Mortgage Banking Update - December 2, 2021
In This Issue:
- DOJ, CFPB and HUD Officials Outline Priorities at Industry Fair Lending Conference
- This Week’s Podcast: CFPB Director Chopra’s Targeting of “Digital” or “Algorithmic” Redlining: What It Means for Providers of Technology and Consumer Credit
- Podcast: A Look at the Legal Issues Raised by Targeted Marketing
- Eleventh Circuit Orders En Banc Rehearing in Hunstein
- Eleventh Circuit Requests Briefing on Standing in Hunstein En Banc Rehearing
- CFPB, Federal Banking Agencies, and State Financial Regulators Announce End of Flexible Supervisory and Enforcement Approach to Mortgage Servicer Compliance
- CFPB Issues Request for Information Regarding Assessment of HMDA Rule
- New York Amends its Community Reinvestment Act to Cover Non-Bank Mortgage Lenders; New York DFS Issues Proposed Revisions to CRA Regulation to Require Collection of Data by Banks on Loan Applications From Minority- and Women-Owned Businesses
- New York Enacts Significant Changes Impacting Debt Collection Lawsuits
- NYDFS Proposes Amendments to Debt Collection Regulation
- CFPB Issues Guidance to Staff to Address Concerns About “Revolving Door” and “Special Treatment” of Former CFPB employees
- CFPB Files Seventh Status Report in Section 1071 Rulemaking Lawsuit
- CA DFPI Proposes Rule to Require Registration of Consumer Financial Services Providers
- Federal Banking Agencies Issue “Crypto Asset Roadmap” for 2022 Guidance; OCC Confirms Prior Interpretive Letters on Crypto (But Adds No-Objection Requirement)
- Did You Know?
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At an industry fair lending conference, officials from the U.S. Department of Justice (DOJ), the CFPB, and the U.S. Department of Housing and Urban Development (HUD) outlined fair lending priorities for their agencies. These represent the first remarks by these regulators following the DOJ’s announcement of its major new “Combatting Redlining Initiative” on October 22, 2021, and it was the topic of each of their presentations. Although the DOJ officials’ remarks largely reflected the news release concerning the new anti-redlining initiative, a few new revelations came to light related to both DOJ’s initiative and the CFPB’s general and fair lending priorities under its new Director Rohit Chopra.
DOJ. Keynote speaker Kristen Clarke, the new Assistant Attorney General (AAG) for the DOJ’s Civil Rights Division, explained the agency’s “Combatting Redlining Initiative” and partnership with other federal and state agencies. She stated that fair lending is “one of most significant issues of our time,” and that the Civil Rights Division is “compelled to tackle this issue [of redlining] head-on” because of the “widespread practice” in the lending industry and the fact that large homeownership disparities still exist in the U.S. along racial, ethnic, and national origin lines.
AAG Clarke explained that the DOJ’s new initiative is the “most aggressive and coordinated effort” to address redlining to date. She noted that the agency will work with the CFPB, HUD, prudential regulators, U.S. Attorneys’ offices, and state attorneys general to carry out its initiative using a “whole of government” approach to root out redlining practices on a broad geographic scale.
AAG Clarke further explained that DOJ plans to investigate lenders of all types and sizes for redlining practices, including non-depository institutions that now originate the majority of residential mortgages in the U.S, and noted that several investigations are already underway. She also discussed the list of factors used by the DOJ to determine whether a lender is engaged in redlining activities.
Furthermore, AAG Clarke dwelt on the recent Cadence Bank and Trustmark National Bank redlining settlements, stating that the significance of those settlements is not just about the dollar amount, but DOJ’s goal to repair “decades of discrimination.” She also noted that redlining settlements can ultimately benefit the health of institutions and their surrounding communities.
AAG Clarke further noted that DOJ seeks to work “cooperatively and collaboratively” with institutions to address the “deep-seated” redlining problem and wants to make a “positive and lasting impact” on the state of fair lending in the U.S. She also noted that the DOJ will continue to pursue investigations and enforcement actions when discrimination is detected in underwriting and pricing in other types of lending beyond mortgage lending, broadly including “all types of discrimination across the lending process and credit markets.”
In a separate panel, Jon Seward, who is Principal Deputy Chief of the Housing and Civil Enforcement Section, Civil Rights Division at DOJ, indicated that “in the not too distant future,” DOJ plans to announce an enforcement action against a non-depository institution. Although the CFPB filed a redlining lawsuit against Townstone Financial, Inc., a nonbank mortgage lender, in 2020, the DOJ previously has not pursued redlining allegations against nonbanks, so this will break new ground for that agency.
CFPB. Patrice Ficklin, Fair Lending Director of the CFPB, was also a keynote speaker. She began her remarks by noting the profound impact the COVID-19 pandemic has had on low- and moderate-income communities and people of color, and the CFPB’s goal to promote equitable and inclusive economic recovery for all consumers.
