Mortgage Banking Update - June 8, 2023
In This Issue:
- Highest National Ranking From Chambers USA Awarded Again to Ballard Spahr’s Consumer Financial Services Group
- Housing Market Industry Group Urges Supreme Court to Preserve CFPB’s Mortgage and Real-Estate Regulations Regardless of Constitutional Question’s Outcome
- Plaintiffs Challenging Section 1071 Final Rule Seek Preliminary Injunction; Ballard Spahr to Hold June 15 Webinar
- This Week’s Podcast Episode: The Consumer Financial Protection Bureau’s Final Section 1071 Rule on Small Business Data Collection: What You Need to Know, Part I
- CFPB Speaks to ECOA and Small Business Lending Rule Coverage of Franchise Financing
- Federal Agencies Propose Automated Valuation Model Quality Control Rule
- Pending New York Bills Would Significantly Expand UDAP Liability and Persons Entitled to Sue
- DOL Issues Guidance for Field Staff on PUMP Act Requirements
- Will Ciminelli’s Impact on Wire Fraud Cases Ripple Out to Bank Fraud?
- SCOTUS Latest Clean Water Act Decision Raises More Questions About Chevron’s Future
- Arizona Amends Certain Licensing and Record-Keeping Provisions for Mortgage Brokers, Mortgage Bankers, and Commercial Mortgage Bankers
- Montana Mortgage Act is Amended Effective July 1, 2023
- Did You Know?
- Looking Ahead
We are pleased to report that Ballard Spahr’s Consumer Financial Services Group has once again received the highest national ranking from Chambers USA: America’s Leading Lawyers for Business. The Group was ranked in the highest tier nationally in the Compliance category of Financial Services Regulation: Consumer Finance. The Group was also ranked nationally in the categories of Litigation and Enforcement & Investigations.
Our firm is one of only three firms to be ranked in the highest tier nationally in the Compliance category and one of only two firms to have the highest aggregate ranking based on all three categories. Our CFS Group has been ranked in Band One for Compliance in each of the 18 years that Chambers USA has published a national ranking for Financial Services Regulation: Consumer Finance. The Group has also been nationally ranked in Litigation and Enforcement & Investigations every year since Chambers added Litigation and Enforcement & Investigations as categories of Financial Services Regulation: Consumer Finance.
These rankings demonstrate the strength of our CFS practice, with more than 70 lawyers across the country. Chambers USA annual rankings are compiled using a methodology that involves client interviews, peer reviews, and independent research. The rankings reflect criteria considered most valued by clients, including legal ability, professional conduct, client service, commercial awareness, diligence, and value. The rankings are not approved or sanctioned by any judicial body.
Released this week, the Chambers USA report praised the Group for its capability to support clients on both the state and federal regulatory levels. The report noted the Group’s work with banks and non-banks on the full range of consumer finance regulatory matters, including credit cards, mortgage, and auto finance issues. Chambers USA also noted the Group’s expertise in the areas of fintech, e-commerce, and prepaid cards and its ability to provide robust representation of clients in CFPB enforcement actions, arbitrations and litigation.
The 2023 edition quotes our clients who have said that Group members “recognize each other’s strengths and are willing to pass me to the attorney with the right skills rather than just trying to assist,” described the Group as “a leader in the consumer finance litigation and regulatory space [that is] excellent with big time class actions with potential massive liability,” and commented that the Group has “a deep bench and excellent team leaders too” and that “[t]he lawyers are very smart and practical.”
We are proud of the work we do, and very grateful to our clients for entrusting us to help them develop new products, defend them in private litigation and against enforcement actions, and assist them in navigating the increasingly complex array of federal and state regulations.
As the financial services industry continues to monitor the proceedings in Community Financial Services Association of America v. Consumer Financial Protection Bureau, an industry group composed of the Mortgage Bankers Association (MBA), National Association of Home Builders (NAHB), and National Association of REALTORS® (NAR) has filed a brief as amici curiae cautioning the Supreme Court against a ruling that could call into question all of the CFPB’s regulations. Writing in support of neither party, the group focuses its argument on the importance of limiting the impact any ruling may have on the consumer finance industry. While cautioning that the group intends to express neither support nor objection to the merits or legality of the CFPB’s past actions, the brief emphasizes “the potentially catastrophic consequences that a decision drawing those rules into doubt could have on the mortgage and real-estate markets.”
