Mortgage Banking Update - October 28, 2021
In This Issue:
- Rohit Chopra Sworn in as CFPB Director
- Illinois Federal Court Rejects Plaintiffs’ Attempt to Avoid Federal Court Jurisdiction in Cases Alleging FDCPA Violations Based on Hunstein
- CFPB Announces Senior Leadership Changes
- CFPB Publishes Director Chopra’s Statement to Staff and Other Regulators
- CFPB Enters Into Second Settlement With Reverse Mortgage Provider
- No Further Supreme Court Review to be Sought by Seila Law
- CFPB Adds New Section on Information Technology to Supervision and Examination Manual
- Do You Have a Question for the CFPB?
- This Week’s Podcast: CFPB Enforcement Action Developments and Trends
- CFPB, Federal and State Bank and Credit Union Regulators Warn of Increased Supervisory Scrutiny in Joint Statement on Managing LIBOR Transition
- CFPB Releases Spanish Translation of Model Validation Notice
- CBA Issues White Paper Advocating CFPB’s use of Rulemaking and Guidance in Lieu of “Regulation by Enforcement”
- NYDFS Publishes Notice of Proposed Regulation on Consumer-Like Disclosures for Commercial Financing Transactions
- Did You Know?
- Looking Ahead
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On October 12, Rohit Chopra was sworn in as CFPB Director. According to media reports, now former Acting Director Dave Uejio will remain at the CFPB pending his confirmation as Assistant Secretary for Fair Housing and Equal Opportunity at HUD. Mr. Uejio’s nomination was received by the Senate without a recommendation from the Senate Banking Committee, which voted 12-12 along party lines. (Mr. Chopra’s nomination similarly went to the Senate without a Banking Committee recommendation.)
It has also been reported that Mr. Chopra has named Jan Singelmann as his Chief of Staff. Mr. Singelmann will return to the CFPB after serving as counsel to the Senate Banking Committee. He previously spent more than six years at the CFPB serving as an enforcement attorney.
Mr. Chopra’s swearing-in creates a vacancy at the FTC and means that pending confirmation of Alvaro Bedoya, President Biden’s nominee to fill Mr. Chopra’s seat as FTC Commissioner, Democrats will not hold a majority and the Commission will be divided 2-2 along party lines.
In two cases in which the plaintiffs alleged that the debt collector defendants violated the FDCPA by sharing information about their debts with third party vendors used to prepare collection letters, an Illinois federal district court rejected the plaintiffs’ attempts to have their cases remanded to state court based on a lack of Article III standing. The decisions are at variance with recent New York federal court decisions.
In making their FDCPA claims, the plaintiffs relied on the Eleventh 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 in Section 1692c(b) on third party communications. Originally filed in Illinois state court, the plaintiffs’ lawsuits were removed by the defendants to federal court. Both plaintiffs filed motions to remand their cases to state court based on their lack of Article III standing. In response, the debt collectors argued that the consumers had met the requirements for standing in federal court.
In Keller v. Northstar Location Services and Thomas v. Unifin, Inc., the debt collectors argued that the plaintiffs had alleged an intangible but concrete harm because their claims alleged that they suffered an invasion of privacy. In making this argument, the debt collectors also relied on Hunstein, in which the 11th Circuit concluded that the alleged violation of FDCPA Section 1692c(b) had a close relationship to the harm resulting from the common law tort of invasion of privacy, specifically the private disclosure of private facts. The 11th Circuit held that a violation of FDCPA Section 1692c(b) gives rise to a concrete injury-in-fact for Article III standing.
Based on Hunstein and Seventh Circuit precedent, the district court agreed with the debt collectors and concluded that the plaintiffs had Article III standing to bring their FDCPA claims. Accordingly, the district court denied both motions to remand.
In July 2021, a New York federal district court dismissed six class action Hunstein “copycat” cases for lack of Article III standing. In dismissing the cases, the district court concluded that the plaintiffs’ speculative claims of potential future harm through the release of information by the mailing vendors used by the debt collector defendants could not support Article III standing.
As expected, with Rohit Chopra having been sworn in on October 12 as CFPB Director, the Bureau announced senior leadership changes. The changes consist of the following:
- Zixta Q. Martinez will serve as Deputy Director, and in that role will oversee the Bureau’s Operations Division. Ms. Martinez joined the Bureau in 2011 to help lead the implementation team and has since served as Senior Advisor for Supervision, Enforcement and Fair Lending, Associate Director for External Affairs, and Assistant Director for the Office of Community Affairs.
