analysis of whether providing a particular financial service to that person presents quantifiable risks to the bank, as opposed to indirect or generalized risks that could be balanced by the political branches of government or by price signals or other free market forces. Conclusory, inconsistent, or categorical assertions in any substantive area not tied to the bank’s specific risk profile reflect poor management and unsafe and unsound behavior.”
  • In response to comments that the proposal represented unwarranted government involvement in bank decision-making, the OCC stated that final rule does not (1) require a bank “to provide any specific type of financial service, to do business with a particular person or industry, or to operate in a particular market,” (2) prevent a bank from declining to provide financial services “to a risky or unprofitable person or to a person with a risk-profile that the bank does not have the expertise to evaluate or manage,” (3) prevent a bank from “pricing or setting other terms of a financial service in a way that reflects the bank’s analysis of the risks posed by a particular customer,” or (4) prevent a bank from declining or ceasing to offer a particular type of financial service. As an example of how the fourth item applies, the OCC stated that the rule does not require a bank to provide custody services but if a bank does offer such services, the rule requires the bank to provide fair access to those services to all persons “absent demonstrated individual risk factors that cannot reasonably be managed.” As another example, the OCC indicated that if a bank has historical expertise serving the retail sector but not the energy sector, the rule allows the bank to provide financial services that require this expertise to the former and not the latter. A bank could not, for example, provide payroll administration services to a company in the wind power business but not to a company in the natural gas business “absent a showing that facts particular to the specific natural gas company reflect risks to the bank not presented by the wind power company.”
  • The OCC received comments arguing that banks should be allowed to take all risks, not just quantifiable risks, into account when making decisions, and that the proposal conflicted with safety and soundness principles by inhibiting responsible management of reputation risk. While citing language from the Comptroller’s Handbook on the Bank Supervision Process stating that “risk cannot always be quantified in dollars,” the OCC indicated that the final rule requires examiners and bank to “ensure that their evaluation of risk is supported by objective fact rather than mere preference or opinion.” It stated further that the OCC uses the term “quantify” to mean “measurable, auditable, and falsifiable” and that when making a decision about whether to provide a financial service to a customer, a bank may not rely on factors that cannot be quantified. According to the OCC, “all legitimate risks can be quantified, albeit with different degrees of precision.” In its view, “even reputation risk can be (and generally is) quantified in terms of the anticipated reach and frequency of negative news stories, the perception of those stories by various segments of the bank’s customer population, the forecasted effect on the bank’s ability to raise capital, and other factors affecting the severity of a given event. These factors will determine whether a borrower can repay its debts and more broadly whether a given customer relationship will be profitable or unprofitable to the bank on a risk-adjusted basis.”

As reflected in our prior blogs concerning “Operation Choke Point,” we think it was wholly inappropriate for unelected government bureaucrats to pressure banks to withhold essential banking services from lawful businesses they personally disfavored. We have similar concerns that a handful of executives of the largest banks in the country can likewise deprive lawful businesses of banking services. Thus, we are sympathetic to the objectives of the OCC’s fair access rule. Nevertheless, we are also mindful of the interests of persons with conscientious objections to specified activities or concerns about the reputational consequences of servicing companies engaged in such activities. Whether the rule represents an appropriate balancing of these competing interests—and whether the rule will survive the attacks that are sure to occur—remain to be seen.

- Jeremy T. Rosenblum & Ronald K. Vaske

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FHFA Extends Foreclosure and Eviction Moratoriums

The Federal Housing Finance Agency (FHFA) announced January 19, 2021 the extension of the Fannie Mae and Freddie Mac moratorium on single-family foreclosures from January 31, 2021 to February 28, 2021. The moratorium on evictions from single-family homes owned by Fannie Mae or Freddie Mac also is extended until February 28, 2021. The announcement does not address evictions from multi-family properties subject to a Fannie Mae or Freddie Mac loan.

Fannie Mae addresses the foreclosure moratorium extension in Lender Letter 2021-02, and Freddie Mac addresses the foreclosure moratorium extension in Bulletin 2021-3. Both Fannie Mae and Freddie Mac advise that the moratorium does not apply to properties determined to be vacant or abandoned.

In Lender Letter 2021-02, Fannie Mae also sets forth policies previously published in the December 9, 2020, update to Lender Letter 2020-02, with revisions.

- Mortgage Banking Group

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

In coordination with the Federal Housing Finance Agency on January 14, 2021, Fannie Mae in Lender Letter 2021-03 and Lender Letter 2021-04 and Freddie Mac in Bulletin 2021-1 extended certain loan origination flexibilities due to COVID-19 from January 31, 2021, to February 28, 2021.

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.