Director Ficklin proceeded to outline the Bureau’s three key priorities under new Director Chopra’s leadership:
- Stimulate greater competitive intensity in the consumer financial services market. She noted that greater competitive intensity would benefit individuals and families, citing the “dearth of competition” in the mortgage refinance market for individuals of color. In keeping with Director Chopra’s priorities honed during his recent tenure as an FTC commissioner, the CFPB will pay close attention to practices that may hamper competition by “dominant incumbents,” including those in Big Tech.
- Sharpened focus on repeat offenders that violate agency or court order. Director Ficklin noted that the Bureau has entered into a substantial number of consent orders and will closely monitor compliance with them. When needed, the CFPB will work closely with state and federal regulators to address non-compliance and fashion appropriate remedies.
- CFPB will look for ways to restore relationship banking in an era of Big Data. As artificial intelligence and machine learning credit models proliferate, there is less transparency into how credit decisions are made through “black boxes” today, and sometimes those practices can reinforce bias and discrimination. According to Director Ficklin, preserving relationship banking is “crucial to our nation’s resilience and recovery, particularly during times of stress.”
Director Ficklin then outlined the Bureau’s fair lending priorities:
- Redlining. She noted that redlining has been a top priority since the Bureau’s inception in 2011 and both the Trump and Biden administrations, and that the CFPB intends to take “fresh approaches,” citing the DOJ’s anti-redlining initiative. She also underscored Director Chopra’s remarks at the DOJ press conference announcing the initiative that the CFPB will focus on digital redlining going forward, including concerns about “black box” algorithms that may reinforce biases that already exist.
- Appraisal bias. She noted this was one of Director Chopra’s key priorities. She explained that home valuations have traditionally been based on human judgment and discretion, and additional objective controls are needed. The CFPB already has held meetings with industry representatives concerning the policies, procedures and controls currently in use to better understand valuation issues. The Bureau is also partnering with the FHFA and prudential agencies on a long-standing rulemaking for QC standards for automated valuation methods stemming from a requirement in the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which is currently in the pre-rule stage. An interagency taskforce established in June by President Biden is expected to issue a report with recommendations in the future.
- Special purpose credit programs (SPCPs). Also a top priority of Director Chopra, the CFPB seeks to promote usage of SPCPs to increase equitable access to credit. Ms. Ficklin noted the Bureau’s December 2020 guidance on SPCPs and encouraged lenders to reach out to CFPB to discuss plans to launch an SPCP.
- Small business lending. The CFPB issued a notice of proposed rulemaking that would implement Section 1071 of the Dodd-Frank Act in September 2021, and Ms. Ficklin encouraged public comments, which are due on January 6, 2022. She noted that the Bureau also launched a small business webpage on its website, including a “tell your story” portal for small business applicants to share their stories about applying for credit to help the CFPB better understand the small business lending market.
- Limited English Proficiency (LEP) consumers. She noted that LEP individuals face unique challenges in learning about and accessing consumer financial products and services because disclosures are generally not available in non-English languages. She briefly explained the CFPB’s LEP guidance issued in January 2021 that sought to provide better guidance to the industry on serving LEP consumers, and in September 2021, the Bureau’s publication of a blog post on how mortgage lenders can better serve LEP borrowers.
- Focus on unfairness and discrimination in examinations and supervision. Ms. Ficklin stressed that violations of law will not be tolerated, especially during the pandemic. In the CFPB’s quest to advance racial and economic equity, the Bureau has increased resources targeted toward small business lending. The CFPB will also pursue “other illegal practices outside of ECOA and HMDA,” with the goal of using its authority to narrow the racial wealth gap and ensure markets are clear, transparent and competitive. Again, Director Chopra’s focus on anticompetitive market behavior appears to be evident in her remarks.
HUD. David Enzel, who is the General Deputy Asst. Secretary for Fair Housing, at HUD, also expressed his concerns about redlining practices. He noted that HUD maintains a dedicated team in Washington focused on that topic and that several “significant issues” are currently underway at the agency. Mr. Enzel encouraged proactive use of “second look” review programs for both credit applications and low appraisals and close review of advertising practices for intentional and unintentional bias, especially those that are digital and custom-tailored to individuals, which can sometimes be based on race and ethnicity factors.
After reviewing federal regulators’ traditional theory of redlining, we discuss the types of underwriting practices that are likely targeted by Director Chopra’s recent comments expressing concern about “algorithmic redlining,” examine how the use of machine learning (ML) underwriting models incorporating alternative data can be more inclusive than traditional logistic regression models and result in more approvals for protected class members and “credit invisibles,” and offer our thoughts on actions that technology and credit providers should take in response to Director Chopra’s comments when developing and using ML models.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Chris Willis, Co-Chair of the firm’s Consumer Financial Services Group.
Click here to listen to the podcast.
Targeted advertising has become an important marketing tool for many providers of consumer financial services. After discussing the primary screening methods offered to providers for identifying consumers to receive their advertising, we look at claims made in private lawsuits involving the intersection of targeted marketing and anti-discrimination laws and how the courts have responded to such claims, the status of regulatory activity, whether advertisers using targeted marketing are vulnerable to redlining claims, and issues for providers to consider before engaging in targeted marketing.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Chris Willis, Co-Chair of the firm’s Consumer Financial Services Group.