- Karen Andre will serve as Associate Director for Consumer Education & External Affairs. Prior to joining the CFPB, Ms. Andre served in a number of government, campaign, and private sector roles. Most recently, Ms. Andre served as Special Assistant to the President for Economic Agency Personnel within the Executive Office of the President.
- Jan Singelmann will serve as Chief of Staff. Mr. Singelmann previously served as Senior Litigation Counsel in the CFPB’s Office of Enforcement. Most recently, Mr. Singelmann served as Counsel for Senate Banking, Housing, and Urban Affairs Committee Chairman Senator Sherrod Brown.
- Erie Meyer will serve as Chief Technologist. Ms. Meyer served on the implementation team that launched the CFPB, and became a founding team member of the Bureau’s Office of Technology and Innovation. Most recently, Ms. Meyer served as Senior Advisor to FTC Chair Khan for Policy Planning and Chief Technologist for the Federal Trade Commission, and as then-FTC Commissioner Chopra’s Technology Advisor.
The CFPB published the statement that Director Chopra sent to CFPB staff and other financial regulators following his swearing-in on October 12. The statement can be found here.
The CFPB simultaneously has filed a lawsuit against American Advisors Group (AAG) in a California federal district court and a proposed stipulated final judgment and order to settle the lawsuit. The lawsuit alleged that AAG inflated estimated home values in marketing its reverse mortgage product and made false representations about AAG’s effort to ensure home value information was reliable.
In 2016, the Bureau entered into a consent order with AAG to settle claims that AAG engaged in deceptive advertising in violation of the Mortgage Acts and Practices-Advertising Rule (Regulation N) and the Consumer Financial Protection Act. In addition to requiring AAG to pay a civil money penalty of $400,000, the consent order contained a provision prohibiting AAG from violating the CFPA for five years, or until December 2021.
In its new complaint, the CFPB claimed that AAG’s alleged use of inflated home values and false representations about its efforts to ensure home value information is reliable constituted deceptive acts or practices in violation of the CFPA. It also alleged that by engaging in such deceptive acts or practices, AAG violated the consent order. The CFPB claimed that by violating the consent order, AAG violated federal consumer financial law because the consent order, as an order prescribed by the Bureau, constitutes a federal consumer financial law.
The proposed stipulated final judgment and order requires AAG to pay a $1.1 million civil money penalty and $173,400 in consumer redress to consumers who received mailers from AAG with estimated home values, paid for and received appraisals with property values lower that AAG’s estimates, and decided not to proceed in obtaining a reverse mortgage from AAG. It also prohibits AAG from engaging in deceptive practices generally and, in connection with marketing its consumer financial products, it prohibits AAG from misrepresenting any fact material to consumers, including, but not limited to, home values. Additionally, AAG must submit a compliance plan to the CFPB and include links to specific CFPB materials about reverse mortgages in its direct mail solicitations and in welcome communications to borrowers with newly-originated reverse mortgages.
Seila Law has sent a letter advising the Ninth Circuit that it will not seek further review from the U.S. Supreme Court.
After the Supreme Court ruled that the CFPB’s structure was unconstitutional and remanded the case for further consideration, a unanimous Ninth Circuit panel ruled that the civil investigative demand (CID) issued to Seila Law was validly ratified by former Director Kraninger and affirmed the district court’s decision granting the CFPB’s petition to enforce the CID.
Following a sua sponte request from a Ninth Circuit judge for a vote on whether to rehear the case en banc, a majority of the non-recused Ninth Circuit active judges voted against en banc reconsideration and rehearing en banc was denied. However, four judges joined in an opinion dissenting from the denial. Seila Law then filed a motion for a stay of the mandate pending its filing of a petition for a writ of certiorari in the Supreme Court. Subsequently, the three-judge panel that ruled former Director Kraninger had validly ratified the CID granted Seila Law’s motion for a stay of the mandate.
While Seila Law’s decision not to file a certiorari petition presumably means that it no longer plans to challenge the CFPB’s authority to issue the CID, it is possible Seila Law may seek to challenge the CID on other grounds.
The CFPB has added a new section to its Supervision and Examination Manual titled “Compliance Management Review-Information Technology.” The new section supplements the existing section on Compliance Management Review to provide examination procedures to be used by CFPB examiners to assess information technology (IT) and IT controls as part of a Compliance Management System (CMS) review.
In the introduction to the new section, the CFPB recognizes that IT used by institutions can impact their compliance with federal consumer financial laws. Accordingly, in conducting an overall CMS assessment, the CFPB may evaluate an institution’s IT as it relates to compliance. It may also evaluate the technology controls of an institution and its service providers. This follows from the general principle that the Bureau’s supervisory expectations with respect to an institution’s compliance program extends to its service provider relationships.
