In This Issue:
- Podcast: Recent Enforcement Activities of State Attorneys General, With Shennan Kavanaugh, Division Chief, Consumer Protection Division (CPD), Massachusetts Attorney General’s Office
- U.S. Chamber of Commerce and Other Trade Groups File Motion for Summary Judgment in Lawsuit Against CFPB Challenging UDAAP Update to Exam Manual
- New Blog Post by Adam White Discusses ‘The CFPB’s Blank Check;’ Ballard Spahr to Hold Webinar on CFSA Decision
- CFPB Addresses Approach to Court Order Overturning Closed-End Loan HMDA Reporting Threshold
- CFPB Issues Technical HMDA Rule for Closed-End Loan Threshold
- CFPB and FTC File Amicus Brief Regarding Servicemembers’ Right to Sue Under the Military Lending Act
- FHFA Announces 2023 Conforming Loan Limits
- HUD Announces 2023 Loan Limits for FHA Forward Mortgages and HECMs
- CFPB Analyzes Impacts of Higher Mortgage Interest Rates
- Senate Holds Hearing on Fairness in Financial Services
- CFPB Makes Preliminary Determinations That Truth in Lending Act Does Not Preempt New York, California, Utah, and Virginia Commercial Financing Disclosure Laws
- Advocacy Group Files Lawsuit Challenging California Regulations Requiring Consumer-Like Disclosures for Commercial Transactions
- OCC Official Highlights Agency’s Fair Lending Focus
- CFPB Director Chopra Scheduled To Appear Before House and Senate Committees
- Ginnie Mae Report Includes Recommendations to Improve VA Loan Program
- European Court Puts the Brakes on AML Directive: Public Access to Beneficial Ownership Database Violates European Privacy Laws
- New York Enacts Statewide Law Superseding Local Requirements for Registration of Mortgages in Default
- Did You Know?
For the latest updates on the COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
Podcast: Recent Enforcement Activities of State Attorneys General, With Shennan Kavanaugh, Division Chief, Consumer Protection Division (CPD), Massachusetts Attorney General’s Office
While most attention is focused on the CFPB, state attorneys general are very active in investigating and enforcing state laws relating to consumer financial services (and often federal laws when incorporated into state law or when using their Dodd-Frank authority). We first discuss the CPD’s priorities and how they are determined; use of its state law UDAAP authority and available remedies; enforcement of federal law; and collaboration with the CFPB and other state AGs. We also discuss how a company’s self-identification/self-remediation of violations factors into the CPD’s enforcement approach. We then discuss key issues of CPD concern and enforcement activity in specific areas, including mortgage servicing, auto sales and financing, debt collection, fintech/new technologies, and buy-now-pay-later.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation joined by John Grugan and Adrian King, partners in the firm’s Litigation Group, who defend companies facing state attorneys general enforcement initiatives.
To listen to the episode, click here.
- Alan S. Kaplinsky, John Grugan, & Adrian King
U.S. Chamber of Commerce and Other Trade Groups File Motion for Summary Judgment in Lawsuit Against CFPB Challenging UDAAP Update to Exam Manual
The U.S. Chamber of Commerce has filed a motion for summary judgment in its lawsuit filed in September 2022 against the CFPB challenging the CFPB’s recent update to the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) section of its examination manual to include discrimination. The other plaintiffs in the lawsuit, which was filed in a Texas federal district court, are the American Bankers Association, Consumer Bankers Association, Independent Bankers Association of Texas, Longview Chamber of Commerce, Texas Association of Business, and Texas Bankers Association.
The plaintiffs argue first that they are entitled to summary judgment based on the decision in Community Financial Services Association of America Ltd. v. CFPB, in which a Fifth Circuit held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution. They assert that they can show harm resulting from the unconstitutional funding because without such funding, the Bureau lacked the means to issue the manual update or exercise any authority over discrimination.
While arguing that they are entitled to have the Court set aside the manual update and permanently enjoin the CFPB from taking any action based on it based on the CFSA decision, they also ask the Court to hold that they are entitled to those remedies under the Administrative Procedure Act (APA). According to the plaintiffs, a ruling on their APA claims will preserve resources and avoid harm to plaintiffs’ members because, “whatever the Supreme Court decides in Community Financial, Plaintiffs’ members will be protected from irreparable harm and this case will be ready for appellate review.” (The CFPB has filed a certiorari petition seeking review of the CFSA decision and asked the Supreme Court to hear the case this Term.)
As previously set forth in their complaint, the plaintiffs claim that the manual update violates the APA and should be set for the following reasons:
- The update exceeds the CFPB’s UDAAP authority in the Dodd-Frank Act because such authority does not encompass discrimination.
- The update is “arbitrary and capricious” because the CFPB’s interpretation of “unfairness” contradicts the historical use and understanding of the term.
- The update violates the APA’s notice-and-comment requirement because it is a legislative rule that imposes new substantive obligations on regulated entities.
- Alan S. Kaplinsky & Michael Gordon
New Blog Post by Adam White Discusses ‘The CFPB’s Blank Check;’ Ballard Spahr to Hold Webinar on CFSA Decision
The eyes of the consumer finance world are now on the U.S. Supreme Court as it decides whether to grant the CFPB’s certiorari petition in Community Financial Services Association of America Ltd. v. CFPB (CFSA Decision). In the CFSA Decision, a Fifth Circuit panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution.
Adam White, a renowned expert on Separation of Powers and the Appropriations Clause and a close follower of the Supreme Court, recently wrote a blog post published by the Yale Journal on Regulation titled “The CFPB’s Blank Check—or, Delegating Congress’s Power of the Purse.” In the post, Adam shares some of his observations about the CFSA Decision, a decision that he views as raising “the most important administrative-state issues of our time.”
On December 16, 2022, from 2:00 p.m.to 3:30 p.m. ET, Adam will join members of Ballard Spahr’s Consumer Financial Services Group for a 90-minute webinar in which we will take deep dive into all important aspects of the CFSA Decision. For more information and to register for the webinar, “How the Supreme Court Will Decide Threat to CFPB’s Funding and Structure,” click here.
Adam also recently wrote an op-ed published in the Wall Street Journal titled “The CFPB Engages in Legal Deception” in which he argues that the CFPB’s position in its certiorari petition that its funding structure satisfies the Appropriations Clause is inconsistent with previous CFPB declarations that its funding does not come from “appropriations.”
CFPB Addresses Approach to Court Order Overturning Closed-End Loan HMDA Reporting Threshold
In a recent blog post, the CFPB addressed its approach to the court ruling that overturned the part of a CFPB April 2020 Home Mortgage Disclosure Act (HMDA) rule that increased the threshold to report closed-end mortgage loans from 25 covered loans originated in each of the prior two years to 100 covered loans originated in each of the prior two years.
