Legal Alert

Mortgage Banking Update

August 4, 2021

In This Issue:

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

 

Consumer Finance Monitor Celebrates Its Tenth Anniversary

July 21 marked the tenth anniversary of our blog, Consumer Finance Monitor. Originally named CFPB Monitor, we launched our blog to coincide with the CFPB’s first day.

Over the past ten years, our blog has received numerous awards and been recognized as a source of authoritative analysis and commentary. Since launching our blog, it has been our hope that our readers not only find it to be a place where they can go to get up-to-the-minute reporting on important developments relevant to the consumer financial services industry, but also a place where they can find informed analysis that helps them to understand the significance of those developments. This will remain our hope and goal as we continue to report on what is shaping up to be a challenging legal environment for our industry.

On July 26 and August 3, 2021, we held a two-part webinar, “The CFPB’s 10th Anniversary: Looking Back and Moving Forward.” In Part I, we took a close look at the Bureau’s major regulatory initiatives during its first 10 years, how it has responded to the rapid change in technology, and what we expect going forward. Part II was devoted to supervisory and enforcement activities.

- Alan S. Kaplinsky & Barbara S. Mishkin

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Ballard Spahr to Hold Aug. 6 Webinar on Proposed Guidance on Risk Management in Third-Party Relationships

The OCC, Federal Reserve Board, and FDIC issued proposed guidance for banking organizations on managing risks associated with third-party relationships, including those with financial technology-focused entities such as bank/fintech sponsorship arrangements. The agencies have made clear that if banks have ineffective risk management processes, agency examiners will closely scrutinize their third-party risk management and identify and report deficiencies in examination reports and recommend appropriate supervisory actions.

On August 6, 2021, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “Risk Management in Third-Party Relationships: What Banks and Service Providers Need to Know.” For more information and to register, click here.

- Alan S. Kaplinsky

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While Foreclosure Moratorium Ended, FHFA, HUD, VA, and USDA Extend Eviction Moratoria

The Centers for Disease Control and Prevention's (CDC) eviction moratorium expired on July 31, 2021. Meanwhile, at President Biden's request, the Acting Director of the Federal Housing Finance Agency, and the Secretaries of the U.S. Department of Agriculture (USDA), U.S. Department of Housing and Urban Development (HUD), U.S. Department of Treasury, and U.S. Department of Veterans Affairs (VA) announced the extension of their foreclosure-related eviction moratoria until September 30, 2021.

In Mortgagee Letter 2021-19, dated July 30, 2021, HUD advises that the extension of its foreclosure-related eviction moratorium applies to all FHA Title II single-family forward and Home Equity Conversion (reverse) mortgage loans, other than FHA loans secured by vacant or abandoned properties. HUD stated that it extended the foreclosure-related eviction moratorium to “avoid displacement of severely distressed borrowers” and “provide [b]orrowers additional time to access federal, state, or local housing stability resources or to consult with HUD-certified housing counselors.” HUD also advises that during the eviction moratorium, a lender or servicer may not initiate or continue with an eviction to acquire possession of a foreclosed property.

In VA Circular 26-21-14, dated July 30, 2021, the VA advises that foreclosure-related evictions are not to be initiated or completed on properties previously secured by VA-guaranteed loans (including properties in VA’s real estate owned portfolio), although the moratorium does not apply to vacant or abandoned properties.

In press release No. 0169.21, dated July 30, 2021, USDA states that despite the expiration of the foreclosure moratorium on July 31, 2021, after that date “no new foreclosure filings should occur until homeowners are reviewed for new options to reduce their payments and stay in their homes.”

- Richard J. Andreano, Jr.

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Biden Administration Announces New COVID-19 Relief Measures for FHA, VA and USDA Borrowers

The Biden Administration recently announced additional COVID-19 relief measures for borrowers with loans insured or guaranteed by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA). The action is intended to bring options for such borrowers “closer in alignment with options for homeowners with mortgages backed by Fannie Mae and Freddie Mac.”

The U.S. Department of Housing and Urban Development (HUD) addresses the relief measures in Mortgagee Letter 2021-18. The measures now include the following loss mitigation options: COVID-19 Forbearance, COVID-19 Advance Loan Modification, COVID-19 Recovery Standalone Partial Claim, COVID-19 Recovery Modification, COVID-19 Recovery Non-Occupant Loan Modification, COVID-19 Pre-Foreclosure Sale, and COVID-19 Deed-in-Lieu of Foreclosure.

The VA addresses the relief measures in Circular 26-21-13, with a graphic version of the home retention waterfall set forth in Exhibit A to the Circular and a side-by-side comparison of the COVID-19 Veterans Assistance Partial Claim Payment and the COVID-19 Refund Modification options set forth in Exhibit B.

