Legal Alert

Mortgage Banking Update - April 29, 2021

April 29, 2021
In This Issue:


11th Circuit Rules FDCPA Restriction on Third-Party Communications Applies to Debt Collector’s Transmittal of Debtor’s Personal Information to Vendor that Generated and Sent Collection Letters

In a very troubling decision of first impression, a unanimous panel of the U.S. Court of Appeals for the Eleventh Circuit has ruled that a debt collector’s transmittal of the plaintiff’s personal information to the vendor it used to generate and send collection letters “constituted a communication ‘in connection with the collection of any debt’ within the meaning of [FDCPA Section 1692c(b)]”. That provision generally prohibits a debt collector from communicating with anyone other than the debtor and certain specified third-parties “in connection with the collection of any debt” without the debtor’s consent, court permission, or to effectuate a postjudgment judicial remedy.

In Hunstein v. Preferred Collection and Management Services, Inc., the debt collector transmitted certain information about the plaintiff, including his status as a debtor, the amount of the debt, and the entity to whom the debt was owed, to a vendor that used the information to generate and send a collection letter to the plaintiff. The plaintiff filed a complaint alleging violations of the FDCPA and Florida law. The district court dismissed the complaint for failing to state a claim, concluding that the plaintiff had not sufficiently alleged that the debt collector’s transmittal of information to the vendor violated Section 1692c(b) of the FDCPA because the transmittal did not qualify as a “communication in connection with the collection of any debt.” (The district court did not accept supplemental jurisdiction of the state law claim.)

The plaintiff appealed to the Eleventh Circuit. After concluding that the plaintiff had Article III standing, the Eleventh Circuit rejected the district court’s conclusion that the phrase “in connection with the collection of any debt” necessarily involves a demand for payment. According to the Eleventh Circuit, such an interpretation would make redundant the exceptions in Section 1692c(b) of the FDCPA that allow a debt collector to communicate, in connection with the collection of any debt, with “the debtor’s attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector.” The Eleventh Circuit commented that “communications with four of the six excepted parties—a consumer reporting agency, the creditor, the attorney of the creditor, and the attorney of the debt collector—would never include a demand for payment.” (emphasis supplied). With regard to Section 1692b(c)’s exception for communications with persons other than the debtor for the purpose of acquiring location information, the Eleventh Circuit commented that “a debt collector would presumably never make a demand for payment of a party matching that description.”

In addition, the Eleventh Circuit found that the district court essentially interpreted “in connection with the collection of any debt” to mean “to collect any debt.” In the Eleventh Circuit’s view, the district court’s interpretation resulted in the phrase “in connection with” having no independent meaning. The Eleventh Circuit also commented that the district court had been “led astray by its reliance on decisions interpreting Section 1692e,” which prohibits the use of false, deceptive or misleading representations “in connection with the collection of any debt.” It observed that Section 1692c(b) targets a debt collector’s communications with third parties rather than with debtors and the typical section 1692c(b) case involves a communication with someone other than the debtor. According to the Eleventh Circuit, because of this “practical operational difference” between Sections 1692e and 1692c(b), the phrase “in connection with the collection of any debt” does not necessarily need to have the same meaning in both sections.

The Eleventh Circuit also rejected what it termed the debt collector’s “industry practice” argument that there is widespread use of mail vendors by debt collectors and a dearth of FDCPA cases against them. It commented that none of the cases cited by the debt collector involved Section 1692c(b) claims, the courts in those cases had no obligation to sua sponte determine whether there was a Section 1692c(b) violation, and the fact that this case “is (or may be) the first case in which a debtor has sued a debt collector for disclosing his personal information to a mail vendor hardly proves such disclosures are lawful.”

Having found that the plaintiff had stated a claim for a violation of Section 1692c(b), the Eleventh Circuit reversed the district court and remanded the case. Anticipating the reaction its decision may engender, the Court concluded its opinion with the observation:

It’s not lost on us that our interpretation of § 1692c(b) runs the risk of upsetting the status quo in the debt-collection industry. We presume that, in the ordinary course of business, debt collectors share information about consumers not only with dunning vendors like [the defendant’s vendor], but also with other third-party entities. Our reading of § 1692c(b) may well require debt collectors (at least in the short term) to in-source many of the services that they had previously outsourced, potentially at great cost. We recognize, as well, that those costs may not purchase much in the way of “real” consumer privacy, as we doubt that the [letter vendors] of the world routinely read, care about, or abuse the information that debt collectors transmit to them. Even so, our obligation is to interpret the law as written, whether or not we think the resulting consequences are particularly sensible or desirable. Needless to say, if Congress thinks that we’ve misread § 1692c(b)—or even that we’ve properly read it but that it should be amended—it can say so.

In digesting this opinion, our initial reaction is that this decision has potentially far greater consequences. First, there is no reason to believe it will be limited to letter vendors. Rather, providing information that discloses a consumer owes a debt to any service provider – email and text communication providers, bankruptcy/SCRA/probate/other scrub providers, collection account scoring vendors – runs the risk of resulting in the collector having unlawfully disclosed the debt under this decision. At a minimum, collectors should assess if there is a way to avoid providing information to such vendors, or to do so in an anonymized way or a way that does not link the fact of the debt to a specific consumer. Under Zortman, omitting the name from the rest of the debt information may provide an option. However, in some instances, this is likely to be unavoidable.

Additionally, a number of states prohibit unauthorized debt disclosures by creditors and their first-party service providers who are not subject to the FDCPA, such as the California Rosenthal Act. Some of these state statutes and regulations wholesale incorporate the FDCPA itself, including Section 1692c(b). Therefore, this decision may well affect how such statutes are interpreted going forward.

We believe this decision stands to reverberate throughout the receivables industry and is likely to result in a veritable landslide of litigation under the FDCPA and state analogues.