Click here to listen to the podcast.
In a surprising turn of events, the U.S. Court of Appeals for the 11th Circuit issued an order sua sponte to rehear Hunstein v. Preferred Collection and Management Services, Inc. en banc. The sua sponte order was issued after an 11th Circuit judge requested a poll on whether the case should be reheard en banc and a majority of the active judges voted in favor of the rehearing. The order also expressly vacated the existing substitute opinion issued by the panel earlier this month, meaning that the opinion is no longer binding precedent in the 11th Circuit and should not be cited as having any precedential value within the 11th Circuit or beyond.
The order to rehear the case en banc follows the panel’s 2-1 decision, in which the panel issued a substitute opinion in response to the first effort to obtain rehearing by the defendant. In the substitute opinion, the majority affirmed its original April 2021 holding that the plaintiff had Article III standing and sufficiently pled a claim but also included analysis of the U.S. Supreme Court’s intervening decision in TransUnion v. Ramirez in the panel’s standing analysis. In dissent, Judge Tjoflat argued that the majority’s decision conferred standing too broadly in light of Ramirez and that Congress did not intend for a violation of FDCPA §1692c(b) to create standing in the absence of actual damages.
The next step will be for the 11th Circuit to state the specific issues on which it requests briefing and establish the timing for rehearing en banc. We are hopeful that the full court will agree to consider not just the standing issue on which the panel divided, but also the broader issue of whether any FDCPA claim can exist under the circumstances in light of the plain language of the FDCPA and other considerations, all of which were briefed extensively in prior amicus petitions supporting the defendant’s original rehearing effort earlier this year.
The U.S. Court of Appeals for the 11th Circuit ordered rehearing en banc in Hunstein v. Preferred Collection and Management Services, Inc. The 11th Circuit issued a memorandum indicating that for purposes of the en banc rehearing, the Court wants counsel to focus their briefs on the question: “Does Mr. Hunstein have Article III standing to bring this lawsuit?”
The Court also directed Preferred Collection and Mr. Hunstein to serve and file their briefs by, respectively, December 23, 2021 and January 18, 2022. An en banc reply brief must be filed by February 1, 2022 and oral argument will be conducted during the week of February 21, 2022.
Although the Court has asked the parties to focus their briefs on Mr. Hunstein’s Article III standing, the Court could still reach the question of whether Mr. Hunstein has stated a FDCPA claim and conclude that he has not. In the rehearing, the Court must decide whether to affirm or reverse the district court’s dismissal of the complaint for failing to state a claim. The district court concluded that Mr. Hunstein 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.”
If the 11th Circuit concludes that Mr. Hunstein has Article III standing, it could also decide to affirm the district court’s dismissal for failure to state a FDCPA claim. Alternatively, if the 11th Circuit rules that Mr. Hunstein does not have standing, it might still consider whether Mr. Hunstein has stated a FDCPA claim but any such discussion would be dicta.
In the latest demonstration that there’s a “new CFPB” as well as other new regulatory sheriffs in town, the CFPB, the federal banking agencies (OCC, FDIC, Federal Reserve Board, and NCUA), and state financial regulators issued a joint statement to announce that they will no longer provide “supervisory and enforcement flexibility” to mortgage servicers in meeting compliance requirements. Concurrently with the release of the joint statement, the CFPB also issued a report titled “Mortgage Servicing Efforts in Response to the COVID-19 Pandemic.”
In April 2020, the agencies issued a joint statement to announce that, in response to the COVID-19 pandemic, they would not take supervisory or enforcement action against mortgage servicers for failing to meet certain timing requirements in the Regulation X mortgage servicing rules as long as the servicers made a good faith effort to provide the required notices or disclosures and took related actions within a reasonable time period.
In the joint statement, the agencies announce that “the temporary flexibility described in the April 2020 Joint Statement no longer applies” and that they “will apply their respective supervisory and enforcement authorities, where appropriate, to address any noncompliance or violations of the Regulation X mortgage servicing rules that occur after [November 10, 2021].” The agencies explain that they believe the temporary flexibility is no longer needed “because servicers have had sufficient time to adjust their operations by, among other things, taking steps to work with consumers affected by the COVID-19 pandemic and developing more robust business continuity and remote work capabilities.”
The agencies conclude the joint statement by advising servicers that they “will consider, when appropriate, the specific impact of servicers’ challenges that arise due to the COVID-19 pandemic and take those issues in account when considering any supervisory and enforcement actions.” They further state that “[a]s part of their considerations, the agencies will factor in the time it takes to make operational adjustments in connection with the joint statement.” This suggests that the agencies might provide some leniency in the event of non-compliance. However, it is clear from the overall message delivered by the agencies that servicers who rely on this suggestion with the expectation that they will receive leniency for non-compliance do so at their peril.
