Legal Alert

Mortgage Banking Update - October 27, 2022

October 27, 2022

In This Issue:

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A New Dark Cloud Descends: Fifth Circuit Panel Rules That CFPB Funding Mechanism Is Unconstitutional

With the dark cloud over the CFPB that was the constitutional challenge to the for-cause limit on removal of its Director having mostly lifted, a new and even darker cloud has descended in the form of another constitutional challenge.  A unanimous three-judge panel of the U.S. Court of Appeals for the Fifth Circuit ruled that the Consumer Financial Protection Bureau’s funding mechanism violates the U.S. Constitution’s Appropriations Clause and the separation of powers principles on which it is based. Pursuant to the Dodd-Frank Act, the CFPB receives its funding through requests made by the CFPB Director to the Federal Reserve, subject to a cap equal to 12 percent of the Federal Reserve’s budget, rather than through the Congressional appropriations process.

The ruling was issued in Community Financial Services Association of America, Limited v. Consumer Financial Protection Bureau, a lawsuit brought by the CFSA and another trade group challenging the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (Rule). (Under former Director Kraninger, the CFPB rescinded the Rule’s ability to repay provisions but ratified its payment provisions.) The district court granted summary judgment for the CFPB, rejecting all of the trade groups’ claims, including their arguments that the Consumer Financial Protection Act’s restriction on the CFPB Director’s removal (which the U.S. Supreme Court ruled was unconstitutional in Seila Law) rendered the Rule void ab initio and that the Rule was invalid because the CFPB’s funding mechanism violates the Appropriations Clause.

Prior to oral argument in the trade groups’ Fifth Circuit appeal, the en banc Fifth Circuit ruled in CFPB v.  All American Check Cashing that the CFPB’s enforcement action against All American could proceed despite the removal provision’s unconstitutionality at the time the enforcement action was filed.  The en banc Fifth Circuit did not reach All American’s alternative argument that the CFPB’s funding mechanism contravened the Constitution’s separation of powers and instead left that issue open for the district court to consider on remand. However, in a concurring opinion in which four other Fifth Circuit judges joined, Judge Edith Jones agreed with All American’s argument that the CFPB’s funding mechanism was unconstitutional and concluded that the proper remedy was for the enforcement action to be dismissed. The trade groups submitted the concurring opinion as supplemental authority to the Fifth Circuit panel hearing their appeal and argued that the panel should adopt the reasoning of the concurring opinion and invalidate the Rule.

The Fifth Circuit panel first rejected the trade groups’ arguments that the Rule’s payment provisions were invalid because (1) they were promulgated by a CFPB Director who was unconstitutionally insulated from removal by the President, (2) they were promulgated in violation of the Administrative Procedure Act because the Rule exceeded the Bureau’s UDAAP authority and was arbitrary and capricious, and (3) the CFPB’s rulemaking authority represents an unconstitutional delegation of legislative power to the CFPB by Congress because there is no intelligible principle behind the CFPB’s broad rulemaking authority.

Turning to the trade groups’ Appropriations Clause argument, the Fifth Circuit panel first referenced the “magisterial separate opinion” written by Judge Jones in All American and announced that they reached the same conclusion as Judge Jones “that the Bureau’s funding mechanism contravenes the Constitution’s separation of powers.” Based on its review of the Appropriation Clause’s history, the panel established the critical role that the Clause is intended to play in the separation of powers by ensuring Congress’s exclusive power over the federal purse. With that backdrop, the panel examined the CFPB’s funding mechanism. Observing that the CFPB receives its funding directly from the Federal Reserve which itself is funded outside of the appropriations process, the panel stated:

So Congress did not merely cede direct control over the Bureau’s budget by insulating it from annual or other time limited appropriations. It also ceded indirect control by providing that the Bureau’s self-determined funding be drawn from a source that is itself outside the appropriations process–a double insulation from Congress’s purse strings that is ‘unprecedented’ across the government….Whatever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it.

The panel rejected the CFPB’s argument that its funding mechanism satisfied the Appropriations Clause because that mechanism was created by Congress and could be altered by Congress. According to the panel, a law alone did not satisfy the Appropriation Clause’s command that “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by law.” In the panel’s view, to satisfy the Clause, “an appropriation is required.”