The new section sets forth IT-specific procedures for examiners to use in assessing:
- Board and management oversight related to IT
- A supervised entity’s compliance program related to IT, specifically IT policies and procedures, IT training, IT monitoring and/or audit, and IT-related consumer complaint response
- A supervised entity’s oversight of service providers that support IT functions
We want to make our blog readers aware (or remind those who already know) that the CFPB will provide informal staff guidance on its regulations in response to specific questions that are submitted through its website portal.
The Bureau indicates that a company that submits a question can expect to hear back from the Bureau in 10 to 15 business days and that, if the Bureau needs more time to answer a question or cannot answer a question, it will let the company know. The Bureau also cautions that its responses are not official interpretations and are not a substitute for formal legal counsel or other compliance advice.
CFPB enforcement activity has already ramped up and the pace is expected to increase with Director Chopra now at the helm. We look at the areas expected to be the focus of intensified enforcement activity, such as military lending, fair lending, and treatment of LEP consumers, and new areas under consideration by CFPB enforcement staff, such as machine learning models, use of alternative data, and fair lending related to servicing and loss mitigation (particularly in light of the end of pandemic-related forbearances). Other issues discussed include the CFPB’s use of aiding and abetting liability to reach service providers and the implications of a recent Seventh Circuit decision on judicial relief available to the CFPB.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Chris Willis, Co-Chair of Ballard Spahr’s Consumer Financial Services Group, James Kim, a partner in the Group, Sarah Reise, Of Counsel in the Group, and Sarah Pruett, an associate in the Group.
Click here to listen to the podcast.
The CFPB, Federal Reserve Board, FDIC NCUA, OCC, in conjunction with the state bank and state credit union regulators, jointly issued a statement on managing the transition away from LIBOR (Joint Statement).
In 2017, the United Kingdom’s Financial Conduct Authority (FCA), the regulator that oversees the panel of banks on whose submissions LIBOR is based, announced that it would discontinue LIBOR sometime after 2021. That announcement was followed by a series of actions by federal regulators in anticipation of the discontinuation, including the issuance of a statement in July 2020 by the Federal Financial Institutions Examination Council that highlighted the financial, legal, consumer protection, and operational risks that will result from LIBOR’s discontinuation.
The Joint Statement indicates that in March 2021, the FCA announced that the one-week and two-month U.S. Dollar (USD) LIBOR settings will no longer be published after December 31, 2021, but the publication of overnight and one, three-, six-, and 12-month USD LIBOR settings will be extended through June 30, 2023. The Joint Statement advises that this extension “is not an indication that any of the extended USD LIBOR rates will be subsequently published after June 30, 2023.”
The Joint Statement emphasizes the agencies’ expectation that supervised institutions with LIBOR exposure continue to progress toward an orderly transition away from LIBOR and, most significantly, warns that “[s]upervisory focus and review will continue to increase as the LIBOR cessation date approaches.” It provides the following clarifications regarding new LIBOR contracts, considerations when assessing the appropriateness of alternative reference rates, and expectations for fallback language:
- New LIBOR contracts. The agencies view entering into new contracts, including derivatives, that use LIBOR as a reference rate after December 31, 2021 as actions that would create safety and soundness risks. The Joint Statement clarifies that for this purpose, a new contract would include an agreement that (1) creates additional LIBOR exposure for a supervised institution, or (2) extends the term of an existing LIBOR contract. A draw on an existing agreement that is legally enforceable would not be viewed as a new contract. Contracts entered into on or before December 31, 2021 should either use a reference rate other than LIBOR or have fallback language providing for the use of “a strong and clearly defined alternative reference rate after LIBOR’s discontinuation.”
- Appropriateness of alternative reference rates. Safe and sound practices include conducting due diligence to ensure that alternative rate selections are appropriate for a supervised institution’s products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities. Due diligence includes obtaining an understanding how a reference rate is constructed and identifying any fragilities associated with the rate and the markets underlying it.
- Fallback language. Supervised institutions should identify all contracts that reference LIBOR, lack adequate fallback language, and will mature after the relevant reference rate ceases. Supervised institutions, going forward, are encouraged to include fallback language in new or updated contracts that provides for “a strong and clearly defined fallback rate when the initial reference rate is discontinued.”
The Joint Statement also encourages supervised institutions to develop and implement a transition plan for communicating with consumers, clients, and counterparties, and to ensure that their systems and operational capabilities will be ready to transition to a replacement reference rate after LIBOR’s discontinuation.
The CFPB has released a Spanish translation of the model-English language validation notice set forth in Appendix B of Regulation F.