CFPB mortgage servicing report. The report reviews actions taken by the CFPB to “respond to the evolving needs of homeowners and CFPB supervised entities,” including prioritized assessments of mortgage servicers and a targeted review of high-risk complaints related to COVID-19. forbearance. The CFPB states that it will continue targeted data collection and evaluation efforts to assess how individual servicers performed for consumers exiting forbearance.” As part of those evaluation efforts, the CFPB plans to use “complaints, supervisory information, and other available data.”
The CFPB issued a Request for Information (RFI) regarding an assessment of the significant amendments to the Home Mortgage Disclosure Act rules, known as Regulation C, adopted in October 2015 and subsequently revised in several additional rulemakings (the HMDA Rule). Responses to the RFI will be due 60 days after it is published in the Federal Register. It is clear from the title of the CFPB’s news release announcing the assessment, “CFPB Seeks Input on Detecting Discrimination in Mortgage Lending,” that the CFPB is treating this assessment as an initiative addressing fair lending.
Under the Dodd-Frank Act, the CFPB must conduct an assessment of each significant rule or order it has adopted under federal consumer financial law and publish a report of each assessment no later than five years after the effective date of the rule or order. The CFPB advises that while it determined that the HMDA Rule is not a significant rule for purposes of the Dodd-Frank Act, the CFPB “considers the HMDA Rule to be of sufficient importance to support the [CFPB] conducting a voluntary assessment.” The CFPB plans to issue a report of its assessment not later than January 1, 2023 (most of the October 2015 amendments became effective on January 1, 2018).
The CFPB advises that it intends to focus its evaluation on the following primary topic areas: (1) institutional coverage and transactional coverage, (2) data points, (3) benefits of the new data and disclosure requirement, and (4) operational and compliance costs. The CFPB’s public guidance that sets forth the balancing test used to determine whether and how HMDA data should be modified prior to its disclosure to the public to protect applicant and borrower privacy is outside the scope of the assessment. With regard to operational and compliance costs, the CFPB notes that it “will work from the methods and findings it published with the cost-benefit analysis in the 2015 HMDA Final Rule [and] will also use comments responding to this request for information to determine whether those methods and findings remain valid.”
The CFPB requests information on a number of specific issues, including:
- Data and other factual information that the CFPB may find useful in executing its assessment plan and answering related research questions, particularly research questions that may be difficult to address with the data currently available to the CFPB.
- The specific data points reported under the HMDA Rule that help meet the objectives of the Rule.
- Data and other factual information about the benefits and costs of the HMDA Rule for communities, public officials, reporters, mortgage industry participants, or other stakeholders, the effects of the rule on transparency in the mortgage market, and the utility, quality, and timeliness of HMDA data in meeting the Rule’s stated goals and objectives.
- Data and other factual information about the accuracy of estimates of annual ongoing compliance and operational costs for HMDA reporters, or the analytical approach used to estimate these costs, as delineated in the Small Business Review Panel Report issued by the panel that the Bureau convened and chaired in 2014 pursuant to the Small Business Regulatory Enforcement Fairness Act. In particular, the CFPB seeks comments:
- Related to the nature and magnitude of any operational challenges in complying with the HMDA Rule, and whether they are significantly different from those delineated in the published Report of the Small Business Review Panel.
- Delineating and describing the ongoing costs incurred in collecting and reporting information for the HMDA Rule, and whether they are significantly different from those delineated in the published Report of the Small Business Review Panel.
- Recommendations for modifying, expanding, or eliminating any aspects of the HMDA Rule, including but not limited to the institutional coverage and loan-volume thresholds, transactional coverage, and data points.
New York Amends its Community Reinvestment Act to Cover Non-Bank Mortgage Lenders; New York DFS Issues Proposed Revisions to CRA Regulation to Require Collection of Data by Banks on Loan Applications From Minority- and Women-Owned Businesses
Expansion of CRA coverage. On November 1, New York Governor Hochul signed into law amendments (S.5246-A/A.6247-A) to the New York Community Reinvestment Act (NYCRA) that expand the NYCRA’s coverage to non-depository mortgage lenders. The amendments are effective November 1, 2022. New York now joins a small group of states, including Illinois and Massachusetts, that apply CRA-type laws to non-depository mortgage lenders.
The amendments require the DFS to consider the performance record of a New York-licensed mortgage banker “in helping to meet the credit needs of its entire community, including low and moderate income neighborhoods…consistent with safe and sound operation” when taking action on an application for a change in control. The amendments allow DFS to issue regulations expanding the types of applications and notices for which it will consider such performance when taking action.
The amendments direct the DFS, in assessing a mortgage banker’s performance, to review all reports and documents filed by the mortgage banker. They also include a list of factors that DFS must consider when making such assessments. Most significantly, the amendments provide that an assessment of a mortgage banker’s performance can be the basis for DFS to deny an application. They also authorize DFS to issue regulations to implement the amendments, including establishing a minimum annual number of loans that a mortgage banker must originate to be subject to a NYCRA assessment.