Having concluded that the CFPB’s funding mechanism “cannot be reconciled with the Appropriations Clause and the clause’s underpinning, the constitutional separation of powers,” the panel turned to the question of remedy. The panel drew a distinction between the CFPB’s power to take an action and having the lawful money necessary to take that action. Based on the Supreme Court’s decision in Collins (which held that the restriction on the FHFA Director’s removal was unconstitutional), the panel found that because the violation did not remove the CFPB’s power to promulgate the Rule, the trade groups had to show harm resulting from the Appropriations Clause violation. However, it considered “making that showing [to be] straightforward in this case” because without the unconstitutional funding, the CFPB “lacked any other means to promulgate the rule.” According to the panel, the trade groups “were thus harmed by the Bureau’s improper use of unappropriated funds to engage in the rulemaking at issue.”

The panel reversed the district court’s grant of summary judgment in favor of the Bureau on the Appropriations Clause issue, and vacated the Rule “as the product of the Bureau’s unconstitutional funding scheme.” 

Given the decision’s enormous potential implications, we expect the CFPB to seek to overturn the ruling by either petitioning the Fifth Circuit for a rehearing en banc or proceeding directly to the Supreme Court with a certiorari petition. The CFPB would appear to face daunting odds in obtaining a rehearing en banc.  For a petition for rehearing en banc to be granted, a majority of the active Fifth Circuit judges must vote in favor of a rehearing. The Fifth Circuit currently has 16 active judges. (There is one vacancy and President Biden’s nominee to fill the vacancy is awaiting a confirmation vote in the Senate.) Of the 16 active judges, 12 are nominees of Republican Presidents (including five nominees of former President Trump). In addition to the three Republican-appointed active judges on the panel who ruled for the trade groups, four other Republican-appointed active judges have indicated that they agree that the CFPB’s funding mechanism is unconstitutional by joining in the concurrence in All American.  Assuming these seven active judges would vote against a rehearing en banc, a rehearing en banc could only be granted if nine of the remaining active judges were to vote in favor of a rehearing.  Since only four of the nine remaining judges are Democratic appointees, even assuming all four Democratic nominees were to vote in favor of a rehearing, a rehearing en banc would require all five Republican nominees to vote in favor of a rehearing.  Assuming the CFPB engages in a similar “head counting,” it might decide not to seek a rehearing en banc and instead file a certiorari petition with the Supreme Court and ask the Fifth Circuit to stay its mandate while the petition is pending.

Perhaps foremost among the decision’s enormous potential implications is its potential impact on all rules and guidance that the CFPB has issued as well as on any other actions the CFPB has taken based on its UDAAP or other authority, both ultimately if the decision becomes final in its present form and during the pendency of the rehearing/certiorari petition process. Those actions include existing enforcement orders, particularly ones with ongoing reporting and related requirements. At present, the Fifth Circuit’s decision is only binding on federal district courts in Texas, Louisiana, and Mississippi. However, because it is an appellate court ruling, it might be given weight by district courts outside of the Fifth Circuit considering challenges to CFPB enforcement actions and other CFPB activity based on an alleged Appropriations Clause violation. 

The decision, if it becomes final in its present form, would appear to mean that for the CFPB to survive, it will have to become subject to the Congressional appropriations process. Such a change would carry vast political implications that are likely to impact how the CFPB approaches its mission.  

Beyond its potential implications for the CFPB, the decision also has potential implications for other federal agencies that are funded outside of the Congressional appropriations process. In addition to the Federal Reserve, the OCC, FDIC, NCUA, and FHFA are not funded through appropriations. While the panel observed that “[t]he Bureau’s perpetual self-directed, double-insulated funding structure goes a significant step further than that enjoyed by the other agencies” and that none of these agencies have enforcement or regulatory authority “remotely comparable” to that of the CFPB, the panel did not provide clear guidance on what “the line between a constitutionally and unconstitutionally funded agency may be.” Thus, the decision creates the potential for these other agencies to face Appropriations Clause challenges to actions they take.