- Mortgage Banking Group

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HUD Extends Foreclosure and Eviction Moratoriums

In Mortgagee Letter 2020-43, dated January 21, 2021, the U.S. Department of Housing and Urban Development (HUD) extended the foreclosure and eviction moratoriums for FHA insured single-family loans from February 28, 2021 to March 31, 2021. The FHA moratoriums apply to all FHA Title II single-family forward and Home Equity Conversion (reverse) mortgage loans, except for FHA loans secured by vacant or abandoned properties. Deadlines for the first legal action and reasonable diligence timelines are extended by 120 days from the date of expiration of the foreclosure moratorium.

- Mortgage Banking Group

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Our New Diversity Fellowship Program

I am truly excited to announce a new program that our Consumer Financial Services Group is launching this year, which is aimed at increasing the number of diverse lawyers – lawyers who have overcome one or more substantial obstacles in pursuing a legal career, come from a disadvantaged background, and/or are under-represented in the legal community – within the consumer financial services industry.

We believe that there are too few diverse lawyers in the industry, and that we need to take action to move the industry in the right direction. Rather than waiting for diverse lawyers to come to us, or to become interested in the industry on their own, we want to generate interest in consumer finance among law students, and lay the foundation for diverse students to have a successful career in CFS. The idea is to identify diverse law students who may be interested in consumer finance and bring them into our CFS group, either during the school year or during the summer. We plan to introduce them to consumer finance law; to mentor them and give them an overview of the consumer finance industry; and to provide them with introductions to clients, regulators, and trade associations. The concept is to “show them the world” of consumer finance, including the law, the business and the relationships. These programs are designed to feed into permanent associate positions within our CFS group.

We are launching the program with a summer fellowship for this coming summer. You can see the details and submit an application by clicking here. If you know someone who might be interested in our program, please encourage them to apply.

We look forward to working in partnership with law professors, law schools, our clients, regulators, and trade associations to welcome diverse students into our industry.

- Christopher J. Willis

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The Federal Communications Commission Adopts Measures Targeting Artificial or Prerecorded Telephone Calls to Residential Telephone Lines

On December 30, 2020, the Federal Communications Commission (FCC) released its Report and Order, implementing provisions of the Pallone-Thune Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (the “TRACED Act“).

By way of background, the Telephone Consumer Protection Act of 1991 (TCPA) includes a provision that bans “any telephone call to any residential telephone line using an artificial or prerecorded voice to deliver a message without the prior express consent of the called party,” unless a statutory or regulatory exception applies.

Beginning in 1992, the FCC began carving out regulatory exemptions to the TCPA’s ban against such calls. Relevant here, the FCC created exemptions for calls made to a residential telephone line that are: (i) not made for a commercial purpose; (ii) made for a commercial purpose but that do not contain an unsolicited advertisement; (iii) made by tax-exempt nonprofit organizations; or (iv) subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA).

Section 8 of the TRACED Act directed the FCC to ensure any exemption granted under sections 227(b)(2)(B) or (C) of the TCPA specify “(i) the classes of parties that may make such calls; (ii) the classes of parties that may be called; and (iii) the number of such calls that a calling party may make to a particular called party.” As a result, on October 1, 2020, the FCC issued a Notice of Proposed Rulemaking to implement Section 8.

After receiving public comments, the FCC released a Report and Order on December 30, 2020. Among other things, the Report and Order codifies all existing exemptions under section 227(b)(2)(C) of the TCPA, establishes an opt-out requirement, and imposes frequency limitations as set forth below. In most cases, the FCC has limited the number of artificial or prerecorded voice calls to residential telephone lines to three such calls within a consecutive 30-day period unless the caller has obtained prior express consent:

RELEVANT EXEMPTION

CALLERS

CALLED PARTIES

NUMBER OF CALLS

OPT-OUT REQUIRED?

Non-commercial calls to a residence

“ . . . callers that are not calling for a commercial purpose”

“ . . . calls made to residential telephone lines.”

“ . . . three artificial or prerecorded voice calls within any consecutive 30-day period.”

Yes

Calls made for a commercial purpose but that do not include or introduce an advertisement or constitute telemarketing

“ . . . those making calls for a commercial purpose where the call does not introduce an advertisement or constitute telemarketing”

“ . . . calls made to residential telephone lines.”

“ . . . three artificial or prerecorded voice calls within any consecutive 30-day period.”

Yes

Tax-exempt nonprofit organization calls to a residence

Tax-exempt nonprofit organizations

“ . . . calls made to residential telephone lines.”

“ . . . three artificial or prerecorded voice calls within any consecutive 30-day period.”

Yes

HIPAA calls to a residence

Calls “made by, on behalf of, a ‘covered entity’ or its ‘business associate’ as those terms are defined in the HIPAA Privacy Rule, 45 CFR 160.103”

“ . . . calls made to residential telephone lines.”

“ . . . one artificial or prerecorded voice call per day up to a maximum of three artificial or prerecorded voice calls per week.”