Even if the Court strikes down the Payday Lending Rule at issue in CFSA v. CFPB, the housing industry group calls for “a circumscribed ruling that does not call into question other crucial regulations issued by the CFPB over the past years while receiving funding under 12 U.S.C. § 5497.” Emphasizing the significant role that CFPB plays in the industry, the group notes that “virtually all financial transactions for residential real estate in the United States depend upon compliance with the CFPB’s rules, and consumers rely on the rights and protections provided by those rules.” Moreover, “the industry has invested billions of dollars into structuring its operations for compliance” with those rules. If the Court opens the door to invalidating not only the Payday Lending Rule but all rules promulgated using funds appropriated through the mechanism at issue, the group warns that this “could set off a wave of challenges and the housing market could descend into chaos.”
MBA, NAHB, and NAR identify several examples of the areas in which housing market participants rely on CFPB rules and guidance. The group first highlights the benefits to consumers of the disclosure requirements under TRID (the TILA-RESPA Integrated Disclosure Rule, codified at 12 C.F.R. parts 1024 and 1026, which integrated and simplified the previous disparate disclosure requirements of the Truth in Lending Act and Real Estate Settlement Procedures Act). The group next addresses the borrower protections promulgated under CFPB’s Regulation X, particularly with regard to the procedures for noticing and correcting servicer errors and creating nationwide standards for loss-mitigation applications prior to foreclosure. They also highlight the benefits to lenders of the CFPB’s ability-to-pay safe-harbor rule, which deems certain mortgages with an annual percentage rate at or below a weekly published rate to be compliant with TILA ability-to-pay requirements. Relying on the lowered legal risk profile created by this safe-harbor rule, lenders have originated millions of loans that might otherwise have been unavailable to purchasers.
To further underscore the degree to which these CFPB rules impact the housing finance industry, the group notes that several states—including New York, California, and Texas—statutorily require lenders to demonstrate adherence to Federal law in addition to state law, a process made simpler by CFPB’s role as the standard-setter for Federal financial regulators. If a ruling in CFSA v. CFPB called all of these rules into question, the group argues that the resulting uncertainty surrounding compliance with both state and Federal law would cause lenders to pull back on issuing new loans, with devastating consequences for homebuyers, builders, and real estate professionals. The reduced availability of credit would shift the housing market “toward the relatively few buyers who can afford to purchase a home with cash—all while the loss of financing depressed home values and thus the value of bank-owned residential mortgage-backed securities, potentially triggering solvency issues for some banks.”
To avoid these adverse consequences, the Court should follow its own example from Seila Law—the last time it addressed the Dodd-Frank Act—and sever any unconstitutional portions of the statute without disrupting the rest. The group notes that:
As Seila Law recognized, the Dodd-Frank Act has an express severability clause. 140 S. Ct. at 2209. Section 5302 of Title 12—called “Severability”—provides that “[i]f any provision of this Act” or any provision’s application in a given situation “is held to be unconstitutional, the remainder of this Act …shall not be affected thereby.” So “[t]here is no need to wonder what Congress would have wanted” under the circumstances here, “because it has told us.” Seila Law, 140 S. Ct. at 2209.
Pointing to the CFPB’s own brief, the industry group suggests that several provisions could be severed from § 5497 while leaving in place the statutory framework that allows CFPB to operate and fulfill the role Congress set out for it. For example, the provision that the CFPB’s funds “shall remain available until expended” (§ 5497(c)(1)) or that the agency’s budget shall not be subject to “review” by the Appropriations Committees (§ 5497(a)(2)(C)) could be removed without impacting the agency’s regulatory authority. Given the availability of this approach, MBA, NAHB, and NAR argue that “[t]he funding issue before the Court… should not be construed to implicate the CFPB’s substantive authority.” As a further step to minimize the regulatory disruption of an affirmance, the group calls on the Court to recognize explicitly that rules not presently encompassed by the question before it have “de facto validity.” The Court can also stay its judgment to allow Congress time to enact a proper funding mechanism without invalidating past acts funded through the unconstitutional mechanism, as it did in Buckley v. Valeo, 424 U.S. 1, 142-43 (1976), and Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 88 (1982). Even more so than in those cases, the industry group emphasizes that the intent of Congress to enable the CFPB’s regulatory actions is not in doubt. In sum, MBA, NAHB, and NAR urge that “the public interest demands” that the Court “mitigate the adverse consequences of a ruling that would call all the CFPB’s rules into question.”
Several other amici curiae highlight the potential impact on the financial services industry, and consequently on consumers and the economy in general, if the Court’s decision disrupts existing CFPB regulations beyond the Payday Lending Rule. As of May 15, the following amici have filed briefs in support of Petitioners:
- Farm Action, et al. – Amici argue that the Fifth Circuit’s reading of the Appropriations Clause threatens the Farm Credit System, including the Farm Credit Administration, and express concern with the potential loss of CFPB activities that expand access to credit in the agricultural sector.