The USDA addresses the relief measures in a stakeholder announcement and a bulletin, with the latter containing a link to an advance copy of Section 5 of Chapter 18 of the technical Handbook-1-3555.

Among other relief, the measures provide for a 25% or greater reduction in the monthly principal and interest loan payment for FHA borrowers, a 20% or greater reduction in the monthly principal and interest payment for VA borrowers, and a 20% reduction in the monthly principal and interest payment for USDA borrowers.

- Richard J. Andreano, Jr.

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Friday Afternoon Surprise: CFPB Announces Final Debt Collection Rule Will Be Effective November 30

To the surprise of the debt collection industry, the CFPB announced that its final debt collection rule (Parts I and II) will take effect on November 30, 2021 as originally scheduled.

Many in the industry were expecting the CFPB to extend the effective date to January 29, 2022, consistent with its April 2021 proposal. In April 2021, the CFPB proposed the extension due to concerns that, as a result of the disruption caused by the COVID-19 pandemic, stakeholders would need additional time to review and implement the final rule.

In its announcement, the CFPB stated that it determined the extension was unnecessary. According to the CFPB, the comments it received on the proposal generally did not support an extension, with most industry commenters stating that they would be prepared to comply with the final rule by November 30. The CFPB also indicated that although consumer advocate commenters generally supported an extension, they did not focus on whether additional time was needed to implement the rule but instead many argued that an extension was needed to allow reconsideration of the rule. The CFPB stated that reconsideration of the rule as the basis for an extension was beyond the scope of the proposal and could raise concerns under the Administrative Procedure Act. It also noted that the CFPB was not precluded from reconsidering the rule at a later date.

To comply with the new rule, companies must redesign their systems, policies, procedures, and compliance monitoring. The CFPB’s announcement means that any companies that have based their timetable for making the necessary changes on a January 29 effective date must now accelerate their efforts so that the necessary changes are completed in time to meet the November 30 deadline.

- Stefanie Jackman

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New York Federal Court Dismisses Six Class Action Cases Alleging FDCPA Violations in Reliance on Hunstein

A New York federal district court dismissed for lack of Article III standing six class action cases alleging that debt collectors violated the FDCPA by sharing data about the plaintiffs’ debts with mailing vendors. In making these claims, the plaintiffs relied on the 11th Circuit’s ruling in Hunstein v. Preferred Collection and Management Services that a debt collector’s transmittal of debt information to its letter vendor could violate the FDCPA’s limits on third party communications.

In his decision in In Re FDCPA Mailing Vendor Cases, Judge Gary R. Brown first criticized plaintiffs’ lawyers for filing “legions of FDCPA cases that have little to do with the purposes of the statute.” He commented that “[i]ncentivized by the promise of easy settlements and attorneys’ fees, counsel representing FDCPA plaintiffs have applied considerable imagination in devising theories of violation.”

Turning to his standing analysis, Judge Brown discussed the U.S. Supreme Court’s recent ruling in TransUnion, LLC. v. Ramirez that only class members who were concretely harmed by TransUnion’s FCRA violation had Article III standing to seek damages. The named plaintiff in TransUnion alleged that his credit report provided by TransUnion to an auto dealer incorrectly indicated that his name matched a name found on the OFAC terrorist list. The Supreme Court found that the only class members who had demonstrated concrete harm sufficient to confer Article III standing were those whose credit reports containing misleading OFAC alerts had been provided to third parties. It found that class members whose credit files contained such misleading information but whose credit reports had not been provided by TransUnion to any potential creditors (the vast majority of the class) did not have standing because no harm was caused by credit file information that was not disclosed to a third party.

As an initial matter, Judge Brown indicated that he was not bound by Hunstein. He then discussed why TransUnion casts significant doubt on Hunstein’s continued viability. First, he noted the plaintiffs’ argument in TransUnion that although TransUnion had not shared their credit information with third parties, it had nevertheless published the information internally to TransUnion employees and to the vendors that printed and sent the mailings that class members received advising them that their names were a potential match to names on the OFAC list. The Supreme Court rejected this argument, observing that many American courts did not traditionally recognize intracompany disclosures as actionable publications for purposes of the tort of defamation nor have they necessarily recognized disclosures to printing vendors as actionable. Judge Brown commented that while dicta, the Supreme Court’s language appeared to be dispositive of Hunstein’s vendor theory.

Judge Brown also rejected the plaintiffs’ attempt to show concrete harm through the assertion that they suffered a material risk of future harm. He noted that TransUnion emphasizes that the mere risk of future harm standing alone cannot qualify as a concrete harm. Judge Brown concluded that the plaintiffs’ speculative claims of potential future harm through the release of information by the mailing vendors “cannot support plaintiffs’ claim of Article III standing.”