Yes

The opt-out mechanism allows consumers to stop unwanted calls made pursuant to the above exceptions. 47 C.F.R. § 64.1200(b)(3) governs the opt-out requirement and requires the caller to provide “an automated, interactive voice- and/or key press-activated opt-out mechanism for the called person to make a do-not-call request” along with instructions explaining how to use the mechanism. The opt-out mechanism must be provided within two seconds of providing the identification information required under § 64.1200(b)(1). Further, the opt-out mechanism “must automatically record the called person’s number to the seller’s do-not-call list and immediately terminate the call” once the called party uses the opt-out mechanism. Additional requirements apply if the artificial or prerecorded voice telephone message is left on an answering machine or voice mail service.

Although the Report and Order establishes a six-month implementation period, the FCC noted it “fully expect[s] that the implementation period will be longer than six months because of the additional time required for the [Office of Management and Budget] to approve the information collections associated with the new rules.”

- William Rooks & John L. Culhane, Jr.

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CFPB Files Complaint Against a Former Mortgage Lender

The CFPB recently filed a complaint in the United States District Court for the District of Connecticut alleging violations of various federal consumer protection laws by 1st Alliance Lending, LLC (1st Alliance), a former mortgage lender. The complaint also names several principals of 1st Alliance as defendants. According to the complaint, certain alleged conduct occurred from 2015 until at least August 2019, with other alleged conduct occurring in a narrower period within such timeframe. The CFPB indicates that it believes 1st Alliance ceased lending in August 2019, and then ceased operations in November 2019.

Among the allegations made by the CFPB in the complaint are that 1st Alliance:

  • Had employees who were not licensed as mortgage loan originators in accordance with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and related state licensing laws regularly perform licensable activities. The CFPB also alleges that:
    • Unlicensed employees sent solicitations to consumers indicating that they were licensed.
    • Unlicensed employees in a certain position would at times provide credit-repair advice, discuss interest rates and other loan terms with consumers, make credit decisions, and disqualify consumers.
    • Unlicensed employees made misrepresentations to borrowers concerning a borrower’s likelihood of obtaining a mortgage-credit product or term, including whether the consumer was prequalified for a mortgage with 1st Alliance. The CFPB also asserts that as a result of their reliance on the employees’ misrepresentations concerning their likelihood of obtaining a loan with 1st Alliance, some consumers lost thousands of dollars in fees, expenses, and deposits and wasted months of time that they could have spent securing alternative financing for a home.
  • Had employees regularly require consumers to submit documents for verification before 1st Alliance issued Loan Estimates to the consumers, which is not permitted by the TRID rule.
  • Allowed employees during initial calls with consumers treat the interactions as applications for credit by advising the consumers that they were “ineligible” or “not qualified” for a mortgage loan without issuing adverse action notices under the Equal Credit Opportunity Act (ECOA) or Fair Credit Reporting Act (FCRA).
  • Had employees represent to consumers seeking purchase-money mortgage loans that after six months of satisfactory payments the consumers could obtain a significantly better rate through a streamline refinance mortgage loan, even though the employees had no assurance that the consumer would qualify for a streamline refinance loan, even if the on-time payment conditions were met, or that the rate would be significantly better than the consumer’s purchase-money mortgage interest rate. The CFPB also asserts that employees frequently told consumers that the consumer could obtain a streamline refinance loan at no cost to the consumer when, in fact, this was not true.

The CFPB asserts that the alleged conduct violated various federal consumer protection laws, including the Truth in Lending Act (TILA) and Regulation Z; the SAFE Act and related state licensing laws; the Consumer Financial Protection Act (CFPA), with regard to its prohibitions against unfair and deceptive acts or practices; the Mortgage Acts and Practices (MAP) Rule (also known as Regulation N); the ECOA; and the FCRA.

The relief requested by the CFPB includes (1) enjoining the defendants from committing future violations of the CFPA, TILA, the MAP Rule, ECOA and FCRA, (2) awarding additional injunctive relief as justice may require, (3) awarding consumer redress, (4) awarding damages or other monetary relief, (5) ordering disgorgement of ill-gotten gains, and (6) awarding civil-money penalties.

The CFPB notes in the complaint that 1st Alliance was previously subject to a February 2014 CFPB consent order in which the CFPB alleged violations of section 8 of the Real Estate Settlement Procedures Act.

- Richard J. Andreano, Jr.

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CFPB Finalizes Rule to Implement Growth Act Escrow Exemption for Higher-Priced Mortgage Loans

As previously reported, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Growth Act), passed in June 2018, created an exemption from the requirement to maintain an escrow account in connection with a higher-priced mortgage loan (HPML) for insured depository institutions and insured credit unions (insured creditors) that meet certain conditions. The CFPB recently adopted a final rule to implement the exemption. The CFPB also issued an executive summary of the rule, and an updated version of the TILA HPML Escrow Rule Small Entity Compliance Guide. The rule will become effective upon publication in the Federal Register, which the CFPB expects to occur in February 2021.