Alan S. KaplinskyMichael Gordon & John L. Culhane, Jr.

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Defendants in Three CFPB Enforcement Actions Seek Dismissal Based on Fifth Circuit Decision Holding CFPB’s Funding Mechanism Is Unconstitutional

Although it has not yet been a week since a Fifth Circuit panel issued its decision holding that the CFPB’s funding mechanism is unconstitutional, the defendants in three CFPB enforcement matters are already attempting to use the decision as grounds for dismissal of the CFPB actions.  

The Fifth Circuit’s decision in Community Financial Services Association v. CFPB would only be binding on federal district courts in in Texas, Louisiana, and Mississippi if it becomes final. Nevertheless, one of the cases in which the defendants have filed the decision as supplemental authority is pending in an Illinois federal district court and the other case is pending in a Utah federal district court. The Illinois case is CFPB v. TransUnion, in which the CFPB alleges that TransUnion violated a prior consent order with the CFPB entered into in 2017. In its Notice of Supplemental Authority, TransUnion argues that the CFSA decision establishes that the CFPB’s enforcement action must be dismissed because the consent order is invalid as the CFPB “used unappropriated funds to negotiate and prepare it.” TransUnion also argues that the CFPB “may not expend unappropriated funds prosecuting this suit.”

The Utah case is CFPB v. Progrexion Marketing, Inc., in which the CFPB alleges that the methods used by the defendants to market credit repair services violated the Telemarketing Sales Rule and the Consumer Financial Protection Act. The defendants had raised the Appropriations Clause issue in their motion to dismiss. In their Notice of Supplemental Authority, the defendants argue that the Fifth Circuit decision “vitiates the Bureau’s case here” and seek leave to reopen briefing on the Appropriations Clause issue.

The third case in which the defendants are attempting to use the Fifth Circuit decision as grounds for dismissal is CFPB v Nationwide Biweekly Administration, which is pending before the Ninth Circuit. In that case, a California district court imposed a $7.9 million civil penalty against the defendants for allegedly misleading marketing practices but did not award the nearly $74 million in restitution sought by the CFPB. (The CFPB is seeking in the appeal to have the district court’s denial of restitution reversed.) In their Notice of Supplemental Authority filed with the Ninth Circuit, the defendants argue that based on the Fifth Circuit’s decision, the Ninth Circuit should reverse the district court’s civil penalty award and dismiss the CFPB’s enforcement action.

We expect to see more similar filings by defendants in CFPB enforcement actions in the weeks to come.  We also expect to see the targets of ongoing CFPB investigations attempt to use the Fifth Circuit’s decision to block such investigations from continuing.

Michael Gordon & Michael R. Guerrero

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Justice Department Announces Settlement to Resolve Lending Discrimination Claims Against Evolve Bank and Trust

On September 29, 2022, the Justice Department announced a proposed consent order with Evolve Bank and Trust to resolve allegations of lending discrimination on the basis of race, sex, and national origin in the pricing of its residential mortgage loans from at least 2014 through 2019.

Headquartered in Memphis, Tennessee, Evolve Bank maintains mortgage lending offices and provides mortgage lending services in 15 states. Pursuant to the settlement, Evolve Bank must establish a settlement fund of $1.3 million to compensate affected borrowers, and must also pay a $50,000 civil penalty. By way of background, after opening an investigation, the Justice Department filed a complaint alleging violations of the Fair Housing Act and the Equal Credit Opportunity Act by Evolve Bank. The Justice Department alleged that Evolve Bank’s loan pricing resulted in Black, Hispanic and female borrowers paying more in their “discretionary pricing” components of home loans than White or male borrowers for reasons unrelated to their creditworthiness. This “discretionary pricing” component allegedly allowed Evolve Bank’s loan officers to set artificially high interest rates for reasons having nothing to do with the borrower’s credit qualifications or loan characteristics and then to offer discounts without any requirement for a loan officer to provide or document a justification.

The proposed consent order requires Evolve Bank, for a period of four years, to maintain policies that reduce loan officer discretion, employ a fair lending officer who will work in close consultation with the bank’s leadership, and provide fair lending training to its personnel.