As we noted in our prior blog post that is linked above, “[a] potential approach that the CFPB may take is to re-implement the 25 closed-end loan threshold for the 2023 reporting year, with institutions that originated at least 25 covered closed-end mortgage loans in both 2021 and 2022 being subject to HMDA requirements for closed-end loans.” That is the approach that the CFPB decided to take. In its recent blog post, the CFPB advised as follows:
The CFPB recognizes that financial institutions affected by this change may need time to implement or adjust policies, procedures, systems, and operations to come into compliance with their reporting obligations. In these limited circumstances, in allocating the CFPB’s enforcement and supervisory resources, the CFPB does not view action regarding these institutions’ HMDA data as a priority. Thus, the CFPB does not intend to initiate enforcement actions or cite HMDA violations for failures to report closed-end mortgage loan data collected in 2022, 2021, or 2020 for institutions subject to the CFPB’s enforcement or supervisory jurisdiction that meet Regulation C’s other coverage requirements and originated at least 25 closed-end mortgage loans in each of the two preceding calendar years but fewer than 100 closed-end mortgage loans in either or both of the two preceding calendar years.
Based on this approach, it appears that the institutions that satisfied the 25-loan threshold, but not the 100-loan threshold, for 2020 and 2021 may, but will not be required to, report closed-end mortgage loan data for 2022. However, institutions that satisfy the 25-loan threshold for 2021 and 2022 will need to collect and report closed-end mortgage loan HMDA data for 2023.
CFPB Issues Technical HMDA Rule for Closed-End Loan Threshold
The CFPB recently issued a technical rule to reinstate the closed-end loan reporting threshold under the Home Mortgage Disclosure Act (HMDA) of 25 originated covered loans in each of the prior two calendar years that was adopted in an October 2015 rule. The technical rule will be effective on the date that it is published in the Federal Register.
As previously reported in September 2022, the federal district court for the District of Columbia invalidated the change in the threshold from 25 to 100 covered loans in each of the prior two calendar years that was made in an April 2020 CFPB rule. (The court let stand the increase in the permanent threshold for reporting open-end lines of credit made by the April 2020 rule from 100 covered lines of credit in each of the two prior years to 200 covered lines of credit in each of the two prior years.)
More recently, in a blog post the CFPB advised that it was reinstating the 25 closed-end loan threshold for the 2023 reporting year, with the result being that institutions that originated at least 25 covered closed-end mortgage loans in both 2021 and 2022 are subject to HMDA requirements for closed-end loans for calendar year 2023.
In the preamble to the technical rule, the CFPB states as follows:
This action is not a rule under the Administrative Procedure Act (APA), because the Bureau is not interpreting, implementing, or prescribing law or policy. Instead, the Bureau is updating the published Code of Federal Regulations so that it accurately reflects the court’s vacatur of part of the underlying 2020 HMDA Rule. In the alternative, if this action were a rule, the Bureau finds that notice and comment would be unnecessary under the APA, because there is no basis for disagreement that the court’s ruling vacates the relevant portion of the 2020 HMDA Rule.
CFPB and FTC File Amicus Brief Regarding Servicemembers’ Right to Sue Under the Military Lending Act
On November 22, 2022, the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) filed an amicus brief in a case involving the right of servicemembers to sue under the Military Lending Act (MLA). In the brief, the agencies ask the 11th Circuit to overturn a district court decision that held the plaintiffs (a servicemember and his wife) did not have a right to sue under the MLA because they had not suffered a concrete injury sufficient to confer standing.
The MLA and its implementing regulations contain protections for servicemembers and their dependents who are identified at origination of certain credit transactions as “covered borrowers.” These protections include a maximum Military Annual Percentage Rate (MAPR) of 36 percent, a prohibition against requiring arbitration, and mandatory loan disclosures. 10 U.S.C. § 987(b), (c), (e)(3); 32 C.F.R. §§ 232.4(b), 232.6, 232.8(c). In their class action complaint filed in the U.S. District Court for the Southern District of Florida, the plaintiffs alleged that the defendant failed to provide them with protections required under the MLA because it did not check if they were “covered borrowers” prior to extending credit.
In its motion to dismiss the complaint, defendant argued, among other things, that the plaintiffs did not have standing because they had not adequately alleged any resulting injury. In dismissing the case, the district court found that even if there was a technical MLA violation, there was no concrete injury to the plaintiffs directly or indirectly resulting from it.
On appeal, the plaintiff-appellants present the issue as one fundamental to the MLA and contract law generally: Do parties who are purportedly obligated to pay money under a void contract have standing to sue to rescind that contract and to seek restitution of any payments already made? A respondent’s brief has not yet been filed.
In their joint amicus brief, the CFPB and FTC argue that the plaintiffs suffered an injury-in-fact when they made payments under an illegal contract, and that the injuries are traceable to the illegal contract and redressable by a court order compensating the plaintiffs for financial losses suffered and clarifying their ongoing legal obligations. Perhaps most importantly, the two agencies argue that the district court’s decision undermines the MLA’s remedial purposes, which includes a private right of action and a broad array of remedies in addition to rendering a contract void if it is non-compliant. 10 U.S.C. § 987(f)(5). According to the CFPB and FTC:
There is no doubt then that Congress intended for servicemembers to bring suit to challenge the legality of contracts that violate the MLA and to demand the remedies to which they are entitled under the statute. The district court’s holding, however, risks substantially curtailing private enforcement of the MLA and limiting servicemembers’ ability to vindicate their rights under the statute. It does so by reading the MLA’s voiding provision out of the statute and reading into the statute an a textual materiality requirement. But it may be very difficult, if not impossible, for servicemembers to demonstrate that certain MLA violations had a direct effect on their decision to procure a financial product or caused them to pay money they would not otherwise have paid.
In addition to the amicus brief filed by the FTC and CFPB, an amicus brief supporting the plaintiffs has been filed by the Military Officers Association of America (MOAA) and several other military and legal aid organizations. These groups argue that the MLA has been incredibly effective precisely because it voids agreements that do not meet its requirements, and that a contrary ruling puts servicemembers and our country at risk during a time of record recruiting shortfalls. The groups further assert in their brief that, “If this decision is not reversed, predatory lenders will realize they can return to military bases en masse, ignore all of the MLA’s protections, and only have to worry about lawsuits from the small minority of victims able to prove reliance on specific statutory violations.”
Section 987(f)(3) of the MLA provides that “[a]ny credit agreement, promissory note, or other contract prohibited [by the MLA] is void from the inception of such contract.” 10 U.S.C. § 987(f)(3).