- Stefanie Jackman & Glen P. Trudel

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CFPB Delays Mandatory Compliance Date of New General Qualified Mortgage Rule

The CFPB recently issued a final rule delaying the mandatory compliance date for the new general qualified mortgage (QM) rule based on an annual percentage rate (APR) limit from July 1, 2021 to October 1, 2022. The final rule is effective on June 30, 2021. The CFPB also issued an executive summary of the final rule.

In December 2020, the CFPB issued the new general QM rule to replace the original general QM rule based on a strict 43% debt-to-income (DTI) ratio. At the same time the CFPB also issued a seasoned loan QM rule. Both rules became effective on March 1, 2021, although because of the 36 month seasoning period, the seasoned loan QM rule did not have any immediate impact.

Based on the new general QM rule’s original mandatory compliance date of July 1, 2021, for applications received on or before June 30, 2021, creditors could rely on the original general QM rule, the new general QM rule, or the temporary QM rule based on a loan being eligible for sale to Fannie Mae or Freddie Mac (often referred to as the “GSE Patch”), as long as Fannie Mae and Freddie Mac did not exit conservatorship. Among those three QM rules, for applications received on or after July 1, 2020, only the new general QM rule would be available.

The CFPB proposed to delay the mandatory compliance date from July 1, 2021 to October 1, 2022, so that the original general QM rule, new general QM rule, and GSE Patch QM rule would all be available for applications received on or before September 30, 2022 (although the GSE Patch QM rule would end if Fannie Mae and Freddie Mac exited conservatorship). The CFPB made the following statement regarding the rationale for the proposal:

The COVID-19 pandemic has left almost 3 million American homeowners behind on their mortgages. Black and Hispanic communities, in particular, have still not recovered from the impact of the Great Recession and bear the heaviest burden of job losses under COVID-19. Forbearance plans and foreclosure moratoriums have helped many homeowners stay in their homes, but those interventions may end before either the broader economy has recovered from the impact of the pandemic or the housing market has reached a new equilibrium. The CFPB believes that an extension of the mandatory compliance date may help ensure stability and access to affordable, responsible credit in the mortgage market.

Based on other actions, however, the goal of the CFPB may not be fully realized. In January 2021 the Preferred Stock Purchase Agreements (PSPAs) regarding Fannie Mae and Freddie Mac were amended. Pursuant to the amendments, with regard to the original general QM rule, the new general QM rule, and the GSE Patch QM rule, on or after July 1, 2021, Fannie Mae and Freddie Mac could only purchase new general QM rule loans. The proposal of the CFPB to delay the mandatory compliance date for the new general QM rule to October 1, 2022, raised the issue of whether the PSPAs would be further amended to continue to provide for the purchase of original general QM rule loans and GSE Patch QM rule loans after July 1, 2021, if the CFPB finalized the proposed delay.

As previously reported, on April 8, 2021, Fannie Mae and Freddie Mac announced that for loans with applications received on or after July 1, 2021, they will purchase new general QM rule loans, and not original general QM rule loans or GSE Patch QM rule loans. As a result, for applications received on or after July 1, 2021: (1) the original general QM rule loans may still be originated, but they will not be eligible for sale to Fannie Mae or Freddie Mac without further action to amend the PSPAs, and (2) because GSE Patch QM loans receive QM status based on the loans being eligible for sale to Fannie Mae or Freddie Mac, the GSE Patch QM rule will in effect no longer be available without further action to amend the PSPAs, or an amendment of the rule by the CFPB.

Various industry representatives submitted comments opposing the proposed delay of the mandatory compliance date, and even various consumer representatives submitted comments opposing the proposed delay or indicating that they did not believe that a delay was necessary. It appears many parties opposing the delay believe the actual, or a significant, reason for the proposed delay is to provide the CFPB with time to reassess and amend the new general QM rule. As previously reported, in February 2021 the CFPB issued a policy statement in which it advised that it intended to propose a rule to delay the mandatory compliance date of the new general QM rule, and that it will consider at a later date whether to initiate a rulemaking to reconsider other aspects of the new general QM rule. In the preamble to the final rule delaying the mandatory compliance date, the CFPB advises that it plans to evaluate the new general QM rule, and again states that it will consider at a later date whether to initiate another rulemaking to reconsider other aspects of the general QM loan definition.

- Richard J. Andreano, Jr.

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CFPB Issues Interim Rule Applicable to FDCPA Debt Collectors Seeking to Evict Tenants for Non-Payment of Rent

The CFPB has issued an interim final rule that requires “debt collectors” as defined under the FDCPA who seek to evict tenants for non-payment of rent to provide written notice to tenants of their rights under the Centers for Disease Control and Prevention (CDC) Order that establishes an eviction moratorium. The interim rule also prohibits FDCPA debt collectors from misrepresenting tenants’ eligibility for protection from eviction under the moratorium. The rule becomes effective on May 3, 2021 and comments on the rule must be submitted by May 7, 2021.

In its discussion of the rule, the CFPB states that the rule is based on its interpretation of FDCPA sections 807 and 808. Those sections, respectively, prohibit a debt collector from using false, deceptive, or misleading representations or means to collect a debt and from using unfair or unconscionable means to collect a debt.

Disclosure requirement. The CDC Order generally prohibits a landlord, owner of a residential property, or other person with a legal right to pursue eviction (including an agent or attorney acting on behalf of a landlord or owner) from evicting tenants for non-payment of rent in any jurisdiction in which the Order applies during the effective period of the Order. The CDC Order has been extended three times, most recently through June 30, 2021. To be eligible for the moratorium, a tenant must submit a written declaration attesting to certain eligibility criteria generally establishing that, because of the tenant’s financial situation, the tenant is unable to afford full rental payments and would likely become homeless or have to move into a shared living setting if evicted.

The rule prohibits a FDCPA debt collector from filing an eviction action for non-payment of rent against a consumer to whom the CDC Order may reasonably apply without disclosing that the consumer may be eligible for temporary protection from eviction under the CDC Order. The disclosure must be clear and conspicuous and in writing and must be provided on the date the FDCPA debt collector provides the consumer with an eviction notice or, if no eviction notice is required by law, on the date the eviction notice is filed. A FDCPA debt collector can provide the notice even if the consumer might not be covered by the CDC Order. The commentary to the rule includes sample disclosure language that a FDCPA debt collector can use to comply with the rule’s requirement. A violation of the disclosure requirement is deemed a violation of FDCPA Section 808.