- States of New York, et al. (New York, Arizona, California, Colorado, Connecticut, Delaware, Hawaiʻi, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin, and the District of Columbia) – Amici argue that their states have a compelling interest in preserving the validity of the CFPB’s regulatory and enforcement actions, and that “[t]he Fifth Circuit’s vacatur of a completed CFPB action is neither justified nor compelled by law as a remedy for a purported Appropriations Clause violation.”
- Community Development Financial Institutions and Credit Unions (Including Self-Help Credit Union, the Center for Responsible Lending, and National Association of Latino Community Asset Builders) – Amici argue that small financial institutions rely on the body of rules, policies, and practices developed by the CFPB, and interrupting its operations would cause “massive disruption.”
- Professors of History and Constitutional Law – Amici argue that Congress’s ability to direct how money should be drawn from the Treasury should not be narrowly constrained by “judicial second-guessing” and that “Congress has authorized self-funding and indefinite appropriations since the founding.”
- Lawyers’ Committee for Civil Rights Under Law, et al. – Amici argue that “the stable means of funding Congress set out in law was, and is, a constitutionally valid choice grounded in Congress’s knowledge of events contributing to the crisis, the long track record of similarly funded regulators, and the plain text of the Constitution’s Appropriations Clause.”
- Military and Veterans Organizations – Amici argue that “CFPB plays a unique and essential role in protecting servicemembers’ financial health and readiness” and that the “Department of Veterans Affairs is funded in a range of ways, some of which could be called into question by this case.”
- National Treasury Employees Union – Amicus, the bargaining unit representative of employees at the CFPB, argues that the Fifth Circuit’s ruling is at odds with Supreme Court precedent “that the Appropriations Clause requires only that the payment of Treasury funds ‘be authorized by statute.’”
- Current and Former Members of Congress – Amici, identifying themselves as more than 140 current and former members of Congress, including sponsors and drafters of Dodd-Frank, argue that Congress has authority to exercise its appropriations power in a manner “tailored to the problem at hand” and that this “flexibility is precisely how the Framers drafted the Constitution, leaving the ultimate choice of how to appropriate in Congress’s hands.”
- 90 State and Local Nonprofit Organizations – Amici argue that state constitutions’ appropriations provisions mirror the U.S. constitution, that state legislatures regularly establish independently funded regulatory agencies to meet a wide variety of purposes, and that adopting the Fifth Circuit’s ruling could “hobble agencies throughout the states.”
- AARP and AARP Foundation – Amici argue that upholding the Fifth Circuit’s interpretation threatens the protections that older Americans receive from the CFPB’s activities.
- Public Citizen Litigation Group on behalf of Ten Consumer Advocacy Organizations (Americans for Financial Reform Education Fund, Consumer Action, Consumer Federation of America, Consumer Reports, Electronic Privacy Information Center, National Association of Consumer Advocates, National Consumer Law Center, Student Borrower Protection Center, U.S. Public Interest Research Group) – Amici argue that the CFPB’s funding mechanism functions as an appropriation regardless of the specific label Congress used to describe it in the statute, and that it is wrong to interpret this as “insulat[ing] the CFPB from Congress’s appropriations power.”
- Financial Regulation Scholars – Amici argue that defunding the CFPB would have numerous detrimental economic consequences and that “[t]hese effects would reach entities regulated and protected by the other federal bank regulators, which are funded in the same way as the CFPB.”
Respondents’ brief is due July 3, with supporting amicus briefs due July 10. We will continue to monitor and report on developments in this case, given the potential wide-reaching impact on the industry.
- Tanner Horton-Jones
The plaintiffs in the lawsuit filed in a Texas federal district court challenging the validity of the CFPB’s final rule implementing Section 1071 of the Dodd-Frank Act have filed a motion seeking a preliminary injunction. (The final rule was published in today’s Federal Register.) Originally filed last month naming the Texas Bankers Association and Rio Bank, McAllen, Texas as plaintiffs, the complaint was amended this month to add the American Bankers Association as a plaintiff.
On Thursday, June 15, 2023, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “An Even Deeper Dive into the CFPB’s Final Section 1071 Rule on Small Business Data Collection.” The webinar is a follow-up to our April webinar on the rule that had record-breaking attendance. We received many excellent questions from attendees and will be providing answers to those questions in the June webinar. For more information and to register for the June webinar, click here.
The amended complaint alleges that the 1071 rule is invalid because the CFPB’s funding structure is unconstitutional and because portions of the rule also violate various requirements of the Administrative Procedure Act. The plaintiffs’ constitutional argument is that because the CFPB’s funding structure violates the Appropriations Clause, the rule is invalid and should be vacated based on Community Financial Services Association of America Ltd. v. CFPB in which a Fifth Circuit panel held that the CFPB’s funding is unconstitutional. (The U.S. Supreme Court has agreed to review the decision in its next Term.)