Proposal Regarding Data Collection on Loan Applications From Minority- and Women-Owned Businesses. In 2019 and effective in 2020, the NYCRA was amended to require DFS to consider several aspects of a New York-chartered bank’s activities with respect to minority- and women-owned businesses in NYCRA performance evaluations. DFS must consider “the record of performance of the banking institution in helping to meet the credit needs of its entire community, including … minority- and women-owned businesses, consistent with safe and sound operation of the banking institution.” The factors DFS must consider in assessing a bank’s performance include its “participation, including investments, … in technical assistance programs for small businesses and minority- and women-owned businesses” and its “origination of … minority- and women-owned business loans within its community or the purchase of such loans originated in its community.”
Last month, DFS issued proposed revisions to its regulations implementing the NYCRA that would add a new section titled “Minority- and women-owned business loan data collection.” The new section sets forth the data that banks must compile and maintain regarding loan applications from minority- and women-owned businesses and make available to DFS upon request. It also includes (1) provisions restricting the access of loan underwriters or other bank officer or employee involved in making credit decisions to information provided by an applicant indicating whether or not it is a minority- or women-owned business, and (2) a new disclosure that banks must provide to business loan applicants. Comments on the proposal are due by January 3, 2022.
The CFPB is currently engaged in a rulemaking to implement Dodd-Frank Act Section 1071 which require financial institutions to collect and report certain data in connection with credit applications made by small businesses, including women- or minority-owned small businesses. Unlike the DFS’s proposal which would require banks to compile and maintain data about loan applications from all minority- and women-owned businesses regardless of their size, the CFPB’s proposed Section 1071 rule requires banks to collect and report data only regarding applications from women-owned and minority-owned businesses that are “small businesses.” The proposed DFS revisions, however, allow the DFS, at its discretion, to determine that a bank’s compliance with the CFPB’s final Section 1071 rule constitutes compliance with DFS’s data collection requirements for applications from minority- and women-owned businesses.
On November 8, 2021, New York Governor Hochul signed into law the “Consumer Credit Fairness Act” (S.153). The Act contains a series of amendments to the New York Civil Practice Law and Rules that significantly impact debt collection lawsuits filed in New York state courts by creditors or debt collectors.
The key amendments include:
- A three-year statute of limitations for most collection lawsuits arising out of a consumer credit transaction
- A prohibition on revival or extension of the limitations period based on a subsequent payment, written or oral affirmation, or other activity on the debt
- When a collection action against a consumer arising out of a consumer credit transaction is filed, a specified notice must be submitted to the court by the plaintiff for the court to mail to the consumer
- Documentation/information requirements for a collection action arising out of a consumer credit transaction, which include:
- The contract or other written instrument on which the lawsuit is based must be attached to the complaint (which for revolving accounts can be satisfied by the charge-off statement)
- If the plaintiff is not the original creditor, the complaint must include the date of assignment or sale of the debt to the plaintiff, the name of each previous owner of the account and the date of assignment to that owner, and the amount due at the time of sale or assignment by the original creditor
- When summary judgment is sought in a collection action against a consumer arising out of a consumer credit transaction where the consumer is not represented by an attorney, a specified notice must be submitted to the court by the plaintiff for the court to mail to the consumer
- When a default judgment is sought in a collection action arising out of a consumer credit transaction by a plaintiff who is not the original creditor, the application for default judgment must include (1) an affidavit by the original creditor “of the facts constituting the debt, the default in payment, the sale or assignment of the debt, and the amount due at the time of sale or assignment,” (2) for each subsequent assignment, an affidavit of sale of the debt by the debt seller, and (3) an affidavit of a witness of the plaintiff which includes a chain of title of the debt
With the exception of the prohibition on revival or extension of the statute of limitations which becomes effective on April 6, 2022, the other amendments described above become effective on May 6, 2022.
On October 29, the New York Department of Financial Services issued proposed amendments to 23 NYCRR 1, its regulation titled “Debt Collection by Third-Party Debt Collectors and Debt Buyers.” The proposed amendments would make significant changes to the sections of the current regulation dealing with initial disclosure requirements, statute of limitations disclosures, substantiation requirements, and telephone and electronic communications. They also would align the DFS regulation with several of the CFPB’s requirements in Regulation F. Regulation F is set to become effective on November 30, 2021.
Required initial disclosures by debt collectors
23 NYCRR 1 currently requires debt collectors to provide certain written information, within five days of the initial communication (unless the initial communication was in writing and included the notice). The proposed amendments revise the information about the debt that must be included in the initial disclosures. They require a debt collector to disclose:
- Name of the creditor to which the debt was originally owed or alleged to be owed
- Account number or a truncated version of such number
- Merchant brand, affinity brand, or facility name associated with the debt
- Name of the creditor to which the debt is currently owed
- Date of default
- Date of last payment
- For a debt not reduced to judgment, the applicable statute of limitations expressed in years
- Itemized accounting of the debt, including current amount due
Additionally, these amendments require a debt collector to send, either in the initial notice or within five days of it:
- Information about the debt
- A notice that the debt collector is prohibited from engaging in abusive, deceptive, and unfair debt collection efforts
- A notice that the consumer has the right to dispute the validity of the debt, including instructions on how to dispute
- A notice that some forms of income are protected from debt collection
Disclosures for debts for which the statute of limitations may be expired
Under the current regulation, a debt collector must provide specific disclosures to the consumer before it accepts payment when it knows or has reason to know that the statute of limitations for a debt may be expired. The proposed amendments require a debt collector to include the disclosures in all communications, including the initial disclosures, when it seeks to collect on a debt for which it has determined that the statute of limitations has expired. (The proposal would change the required disclosures to inform the consumer that the applicable statute of limitations “has expired” rather than that it “may be expired.”)