The Department of Justice consent order with Evolve is just the latest of a series of consent orders that the CFPB and/or DOJ have entered into this year with banks and non-banks involving alleged discrimination in violation of the Fair Housing Act and/or Equal Credit Opportunity Act. As is typically the case, the DOJ had no evidence of direct discrimination against members of a protected class and relied instead on the disparate impact theory in alleging violations of these statutes. The major takeaway from recent matters is that redlining and the use of discretionary pricing are likely to continue to be matters that draw the attention of the DOJ and CFPB.

- Erik L. Johnson

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Want To Save Money and Avoid Annoying Judges? Read the World’s First Opinion Evaluating Regulation F (Also: Read Regulation F)

It’s official! We have our first-ever federal court opinion evaluating the requirements of Regulation F!  Okay, maybe “evaluating” isn’t the right word. “Reading Regulation F out loud” is more like it.

  • The Question: Does Regulation F require debt collectors to use the CFPB’s model validation notice (MVN) to comply with the FDCPA?
  • The Court’s Answer: “[I]t clearly does not.”

The court explained:

The CFPB provides a model form along with Regulation F. See id. § 1006.34(d)(2). Use of the model form is a safe harbor; if used, a debt collector complies with the information and form requirements of Regulation F. Id. § 1006.34(d)(2)(i)….The phrase ‘safe harbor’ indicates that use of the form is sufficient but not necessary for compliance. See 12 C.F.R. § 1006.34(d)(2). A debt collector may comply by using a different form so long as the required information is provided in a clear and conspicuous manner. Id. § 1006.34(d)(1).

You can read the case here: Collectional Professionals, Inc. v. McDonough District Hospital.  The ending may be predictable but the story is a little surprising.

First surprise: This is not your standard consumer v. collector case. This story is about a debt collector and a client who had been working together since 2007.  In 2021, the debt collector, Collectional Professionals, Inc. (CPI), was working with its letter vendor to implement a new letter template based on the CFPB’s MVN.  They had hoped to have it ready before Regulation F took effect on November 30, 2021. Sadly, it was not meant to be. So, CPI told its client, McDonough District Hospital (the Hospital), about its efforts and reassured them that, in the meantime, they could keep using their own version of the letter which was compliant. The Hospital disagreed, telling CPI that “failure to use the safe-harbor model amounted to a violation of Regulation F and the FDCPA.” The Hospital claimed CPI was in breach of contract and demanded they immediately cease all activity on their account.

Second surprise: Both parties obtained opinion letters from their attorneys who came to opposite conclusions about whether the MVN was optional or required. To end the dispute, CPI filed in state court seeking “a declaration that its initial contact letter complies with Regulation F.” The Hospital removed it to federal court, arguing the state breach of contract claim depended on a question of federal law. CPI asked the federal court to remand it back to state court, which they ultimately did. But not before taking one last jab:

[W]hile resolution of this dispute is important to these parties, it would not be important to the federal system as a whole. Having found that the federal issue in the claim is not substantial enough to warrant exercise of federal jurisdiction over a state law claim, the Court finds that it has no subject matter jurisdiction over this case.

Here’s the takeaway:

  • Regulation F’s model validation notice (MVN) is optional, not required. But using it (or something like it) gives you a safe harbor, so it’s highly recommended.
  • All of this could have been avoided with a little careful reading. Don’t believe me? Read these excerpts and decide for yourself:
  • “Safe harbor…A debt collector who uses Model Form B–1 complies with the information and form requirements…A debt collector who uses Model Form B–1…may make changes to the form and retain a safe harbor for compliance with the information and form requirements…provided that the form remains substantially similar to Model Form B–1.” See CFPB, Regulation F Final Rule, 12 C.F.R. § 1006.34(d)(2) (Dec. 18, 2020).
  • “[A]s discussed in the section-by-section analysis of § 1006.34(d)(2), the Bureau is adopting a more flexible framework in which debt collectors need not use either the model validation notice, specified variations of the model notice, or a substantially similar form, but debt collectors who do so will receive a safe harbor for compliance with the information and form requirements of § 1006.34(c) and (d)(1).” See CFPB, Regulation F Final RuleSection-by-Section Analysis at pg. 198 (Dec. 18, 2020).
  • “[A] debt collector may comply with the requirements in § 1006.34(c) and (d)(1) without using the model validation notice.” See CFPB, Regulation F Final RuleSection-by-Section Analysis at pg. 205 (Dec. 18, 2020).
  • “Is use of the model validation notice required? No. The Debt Collection Rule does not require a debt collector to use the model validation notice provided in Appendix B of the Rule. Instead, the Rule requires compliance with the validation information content and format requirements in Regulation F…The model validation notice provides one way to comply with those requirements. There are other ways to comply with the Rule’s validation information content and format requirements…However, if a debt collector makes changes to the content or format of the model validation notice such that the notice is not substantially similar to the model validation notice, the debt collector generally will not obtain the Rule’s safe harbor for the validation information content and format requirements. 12 CFR § 1006.34(d)(2); see also 12 CFR § 1006.34(c) and 34(d)(1).” See CFPB, Debt Collection Rule FAQs: Validation Information FAQ #3 (Oct. 29, 2021).

- Abigail S. Pressler

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Implementation of the AMLA and the CTA by Financial Institutions: A Podcast

We are extremely pleased to offer a podcast (here) on the legal and logistical issues facing financial institutions as they implement the regulations issued by the Financial Crimes Enforcement Network (FinCEN) pursuant to the Anti-Money Laundering Act of 2020 (AMLA) and the Corporate Transparency Act (CTA), and as they try to anticipate future related regulations.

We are very fortunate to have Matthew Haslinger as our guest speaker. Mr. Haslinger serves as the Chief BSA/AML/OFAC Officer for M&T Bank. He began his career as a federal prosecutor in the Bank Integrity Unit of the U.S. Department of Justice’s Money Laundering and Asset Recovery Section, where he investigated and prosecuted complex national and international money laundering and sanctions-related matters. Mr. Haslinger then moved to M&T Bank, where he initially headed the Financial Investigations Unit and was responsible for day-to-day operations and strategic decision-making relating to enterprise-wide transaction monitoring, customer investigations and suspicious activity report filing for the bank. In July 2020, he became the Chief BSA/AML Officer. In this role, Mr. Haslinger is now responsible for oversight, implementation, and strategic direction of the enterprise-wide programs for Bank Secrecy Act (BSA), Anti-Money Laundering (AML) and Governmental Sanctions compliance.

In this podcast, we dive into the historic changes made by the AMLA and the CTA. After reviewing how the AMLA expands the BSA’s goals, we look at some of the AMLA provisions which have the most impact on BSA compliance, including the AMLA’s emphasis on information sharing, FinCEN’s “national priorities” and the value of threat pattern and trend information to bank compliance efforts, and the AMLA’s expansion of the U.S. government’s authority to subpoena information from foreign financial institutions that maintain correspondent banking relationships with U.S. banks. We also review the CTA’s new beneficial ownership reporting requirements and discuss how they may interact with existing customer due diligence (CDD) requirements and the need to align CTA and CDD regulations.

This podcast is the latest episode in Ballard Spahr’s Consumer Financial Monitor Podcast series— a weekly podcast focusing on the issues that matter most, from new product development and emerging technologies to regulatory compliance and enforcement and the ramifications of private litigation.  We hope that you enjoy it..

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.  To visit Ballard Spahr’s Consumer Financial Monitor blog, please click here.

Peter D. Hardy & Terence M. Grugan

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Podcast: Use of the FDIC Name and Logo: Proceed With Caution

We discuss the FDIC’s final rule on misuse of the FDIC name or logo, advisory to insured banks on deposit insurance and dealings with crypto companies, and cease and desist letters to five crypto companies alleging they made false and misleading statements about deposit insurance. We also discuss the CFPB’s circular warning that a misrepresentation involving the FDIC name or logo can constitute a UDAAP violation. We then identify key takeaways for banks and non-banks, including action items that should be considered for relationships involving pass-through insurance and the extent to which the FDIC name or logo can be used in advertising of credit products.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation joined by Ron Vaske, a partner in the firm’s Consumer Financial Services Group, and Mindy Harris, Of Counsel in the Group.