The CFPB notes in its discussion of the rule that a large number of states and localities have adopted their own eviction moratoria. It states that in light of this, the Bureau has not made a finding in the interim rule that it is unfair or deceptive under the FDCPA for a debt collector in a jurisdiction in which such a moratorium applies to file an eviction action against a consumer without disclosing that moratorium to the consumer. However, the Bureau also states that nevertheless, a FDCPA debt collector’s failure to disclose such information to a consumer could violate the FDCPA’s prohibition on deception or unfairness (or both), particularly if the state or local law offers greater protection than the CDC Order. The CFPB indicates that providing a disclosure using the alternate sample language in the rule “likely cures any deception or unfairness under FDCPA sections 807 or 808 that would arise from the failure to disclose a more protective [state or local law].” It also indicates that nothing in the rule’s disclosure requirement affects a debt collector’s obligation to provide any moratorium-related disclosure required by state or local law.

A landlord would generally not be directly subject to the rule because a landlord is typically not a “debt collector” covered by the FDCPA. However, it is possible the rule could influence how a state regulator or court might apply a state debt collection law that applies more broadly to creditors and incorporates FDCPA prohibitions.

False representations. The rule prohibits a debt collector covered by the FDCPA from falsely representing or implying that a consumer is ineligible for protection from eviction under the CDC Order. A violation of this prohibition is deemed a violation of FDCPA Section 807.

- Stefanie Jackman

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CFPB Issues Series of Measures Impacting Mortgage Servicers

The CFPB was busy last week, issuing a series of measures that impact the mortgage servicing industry.

  • On March 31, the CFPB rescinded seven policy statements, including statements that provided flexibility from supervisory or enforcement actions for loss mitigation and credit reporting activity in connection with the COVID-19 national emergency.
  • On April 1, the CFPB issued Compliance Bulletin 2021-02 (the “Compliance Bulletin”), warning mortgage servicers to take certain measures in anticipation of the wave of homeowners who will need assistance after the expiration of CARES Act forbearances and other similar COVID-related measures.
  • On April 5, the CFPB issued a Mortgage Servicing COVID-19 Proposed Rule (the “Proposed Rule”), which could have a dramatic impact on mortgage servicers and the housing industry as a whole.
  • Also on April 5, the CFPB issued a blog post discussing mortgage servicing communication strategies during the COVID-19 pandemic.

These measures unmistakably put the mortgage servicing industry on notice that it will be a top priority of the “new CFPB,” which should not come as a surprise. In addition, these developments impact the industry in significant and varying ways. For instance, in rescinding past policy statements, the CFPB has formally signaled that the gloves are off in terms of enforcement and supervisory activities. The new Compliance Bulletin furthers that message, but also clarifies what the CFPB expects servicers to prioritize for compliance and best practices.

The Proposed Rule provides some helpful flexibility to the industry, but also includes a sweeping foreclosure moratorium that would essentially stall residential foreclosures until 2022 (at least for loans subject to Regulation X). This obviously would significantly impact mortgage servicers and the broader housing industry, and the proposal’s validity may very well be contested.

Finally, in its blog post, the CFPB has encouraged the development of, and investment in, new communication resources for the mortgage servicing industry. In light of the other developments (and warnings) last week, many in the industry may decide that the time is right to make those investments.

We address each of these four developments in more detail in the following series of separate blog posts:

CFPB Rescinds Two Policy Statements Affecting Mortgage Servicers

CFPB Issues Compliance Bulletin (2021-02) on Supervision and Enforcement Priorities Regarding Housing Insecurity

CFPB Issues Mortgage Servicing Notice of Proposed Rulemaking

CFPB Issues Blog Post on COVID-19 Mortgage Servicing Communication Strategies

- Reid F. Herlihy

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CFPB Issues Proposal to Extend Effective Date of Debt Collection Rule

The CFPB issued a proposal today that would extend by 60 days the effective date of Part I and Part II of its final debt collection rule issued in, respectively, October 2020 and December 2020. Comments on the proposal will be due no later than 30 days after the date it is published in the Federal Register.

The debt collection rule (Parts I and II) is scheduled to take effect on November 30, 2021. The CFPB’s proposal would extend the effective date to January 29, 2022.

In addition to requesting comment on whether to extend the final rule’s effective date and whether 60 days is the appropriate amount of time for an extension, the CFPB requests comment on whether it would facilitate implementation to retain the November 30 effective date for some or all of the final rule’s safe harbors. In its discussion, the CFPB observes that to the extent the final rule establishes a safe harbor from liability for certain conduct, or a presumption that certain conduct complies with or violates the rule, those safe harbors and presumptions will not take effect until the effective date. Accordingly, as an example of the information it seeks, the CFPB asks for comment on the costs and benefits of allowing debt collectors to obtain a safe harbor by using the CFPB’s model validation notice as of November 30 even if the final rule does not otherwise take effect until January 29, 2022.

To explain why it has issued the proposal, the CFPB points to the disruption caused by the COVID-19 pandemic. It indicates that, due to this disruption, an extension to allow stakeholders additional time to review and implement the final rule may be warranted.

While the CFPB does not suggest in its discussion of the proposal that it may also consider substantive changes to the rule, that remains a possibility. For example, we would not be surprised if consumer advocates argue that the CFPB should not only reconsider the final rule’s effective date in light of the pandemic but should also consider whether the pandemic’s effects warrant reconsideration of certain substantive provisions of the final rule. A delay in the effective date may create more opportunity for the Bureau to propose substantive changes to the rule.