The proposed amendments would also add a prohibition on oral communications—telephone calls or other means—by a debt collector with a consumer regarding a debt for which the debt collector has determined that the applicable statute of limitations has expired unless the debt collector has directly received from the consumer “prior written and revocable consent” or has the express permission of a court of competent jurisdiction.
It should be noted that the disclosure regarding revival of the statute of limitations that is required by the proposed amendments may conflict with a recent amendment to the New York Civil Practice Law and Rules (S. 153) that was signed into law by Governor Hochul on November 8, 2021 and becomes effective on April 6, 2022.
S. 153 added a new section 2-14-i to the New York Civil Practice Law and Rules that provides:
An action arising out of a consumer credit transaction where a purchaser, borrower or debtor is a defendant must be commenced within three years, except as provided in Section Two Hundred Thirteen-A of this Article or Article 2 of the Uniform Commercial Code or Article 36-B of the General Business Law. Notwithstanding any other provision of law, any subsequent payment toward, written or oral affirmation of or other activity on the debt does not revive or extend the limitations period.” (emphasis added)
Among the specific disclosures that the proposed amendments would require a debt collector to provide to the consumer before it accepts payment when it knows or has reason to know that the statute of limitations for a debt may be expired is a disclosure that “if the consumer makes any payment on a debt for which the statute of limitations has expired or admits, affirms, acknowledges, or promises to pay such debt, the statute of limitations may restart.” The model disclosure notice in the proposed amendments includes the statement that:
It is against the law to sue to collect on this debt because the legal time limit (statute of limitations) for suing you to collect this debt has expired. It is a violation of the Fair Debt Collection Practices Act, 15 U.S.C. section 1692 et seq., to sue to collect on a debt for which the statute of limitations has expired. If a creditor does sue you to collect on this debt, you may be able to prevent the creditor from obtaining a judgment against you. To do so, you must tell the court that the statute of limitations has expired. However, if you make a payment on the debt, then your creditor or debt collector may be able to sue you in court to collect on the debt. (emphasis added)
Substantiation of consumer debts
Currently, 23 NYCRR 1 allows debt collectors 60 days to provide written substantiation of a charged-off debt to a consumer if the consumer disputes the validity of the debt in writing and requests substantiation documentation. The proposed amendments reduce this period to 30 days but would require the dispute to have been made in writing to trigger the debt collector’s obligation to provide written substantiation. The proposed amendments also add the requirement that a debt collector must provide substantiation by hard copy through the mail. If the consumer has consented to receive electronic communications from the debt collector, the debt collector would be required to provide substantiation both by mail and electronically. Debt collectors also currently must retain any requests for substantiation, as well as all documentation sent to the consumer, “until the debt is discharged, sold, or transferred.” The proposed amendments would require documentation to be retained for the longer of either seven years, or until the debt is discharged, sold, or transferred.
Communication by telephone or through electronic mail
The proposed amendments would add significant limits on both telephone and electronic communications. The proposed amendments add requirements that a debt collector must comply with to correspond with a consumer electronically to collect a debt. Such requirements include that the consumer must have voluntarily provided contact information for electronic communications (e.g., email address, a telephone number for text messages) and have given written revocable consent for electronic communications from the debt collector in reference to a specific debt.
With regard to telephone calls, the proposed amendments cap the number of calls a debt collector can make to a consumer absent the consumer’s prior written and revocable consent given directly to the debt collector. Specifically, the proposed amendments would allow a debt collector to make no more “than one telephone call and three attempted telephone calls per seven-day period per consumer.” (The one phone call cap can be exceeded in specified circumstances, including when a call is made in response to the consumer’s request to be contacted.) Because the proposed caps apply on a per consumer basis, they are stricter than those in Regulation F, which allow seven attempts in seven days per debt.
Comments on the pre-proposed amendments were due by November 8. The DFS will next publish the proposed amendments in the New York State Register, with any changes made based on comments received on the pre-proposal.
The CFPB last month issued guidance to its staff titled “Ethics Guidance for Engaging with Former Federal Employees.”
In an accompanying statement, Director Chopra indicated that the guidance was needed to protect the public interest from potential risks and misconduct associated with the “revolving door.” He described the “revolving door” (i.e. when an individual moves back and forth between government and private employment) as a phenomenon that allows former government employees to “market themselves to regulated entities, law firms, and lobbying organizations by touting their knowledge of the inner workings of a regulatory agency” and expressed concern “that some former employees may have a financial incentive to exploit confidential information to which they may have had access.”