As further support for his conclusion that the plaintiffs lacked Article III standing, Judge Brown observed that the facts in the vendor cases were distinguishable from cases in which plaintiffs can plausibly demonstrate injury-in-fact. He noted that “[i]n contrast to the spurious information at issue in TransUnion, to wit: erroneously branding class members as terrorists, the cases at issue involve debts ranging from $482.28 to as little as $25.00” Commenting that “[i]t is one thing to falsely brand someone a drug trafficker; reporting that they failed to satisfy a modest obligation is quite another,” Judge Brown was unwilling to accept the plaintiffs’ attempt to analogize their alleged harms to a traditional common law tort, whether defamation or invasion of privacy.

Judge Brown “[f]or avoidance of doubt” dismissed the complaints in the six cases without prejudice subject to repleading within 14 days. He indicated that this period would allow the plaintiffs to amend their pleading to allege facts, if any, demonstrating actual damages, or in the alternative, other forms of relief they might be able to pursue. He also noted that the dismissal was without prejudice to refiling in state court if appropriate.

Hundreds of Hunstein “copycat” cases have been filed nationwide.

- Stefanie Jackman

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Federal District Court Concludes FCRA Does Not Require Consumer Reporting Agencies to Verify Legitimacy of End Users’ Businesses

A Florida federal district court dismissed a lawsuit filed by a borrower alleging FCRA violations by Clarity Services, Inc. (Clarity), the consumer reporting agency that provided the borrower’s consumer report to her lender. In dismissing the plaintiff’s FCRA claims, the district court rejected the plaintiff’s argument that the FCRA requires a consumer reporting agency, before providing a consumer report, to verify the legitimacy of the business of the report’s end user.

In Beckford v. Clarity Services, Inc., the plaintiff initially filed a lawsuit against her lender, various related companies and individuals, and Clarity alleging violations of the FCRA and Florida law. The plaintiff subsequently settled her claims against all of the defendants other than Clarity. The plaintiff thereafter filed an amended complaint against Clarity alleging that it violated: (1) FCRA Section 1681b by providing a consumer report without a permissible purpose, and (2) FCRA Section 1681a(b) by failing to maintain reasonable procedures to ensure consumer reports are furnished only for permissible purposes. Based on the allegations of the amended complaint, it was undisputed that the plaintiff applied for and received credit from the lender to which Clarity had provided the plaintiff’s consumer report.

As described by the court, the plaintiff contended that the lender was “an online loan shark” and “[t]he crux of [her] FCRA claims against Clarity is that Clarity failed to verify that [the lender] is a legitimate business.” The lender claimed it was entitled to sovereign immunity from state usury laws as an “arm of the tribe.” The plaintiff alleged having a good faith belief that the lender was actually operated by non-tribal investors who used a tribe to serve as a straw owner of the lender in order to claim the tribe’s sovereign immunity. The plaintiff alleged that Clarity’s records reflected an address for the lender that was for “a small residential apartment and not the home base of a large lending enterprise” and that Clarity did not have a phone number for the lender. Based on these two facts, the plaintiff contended that “Clarity is aiding and abetting the proliferation of illegal payday lenders.”

In her response to Clarity’s motion to dismiss, the plaintiff argued that despite her having obtained a loan from the lender, “Clarity had a duty to prevent companies, like [the lender], from obtaining [her] consumer report.” The court rejected this theory, stating simply that “[t]he FCRA does not impose such a duty.” It found that the plaintiff’s application and receipt of credit from the lender was “plainly a permissible purpose under the FCRA.” The court stated that because the plaintiff had “alleged facts that affirmatively demonstrate that Clarity did not violate Section 1681b, her claim should be dismissed with prejudice.”

The court also dismissed with prejudice the plaintiff’s reasonable procedures FCRA claim, stating that it was well-established that a reasonable procedures claim requires a plaintiff to first show that the consumer reporting agency provided a consumer report without a permissible purpose. According to the court, because the plaintiff’s own allegations defeated her permissible purpose claim, it was necessary to also dismiss her reasonable procedures claim.

- Kim Phan

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This Week’s Podcast: A Close Look at the U.S. Supreme Court’s Decision in TransUnion v. Ramirez

After reviewing the facts and holding in Ramirez, we discuss how the decision clarifies the concrete harm requirement established by SCOTUS’s Spokeo decision, Ramirez’s implications for class action and individual lawsuits alleging violations of federal consumer financial protection laws, and the potential impact on state court litigation.

Chris Willis, Co-Chair of Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by Dan McKenna, Practice Group Leader of the firm’s Consumer Financial Services Litigation Group.

Click here to listen to the podcast.