In their preliminary injunction motion, the plaintiffs ask the court to enjoin the final rule and stay the compliance dates and to keep the preliminary injunction in place pending the Supreme Court’s decision in the CFSA case. In support of their motion, the plaintiffs assert that Rio Bank, as well as the plaintiff Associations’ other members, “are immediately beginning to undertake substantial expenses in preparation for the scheduled 2024 implementation of the [Section 1071 rule].” They allege that they satisfy the standard for issuance of a preliminary injunction because (1) they are likely to succeed on the merits of their constitutional claim, (2) plaintiffs and their members will be irreparably harmed without a stay because they will be forced to spend significant sums preparing to comply with the rule, and (3) the balance of equities leans heavily in the plaintiffs’ favor because the CFPB is seeking to enforce an invalid rule.
At the end of March 2023, the CFPB issued its long-awaited final rule to implement Section 1071 of the Dodd-Frank Act. Section 1071 amended the Equal Credit Opportunity Act to require financial institutions to collect and report certain data in connection with credit applications made by small businesses, including women- or minority-owned small businesses. Although the final rule will be effective on August 29, 2023, it contains a tiered compliance date schedule, with an earliest compliance date of October 1, 2024 for financial institutions that originate the most covered credit transactions and later compliance dates for institutions with lower transaction volumes.
In Part I of this two-part episode, we first take a close look at the final rule’s key definitions, specifically those for “covered application,” “covered financial institution,” “covered credit transaction,” and “small business.” We then discuss the data points that must be collected about the credit applied for, the borrower, and the borrower’s principal owners and consider how the data points are similar to or different from the data points required to be collected pursuant to the Home Mortgage Disclosure Act. We conclude with a discussion of the rule’s provisions regarding procedures for the collection of data, such as the restrictions on employee and officer access to data.
To listen to Part I of the episode, click here.
The CFPB has published a document on its website that “communicates the extent to which the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B apply with respect to franchises seeking credit to finance their businesses.” The document also addresses the application of the CFPB’s Section 1071 rule on small business lending to franchise financing.
With regard to ECOA and Regulation B coverage, the CFPB first observes that franchisees generally obtain credit either directly from the franchisor or from third party finance companies that are either independent of the franchisor or brokered by or affiliated with the franchisor. It then states that because in either scenario the franchisee is being granted the right to defer payment for debts they incur, the financing would be “credit” under the ECOA and Regulation B. The CFPB indicates that franchise financing would also constitute “business credit” subject to the ECOA and Regulation B, which is defined as “extensions of credit primarily for business or commercial (including agricultural) purposes.” As a result, the CFPB will treat creditors, including franchisors, providing financing to franchisees as subject to the ECOA and Regulation B prohibitions against discrimination.
With regard to coverage of the CFPB’s Section 1071 rule on small business lending, the CFPB indicates that entities providing credit to franchisees, whether or not affiliated with the franchisor, would generally be “financial institutions” subject to the rule’s data collection and reporting requirements to the same extent as any other provider of business credit. The CFPB notes, however, that under certain circumstances, franchisors that directly provide credit to franchisees may be subject to the rule’s exception for “trade credit,” which the rule defines as a “financing arrangement wherein a business acquires goods or services from another business without making immediate payment in full to the business providing the goods or services.” Thus, according to the CFPB, “if a franchisor— rather than a third party providing credit to franchisees—is providing goods and services (such as inventory, marketing rights, or licensing) and allowing the franchisee to repay it for those goods and services over time, that transaction could meet the definition of trade credit such that reporting would not be required under the rule.” (We assume that the CFPB’s reference to “a third party providing credit to franchisees” is intended to refer to a third party providing credit to a franchisee that the franchisee uses to purchase goods and services from the franchisor or another provider.)
The CFPB adds two caveats. The first caveat is that even if a franchisor is providing trade credit to franchisees and thus is not required to collect and report data under the small business lending rule, it remains subject to the ECOA and Regulation B prohibitions against discrimination. The second caveat is that to the extent a franchisor is providing credit that could be used for purposes other than the purchase of its own goods or services, such as general operating expenses, purchase of the premises in which the franchise will operate or cash register funds, that aspect of the transaction would not constitute trade credit and the franchisor would be required to collect and report data under the rule if it meets the rule’s origination threshold for coverage.
The “document” published by the CFPB appears to be yet another substitute for amendments to the Official Staff Commentaries. We continue to encourage the CFPB to revive the Official Staff Commentaries as the appropriate method for interpreting its regulations rather than through the issuance of arbitrary “documents.”