- Christopher J. Willis & Stefanie H. Jackman

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SCOTUS Rules FTC Act Section 13(b) Does Not Authorize FTC to Seek Restitution or Disgorgement

In a unanimous decision, the U. S. Supreme Court ruled April 22 that Section 13(b) of the Federal Trade Commission Act (Act) does not authorize the FTC to seek, and a court to award, monetary relief such as restitution or disgorgement.

In AMG Capital Management, LLC v. FTC, the FTC filed a lawsuit in federal district court against several payday lenders and their owner for engaging in alleged unfair or deceptive acts or practices in violation of Section 5 of the Act. Relying on Section 13(b), the FTC’s complaint sought a permanent injunction to prevent the defendants from committing future violations of the Act and monetary relief in the form of restitution and disgorgement. In addition to granting the FTC’s summary judgment motion, the district court granted the FTC’s request for a permanent injunction and directed the defendants to pay $1.27 billion in restitution and disgorgement. On appeal to the Ninth Circuit, the defendants argued unsuccessfully that Section 13(b) did not authorize the monetary relief ordered by the district court. The defendants then sought certiorari which the Supreme Court granted to resolve a circuit split, with the Seventh Circuit having reached an opposite conclusion from the Ninth Circuit on the scope of the FTC’s Section 13(b) authority.

The Supreme Court, in its opinion written by Justice Breyer, first looked at the language of three provisions of the Act:

  • Section 13(b) which was added to the Act in 1973 and allows the FTC to proceed directly to court (before issuing a cease and desist order) to obtain a “temporary restraining order or preliminary injunction” and to also “in proper cases” obtain a “permanent injunction.”
  • Section 5(l) which was amended in 1973 to authorize district courts to award civil penalties against respondents who violate final FTC cease and desist orders, and to “grant mandatory injunctions and such other and further equitable relief as they deem appropriate in the enforcement of such final orders of the Commission.”
  • Section 19 which was added to the Act in 1975 and authorizes district courts to grant “such relief as the court finds necessary to redress injury to consumers,” including through the “refund of money or property.” Section 19 limits the availability of consumer redress to cases in which a person has “engage[d] in any unfair or deceptive act or practice…with respect to which the Commission has issued a final cease and desist order which is applicable to such person.”

The Court then discussed the following considerations which “taken together, convince us that Section 13(b)’s ‘permanent injunction’ language does not authorize the Commission directly to obtain court-ordered monetary relief”:

  • Section 13(b) refers only to injunctions and focuses on relief that is prospective, not retrospective. While observing that the words “permanent injunction” might be read to allow the FTC to dispense with administrative proceedings before seeking an injunction, the Court was unwilling to “read those words as allowing what they do not say, namely, as allowing the Commission to dispense with administrative proceedings to obtain monetary relief as well.” In the Court’s view, such reading “is to read the words as going well beyond the provision’s subject matter” and “[i]n light of the historical importance of administrative proceedings, that reading would allow a small statutory tail to wag a very large dog.”
  • Sections 5(l) and 19, which were enacted at the same time as or a few years after Section 13(b), give district courts authority to impose monetary penalties and award monetary relief in cases where the FTC has issued a cease and desist order in an administrative proceeding. Since Congress explicitly provided in these provisions for “other and further equitable relief” and “the refund of money or return of property,” the Court found Congress “likely did not intend Section 13(b)’s more cabined ‘permanent injunction’ language to have similarly broad scope.” Section 19 also has limitations not found in Section 13(b), including that it only applies where the FTC begins its Section 5 process within three years of the violation and seeks monetary relief within one year of any resulting cease and desist order. The Court found it “highly unlikely Congress would have enacted provisions authorizing conditioned and limited monetary relief if the Act, via Section 13(b), allowed the Commission to obtain that same monetary relief and more without satisfying those conditions and limitations.” (emphasis included).
  • Reading Section 13(b) to authorize injunctive but not monetary relief produces a coherent enforcement scheme—the FTC can obtain monetary relief by first invoking its administrative procedures and then Section 19’s redress provisions and the FTC can use Section 13(b) to obtain injunctive relief while administrative proceedings are pending or in progress, or when it seeks only injunctive relief. In contrast, according to the Court, the FTC’s reading would allow it to use Section 13(b) as a substitute for Sections 5 and 19.

The Supreme Court rejected all of the arguments made by the FTC in support of its reading, including its arguments that traditional equitable authority to grant an injunction includes the power to grant monetary relief and that it was important as a policy matter to allow the FTC to use Section 13(b) to obtain monetary relief rather than only allowing it to enjoin those who violate the Act while leaving them with the profits of their wrongdoing. In response to the FTC’s policy argument, the Court commented that if the FTC believes its authority under Sections 5 and 19 to obtain restitution is too cumbersome or otherwise inadequate, it is “free to ask Congress to grant it further remedial authority.”

The FTC has already asked Congress to grant it express authority to seek monetary relief under Section 13(b). At a hearing before the Senate Commerce Committee earlier this week, the four currently-serving FTC Commissioners called on Congress to pass such legislation and, in a statement criticizing the Supreme Court’s decision, Acting FTC Chairwoman Rebecca Kelly Slaughter urged Congress to act to strengthen the FTC’s powers.

The Supreme Court’s decision is a serious blow to the FTC’s authority to enforce Section 5 of the Act. In contrast to the FTC, the CFPB has broad authority under the Consumer Financial Protection Act to obtain all forms of monetary relief and civil money penalties. In the absence of Congressional action, we expect the Supreme Court’s decision to result in more collaboration by the FTC with the CFPB in bringing enforcement actions for unfair or deceptive acts or practices against non-banks as to whom both agencies have enforcement jurisdiction. We also expect to see the FTC increase its use of administrative proceedings. (If the FTC files a lawsuit based on one of the enumerated consumer financial services laws that it has authority to enforce, it can obtain any monetary relief that is expressly authorized under such laws.)

- Christopher J. Willis

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This Week’s Podcast: The U.S. Supreme Court’s Decision in Facebook v. Duguid: A Discussion of its Implications

After looking at how the decision narrows the technology covered by the Telephone Consumer Protection Act’s automatic telephone dialing system definition, we discuss its implications for TCPA litigation going forward, including do-not-call and prerecorded call claims and the intersection with debt collection claims, and for regulatory compliance when making calls for telemarketing or lead generation, as well as possible Congressional responses to the decision.