While the MLA is clear on its face, the district court, based on Spokeo v. Robins, nevertheless rejected the notion that contracts are automatically void if they fail to comply with the MLA. In Spokeo, the U.S. Supreme Court held that “Congress’ role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.” 578 U.S. at 341. The district court observed that this principle was reaffirmed in TransUnion LLC v. Ramirez, where the Supreme Court explained that Congressional authorization of suits alleging only statutory violations without any injury “would flout constitutional text, history, and precedent.” 141 S. Ct. 2190, 2206 (2021). It remains to be seen whether the 11th Circuit will differentiate the failure to comply with the MLA’s requirements from the Fair Credit Reporting Act violations for which concrete injury was lacking in Spokeo and Ramirez.
If the decision is upheld on appeal, it will provide a legal defense for creditors for technical MLA violations in private lawsuits where plaintiffs cannot show concrete harm, such as a failure to provide a mandatory disclosure about the MAPR for loans to covered borrowers with an MAPR that does not exceed the 36 percent cap. We would caution, however, that the decision would only be binding in the 11th Circuit and, perhaps more importantly, that the CFPB and other regulators are unlikely to recognize this defense in MLA enforcement actions.
FHFA Announces 2023 Conforming Loan Limits
The Federal Housing Finance Agency (FHFA) recently announced the conforming loan limits for residential mortgage loans acquired by Fannie Mae and Freddie Mac in 2023. Fannie Mae addresses the limits in Lender Letter 2022-06.
As was expected based on the significant increase in housing prices during 2022, the limits increased substantially. The standard loan limit for a one-unit home increased from $647,200 in 2022 to $726,200 for 2023. For high-cost areas ̶ and also for Alaska, Guam, Hawaii and the U.S. Virgin Islands ̶ the loan limit for a one-unit home increased from $970,800 for 2022 to $1,089,300 for 2023.
The FHFA announcement includes links to:
A list of conforming loan limits for all counties and county-equivalent areas in the U.S.
A map showing the conforming loan limits across the U.S.
A detailed addendum of the methodology used to determine the conforming loan limits.
A list of FAQs that covers broader topics that may be related to conforming loan limits.
Fannie Mae advises that the loan limits apply to the original loan balance, and not the loan balance at the time of delivery.
HUD Announces 2023 Loan Limits for FHA Forward Mortgages and HECMs
The U.S. Department of Housing and Urban Development (HUD) recently announced the 2023 loan limits for FHA insured forward mortgage loans and FHA insured Home Equity Conversion Mortgages (HECMs). The announcements were made in Mortgagee Letter 2022-20 and Mortgagee Letter 2022-21, respectively.
For forward mortgage loans in non-high cost areas, the amount for a single unit home increased from $420,680 in 2022 to $472,030 in 2023. In high cost areas, the amount for a single unit home increased from $970,800 in 2022 to $1,089,300 in 2023. In Alaska, Guam, Hawaii and the U.S. Virgin Islands, the amount for a single unit home increased from $1,456,200 in 2022 to $1,633,950 for 2023. For HECMS, the maximum claim amount for all areas increased from $970,800 in 2022 to $1,089,300 in 2023.
Each Mortgagee Letter includes a link to a HUD website that can be used to find the applicable loan limit in each county.
We recently reported on the residential mortgage loan limits for loans purchased by Fannie Mae and Freddie Mac in 2023.
CFPB Analyzes Impacts of Higher Mortgage Interest Rates
The CFPB’s Office of Research recently issued a blog post regarding its analyses of the impacts of higher mortgage interest rates on borrowers and potential homebuyers. The analyses are based on first and second quarter Home Mortgage Disclosure Act (HMDA) data filed by the 55 mortgage lenders that are required, based on their high volume of mortgage lending, to collect and submit HMDA data on a quarterly basis. For 2021, these 55 lenders accounted for about 55 percent of mortgage applications received and about 52 percent of originated mortgage loans. The CFPB compared the quarterly data of these 55 reporters in the first half of 2022 with their annual data from past years.
The analyses focus on increases in monthly mortgage payments, debt-to-income ratio (DTI) levels for Hispanic, white and Black borrowers, and whether increased DTI ratio levels are leading to higher denial rates. The analyses assess closed-end home-purchase loans secured by a first lien on site-built, single-family homes that are the borrower’s principal residence. Reverse mortgages were excluded.
Monthly Mortgage Payment Increase
For purposes of this analysis, the CFPB focused on the type of loans noted above that were 30-year fixed rate conventional conforming loans (i.e., non-government insured or guaranteed loans eligible for sale to Fannie Mae or Freddie Mac) originated to the prime borrowers. The CFPB found that after two years of decline based on very low mortgage interest rates, beginning in 2021 monthly mortgage payment amounts began to rise and “shot up in the first half of 2022, from $1,446 in December 2021, to $1,974 in June 2022–a 36.5 percent increase in a span of six months.” The CFPB states that the increase mainly was driven by the rise in interest rates, as loan amounts during this period increased by only about 1 percent. The CFPB notes that the “increase in monthly payment amounts was felt across all racial and ethnic groups.” Specifically, during this period average monthly mortgage payment amounts rose by about 37 percent for Black and Hispanic, white borrowers, about 38 percent for non-Hispanic, white borrowers, and about 33 percent for Asian borrowers.
DTI Levels for Hispanic, White, and Black Borrowers
For purposes of this analysis, the CFPB focused on the type of loans noted in the second paragraph above that were 30-year fixed rate conventional conforming loans. DTI first became a HMDA data reporting category for applications received in 2018. The CFPB advises that “[o]verall, the average DTI declined between the end of 2018 and beginning of 2021, given the historical decline of mortgage interest rates taking place over the same period.” The CFPB then states that this trend has reversed since the beginning of 2021, with the average DTI for all groups rising significantly to, or slightly exceeding, 2018 levels by June 2022. At the end of the period, the average DTI for Hispanic, white borrowers and Black borrowers was over 40 percent and over 39 percent, respectively. The CFPB advises that “[a]lthough we don’t have third quarter filings for 2022 HMDA data at this time, given the trends observed in the first half of the year and the fact that the mortgage interest rates continued to rise in the third and fourth quarters of 2022 to the highest level in more than 20 years, we predict that the increase in DTI will likely continue through the rest of 2022.” The CFPB notes that there is the “potential that average DTI for Hispanic white and Black borrowers will approach levels not seen since DTI information was first collected in HMDA in 2018.”