Pursuant to section 1473(q) of the Dodd-Frank Act, a group of federal agencies have proposed a quality control rule for automated valuation models (AVMs). The agencies are the Comptroller of the Currency, Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Federal Reserve Board and National Credit Union Administration. Comments on the proposed rule will be due 60 days after publication in the Federal Register. The agencies propose that the final rule would be effective the first day of a calendar quarter following 12 months after publication of the rule in the Federal Register.
Under the proposed rule, an AVM would be defined as “any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer’s principal dwelling collateralizing a mortgage.” The proposed rule would apply regardless of whether the credit was for consumer purposes or for business purposes. The proposed rule would incorporate the definition of “mortgage originator” from section 103 of the Truth in Lending Act (TILA). Subject to exceptions, the section provides that the “term “mortgage originator”-
(A) means any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain-
(i) takes a residential mortgage loan application;
(ii) assists a consumer in obtaining or applying to obtain a residential mortgage loan; or
(iii) offers or negotiates terms of a residential mortgage loan;
(B) includes any person who represents to the public, through advertising or other means of communicating or providing information (including the use of business cards, stationery, brochures, signs, rate lists, or other promotional items), that such person can or will provide any of the services or perform any of the activities described in subparagraph (A).”
The proposed rule would define a “secondary market issuer” as “any party that creates, structures, or organizes a mortgage-backed securities transaction.”
The proposed rule would apply to the use of an AVM by a mortgage originator or secondary market issuer “in determining the value of collateral in connection with making a credit decision or covered securitization determination regarding a mortgage or mortgage-backed security.” A “credit decision” would be defined as “a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, including a decision whether to extend new or additional credit or change the credit limit on a line of credit.” A “covered securitization determination” would be defined as “a determination regarding: (A) Whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer; or (B) Structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations.”
The proposed rule would require that mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in these transactions adhere to quality control standards designed to:
(i) Ensure a high level of confidence in the estimates produced;
(ii) Protect against the manipulation of data;
(iii) Avoid conflicts of interest;
(iv) Require random sample testing and reviews; and
(v) Comply with applicable nondiscrimination laws.
For purposes of the requirements, “control systems” would be defined as “the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulations.” Addressing the proposed requirements in the preamble to the proposed rule, the agencies state that “[t]his approach would allow mortgage originators and secondary market issuers the flexibility to set their quality control standards for covered AVMs as appropriate based on the size of their institution and the risk and complexity of transactions for which they will use covered AVMs.”
The agencies also advise in the preamble that they “considered whether to propose more prescriptive requirements for the use of AVMs and decided not to do so. Different policies, practices, procedures, and control systems may be appropriate for institutions with different business models and risk profiles, and a more prescriptive rule could unduly restrict institutions’ efforts to set their risk management practices accordingly.”
The fifth factor for the quality control standards—compliance with applicable nondiscrimination laws—is not specified in the Dodd-Frank Act, and the agencies added the factor based on their authority under the Act to account for any other factor that the agencies determine to be appropriate. Addressing the potential for bias in AVMs, the agencies state in the preamble that “[a]s with models more generally, there are increasing concerns about the potential for AVMs to produce property estimates that reflect discriminatory bias, such as by replicating systemic inaccuracies and historical patterns of discrimination. Models could discriminate because of the data used or other aspects of a model’s development, design, implementation, or use. Attention to data is particularly important to ensure that AVMs do not rely on data that incorporate potential bias and create discrimination risks. Because AVMs arguably involve less human discretion than appraisals, AVMs have the potential to reduce human biases. Yet without adequate attention to ensuring compliance with Federal nondiscrimination laws, AVMs also have the potential to introduce discrimination risks.” (Footnote omitted.)
The proposed rule would not apply to the use of AVMs in (i) monitoring of the quality or performance of mortgages or mortgage-backed securities, (ii) reviews of the quality of already completed determinations of the value of collateral, or (iii) the development of an appraisal by a certified or licensed appraiser.
In the preamble, the agencies address the common situation of Fannie Mae or Freddie Mac granting appraisal waivers:
“[When Fannie Mae and Freddie Mac (the GSEs)] use AVMs to determine whether the mortgage originator’s estimated collateral value or the contract price meets acceptable thresholds for issuing an appraisal waiver offer, the GSEs would be making a “covered securitization determination” under the proposed rule. As a result, the proposed rule would require the GSEs, as secondary market issuers, to maintain policies, practices, procedures, and control systems designed to ensure that their use of such AVMs adheres to the rule’s quality control standards. On the other hand, when a mortgage originator submits a loan to determine whether a GSE will offer an appraisal waiver, the mortgage originator would not be making a “covered securitization determination” under the proposed rule because the GSE would be using its AVM to make the appraisal waiver decision in this context. As a result, the mortgage originator would not be responsible for ensuring that the GSEs’ AVMs comply with the proposed rule’s quality control standards.”