Dan McKenna, Practice Group Leader of Ballard Spahr’s Consumer Financial Services Litigation Group, hosts the conversation, joined by Mark Furletti, Co-Chair of the firm’s Consumer Financial Services Group, and three partners in the firm’s Consumer Financial Services Litigation Group: Stefanie Jackman, Jenny Perkins, and Joel Tasca.

Click here to listen to the podcast and view the recording transcript.

- Daniel JT McKenna, Mark J. Furletti, Stefanie H. Jackman, Jenny N. Perkins & Joel E. Tasca

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Fannie Mae and Freddie Mac Announce Plans to Purchase Only New General Qualified Mortgage Loans

In coordination with the Federal Housing Finance Agency (FHFA), on April 21, 2021, Fannie Mae in an update to Lender Letter 2021-04 and Freddie Mac in Bulletin 2021-15 announced the final extension of certain appraisal flexibilities due to COVID-19 for purchase and rate and term refinance loans from April 30, 2021 to May 31, 2021. As previously reported, the final extension of the origination flexibilities with regard to alternative methods for documenting income and verifying employment before closing, and the expanded use of powers of attorney to assist with loan closings, will apply to loans with application dates on or before April 30, 2021.

FHFA noted that it did not plan to continue the flexibilities beyond May 31, 2021 “[d]ue to low usage of the temporary flexibilities.”

- The Mortgage Banking Group

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Fannie Mae and Freddie Mac Announce Final Extension of Appraisal Flexibilities Due to COVID-19

In its Loan Guaranty Circular 26-21-07 the U.S. Department of Veterans Affairs (VA) expanded a temporary loss mitigation option.

As previously reported, in September of 2020 the VA temporarily authorized the use of deferments as a loss mitigation option for borrowers with a COVID-19 forbearance. The VA now will allow the use of a deferment for a borrower who has missed one or more payments because of the COVID-19 pandemic regardless of whether the missed payment was subject to a CARES Act forbearance.

Consistent with the prior guidance, a deferment may be used only with a borrower who can resume making the regularly scheduled loan payments. Pursuant to a deferment, the servicer would defer payment of the total amount of missed payments (including principal, interest, taxes and insurance) to the loan maturity date, or until the a borrower refinances the loan, transfers the property, or otherwise pays off the loan, whichever occurs first. There may not be any added cost, fees or interest to the borrower, nor any penalty for early payment of the deferred amount.

The VA notes that servicers do not need to enter into a modification agreement that alters the terms of the existing loan for the purposes of a loan deferment option. The VA also advises that it is temporarily waiving the requirement that a final installment payment not be in excess of two times the average of the preceding installments.

- The Mortgage Banking Group

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Federal Agencies Propose Revisions to Interagency Q&As Regarding Flood Insurance

Recently, federal agencies proposed revisions to the Interagency Questions and Answers Regarding Flood Insurance. The agencies are the Comptroller of the Currency, Farm Credit Administration, FDIC, Federal Reserve Board, and National Credit Union Administration (Agencies). The proposed Q&As will supplement the proposed Q&As issued by the Agencies in July 2020. Those proposed Q&As contained only two proposed questions on private flood insurance. Based on questions received by the Agencies regarding private flood insurance rules that went into effect on July 1, 2019, the new proposal includes 24 proposed Q&As on private flood insurance. Comments on the new proposed Q&As are due by May 17, 2021.

The Agencies divide the new proposed Q&As on private flood insurance into three main categories: (1) mandatory acceptance (nine proposed Q&As), (2) discretionary acceptance (four proposed Q&As), and (3) general compliance (11 proposed Q&As). The proposed Q&As use the term “Act” to refer to the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as revised by specified federal flood insurance legislation, and use the term “Regulation” to refer to each Agency’s current flood insurance rule. The Agencies note that they plan to publish in the Federal Register a final document based on the new proposed Q&As and the Q&As proposed in July of 2020.

Among other points, the proposed mandatory acceptance Q&As include the following proposed guidance regarding private flood insurance:

  • When a private flood insurance policy comes up for renewal, or the borrower presents a new private flood insurance policy, regardless of whether a triggering event occurred (i.e., making, increasing, extending or renewing a loan), the lender must review the policy to determine if it meets the mandatory purchase criteria. If the policy does not meet the mandatory purchase criteria, the lender may still accept the policy if it meets the discretionary acceptance criteria.
  • If a lender has a policy not to originate mortgage loans in nonparticipating communities or coastal barrier regions in which the flood insurance policies under the National Flood Insurance Program (NFIP) are not available, the private flood insurance requirements under the Regulation do not require that the lender change its policy.
  • A lender is not required to accept a private flood insurance policy solely because the policy contains the compliance aid assurance clause if the lender reviews the policy and determines that the policy actually does not meet the mandatory acceptance requirements. If a private flood insurance policy does not contain the compliance aid assurance clause, the lender must review the policy to determine if it meets the requirements for private flood insurance under the Regulation before the lender may choose to reject the policy.
  • If a private flood insurance policy contains the compliance aid assurance clause, a lender may accept the policy without conducting an additional review, provided that the language of the clause is stated in the policy, or an endorsement to the policy, as set forth in the Regulation. However, please see the following bullet point.
  • Even if a lender relies on the compliance aid assurance clause to accept a private flood insurance policy, the lender (1) must ensure that the coverage is at least equal to the lesser of the outstanding principal balance of the loan or the maximum amount of coverage available under the Act for the type of property, and (2) should also ensure that other key aspects of the policy are accurate, such as the borrower’s name and property address.
  • If a private flood insurance policy does not include a compliance aid assurance clause, the lender may elect to first review the policy to determine if it meets the criteria for acceptance under the discretionary acceptance provision of the Regulation. If the policy does not meet such criteria, the lender still must determine if it is required to accept the policy under the mandatory acceptance criteria.