Higher DTI Levels and Denial Rates
While higher DTI levels can lead to higher denial rates, the CFPB advises that “[s]o far, in the HMDA quarterly filing data, we have not observed a significant increase in the denial rates of mortgage applications for home purchase loans distinguishable from noises and seasonal variation.” However, the CFPB also focused on the reported reasons for denials. The CFPB advises that “[c]ompared to 2021, DTI has become more likely to be reported as a denial reason for denied Black, Hispanic white, and non-Hispanic white applications in 2022.” Specifically, by the end of the second quarter of 2022, over 45 percent of all Black and Hispanic white applicants who were denied had DTI reported as a denial reason. The CFPB concludes by stating “[t]hat is the highest since the revised HMDA data collection and reporting requirements took effect in 2018. Whether this represents a trend into the rest of 2022 remains to be seen and is one indicator we should keep watchful eyes on as additional HMDA data arrive.”
Senate Holds Hearing on Fairness in Financial Services
The Senate Banking Committee recently held a hearing entitled, “Fairness in Financial Services: Racism and Discrimination in Banking.” The hearing was held to discuss historical and ongoing discrimination in the financial services industry, and the roles of Congress and regulators in addressing these issues. The witnesses included: Ms. Lisa Rice, President and CEO, National Fair Housing Alliance; Mr. Marc H. Morial, President and CEO, National Urban League; The Honorable Byron Donalds (R-FL), U. S. House of Representatives; Mr. Devon Westhill, President and General Counsel, Center for Equal Opportunity; and Ms. Janai Nelson, President and Director-Counsel, NAACP Legal Defense and Educational Fund, Inc. (LDF). The witness list did not include any representatives of the financial services industry.
U.S. Senators and participating witnesses discussed the necessity of the Fair Access to Financial Services Act, which was introduced in the Senate in July 2022, and would expand the protections found in other nondiscrimination laws, like the Equal Credit Opportunity Act (ECOA), and apply them to all “goods, services, facilities, privileges, and accommodations of financial institutions.” If enacted, the law would prohibit banks and other financial institutions from discriminating in the services they offer on the basis of race, color, religion, national origin, or sex (including sexual orientation and gender identity). The participants also discussed the appropriateness of the CFPB’s steps to supervise for discrimination through its authority over unfair, deceptive, and abusive acts or practices (UDAAP). As a reminder, in March 2022, the CFPB updated its exam manual and announced, “In the course of examining banks’ and other companies’ compliance with consumer protection rules, the CFPB will scrutinize discriminatory conduct that violates the federal prohibition against unfair practices.” The update has been challenged in a lawsuit filed by the U.S. Chamber of Commerce and other trade groups.
In his remarks, Chair Sherrod Brown (D-OH) explained the importance of addressing the longstanding pattern of discrimination against minority households–from slavery, to Jim Crow, to redlining, to the crypto crisis, and many other forms of discrimination. Chair Brown noted that a 2021 FDIC household survey found about 11 percent of Black and 9 percent of Hispanic households were unbanked or underbanked, and consumer complaints suggested that minority customers are often viewed as suspicious and treated poorly in financial institutions. He went on to explain that the CFPB took an appropriate and necessary approach in including illegal discrimination within the UDAAP framework if the discrimination fits the test already outlined in the CFPB’s guidance. He remarked that the current nondiscrimination laws leave loopholes and allow the financial industry to continue to mistreat minority customers. The Chair added that by fitting discrimination into the unfairness framework, the CFPB is attempting to exhaust all of its options to hold financial institutions to the standard of treating all customers equally.
U.S. Senator Patrick J. Toomey (R-PA) detailed how the current scheme for eliminating discrimination has made banking and borrowing possible for millions of customers, and stated that new nondiscrimination laws will only further complicate the system of rules banks have to navigate. Sen. Toomey also remarked on how difficult disparate impact and other discrimination claims are to prove and how bringing these claims broadly can, and does, sweep up innocent actors making reasonable business decisions. According to the Sen, Toomey, this creates reputational and financial burdens for the financial services industry, as banks continue to bear the costs of compliance, litigation, and settlement of broad claims of discrimination, even when they cannot avoid the disparities that already exist. The Senator went on to explain that the CFPB re-interpreted UDAAP to include discrimination in a way that was never provided by Congress, creating tremendous uncertainty for the industry. Sen. Toomey stated that this instability may lead banks to limit the services offered in order to avoid any risk of litigation, while attempting to guess what the CFPB will do next.
Participating witnesses all brought invaluable perspective and experience to the hearing. Those who work on behalf of consumers focused their testimonies on the necessity of change within the financial system. They described the difficulties faced by consumers, especially people of color who have limited access to basic financial services. According to witness testimony:
- When banks close at higher rates in communities of color, it exacerbates the lack of access for already underbanked households. This allows payday lenders, pawn stores, check cashers, and other predatory businesses to thrive in these communities because the customers have no other services.
- When communities of color do find banks for financial services, employee discretion often leads to people of color being steered into accounts or services that carry higher costs.
- There are many loopholes in the current scheme of nondiscrimination laws: for the example ECOA and the Fair Housing Act only apply to credit transactions. Many communities could benefit from simple, affordable financial tools, such as checking accounts, but discrimination in this area is left unchecked.
On the other hand, a few of the witnesses shed light on the regulatory and compliance burdens faced by the industry, including the following:
- The regulatory and compliance burdens force many financial institutions to close branches or cut staff, further harming minority communities.
- Uncertainty and ambiguity in the law, coupled with infinite rulemaking is not sustainable and does not help financial institutions to create better systems for communities of color.
- While the industry would benefit from eliminating intentional discrimination, it is unreasonable to expect financial institutions to reverse all existing disparity created by decades of past discrimination.
Participants discussed the value of the growing role of community development financial institutions (CDFIs) and the impact these institutions have on the communities they serve. It was generally agreed that CDFIs are typically in a better position than large banks to reach and grow relationships with underserved groups, and that ensuring their access to resources has proven to be beneficial to the entire industry. Some argued that expanding the capabilities and resources for CDFIs should be more of a priority than creating new methods of targeting discrimination, because empowering and funding CDFIs would create an immediate impact for the communities they serve.
On the topic of the CFPB’s role in eliminating discrimination, the testimonies varied greatly. Some witnesses remarked that discrimination can be unfair, because denying access to groups of consumers or offering them unfavorable terms may already fit squarely within the scheme currently used to determine that a practice is unfair. Generally, the participants agreed that rulemaking is valuable in order to receive and include industry feedback in rules and guidance. However, some argued that this process has continuously carved out certain actions or products, which has created room for discrimination that is unfair to consumers.
Ultimately, the hearing was full of robust conversation about how Congress, regulators, and financial institutions must align efforts to eliminate and remediate long-standing discrimination in the financial industry. We will continue to monitor developments involving the Fair Access to Financial Services Act and challenges to the CFPB’s exam manual update on discrimination.
For the full discussion, a recording of the hearing and copies of witnesses’ testimonies can be found here.