Addressing the proposed rule, CFPB Director Chopra continued his theme of asserting that automated systems may have baked in biases:
“Algorithmic appraisals that use so-called automated valuation models can be used as a check on a human appraiser or in place of an appraisal. Unlike an appraisal or broker price opinion, where an individual person looks at the property and assesses the comparability of other sales, automated valuations rely on mathematical formulas and number crunching machines to produce an estimate of value.
While machines crunching numbers might seem capable of taking human bias out of the equation, they can’t. Based on the data they are fed and the algorithms they use, automated models can embed the very human bias they are meant to correct. And the design and development of the models and algorithms can reflect the biases and blind spots of the developers. Indeed, automated valuation models can make bias harder to eradicate in home valuations because the algorithms used cloak the biased inputs and design in a false mantle of objectivity.”
The Director also stated that “[e]merging AI-marketed technologies can negatively impact civil rights, fair competition, and consumer protection. Because technology has the power to transform our lives, we must ensure that AI-marketed technologies do not become an excuse for evasion of the law and consumer harm. It is critical that these emerging technologies comply with the law.”
The Director did not offer any examples of situations where AVMs were found to have inherent biases.
Two companion bills titled the “Consumer and Small Business Protection Act” have been introduced in the New York legislature would make sweeping changes to the provisions of the state’s general business law (Section 349) dealing with deceptive practices. In addition to creating a new private right of action, the bills would greatly expand the powers of the New York attorney general. The bills are currently pending in the Assembly Codes Committee and the Senate Consumer Affairs and Protection Committee.
- Currently, Section 349 only prohibits deceptive acts or practices. The bills would expand the prohibited conduct to include unfair or abusive acts or practices. (The federal Consumer Financial Protection Act gives authority to the New York attorney general and the New York Department of Financial Services to bring actions for violations of the CFPA’s prohibition of unfair, deceptive, or abusive acts or practices.)
- Judicial interpretations have limited the scope of Section 349 to “consumer-oriented conduct,” meaning acts or practices directed toward the public at large. The bills would eliminate this judicially-imposed requirement to provide that actions can be brought under Section 349 “regardless of whether or not the underlying violation is consumer-oriented [or] has a public impact.”
- Currently, private actions can only be brought under Section 349 for injunctive relief. The bills would allow statutory damages of $1000 plus actual damages to be awarded in private actions and make the award of reasonable attorneys’ fees and costs to a prevailing plaintiff mandatory rather than discretionary.
- The bills would allow private plaintiffs and the attorney general to bring actions under Section 349 “regardless of whether or not the underlying violation…involves goods, services, or property for personal, family, or household purposes.” Thus, this would expand the coverage of Section 349 to include businesses disputes, not just consumer disputes.
- The bills would define a “person” who can bring an action under Section 349 as “an individual, firm, corporation, partnership, cooperative, association, coalition or any other organization’s legal entity, or group of individuals however organized.”
- The bills provide that standing to bring an action under Section 349 “shall be liberally construed and shall be available to the fullest extent otherwise permitted by law.”
- The bills would allow any individual or non-profit organization entitled to bring an action under Section 349 “on behalf of himself or herself and such others to recover actual, statutory and/or punitive damages or obtain other relief as provided for in this article.” In such an action, statutory damages would be limited to $1,000 for each named plaintiff and “such amount as the court may allow for all other class members without regard to a minimum individual recovery, not to exceed the lesser of one million dollars or two per centum of the net worth of the business.”
- The bills include a provision intended to give non-profits “tester standing.” It would allow a non-profit organization to bring an action under Section 349 on behalf of itself or any of its members, or on behalf of members of the general public “who have been injured by reason of any violation of this section, including a violation involving goods or services that the non-profit organization purchased or received in order to test or evaluate qualities pertaining to use for personal, family, or household purposes.” Although additional analysis would need to be undertaken, this provision might run afoul of the Federal Arbitration Act (FAA) if the beneficiaries of a “tester” action were parties to an otherwise enforceable arbitration agreement that covered the claims asserted. Alternatively, any relief obtained in such a “tester” action might be limited to persons who are not parties to an arbitration agreement, even if the named plaintiff did not agree to arbitrate. As the U.S. Supreme Court has emphasized, “states [cannot take steps that] … conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms” …. States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons …. [State law is preempted if it] “stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress ….”
The United States Department of Labor (DOL) recently issued a Field Assistance Bulletin (found here) providing guidance to field staff regarding the Providing Urgent Maternal Protections for Nursing Mothers Act (PUMP Act). We previously summarized the requirements of the PUMP Act in our alert here.
The Field Assistance Bulletin provides detailed guidance on the PUMP Act and includes information and examples as to what employers must do to comply with the new law. A summary of the Bulletin is provided below:
- Break Time Requirements
- Employers must provide reasonable break time each time an employee needs to pump breast milk at work for one year after the child’s birth.