Among other points, the proposed discretionary acceptance Q&As include the following proposed guidance regarding private flood insurance:

  • When assessing whether to accept a private flood insurance policy under the discretionary acceptance provision, to evaluate the sufficiency of an insurer’s solvency, strength, and ability to satisfy claims when determining whether the policy provides sufficient protection of the loan consistent with general safety and soundness principles, among other options, a lender may obtain information from the State insurance regulator for the State in which the property is located. A lender may rely on the licensing or other processes used by the State insurance regulator for such an evaluation.
  • If a lender previously accepted a private flood insurance policy in accordance with the discretionary acceptance requirements and the policy is renewed, the lender must review the policy upon renewal to ensure that it continues to meet the discretionary acceptance requirements. Additionally, the lender must document in writing its conclusion regarding the sufficiency of the protection of the loan upon each renewal to indicate that the policy continues to provide sufficient protection of the loan.

Among other points, the proposed general compliance Q&As include the following proposed guidance regarding private flood insurance:

  • For a private flood insurance policy that is accepted under the mandatory acceptance provision, if the total coverage amount does not exceed the maximum amount available under the NFIP, the deductible may not be higher than the maximum deductible permitted for a Standard Flood Insurance Policy (SFIP) under the NFIP. For a private flood insurance policy with a total coverage amount that exceeds the amount available under the NFIP, the deductible may exceed the maximum deductible under a SFIP. The Agencies confirm that this guidance differs from prior guidance that when the total coverage amount under a private flood insurance policy exceeds the amount available under the NFIP, the lender should match the SFIP deductible for the coverage up to the maximum amount available under the NFIP, and could exceed the maximum deductible for a SFIP for the coverage amount over the maximum coverage amount available under the NFIP. The Agencies explain that “based on additional investigation, the Agencies understand that these types of tiered deductibles are not common and the [prior] guidance . . . may not be practicable. Therefore, the Agencies believe the guidance they are proposing . . . with respect to deductibles for private flood insurance policies accepted under the mandatory acceptance provision will be more consistent with private flood insurance policies available in the marketplace and safety and soundness standards.”
  • If a private flood insurance policy is accepted under the discretionary acceptance provision, even for a private flood insurance policy that provides for a total coverage amount up to the maximum amount available under the NFIP, a lender may accept a deductible that exceeds the maximum deductible permitted for a SFIP, provided the lender has determined that the policy provides sufficient protection of the loan consistent with general safety and soundness principles.
  • A lender accepting a private flood insurance policy under the mandatory acceptance provision may require a deductible that is lower than the deductible permitted for a SFIP, consistent with safety and soundness principles and based on the borrower’s financial condition, among other factors. For a private flood insurance policy accepted under the discretionary acceptance provision, the lender need only consider whether the policy, including the deductible, provides sufficient protection of the loan consistent with general safety and soundness principles.
  • The Act and Regulation do not prohibit a lender that uses a third party to review private flood insurance policies from charging a fee to the borrower. However, lenders should be aware of any other applicable requirements regarding fees and disclosures of fees.
  • If the declarations page for a private flood insurance policy provides enough information for a lender to determine whether the policy meets the mandatory acceptance provision or discretionary acceptance provision, or if the declarations page contains the compliance aid assurance clause, the lender may rely on the declarations page to determine that the policy complies with the Regulation. If the declarations page does not provide enough information for a lender to determine whether the policy meets the mandatory acceptance provision or discretionary acceptance provision, the lender should request additional information about the policy to aid in making its determination.
  • When servicing a loan for a lender that is supervised by the Agencies, the servicer must comply with the Regulation when determining whether a private flood insurance policy may be accepted under the mandatory acceptance provision or the discretionary acceptance provision. When servicing a loan for an entity that is not supervised by the Agencies, the servicer should comply with the terms of its contract with the entity.

- Richard J. Andreano, Jr.

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CA DFPI Issues Modifications to Proposed Regulations to Implement 2018 Law Requiring Consumer-Like Disclosures for Commercial Financing

The California Department of Financial Protection and Innovation (DFPI) has issued modifications to its proposed regulations to implement SB 1235, the bill signed into law on September 30, 2018 that requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances.

SB 1235, codified at CA Financial Code (Code) sections 22800-22805, requires a “provider,” meaning a person who extends a specific offer of “commercial financing” as defined in Code section 22800(d) to a recipient, to give the recipient certain disclosures at the time the provider extends the offer. SB 1235 requires the DFPI to issue regulations implementing the specific requirements of the disclosures that must be given to recipients. The law contains exemptions and carve-outs for, among other things, depository institutions, financings of more than $500,000, closed-end loans with a principal amount of less than $5,000, and transactions secured by real property. Compliance with the new disclosure requirements is not required until the DFPI’s final regulations become effective.

In September 2020, the DFPI (then the Department of Business Oversight) issued proposed regulations to implement SB 1235. The modifications issued last week are intended to address the public comments that the DFPI received on the September proposal. Comments on the modifications were to have been submitted to the DFPI by April 26, 2021.