The final debt collection rule allows a debt collector to send a validation that is completely and accurately translated into any language if the debt collector either (1) sends an English-language version in the same communication, or (2) previously provided the consumer with an English-language version in a prior communication.
The CFPB advises that the translated notice is a “complete and accurate” Spanish translation of the model English-language validation notice and that a debt collector that uses the translated notice and also satisfies the requirement to provide an English-language version will have a safe harbor for the rule’s requirement that any translation be complete and accurate.
The Consumer Bankers Association has released a new white paper, “The Case for Regulation Through Rulemaking & Guidance,” that advocates for the CFPB to use rulemaking and informal written guidance in lieu of attempting to create new industry regulatory standards through enforcement. Attorneys from Ballard Spahr’s Consumer Financial Services Group assisted CBA in preparing the white paper.
The white paper forcefully makes the case for why rulemaking and informal written guidance are more effective tools than enforcement for the Bureau to use to create new standards and expectations for industry. Key arguments made by CBA include:
- Consent orders do not clearly communicate the Bureau’s regulatory expectations to industry for reasons that include uncertainty as to whether a consent order’s provisions are specific to the facts of an enforcement target’s conduct and that they are heavily negotiated. As a result, consent orders often create industry confusion because industry members are forced to guess which parts have general applicability and which are target-specific.
- By attempting to change long-standing regulatory interpretations through litigating enforcement actions, the Bureau runs the risk that it will lose control of the message absorbed by industry or will fail to establish a standard. As an example, the CFPB ultimately failed to modify HUD’s controlling interpretation of a RESPA issue through its enforcement action against PHH Corporation and the litigation caused unnecessary disruption to industry practice.
- The Bureau’s attempt to establish a new regulatory standard for the automobile finance industry through enforcement actions challenging dealer participation practices created an uneven playing field among competitors and also ultimately failed to change industry practice.
- Rulemaking and informal written guidance can address general industry practices and variations and make clear how the Bureau will apply the law to those practices. As a result, they can lead to quicker and wider change than enforcement because industry participants have less room for uncertainty about the Bureau’s expectations. Also, rulemaking allows the Bureau to begin shaping industry behavior very early in the rulemaking process through an advance notice of proposed rulemaking, a notice of proposed rulemaking, a SBREFA outline, and other tools such as requests for information.
- Informal written guidance can be used to provide transparency to the entire market regarding best practices, even it does not carry the force of law. Notice and comment rulemaking, however, should be the preferred course of action when new standards are being set, or industry-wide conduct is at issue, because it provides the greatest amount of information to the Bureau and the greatest opportunity for all stakeholders—including consumers—to provide input.
- Many examples exist of clear and effective Bureau rulemaking and written informal guidance, namely the Qualified Mortgage Rule, the TILA/RESPA Integrated Disclosure Rule, the Remittance Rule, Supervisory Highlights, and the statement on providing financial products and services to LEP consumers.
On October 20, 2021, the New York Department of Financial Services published a notice in the New York State Register announcing that it has issued a proposed regulation to implement S 5470–B, which requires consumer-like disclosures for “commercial financing” transactions of $2.5 million or less. Comments on the proposal must be submitted by December 19, 2021.
S 5740-B becomes effective on January 1, 2022. In September 2021, DFS published a draft text of the regulation on its website to solicit comment from small businesses that might be affected. DFS received 8 comments and made several changes in response to those comments. Most significantly, DFS modified the draft text to provide that the compliance date for the final regulation will be six months after the date that a notice of adoption is published in the NYS Register. (It should be noted, however, that while S 5740-B requires disclosures to be provided “according to formatting prescribed by” DFS and authorizes DFS to promulgate implementing regulations, it does not delay the effective date until regulations are adopted.)
Montana Updates Mortgage Licensing Renewal Fees
The Montana Department of Administration amended its provisions relating to licensing renewal fees for mortgage lenders, mortgage brokers, mortgage loan originators, and mortgage servicers. The fees are reduced because, according to the Montana Division of Banking and Financial Institutions, there has been a dramatic growth in the number of mortgage licensees due to the onset of the pandemic, which has allowed individuals to work remotely and which has generated more revenue for the Division than its expenditures. The Division believes it can adequately fulfill its mission with the reduction in licensing fees.
These provisions are effective immediately.
Reminder for MLOs to Complete Annual Continuing Education for 2021
The SAFE Act requires state-licensed mortgage loan originators (MLOs) to complete a minimum of eight hours of NMLS-approved continuing education annually, depending on the state requirements. The NMLS Resource Center contains information on how to review the education records. The state-specific education charts provides information on early deadlines and other state-specific requirements.
November 15, 2021 2:00 PM EST
Speaker: Richard J. Andreano, Jr.
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