CFPB Makes Preliminary Determinations That Truth in Lending Act Does Not Preempt New York, California, Utah, and Virginia Commercial Financing Disclosure Laws
In a notice of “Intent to Make Preemption Determination under the Truth in Lending Act (Regulation Z),” the CFPB announced that it is seeking comments on its preliminary determinations that the Truth in Lending Act (TILA) does not preempt certain provisions of the New York Commercial Finance Disclosure Law (CFDL) or the commercial financing laws of California, Utah, and Virginia. TILA authorizes the CFPB to determine whether a state law requirement is preempted upon the CFPB’s own motion or upon the request of a creditor or other interested party. The CFPB’s preliminary determination regarding the CFDL was made in response to a request for a preemption determination from a business trade association. Its determinations regarding the California, Utah, and Virginia laws are made on the CFPB’s own motion. Comments are due by January 20, 2023.
The CFDL was signed into law in December 2020, and authorized the New York Department of Financial Services (DFS) to adopt regulations to implement the disclosures, including rules regarding calculation of required disclosures such as “APR” and “finance charge” disclosures. The DFS released proposed regulations in September 2022 which have not yet been finalized. The DFS has proposed that the compliance date for the disclosures would be six months after the date that the Notice of Adoption of the final regulations is published in the New York State Register.
TILA provides that it does not preempt state laws “relating to the disclosure of information in connection with credit transactions” except to the extent such laws are “inconsistent with the provisions of [TILA], and then only to the extent of the inconsistency.” Regulation Z identifies two categories of “contradictory” state law that would be preempted. One category is a state law that requires use of the same term to represent a different amount or different meaning than TILA. The other category is a state law that requires the use of a term different from that required by TILA to describe the same item. In its discussion, the CFPB noted that the Federal Reserve Board, which formerly administered Regulation Z, had framed the TILA preemption standard to mean that “[a] state law is contradictory, and therefore preempted, if it significantly impedes the operation of the federal law or interferes with the purposes of the federal statute.” It also noted that the Board had observed that the two categories of “contradictory” state laws identified in Regulation Z were not exhaustive because they would not be relevant in a context where the preemption issue being considered did not deal with disclosures of terms and amounts.
The CFDL requires disclosures to be made before consummation of covered commercial financing transactions. The trade association’s preemption determination request asserted that, even though the CFDL only applies to commercial transactions, the differences between how the CFDL and TILA use the terms “finance charge” and “APR” make the CFDL inconsistent with TILA for purposes of preemption. For example, the CFDL defines “finance charge” to include any charge imposed by a “provider,” which can include a broker, while under TILA, a broker’s fee is only included in the finance charge for a non-mortgage transaction if the creditor requires use of the broker or retains a portion of the broker’s fee. With respect to the APR disclosure required by the CFDL, the CFDL requires certain assumptions about payment amounts and frequencies to calculate the APR which assumptions are not required by TILA. In addition, the CFDL requires the APR for open-end transactions to be calculated using TILA’s closed-end APR requirements instead of its open-end requirements.
The trade group asserted that the CFDL was preempted because these differences could lead to variances in the disclosures required under state and federal law and, even if the CFDL does not contradict TILA in the specific manner described in Regulation Z, it impedes the operation of federal law or interferes with the intent of the federal scheme. According to the trade group, failing to enforce TILA’s APR and finance charge definitions even across different types of financing would impede the benefits of ensuring uniform disclosures which aid consumer understanding and allow consumers to compare financing options and could lead to confusion or misunderstanding among borrowers, including small business owners who might use both consumer credit and commercial financing to pay business expenses.
The CFPB indicated that its preliminary conclusion is that TILA does not preempt the CFDL on the grounds asserted in the request because state and federal law do not appear to be “contradictory” for preemption purposes. It first noted that TILA and the CFDL apply to different transactions (i.e. consumer purpose v. commercial transactions) “so the [CFDL] appears to be far afield of a law that contradicts TILA and Regulation Z.” The CFPB also expressed its preliminary disagreement with the trade group’s assertion that the CFDL significant impedes the operation of TILA or interferes with the operation of the federal scheme. According to the CFPB, the differences between the CFDL and TILA do not frustrate TILA’s purpose of assuring meaningful disclosure of credit terms because lenders are not required to provide the CFDL disclosures to consumers seeking consumer credit. Since consumers will continue to receive only TILA disclosures for consumer credit, they will receive the meaningful disclosure of credit terms contemplated by TILA.
The CFPB also addressed the commercial financing laws of California, Utah, and Virginia. December 9 was the effective date of the final regulations adopted by the California Department of Financial Protection and Innovation to implement SB 1235, the bill signed into law in 2018 that requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances. In March 2022, and April 2022, Utah and Virginia, respectively, became the first two states to require the registration of providers of merchant cash advances. The new laws also include disclosure requirements.
The CFPB stated that it is also considering making determinations whether TILA preempts the California, Utah, and Virginia disclosure requirements. It indicated that it has conducted a preliminary review of those laws “which are similar in relevant aspects to the [CFDL] because they do not apply to consumer credit transactions that are within the scope of TILA.” The CFPB stated that, based on the similar coverage of these state laws, its preliminary conclusion is that they are not preempted by TILA. It noted that as an additional potential basis, but not necessary to its preliminary conclusion, several of these state laws do not require the use of the terms finance charge or APR in a manner that would be different than TILA and Regulation Z if they were applicable.
In addition to seeking comment on its preliminary preemption determinations, the CFPB indicated in the notice that it is considering whether to clarify the Federal Reserve Board’s articulation of the applicable preemption standard and requested comment on how the CFPB should articulate the standard in this and future preemption determinations.
- John L. Culhane, Jr., Michael R. Guerrero & John Sadler
Advocacy Group Files Lawsuit Challenging California Regulations Requiring Consumer-Like Disclosures for Commercial Transactions
On December 2, a non-profit advocacy organization filed a lawsuit in a California federal district court seeking to enjoin the California Department of Financial Protection and Innovation (DFPI) from enforcing the final regulations (Regulations) issued by the DFPI to implement California’s commercial financing disclosure law. SB 1235, which was signed into law in 2018, requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances. The Regulations became effective on December 9.
The plaintiff is the Small Business Finance Association (SBFA) whose mission, as described in the complaint, “is to educate policymakers and regulators about the technology-driven platforms emerging in the small business finance market.” The complaint describes SBFA’s members as “technology-driven financial services companies specifically focused on providing efficient and responsible capital to small and medium-sized businesses across America.”