The provisions of the proposal modified by the DFPI include provisions that address:

  • The meaning of the term “at the time of extending a specific commercial financing offer” in section 22802 of the Code (which is the trigger event in Code section 22802(a) for providing the required disclosures)
  • Closed-end transaction formatting and content requirements
  • Commercial open-end credit plan disclosure formatting
  • Factoring disclosure formatting
  • Sales-based financing disclosure formatting
  • Lease financing formatting and content requirements
  • General asset-based lending transaction disclosure formatting
  • Disclosure formatting for all other transactions
  • Signature requirements
  • Estimates for sales-based financing
  • Example transactions for asset-based lending and factoring

The modifications also add new provisions to the proposed regulations. The new provisions include:

  • Section 3024(b) which states that (1) a provider’s “mere use” of certain words required by the regulations such as interest, interest rate, APR, and prepayment “shall not constitute evidence that a financer’s contract with a recipient is or is not a loan under California law,” and (2) the new subsection “shall not preclude a trier of fact from considering a provider’s statements in the disclosures required by [these regulations] when assessing whether a transaction, based upon the totality of the circumstances, is a loan under California law.” (Previously proposed Section 2057(a)(11) defines a “financer” as “the person who provides or will provide the commercial financing to the recipient or any nondepository institution which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.” As defined in Code section 28000(m), a “provider” includes a “financer.”)
  • Section 3025(b) which states that for purposes of determining whether a recipient’s business is “principally directed or managed from California,” a provider “may rely upon the business address provided by the recipient to the provider in the application for financing.” (Previously proposed Section 3025(a) provides that the requirement to provide disclosures for commercial financing “applies to recipients whose business is principally directed or managed from California.”)
  • Section 3026 creates a tolerance for the disclosed APR and safe harbors from liability for overdisclosures and for inadvertent disclosure errors that are addressed within 60 days of discovery through the provider’s or financer’s own procedures.
  • Section 3027 requires additional disclosures when the amount financed is greater than the amount of funds received by the recipient.

Like California, New York has also enacted a law (S 5470–B) that requires consumer-like disclosures for “commercial financing” transactions. Signed into law by New York Governor Cuomo on December 23, 2020, S 5470–B requires disclosures for transactions of $500,000 or less. The new law states that it takes effect on the 180th day after becoming law, which is June 21, 2021.

- Mark J. Furletti

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FTC “Staff Note” Rejects Transaction Cap for Holder Rule

Almost 45 years after the FTC’s Holder Rule and corresponding FTC staff guidance were issued, the FTC has issued a “staff note” in which FTC staff concludes that the TILA exemption for large transactions does not apply to the FTC’s Holder Rule (which is officially titled the “Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses”). The Holder Rule requires sellers that arrange for or offer credit to finance the purchase of consumer goods or services to include a specified “holder notice” in the credit contract. The notice must state that any holder of the contract is subject to all claims and defenses the consumer could assert against the seller of the financed goods or services, with the consumer’s recovery limited to the amount paid by the consumer under the contract.

As originally enacted, TILA exempted transactions, other than real property transactions, in which the amount financed exceeded $25,000. The Dodd-Frank Act increased the exemption amount to transactions in which the amount financed exceeds $50,000 and directed the CFPB to adjust that amount annually based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers. As a result, the exemption for 2021 is now $58,300. In 1976, the FTC staff who worked on the Holder Rule issued guidelines, more or less contemporaneous with the promulgation of the Rule, that stated that the Holder Rule incorporated the then-existing $25,000 TILA exemption amount. Those guidelines also addressed the nature of the relationship between sellers and lenders that requires the inclusion of the holder notice in loan documents as well as the claims covered by and excluded from the Holder Rule. Although never formally adopted by the FTC, those guidelines have often been relied upon by courts dealing with Holder Rule issues.

Following a systemic review of the Holder Rule, the FTC published a notice in the Federal Register in May 2019 announcing that it had decided to retain the Holder Rule without modification. In that notice, the FTC indicated that it would review relevant guidelines in light of comments received in connection with the Holder Rule review. According to the staff note, such comments prompted the FTC staff to reexamine the issue of whether the TILA exemption amount applies to the Holder Rule.

In the staff note, the FTC indicates that when the Holder Rule was adopted in 1975, the FTC expressly declined to adopt an exemption for large transactions, although such an exemption would have been unnecessary if it was built into the Holder Rule. The staff observes that the argument that the TILA exemption amount applies to the Holder Rule has arisen, as if it were a new development, because the Holder Rule borrows TILA’s “finance charge” and “credit sale” definitions to identify the credit agreements in which the “holder notice” must appear. The staff notes that these definitions do not contain a limit based on the transaction amount, ignoring the fact that they have no relevance in connection with transactions that are excluded from TILA. They also note that the Holder Rule does not incorporate the TILA exemption amount explicitly or by cross-referencing the TILA section containing the exemption amount. However, the staff does not provide a satisfactory explanation as to why the contrary conclusion would have been reached in 1976.

Accordingly, the staff rejects the longstanding, contemporaneous guidance and concludes that the Holder Rule is not limited to transactions below a certain amount and that the statement in the 1976 guidelines that the Holder Rule incorporated the TILA exemption amount “was not supported by the Holder Rule or canons of construction and was contrary to the intent stated by the Commission when it adopted the Rule.”

- John L. Culhane, Jr.

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CFPB Issues 2020 Fair Lending Report

The CFPB recently issued its annual fair lending report. The report describes the CFPB’s fair lending activities in supervision and enforcement; guidance and rulemaking; interagency coordination; and outreach and education for 2020.

The report states that the Bureau announced two public fair lending enforcement actions in 2020. One of those actions represented the CFPB’s first ever redlining complaint against a non-bank mortgage lender and the other action involved allegations of inaccurate HMDA data reporting. The report also states that the CFPB referred four matters to the DOJ in 2020 involving alleged lending discrimination in violation of the ECOA. Two referrals involved alleged redlining in mortgage origination based on race and national origin. One of the other referrals involved alleged discrimination based on receipt of public assistance income in mortgage origination and the second referral involved alleged pricing discrimination in mortgage origination based on race and sex.

In the section of the report on guidance and rulemaking, in addition to HMDA rules and a HMDA interpretive rule issued in 2020, the Bureau discusses its rulemaking to implement Dodd-Frank Section 1071 and its advisory opinion on special purpose credit programs.

The report only covers the CFPB’s fair lending activities under former Director Kraninger. Under the leadership of Acting Director Uejio, and as expected under the leadership of Director-nominee Chopra, the “new CFPB” has identified fair lending as a priority issue. In his introductory message to the report, Mr. Uejio states that “it is crucial that the Bureau apply a racial equity lens and find practical ways to make freedom from racial prejudice and pursuit of racial equity a priority in the full breadth of the Bureau’s work.” He also indicates that the Bureau intends to use “robust enforcement of fair lending laws under the Bureau’s jurisdiction” as part of its efforts “to ensure fair, equitable and nondiscriminatory access to credit.”