The HPML provisions in Regulation Z require that a creditor establish an escrow account for certain first lien HPMLs. While the HPML provisions already include an exemption for small creditors operating in rural or underserved areas that meet certain requirements, the exemption under the Growth Act is an additional exemption for qualifying insured creditors. Insured creditors that meet the following conditions qualify for the exemption:

  • As of the preceding December 31st the insured creditor had assets of $10 billion or less (which dollar amount is subject to annual adjustment for inflation). For applications received before April 1 of the current calendar year, this condition is met if the insured creditor’s assets do not exceed the threshold on December 31st of either of the two preceding calendar years. (The pre-existing small creditor exemption has an inflation-adjusted asset threshold of $2.23 billion.)
  • During the preceding calendar year the insured creditor and its affiliates together extended no more than 1,000 transactions subject to the Regulation Z ability to repay rule (covered transactions) secured by a first lien on a principal dwelling. For applications received before April 1 of the current calendar year, this condition is met if the insured creditor and its affiliates extended no more than 1,000 covered transactions secured by a first lien on a principal dwelling during either of the two preceding calendar years.
  • During the preceding calendar year the insured creditor extended at least one covered transaction that was secured by a first lien on a property located in a rural or underserved area. For applications received before April 1 of the current calendar year, this condition is met if during either of the two preceding calendar years the insured creditor extended at least one covered transaction that was secured by a first lien on a property located in a rural or underserved area.
  • The insured creditor and its affiliates do not maintain an escrow account for consumer credit transactions secured by real property or a dwelling, other than:
    • Escrow accounts established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure, or
    • Escrow accounts established at a time when the insured creditor was required to do so by the HPML provisions. The original HPML escrow account requirement became effective for loan applications received on or after April 1, 2010. Insured creditors that meet the other requirements for the new exemption will qualify for the new exemption if they cease establishing escrow accounts for HPML loans for which the applications are received on or after the 120th day following the effective date of the final rule implementing the new exemption.

Even if an insured creditor qualifies for the exemption from the escrow account requirement, if a transaction is subject to a forward commitment for sale to a purchaser that does not qualify for an exemption from the escrow account requirement, an escrow account is required under the HPML provisions, unless the transaction is otherwise exempt from the requirement.

- Richard J. Andreano, Jr.

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DACA Status Recipients Now Eligible for FHA Mortgage Loans

The U.S. Department of Housing and Urban Development announced on January 20, 2021 that effective January 19, 2021 individuals who are classified under the “Deferred Action for Childhood Arrivals” program (DACA) with the U.S. Citizenship & Immigration Service (USCIS) and are legally permitted to work in the U.S. are eligible to apply for FHA mortgages.

The FHA mortgage loan eligibility for such individuals is based on HUD waiving the following provision in HUD Handbook 4000.1: “Non-US citizens without lawful residency in the U.S. are not eligible for FHA-insured mortgages.” HUD advises that “The term “lawful residency” pre-dates DACA and thus did not anticipate a situation in which a borrower might not have entered the country legally, but nevertheless be considered lawfully present. To avoid confusion and provide needed clarity to HUD’s lending partners, FHA is waiving the above referenced FHA Handbook subsection in its entirety. In a subsequent update to the FHA Handbook the language will be removed.”

HUD also advises that other FHA requirements remain in effect for all potential borrowers, including DACA status recipients:

  • The property will be the borrower’s principal residence;
  • The borrower has a valid Social Security Number (SSN), except for those employed by the World Bank, a foreign embassy, or equivalent employer identified by HUD;
  • The borrower is eligible to work in the U.S., as evidenced by the Employment Authorization Document issued by the USCIS; and
  • The borrower satisfies the same requirements, terms, and conditions as those for U.S. citizens.

The waiver of the HUD Handbook provision was signed by HUD Deputy Secretary Brian Montgomery, who was nominated to the position by President Trump.

- Richard J. Andreano, Jr.

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Did You Know?

Georgia Amends Mortgage Lender and Broker Licensing Regulations

The Georgia Department of Banking and Finance recently adopted amendments to its licensing regulations relating to residential mortgage lenders and brokers. In addition to technical revisions, the amendments eliminate the requirement for certain mortgage brokers to maintain a physical place of business in Georgia and remove the requirement to list the office address on record with the Department and the tagline “Georgia Residential Mortgage Licensee” in all advertisements. Changes were also made to requirements relating to books and records, registration and investigation fees, and others.

The notice of proposed rulemaking showing redline changes is available here.

These amendments are effective on January 28, 2021.

- Aileen Ng

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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