SBFA alleges in the complaint that the Regulations violate the First Amendment rights of its members. According to SBFA, despite the differences between traditional loans and sales-based financing (SBF) transactions, the disclosures mandated by the Regulations erroneously assume that SBF transactions operate like traditional loans. As a result, the mandated disclosures compel SBFA’s members to describe their SBF transactions in ways that misstate the costs and features of the financing. SBFA alleges that (1) in addition to compelling inaccurate and misleading speech, the Regulations prohibit commercial free speech by not permitting modifications to the disclosure form and prohibiting a provider from clarifying required information that is misleading or inaccurate or providing additional information except in limited circumstances that are not sufficient to correct false and misleading statements required by the Regulations, and (2) the compelled disclosure of inaccurate or misleading information is not limited to SBF transactions but also extends to open-end financing.
In addition to its First Amendment claim, SBFA claims that the Regulations are preempted by the Truth in Lending Act (TILA) because they mandate disclosure of the “APR” and “finance charge” but define and calculate those terms differently than TILA. SBFA alleges that the fact that the Regulations apply to commercial and not consumer transactions does not preclude their preemption by TILA. It alleges that:
- Permitting the terms APR and finance charge to be used for products not covered by TILA when they are defined differently than under TILA would frustrate TILA’s purpose of ensuring uniformity because APR and finance charge would no longer be reliably consistent terms and consumers would stop relying on them.
- Because small business owners often finance their businesses through a combination of commercial and consumer finance products, they routinely compare products subject to TILA with products that are not subject to TILA. As a result, a state law mandating disclosure of two key TILA terms for non-TILA products but defining or calculating those terms differently from TILA will create significant confusion for consumers considering TILA products.
As the DFPI will undoubtedly highlight when it responds to SBFA’s complaint, the CFPB has preliminarily determined that California’s financing disclosure law is not preempted by TILA. The CFPB has issued a notice of its intention to make a determination that the TILA does not preempt the commercial financing disclosure laws of four states, including California. Although the notice was issued in response to a trade association’s request for a preemption determination as to New York’s commercial financing disclosure law, the CFPB, on its own motion, also addressed the California, Utah, and Virginia laws.
After giving its preliminary conclusion that TILA does not preempt the New York law, the CFPB stated that it was also considering making determinations whether TILA preempts the California, Utah, and Virginia disclosure requirements. It indicated that it has conducted a preliminary review of those laws “which are similar in relevant aspects to the [New York law] because they do not apply to consumer credit transactions that are within the scope of TILA.” The CFPB stated that, based on the similar coverage of these state laws, its preliminary conclusion was that they also are not preempted by TILA. In its preemption analysis, the CFPB considered, and rejected, many of the same arguments advanced by SBFA in support of its preemption claim.
- Michael R. Guerrero, John Sadler & John L. Culhane, Jr.
OCC Official Highlights Agency’s Fair Lending Focus
In recent remarks at the CRA & Fair Lending Colloquium, Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy at the Office of the Comptroller of the Currency, discussed the OCC’s current fair lending initiatives. Her remarks were intended to convey the message that the OCC is “laser focused on fair lending” and considers fair lending compliance to be an important component of safety and soundness.
A substantial portion of Ms. Gardineer’s remarks were devoted to the OCC’s efforts to improve its ability to identify potential patterns or practices of discrimination. She indicated that those efforts include taking steps to enhance the OCC’s risk-based supervisory approach by:
- Routinely reviewing and updating the OCC’s annual risk-based processes for screening HMDA data to ensure the OCC’s focus is on banks with higher fair lending risk.
- Conducting fair lending risk assessments during every supervisory cycle for each bank that engages in retail lending and based on what the OCC learns from such risk assessments as well as the HMDA screenings, identifying banks for in-depth fair lending examinations.
- Having a framework in place to ensure that banks are following fair lending rules as they incorporate advanced analytics, such as artificial intelligence or machine learning, into underwriting systems and fair lending risk management programs, including providing the support of legal and policy subject matter experts as well as economists to OCC examiners conducting fair lending examinations of banks using advanced analytics.
- Enhancing examiner tools, resources, and training, including:
- Preparing to publish a comprehensive update to the Fair Lending Booklet of the Comptroller’s Handbook that will be accompanied with more instructional guidance for examiners.
- Enhancing technical support for the OCC’s Fair Lending Risk Assessment Tool used by examiners.
- Conducting a series of redlining webinars for examiners.
- In response to a recommendation included in a June 2022 GAO report on the OCC’s oversight of fair lending practices, creating a centralized tracking and monitoring system to collect and analyze information related to fair lending examinations.
Ms. Gardineer also discussed other OCC efforts “aimed at reducing persistent economic inequality and growing trust in banking.” These efforts include:
- Working jointly with the other federal banking agencies to issue a final Community Reinvestment Act rule.
- Participating in the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), which has issued an Action Plan to Advance Property and Valuation Equity.
- Helping to enhance federal oversight and effective monitoring for discrimination in appraisals and technology-based valuations of residential property within the scope of the OCC’s authority (which Ms. Gardineer noted does not include direct supervision of real estate appraisers), including by taking the following actions in the PAVE action plan:
- Strengthening coordination among supervisory and enforcement agencies to identify both safety and soundness and fair lending concerns that result from bias or discrimination in appraisals and other valuation processes.
- Expanding regulatory agency examination procedures of mortgage lenders to include identification of patterns of appraisal bias.
- Improving supervisory methods for identifying potential discrimination in property valuations. (The CFPB is also a participant in PAVE. In February 2022, the CFPB, together with other federal agencies including the OCC, sent a letter to The Appraisal Foundation commenting on proposed changes to the Uniform Standards of Professional Appraisal Practice in which the agencies expressed concern that that the standards did not adequately advise examiners about ECOA and FHA nondiscrimination standards.)
With respect to fair lending concerns raised by advanced analytics, Ms. Gardineer indicated that the OCC “supports fair, ethical, responsible, and transparent adoption of advanced analytics, including artificial intelligence and machine learning, in the financial sector.” She observed that advanced analytics “can offer benefits, including opportunities to expand access to banking services that could help to reduce inequality and increase trust in the banking system” but also “bring risks, primarily from failed or inadequate management of model risk.” More specifically, she commented that because “[f]ailure to appropriately manage models’ compliance risk can contribute to model biases and create adverse effects for consumers,” bank must use appropriate oversight, expertise, and controls to mitigate the risk of discrimination under the ECOA and FHA, unfair, deceptive, or abusive acts or practices under Dodd-Frank, unfair or deceptive acts or practices under the FTC Act, and privacy concerns. Ms. Gardineer also commented that “even when individual variables are not inherently biased, the complex interactions typical of some advanced analytics can lead to unintended effects or outcomes.” She indicated that to control for this risk, lenders need “to devote adequate and integrated technical and compliance expertise to develop and implement risk management,” which may include (1) suitable processes to make complex models understandable, (2) change management and model governance that appropriately prioritizes fairness, (3) sufficient third-party risk management, and (4) independent validation of these processes and controls when warranted. She also observed that the use of alternative data in credit decisions can benefit consumers who would otherwise be denied credit when only traditional data is used.