- Christopher J. Willis

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State AGs File Summary Judgment Motion in Lawsuit Challenging FDIC “Madden-Fix” Rule

The Attorney Generals of the six states and District of Columbia who filed a lawsuit against the FDIC to set aside its “Madden-fix” rule have filed a motion for summary judgment in the case.

The lawsuit is pending before the same California federal district court judge (Judge Jeffrey S. White) who is hearing the lawsuit filed by three state AGs to set aside the OCC’s similar Madden-fix rule. Cross-motions for summary judgment have been filed in that case and oral argument on the motions is scheduled for May 7, 2021.

In their summary judgment motion, the AGs argue that the FDIC rule violates the Administrative Procedure Act because it exceeds the FDIC’s authority and impermissibly preempts state law and is arbitrary and capricious. Their central arguments in support of this position are:

  • The rule exceeds the FDIC’s authority because the plain language of the governing federal statute (12 U.S.C. 1831d) applies only to interest that an FDIC-insured state bank may charge. There is no statutory ambiguity as to when the validity of a loan’s interest rate should be assessed because, contrary to the FDIC’s suggestion, Section 1831d does not apply to certain loans but instead applies to certain entities, namely FDIC-insured banks. Section 1831d gives such banks the privilege of charging interest in excess of otherwise applicable state law. Once such loans are no longer held by an FDIC-insured bank, that preemption ceases. The rule also exceeds the FDIC’s authority because the FDIC can only regulate FDIC-insured banks and the rule regulates non-banks by granting them the power to enforce interest rate terms that violate state law.
  • The rule impermissibly preempts state law by extending the preemption of state interest rate limits to buyers of loans originated by FDIC-insured banks. Even if Section 1831d were ambiguous, the FDIC’s interpretation fails to overcome the presumption against preemption.
  • The rule is arbitrary and capricious because the FDIC failed to give sufficient consideration to evidence that the rule will likely facilitate rent-a-bank schemes and to meaningfully address the true lender doctrine’s applicability to loan sales potentially covered by the rule. More specifically, the issues the FDIC failed to consider include how the rule’s encouragement of rent-a-bank schemes will increase the number and complexity of true lender disputes and how many purported loan sales would likely fall outside the rule’s scope due to true lender issues. The FDIC’s basis for the rule lacks evidentiary support because the FDIC has not shown that Madden has caused any significant effects on credit availability or securitization markets.

Under the modified scheduling order entered by the court:

  • The FDIC must file its opposition to the AGs’ motion and any cross-motion for summary judgment by May 20, 2021.
  • The AGs must file their reply and opposition to a cross-motion for summary judgment filed by the FDIC by June 17, 2021.
  • The FDIC must file its reply by July 15, 2021.
  • Oral argument on summary judgment motions is scheduled for August 6, 2021.

- James Kim & Ronald K. Vaske

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Did You Know?

Arizona Issues Guidance on MLO Compensation for Independent Contractors and Branch Licensing Requirements

On April 23, 2021, the Arizona Department of Insurance and Financial Institutions issued Substantive Policy Statement 2021-02 to address issues concerning loan originator employment and compensation, and branch licensing requirements. In the Statement, the Department determines that Arizona mortgage laws do not prohibit Mortgage Lenders from employing and compensating licensed mortgage loan originators (MLOs) as independent contractors. The Department states that, after review of the relevant Arizona and federal mortgage laws and regulations, it found no express requirement that prohibits such practice.

The Department also provides guidance on branch licensing requirements in light of the developing remote working environment. In the Statement, the Department concludes that the physical location of a MLO does not require a sponsoring Mortgage Lender to obtain a branch license for such location unless the Mortgage Lender maintains that physical location in a similar manner to how it maintains its Arizona location to satisfy the physical presence requirement in the Arizona mortgage laws. However, the Department clarifies that all Arizona-licensed MLOs must continue to have a licensing nexus to an Arizona-licensed location, within or outside of Arizona, of the employing Mortgage Lender.

Arkansas Amends Mortgage Licensing Provisions on MLO Remote Work and Notification Requirements

Arkansas recently amended its licensing provisions under the Fair Mortgage Lending Act (FMLA) to provide a process by which a loan officer may work remotely from an unlicensed location, which will require the Commissioner to impose by rule or order the terms and conditions for such process. Licensees under the FMLA will also be required to provide 30 days’ prior notice for a change of address, which is a change from the current requirement to provide notice within 30 days after the change. Other amendments include clarifying modifications to certain definitional terms and requiring written cybersecurity policies and procedures, among others.

The amendments are effective on August 2, 2021 (or 91 days following adjournment of the current legislative session).

Washington Amends MLO Licensing Provisions to Allow Remote Work

The state of Washington recently amended its licensing provisions under the Mortgage Broker Practices Act to allow licensed mortgage loan originators (MLOs) to work from an unlicensed location if the location is the MLO’s residence and the MLO and the sponsoring company complies with state and federal information security requirements and applicable regulations.

The amendments are effective on July 25, 2021.

NMLS Modernization Public Comment Proposal Town Hall Webinar

The Conference of State Bank Supervisors (CSBS) has scheduled an NMLS Modernization Town Hall on Thursday, May 13, at 3 p.m. EDT, to provide an overview of its proposal for public comment on the Networked Licensing Model, Licensing Requirements Framework, Core Requirements and Identity Verification, as part of the NMLS modernization efforts.

The comment submissions are due by May 31, 2021. The registration for the webinar is available here.

- Aileen Ng

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Looking Ahead

MBA’s Legal Issues & Regulatory Compliance Conference 2021

Online Only | May 25 - 26, 2021

Applied Compliance Track: QM: The New Rule and Path Ahead

Speaker: Richard J. Andreano, Jr.

Regulatory Trends Track: Data Protection and Privacy Challenges

Speaker: Kim Phan

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