To listen to the episode, click here.

Alan S. Kaplinsky, Mindy Harris, Ron Vaske

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CFPB/Fed/OCC Increase Exemption Thresholds for Appraisal Requirement, Regs Z and M

The CFPB, Fed, and OCC have announced that they are increasing three exemption thresholds that are subject to annual inflation adjustments. Effective January 1, 2023, through December 31, 2023, these exemption thresholds are increased as follows:

Alan S. Kaplinsky

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Podcast: How Will the Anti-Money Laundering Act of 2020 (AMLA) and the Corporate Transparency Act (CTA) Impact Banks’ Anti-Money Laundering (AML) Compliance Under the Bank Secrecy Act (BSA)? A Discussion With Special Guest Matt Haslinger Chief BSA/AML/OFAC Officer, M&T Bank

After reviewing how the AMLA expands the BSA’s goals, we look at which AMLA provisions have the most impact on BSA compliance, including the AMLA’s emphasis on information sharing, the Financial Crimes Enforcement Network’s “national priorities” and the value of threat pattern and trend information to bank compliance efforts, and the AMLA’s expansion of the U.S. government’s authority to subpoena information from foreign financial institutions that maintain correspondent banking relationships with U.S. banks. We also review the CTA’s new beneficial ownership reporting requirements and discuss how they interact with existing customer due diligence (CDD) requirements and the need to align CTA and CDD regulations.

Peter Hardy and Terence Grugan, Ballard Spahr partners and co-leaders of the firm’s AML Team, host the conversation.

To listen to the episode, click here.

Peter D. Hardy, Terence M. Grugan

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State Work From Home Update

We previously reported that the Oregon Division of Financial Regulation (the Division) amended its administrative rules pertaining to branch licensure to authorize remote work for licensed loan originators and employees. The Division has indicated that it does not plan on issuing similar regulations for Oregon Consumer Finance Companies because individuals working for such companies are not licensed similar to mortgage loan originators, and that licensed Consumer Finance Companies permitting remote work by their employees need to have safeguards in place to protect consumers and the

Earlier this month, the Washington Department of Financial Institutions released draft regulations on remote work for Consumer Loan Act licensees. The proposed regulations would permit a sponsored and licensed loan originator to work from the loan originator’s residence without licensing it as a branch location, subject to the following conditions:

  • The company must have written policies and procedures that include appropriate risk-based monitoring and oversight processes for supervision of the loan originators and the loan originator must comply with those procedures;
  • Access to company platforms and customer information must be in accordance with the required written information securing plan, which must include safeguards that protect borrower information;
  • Communications containing customers’ protected personal information must be in compliance with federal and state information security requirements, including applicable provisions of Gramm-Leach-Bliley and the Safeguards Rule;
  • The loan originator’s residence may not be held out in any manner, directly or indirectly, as a licensed location, unless so licensed. If the residence is not licensed the following activities are not permitted at the residence:
    • Conducting in-person customer interactions;
    • Storing physical records containing customer information;
    • Receiving physical records containing customer information; and
    • Advertising the location as a licensed main or branch office.
  • The loan originator’s NMLS record must designate the licensed main office or a licensed branch office as their registered location.
  • The loan originator must use their registered location from NMLS in the “loan originator information” section on residential mortgage loan

The DFI will be holding a hearing on the rules on November 16 and is receiving comments on the proposed rules until October 30th.  The amendments are intended to be adopted around the end of November. A copy of the proposed amendments to the regulations is available here.

Stacey L. Valerio & Lisa Lanham

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Did You Know?

In preparation for renewals kicking off on November 1st, NMLS will be unavailable starting October 31 at 9 p.m. ET.

NMLS will resume normal operation Tuesday, November 1 at 7 a.m. ET.

Additionally, the Conference of State Bank Supervisors has provided a list of tips to make renewal go smoothly as possible.

John Georgievski

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