Director Chopra warned that the guidance “will allow the CFPB to detect activity by former employees and other government agencies who may be violating existing ethics and confidential information disclosure laws and regulations” and that the CFPB will use information provided by CFPB employees about such potential violations “to make appropriate referrals to civil and criminal authorities” and, in the case of former government attorneys, to “make referrals to state licensing bodies and bar associations that may wish to consider disciplinary proceedings.”
The guidance advises CFPB employees not to give preferential treatment to former federal government employees or their new employers and to treat former employees “in the same manner as all other members of the public who have business pending before the Bureau.” However, in his statement, Director Chopra goes a step further, indicating that stricter scrutiny will apply to matters involving former CFPB employees. Director Chopra states that “[CFPB] alumni will not get special treatment. In fact, it will be just the opposite. We will be applying heightened scrutiny to matters and decisions where a party has employed or retained the services of a former employee….”
In addition to advising CFPB staff not to give preferential treatment to former CFPB employees, the guidance advises staff to:
- Protect supervisory, confidential, and non-public Bureau information by not sharing such information with another CFPB employee “as soon as [he or she] submits their paperwork to transition out of the Bureau.”
- Report if a former employee communicates or appears before the Bureau in connection with a specific-party matter that the employee worked on while employed by the government
- Report any suspected disclosure by a former employee of confidential or non-public Bureau information
- Report any contact by a former employee with the Bureau on behalf of any third party within the first year following the employee’s departure
- Report any “behind-the-scenes assistance” by a former Bureau attorney on a specific-party matter in which the attorney participated while at the Bureau
The CFPB has not indicated whether a specific ethics-related incident occurred that prompted the issuance of the guidance.
On November 22, 2021, the CFPB filed its seventh status report with the California federal district court hearing the lawsuit brought by the California Reinvestment Coalition, National Association for Latino Community Asset Builders, and two individual plaintiffs in 2019. The purpose of the suit was to force the Bureau to issue a proposal implementing the small business data requirements of Section 1071 of the Dodd-Frank Act of 2010 after years of delay. In the status filing, new CFPB Director Rohit Chopra, who was appointed to that role on October 12, 2021, was automatically substituted for Acting Director Dave Uejio as a defendant under the federal rules of civil procedure.
The status report reiterates the fact that the CFPB has met the deadlines to date under the Stipulated Settlement Agreement with the plaintiffs, including issuing the Small Business Regulatory Enforcement Fairness Act (SBREFA) outline on September 15, 2020; convening a SBREFA panel on October 15, 2020; and completing the SBREFA report on December 14, 2020. Most recently, the Bureau met the deadline for issuance of the Section 1071 notice of proposed rulemaking (Section 1071 NPRM), which was due on September 30, 2021, but published slightly earlier on September 1, 2021. The status report notes that comments on the Section 1071 NPRM are due by January 6, 2022.
Importantly, the status report indicates that after the Section 1071 NPRM rulemaking concludes, the CFPB will meet and confer with plaintiffs regarding an “appropriate deadline” for issuance of the final rule, consistent with the Stipulated Settlement Agreement.
The California Department of Financial Protection and Innovation (DFPI) is seeking comments on a proposed rulemaking under the California Consumer Financial Protection Law (CCFPL). The proposal would implement the authority that the CCFPL gives the DFPI to require companies that provide financial products and services to California consumers to register with the DFPI and to require registered companies “to generate and provide records to facilitate oversight of registrants and detect risks to California consumers.” Comments must be submitted by December 20, 2021.
The proposal would require businesses that provide the following financial products and services to register with the DFPI:
- Debt settlement
- Student debt relief
- Education financing
- Wage-based advances
With regard to education financing, there are no exceptions for open-end credit, loans secured by real property or a dwelling, or school payment plans or short term extensions of credit. The DFPI states in its >Invitation for Comments that the registration requirement would apply to providers of any form of credit where the credit’s purpose is to fund postsecondary education “regardless of whether the provider labels the credit a loan, retail installment contract, or income share agreement, and regardless of whether the credit recipient’s payment obligation is absolute, contingent, or fixed.”
The proposal prohibits a person, unless exempt, from offering or providing these products and services to a California resident without first registering with the DFPI. It provides that registering with the DFPI “does not constitute a determination that other laws, including other licensing laws under the commissioner’s jurisdiction, do not apply” and that “granting registration to an applicant does not constitute a determination that the applicant’s acts, practices, or business model complies with any law or regulation.”
The proposal sets forth registration application procedures and designates the Nationwide Multistate Licensing System & Registry to handle all applications, registrant filings, and fee payments on behalf of the DFPI. It also requires registrants to pay annual assessments and satisfy annual reporting requirements.