- The frequency, timing and duration of breaks will vary based on each individual’s situation.
- Employers cannot require an employee to adhere to a fixed schedule that does not meet the employee’s need. Any agreed upon schedule may need to be adjusted if pumping needs change.
- Examples of Reasonable Break Times:
- Four 25-minute pump breaks each day after first returning to work; then two 25-minute pump breaks when the child is six months old.
- Two 30-minute breaks each day for an employee with a nine year old child.
- One 20-minute break for a part-time employee whose child is six months old.
- Break time to pump must be paid if otherwise required under the Fair Labor Standards Act (FLSA). Under the FLSA, short breaks of 20 minutes or less must be considered hours worked and paid.
- If employers provide paid break times and employees use that time to pump, employees must be compensated the same as other employees for the break time.
- Non-exempt employees must be completely relieved of duties or the time spent pumping is counted as hours worked. Example: An employee receives a work call while taking a pump break; the time she spent on the call must be counted as hours worked.
- Exempt employees’ salaries may not be reduced to reflect break time to pump. Example: An exempt administrative employee takes three pump breaks per day; the employer cannot deduct the time used for pump breaks from the employee’s salary.
- Space Requirements
- Employers must provide space for employees to pump at work that is (1) shielded from view; (2) free from intrusion from coworkers and the public; (3) available each time it is needed; and (4) not a bathroom.
- A temporary space is sufficient so long as it meets the above requirements.
- Privacy can be ensured by displaying a sign when the space is in use or providing a lock for the door.
- Teleworking employees receive the same protections – they must be free from employer observation while pumping.
- The space must contain a place for the employee to sit and a flat surface other than the floor on which to place the pump.
- Employees must also be able to safely store milk at work.
- Access to electricity in the pumping space, as well as sinks nearby, are ideal.
- Exemption for Small Employers if Undue Hardship: Undue hardship is determined on an individual basis. The employer bears the burden of proof. Considerations include the difficulty or expense of compliance in light of size, financial resources, and the nature and structure of the business.
- Exemption for Crew Members of Air Carriers
- Rail Carriers
- Motorcoach Services Operators
- Employee Protections
- Prohibited Retaliation. The PUMP Act prohibits retaliation for an employee who engages in protected activity, including making complaints to one’s supervisor, the employer or the DOL; requesting payment of wages; cooperating with a DOL investigation; exercising or attempting to exercise rights under the act; or testifying at trial. An example offered by the Bulletin is an employee running late from her lunch break after pumping, and her supervisor tells her she cannot use any more time for “personal stuff.” When the employee asked for another pump break, she is sent home for the rest of the day.
- Enforcement. An employee may file a complaint with the DOL or a private cause of action. In order to file a private suit for non-compliance, the employee must first notify her employer and allow the employer 10 days to come into compliance. However, the employee is not required to provide this notice if: (1) the worker has been fired for requesting break time or space; (2) the worker has been fired for opposing employer conduct related to pumping rights; or (3) where the employer has expressly refused to comply.
- Posting Requirements
- Employers are required to post and keep posted the published poster under the FLSA.
The takeaway for employers is that they should review their policies and practices regarding employees who need to pump breast milk while at work to ensure they are in compliance with the PUMP Act in order to avoid claims under this new law.
Ballard Spahr’s Labor and Employment Group frequently advises employers on compliance issues related to employment laws related to pregnancy, lactation and related issues. In addition, we frequently defend employers in matters brought under the FLSA.
In January, we blogged on the Southern District of New York sentencing of Danske Bank to three years of probation and a forfeiture of $2.059 billion. As we noted at the time, the bank was charged with bank fraud, rather than violation of the Bank Secrecy Act (BSA), even though the “heart of the criminal case” was Danske Bank’s concealment (now acknowledged via plea) of its own AML failures in its dealings with three U.S. banks, thus impacting their own compliance with the BSA.
This was, of course, not the first time that the Department of Justice (DOJ) has used bank fraud charges instead of proceeding under the BSA in dealing with a foreign bank. Indeed, the pending case against Turkish bank Halkbank involves in part bank fraud charges.
But DOJ may be forced to reconsider tactics soon: The Supreme Court’s decision earlier this month in Ciminelli v. United States, et al., which addressed and ultimately voided the Second Circuit’s longstanding “right to control” theory of fraud as a basis for liability under the federal wire fraud statute, could have ramifications for DOJ’s approach using the similarly structured bank fraud statute.