- John L. Culhane, Jr. & Richard J. Andreano, Jr.
On December 14, CFPB Director Rohit Chopra was scheduled to appear before the House Financial Services Committee for a hearing, “Consumers First: Semi-Annual Report of the Consumer Financial Protection Bureau.” A copy of the Committee Memorandum is available here.
On Thursday, December 15, Director Chopra was scheduled to appear before the Senate Banking Committee for a hearing, “The Consumer Financial Protection Bureau’s Semi-Annual Report to Congress.”
The CFPB has issued its Semi-Annual Report to Congress covering the period beginning October 1, 2021 and ending March 31, 2022. Although the House and Senate hearings were officially billed as discussions of the semi-annual report, the scope of lawmakers’ questions to Director Chopra had been expected to include issues not addressed in the report, most notably how the CFPB is responding to the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. v. CFPB. In that decision, the panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution.
Ginnie Mae advises in the report that in early 2016 it and investors in Ginnie Mae guaranteed MBS “first began to identify a wave of early loan repayments and serial refinancing as a problem with much greater incidence in VA mortgages in Ginnie Mae securities than loans insured by other agencies.” Ginnie Mae states that while some refinances were due to legitimate factors, specifically lower interest rates and the lower costs to refinance a VA loan as compared to a Federal Housing Administration (FHA) insured loan, “Ginnie Mae’s internal analysis indicated that some loan prepayments of VA mortgages could not be justified by economic factors.” Ginnie Mae refers to the loan churning that was occurring with VA loans. Ginnie Mae also states that when a higher level of prepayments “is the result of marketing schemes to repeatedly refinance a borrower’s mortgage, without a corresponding net benefit to the borrower, refinancing can be harmful from an economic standpoint.” Ginnie Mae notes steps that it and VA took, including steps required by the Growth Act, to address the issue. We recently reported on a VA proposal to amend its rules regarding refinance loans to reflect requirements imposed by the Growth Act.
Ginnie Mae believes that because VA loans have increased in their share of loans backing Ginnie Mae guaranteed securities, and because of the characteristics of the VA loan program, the program requires continued scrutiny. However, Ginnie Mae notes that it “does not have the authority to set program parameters regarding loan origination practices or to take action if unfair or deceptive origination and servicing practices are detected at the [lender] level—concerns in these areas are normally the jurisdiction of the insuring agency or the Consumer Financial Protection Bureau (CFPB).”
While Ginnie Mae believes that the liquidity in the VA loan market is strong, it also believes that “there are opportunities to strengthen and/or solidify liquidity and protect America’s veterans, especially through stronger coordination with other agencies.” Ginnie Mae makes the following recommendations:
- VA and Ginnie Mae create a VA/Ginnie Mae Working Group that meets quarterly to discuss current issues, policy considerations and market conditions.
- VA, Ginnie Mae, and CFPB create a Protecting Veterans Task Force that meets at least biannually to discuss and share monitoring information related to any potential lender abusive, unfair or deceptive practices.
- VA, Ginnie Mae, and CFPB execute a Memorandum of Understanding to share information and data. (Ginnie Mae notes that increased information sharing across these three agencies will both support VA program liquidity and enhance consumer protection for VA loan borrowers.)
We previously reported on a series of CFPB consent orders with lenders in which the CFPB alleged false and misleading advertising of VA refinance loans.
Ruling Could Influence FinCEN in Forthcoming Regulations Under the CTA
On November 22nd, an appeals court in Luxembourg issued a decision that highlights the tensions between anti-money laundering (AML) goals and privacy concerns, and could impact impending beneficial ownership regulations to be issued under the U.S. Corporate Transparency Act (CTA). Specifically, the appeals court decided that the general public’s access to beneficial ownership information (BOI) interfered with the fundamental right of privacy granted under the Charter of Fundamental Rights of the European Union (EU).
Luxembourg Court Strikes Down Public Access to Beneficial Ownership Database
In 2019, pursuant to an AML Directive to Member States of the EU, Luxembourg established a Register of Beneficial Ownership (Register) for information on beneficial owners of corporate entities. BOI provided by a corporate entity is generally available to regulators, law enforcement and financial institutions conducting due diligence on the corporate entity. Further, some BOI from the Register is available publicly, including through the internet–but upon request from a beneficial owner, the administrator of the Register could place restrictions on the broad access of certain information of that beneficial owner. To restrict public access, the beneficial owner must show that “access to [BOI] would expose the beneficial owner to disproportionate risk, risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation, or where the beneficial owner is a minor or otherwise legally incapable.”
A case was brought by two companies and their beneficial owners after the beneficial owners unsuccessfully requested that the administrator of the Register prevent public access to information concerning them. The Luxembourg district court found that the beneficial owners’ claims of privacy violations raised issues of fundamental rights under European law and sent questions to the appeals court for a preliminary ruling. As noted, the appeals court ruled that the general public’s access to BOI through the Register constituted a “serious interference” with the fundamental right of privacy granted under the Charter of Fundamental Rights of the European Union:
[I]n so far as the information made available to the general public relates to the identity of the beneficial owner as well as to the nature and extent of the beneficial interest held in corporate or other legal entities, that information is capable of enabling a profile to be drawn up concerning certain personal identifying data more or less extensive in nature depending on the configuration of national law, the state of the person’s wealth and the economic sectors, countries and specific undertakings in which he or she has invested.
In addition, it is inherent in making that information available to the general public in such a manner that it is then accessible to a potentially unlimited number of persons, with the result that such processing of personal data is liable to enable that information to be freely accessed also by persons who, for reasons unrelated to the [AML] objective pursued by that measure, seek to find out about, inter alia, the material and financial situation of a beneficial owner . . . . That possibility is all the easier when, as is the case in Luxembourg, the data in question can be consulted on the internet.
Furthermore, the potential consequences for the data subjects resulting from possible abuse of their personal data are exacerbated by the fact that, once those data have been made available to the general public, they can not only be freely consulted, but also retained and disseminated and that, in the event of such successive processing, it becomes increasingly difficult, or even illusory, for those data subjects to defend themselves effectively against abuse.