The Federal Reserve Board, FDIC, and OCC (collectively, the Agencies) issued on November 23 a short >Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (Joint Statement), which announced – without further concrete detail – that they had assembled a “crypto asset roadmap” in order to provide greater clarity in 2022 to banks on the permissibility of certain crypto-asset activities. Only the week before, the OCC’s Chief issued >Interpretive Letter #1179, which confirmed that a national bank or federal savings association could engage in certain cryptocurrency, distributed ledger, and stablecoin activities – consistent with prior OCC letters – so long as a bank shows that it has sufficient controls in place, and first obtains written notice of “non-objection” by its supervisory office. This post will discuss both publications.
There is great overlap between the bank activities referenced in the Joint Statement and Interpretive Letter #1179. The 2022 clarity promised by the “roadmap” presumably will supersede, once issued, Interpretive Letter #1179, which appears to function as a general stop-gap until the 2022 publications provide more detail regarding exactly how banks can attain compliance.
Federal banking regulators have been busy in this space. These pronouncements come closely on the heels of a Report on Stablecoins issued earlier in November by the Agencies and the U.S. President’s Working Group on Financial Markets, which delineated perceived risks associated with the increased use of stablecoins and highlighted three concerns: risks to rules governing anti-money laundering (AML) compliance, risks to market integrity, and general prudential risks.
- A “Crypto Asset Roadmap” Promising Future Clarity
In the Joint Statement, the Agencies state that they “recognize that the merging crypto-asset sector presents potential opportunities and risks for banking organizations, their customers, and the overall financial system.” Accordingly, “it is important that [the Agencies] provide coordinated and timely clarity where appropriate to promote safety and soundness, consumer protection, and compliance with applicable laws and regulations, including [AML] and illicit finance statute and rules.” The Joint Statement therefore provides a “crypto asset roadmap” — the five bullet points set forth below — regarding topics for which the Agencies “plan to provide greater clarity [throughout 2022] on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations[.]” The five “roadmap” topics are:
- Crypto-asset safekeeping and traditional custody services.
- Ancillary custody services.
- Facilitation of customer purchases and sales of crypto-assets.
- Issuance and distribution of stablecoins.
- Activities involving the holding of crypto-assets on balance sheet.
In other words: although the Joint Statement provides no concrete details, stay tuned for greater clarity throughout 2022 for banks regarding crypto-assets and related safety and soundness issues. In theory, this potential regulatory clarity sounds promising – but of course, the devil is in the details, and the final product will need to judged according to its actual utility. The Joint Statement also notes that the Agencies will evaluate bank capital and liquidity standards for crypto assets for activities involving U.S. banking organizations.
- OCC Interpretive Clarification
The OCC’s Interpretive Letter #1179 refers back to three prior OCC Interpretive Letters:
- OCC Interpretive Letter 1170, issued on July 22, 2020 and addressing whether banks may provide cryptocurrency custody services;
- OCC Interpretive Letter 1172, issued on September 21, 2020 and addressing whether banks may hold dollar deposits serving as reserves backing stablecoin in certain circumstances; and
- OCC Interpretive 1174, issued on January 4, 2021 and addressing (1) whether banks may act as nodes on an independent node verification network (e., distributed ledger) to verify customer payments, and (2) whether banks may engage in certain stablecoin activities to facilitate payment transactions on a distributed ledger.
All three of the above interpretive letters found that banks could perform the activity under consideration, if certain conditions were met. Distilled, Interpretive Letter #1179 confirms that the activities described in the prior interpretive letters are “legally permissible for a bank to engage in, provided the bank can demonstrate, to the satisfaction of its supervisory office, that it has controls in place to conduct the activity in a safe and sound manner.” Importantly, a national bank or federal savings association wishing to engage in any of the activities described above must notify in writing its supervisory regulator, and should not engage in such activities until it receives written notification of the supervisor’s “non-objection.” As always, the adequacy of the bank’s risk management systems will be critical to this determination. To obtain supervisory non-objection, a bank must demonstrate in writing that it understands any relevant compliance obligations, including under the Bank Secrecy Act, federal securities laws, the Commodity Exchange Act, and consumer protection laws. Once a bank has received supervisory non-objection, the OCC will review these activities as part of its ordinary supervisor process. It is unclear how fact regulators will act – or not – on requests for non-objection before the Agencies issue the clarity promised by “road map” sometime in 2022.
Interpretive Letter #1179 provides that banks already engaged in cryptocurrency, distributed ledger, or stablecoin activities as of the date of the letter do not need to obtain supervisory non-objection, assuming that they previously notified their supervisory offices and have adequate systems and controls in place to ensure that they are operating in a safe and sound manner.
Utah Amends Residential Mortgage Practices and Licensing Rules
The Utah Division of Real Estate recently amended its Residential Mortgage Practices and Licensing Rules to correct and clarify certain references in the rule, and to coordinate certain state requirements with national requirements to eliminate expenses to licensees for unnecessary and redundant criminal background checks and credit reports, among other items. Notably, the amendment would eliminate the need for some licensees to pay for a second set of fingerprints and a second credit report.
The provisions became effective on October 26, 2021.The publication of the proposed rule, which was later adopted, in the Utah State Bulletin (pages 4-13) is available here.