- Christopher J. Willis, Daniel JT McKenna & Alan S. Kaplinsky

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Senate Banking Committee to Hold July 29 Hearing on 36% National Rate Cap

On Thursday, July 29, the Senate Banking Committee held a hearing entitled, “Protecting Americans from Debt Traps by Extending the Military’s 36% Interest Rate Cap to Everyone.”

The scheduled witnesses for the first panel were Republican Congressman Glenn Grothman and Democratic Congressman Jesús G. “Chuy” García. The scheduled witness for the second panel were:

  • Holly Petraeus, Former Assistant Director for Servicemember Affairs, CFPB
  • Ashley Harrington, Federal Advocacy Director and Senior Counsel, Center for Responsible Lending
  • Richard Williams, President/CEO, Essential Federal Credit Union
  • Bill Himpler, President & CEO, American Financial Services Association
  • Professor Thomas W. Miller, Jr., Jack Lee Chair in Financial Institutions and Consumer Finance, Mississippi State University
  • David Pommerehn, General Counsel and Senior Vice President, Consumer Bankers Association.

In 2019, Congressmen García Grothman introduced the Veterans and Consumers Fair Credit Act, which would extended the Military Lending Act’s all-in 36% rate cap to most consumer credit transactions. Earlier in July, Democratic Senators Dick Durbin, Jeff Merkley, Richard Blumenthal, and Sheldon Whitehouse introduced the “Protecting Consumers from Unreasonable Credit Rates Act,” which would establish a 36% all-in rate cap for all open-end and closed-end consumer credit transactions, including payday loans, car title loans, overdraft loans, credit cards, car loans, mortgages, and refund anticipation loans.

In anticipation of the hearing, a group of seven banking trade groups that includes the American Bankers Association and the Consumer Bankers Association sent a letter to Senator Sherrod Brown, Chair of the Senate Banking Committee, and Senator Pat Toomey, the Committee’s Ranking Member, that urged the Senators to oppose pending fee and interest rate cap legislation. In the letter, the trade groups cautioned that the impact of a 36% all-in national rate cap “would extend far beyond payday lenders to the broader consumer credit market to cover affordable small dollar loans (including “accommodation” loans) that depository institutions are being encouraged to offer, credit cards, person loans, and overdraft lines of credit.” They pointed out that the result will be to reduce access to credit and force many consumers who currently rely on credit cards or personal loans “to turn elsewhere for short-term financing needs, including pawn shops, online lenders—or worse—loan sharks, unregulated online lenders, and the black market.” According to the trade groups, “[a] 36% rate cap, however calculated, will mean depository institutions will be unable to profitably offer affordable small dollar loans.” They also cautioned that a 36% all-in rate cap would negatively impact credit cards by resulting in the elimination or reduction of popular and valued credit card features such as cash back or other rewards and inhibiting innovative credit cards with non-credit features designed to attract underserved groups.

- Ronald K. Vaske

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Did You Know?

Connecticut Amends Mortgage Provisions Relating to MLO Temporary Authority, Shared Appreciation Agreements, and Change of Control

The Connecticut legislature recently amended its mortgage licensing statutes to address a mortgage loan originator’s (MLO) temporary authority to operate as a MLO while applying for a Connecticut MLO license, and the definitions of a “shared appreciation agreement” and a “change of control,” among other topics.

The new provisions relating to the temporary authority to operate as a MLO during transition periods is meant to conform to federal law. Regarding shared appreciation agreements, the amendment expressly includes a “shared appreciation agreement” within the definition of a “residential mortgage loan,” which will require the licensure of persons making or offering a shared appreciation agreement, in addition to complying with existing laws applicable to residential mortgage loans. With respect to a “change of control,” the term is now clarified to mean a change that causes a licensee’s majority ownership, voting rights, or control to be held by a different control person or group of control persons. Consequently, a change of control would not involve minor ownership changes.

These amendments will take effect on October 1, 2021.

Oregon Modifies MLO Licensing Education Requirements

The Oregon legislature recently enacted amendments to the mortgage loan originator (MLO) licensing provisions to add additional education requirements, including topics of implicit bias and racial bias. The change is intended to address research from the U.S. Census Bureau’s American Community Survey indicating disparities in homeownership rates and recommendations from the Joint Task Force on Addressing Racial Disparities in Home Ownership (established by the Oregon Legislative Assembly) to improve homeownership rates for communities of color in Oregon.

The amendments will take effect on January 1, 2022.

- Aileen Ng

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Looking Ahead

MBA’s Regulatory Compliance Conference

Washington, DC | September 12 - 14, 2021

Applied Compliance Track: LO Compensation

Speaker: Richard J. Andreano, Jr.

Breakout Session: Data Privacy and Security

Speaker: Kim Phan

Breakout Session: State Law Regulatory and Enforcement Trends

Speaker: Stacey L. Valerio

Breakout Sessions: State Licensing Challenges

Speaker: John D. Socknat

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