Importantly, when the appeals court balanced the right of privacy against the AML objectives of the Directive, it found that the AML objectives were critical enough to justify “even serious interferences with the fundamental rights enshrined in Articles 7 and 8 of the Charter.” Nonetheless, the appeals court found the public nature of the Register to reach beyond the AML objectives and tip the scale in favor of privacy rights. Luxembourg’s method of storing BOI, which required a person or entity to be able to demonstrate a legitimate interest in the information before it was disclosed, did not run afoul of European privacy rights. However, the appeals court found that there was insufficient AML benefit derived from allowing public access to the Register to justify such access. Specifically, the appeals court noted that although “the general public’s access to information on beneficial ownership ‘can contribute’ to combating the misuse of corporate and other legal entities and [public access] ‘would also help’ criminal investigations, it must be found that such considerations are also not such as to demonstrate that [public access] is strictly necessary to prevent money laundering and terrorist financing.”
Privacy Implications for FinCEN and the CTA
As we have blogged, the Financial Crimes Enforcement Network (FinCEN) has issued a final rule regarding the BOI reporting requirements pursuant to the CTA. The Final Rule will require millions of corporate entities registered to do business in the United States to report their BOI to FinCEN. While FinCEN and AML watchdog groups view this development as a “historic step in support of U.S. government efforts to crack down on illicit finance and enhance transparency,” there are also those who are concerned with the privacy risks involved in housing BOI in a government database. FinCEN still needs to issue further regulations under the CTA, including as to how the BOI data base will be maintained and accessed.
The CTA itself addresses privacy concerns in several ways, and does so in a manner that is dramatically different than the AML Directive. For example, BOI is only available to government agencies that send a written request, including a basis for the request, and is not generally available to the public. Within the Department of the Treasury specifically, access to beneficial ownership information is limited to officers and employees whose official duties require them to inspect the information and who have been appropriately trained and authorized. Overall, the CTA requires that FinCEN “maintain information security protections, including encryption, for information reported to FinCEN . . . and ensure that the protections . . . prevent the loss of confidentiality, integrity, or availability of information that may have a severe or catastrophic adverse effect.”
One of the most telling aspects of the CTA’s intent to protect privacy are the penalties for unauthorized disclosure of information: up to $500 per day for each day the violation continues, and/or imprisonment for up to five years. These penalties actually outweigh the penalties under the CTA for not registering as a beneficial owner, or for providing false BOI: up to $500 per day for each day the violation continues, and/or imprisonment for up to two years.
As noted, FinCEN still must issue regulations on the creation and mechanics of the BOI database. Given the privacy protections baked into the CTA by Congress, FinCEN already will be required to craft regulations that strongly protect BOI and restrict access. Even so, the recent decision in Luxembourg should put even more pressure on FinCEN to be careful. Certainly, the decision will provide industry commentators to the forthcoming regulations with more ammunition.
New York Considers an Alternative Approach
In March 2022, New York proposed legislation that would require limited liability companies registered in the state to disclose the names and addresses of their beneficial owners to the New York Department of State. Contra the CTA, and more akin to the EU AML Directive, the proposed legislation contemplates a public database to house BOI–although the information available to the greater public would be limited to which LLCs share common ownership. The public database would not contain names or addresses of beneficial owners; rather, if someone wanted to request that information, they would need to submit a formal request to law enforcement, similar to the federal Freedom of Information Act (FOIA).
New York is the only state to propose this type of BOI database at the state level, and the legislative intent offers insight into why New York has a particular focus on BOI. One of the Democratic Senators who proposed the bill said that “[m]oney laundering, tax avoidance, evasion of sanctions, and systemic code violations have been protected for too long in New York by the veil of LLC anonymity. Sometimes tenants don’t even know who their landlord actually is.” Thus, while AML objectives are certainly relevant at the state level, the New York legislation also seeks to address non-AML concerns, such as providing information to tenants and watchdog groups on otherwise unknown landlords who may be contributing to the deterioration of neighborhoods.
In the three approaches reflected by the EU AML Directive, the CTA and the proposed New York legislation, there is a balancing act between collecting and allowing access to BOI in order to fight money laundering and terrorist financing, and protecting privacy rights enshrined in our foundational legal texts like the EU Charter or U.S. Constitution. Beyond those considerations, this spectrum of privacy approaches raises the question of how global AML programs and requirements can be implemented with maximum consistency. Finally, looming over all of the government-maintained BOI databases is the specter of data breaches and cyber attacks, which threaten not only the individuals whose BOI is affected, but the government agencies themselves.
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New York Assembly Bill A3081, signed by Governor Kathy Hochul on November 21, effectively preempts any local law that would require mortgage lenders to register mortgages in default at any point prior to the filing of a notice of pendency in foreclosure proceedings. Many local governments in New York have put in place these registration requirements designed to prevent blight by shifting the burden of maintaining distressed properties to mortgagees. For example, the Town of Brookhaven on Long Island required mortgage holders to take action within 10 days of declaring a mortgage in default, including such obligations as retaining a local property manager, performing weekly inspections of the property if it is occupied, and paying semiannual fees. However, New York’s legislature has also addressed the issue at a statewide level through the so-called Zombie Property maintenance law, administered primarily by the state Department of Financial Services. Local zombie property laws duplicate the state-level effort and impose additional costs and administrative requirements on mortgages, often months before a property actually becomes vacant or enters foreclosure.
The new state law addresses the redundancy by prohibiting municipalities from requiring “registration of residential mortgages in default prior to a mortgagee filing a notice of pendency in a court of competent jurisdiction.” In New York, a notice of pendency must be filed at least 20 days before a final judgment directing a sale of a foreclosed property. See N.Y. Real Prop. Acts. Law § 1331. In other words, even though the state law still allows for local default mortgage registration requirements, they cannot kick in until much later in the process of moving from default to foreclosure. The law also caps the fees local governments may impose for default mortgage registration at $75 annually. In addition, the new law protects consumers by prohibiting lenders from passing along any of the costs associated with registration. Local governments also may not work around the new state law by attempting to shift the registration requirement to homeowners in default.
The combined impact of the new law is likely to be reduced administrative costs for lenders holding mortgages in default, as well as for defaulting borrowers, who may be relieved of additional burdens associated with the local inspection and maintenance requirements, particularly where those requirements applied to still-occupied properties. With the residential property market facing increasing uncertainty, other states may follow New York in legislative and regulatory efforts to balance the impact on borrowers, lenders, and communities.
- Lisa Lanham & Tanner Horton-Jones
Did You Know?
That CFPB and FHFA recently published updated loan-level data collected by the National Survey of Mortgage Originations. The survey covers borrowers who have recently obtained mortgages, and is designed to gathering feedback on borrowers’ experiences during the process of getting a mortgage, their perceptions of the mortgage market, and their future expectations. The data also provides updated mortgage performance and credit information. The CFPB’s press release can be found here, with the data itself being available on FHFA’s website here.
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