The Ciminelli Decision
Ciminelli dealt with a scheme involving state government lobbyists and a New York construction company owned by Louis Ciminelli (Ciminelli), who together worked to ensure that the company received preferential treatment from New York’s “Buffalo Billion” initiative, an investment program administered through a nonprofit affiliated with the State University of New York (SUNY) that aimed to invest a billion dollars in upstate development projects. Essentially, Ciminelli’s company allegedly paid to ensure that the lobbyists would tailor any requests for proposal (RFPs) issued by the program to Ciminelli’s company’s candidacy, and guarantee it preferred status for development funds.
The individuals involved were indicted on 18 counts, including wire fraud (18 U.S.C. § 1343). The wire fraud statute reads in relevant part:
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises[.]
For comparison, importantly, the bank fraud statute (18 U.S.C. § 1344) reads:
Whoever knowingly executes, or attempts to execute, a scheme or artifice-
- To defraud a financial institution; or
- To obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises[.]
When prosecuting the case, DOJ relied on the “right to control” theory of fraud enshrined in Second Circuit precedent – allowing a prosecutor to establish wire fraud “by showing that the defendant schemed to deprive a victim of potentially valuable economic information necessary to make discretionary economic decisions.” Consistent with that theory, the jury was provided with two key instructions on application of the statute:
- that Section 1343’s use of the term “property” “includes intangible interests such as the right to control the use of one’s assets[,]” and that the jury could find that defendants harmed this right if the nonprofit was “deprived of potentially valuable economic information that it would consider valuable in deciding how to use its assets”; and further
- that “economically valuable information” is defined as “information that affects the victim’s assessment of the benefits or burdens of a transaction, or relates to the quality of goods or services received or the economic risks of the transaction.”
On appeal, Ciminelli argued that the “right to control one’s assets” is not “property” for purposes of the wire fraud statute. The Second Circuit affirmed his conviction, holding that “by rigging the RFPs to favor their companies, defendants deprived [the nonprofit] of potentially valuable economic information.”
The Supreme Court simply wasn’t buying it. Writing for a unanimous Court, Justice Thomas invalidated the right-to-control theory as a valid basis for liability under 18 U.S.C. § 1343. Beginning with the text of the statute, Justice Thomas notes that “[a]lthough the statute is phrased in the disjunctive” – i.e., it seems to distinguish between schemes “to defraud” on the one hand and “for obtaining money or property by means of false or fraudulent pretenses, representations, or promises” on the other – the Court has “consistently understood” the “money or property” requirement as a limitation on the “scheme to defraud” element. Thomas goes on to state that “the fraud statutes” (notably, not cabining this to Section 1343 only) “do not vest a general power ‘in the Federal Government . . . to enforce (its view of) integrity in broad swaths of state and local policymaking[,]’” (quoting Kelly v. United States, 590 U.S. ___, ___ (2020)), but “[i]nstead . . . ‘protec[t] property rights only’” (quoting Cleveland v. United States, 531 U.S. 12, 19 (2000)).
After reviewing the evolution of the right-to-control theory, Justice Thomas declares that it “cannot be squared with the text of the federal fraud statutes” (again, not limiting the declaration to wire fraud) “which are ‘limited in scope to the protection of property rights.’” Ciminelli, slip op. at 6 (quoting McNally v. United States, 483 U.S. 350, 360 (1987)). Justice Thomas concludes by quoting DOJ’s concession as the nail in the coffin of the theory: “[if] the right to make informed decisions about the disposition of one’s assets, without more, were treated as the sort of ‘property’ giving rise to wire fraud, it would risk expanding the federal fraud statutes beyond property fraud as defined at common law and as Congress would have understood it” – a statement which Justice Thomas says displays agreement that the right-to-control theory “is unmoored from the federal fraud statutes’ text.” Ciminelli, slip op. at 7. Again, given the opportunity to confine his critique of the theory to the statute at issue, Thomas instead chooses to refer to the fraud statutes collectively.
The parallels with the theory of harm underlying the Danske Bank plea should be apparent. In concealing its AML failures in its (successful) efforts to obtain correspondent bank accounts at major U.S. banks, Danske Bank did not fraudulently obtain moneys or other actual property from those banks; instead, it deprived those banks of information that “affect[ed] [the banks’] assessment of the benefits or burdens of a transaction, or relate[d] to . . . the economic risks of the transaction” – namely, that going into business with Danske Bank was exposing those banks to potential BSA liability.
There are, to be sure, some significant distinctions between Section 1343 and Section 1344. Perhaps most importantly in light of Ciminelli’s stated concerns about excessive federalization of criminal law regarding fraud, Section 1344 deals with “some real connection to a federally insured bank, and thus implicates a pertinent federal interest.” Loughrin v. United States, 573 U.S. 351, 366 (2014). Indeed, Justice Kagan noted in Loughrin that “Congress passed the bank fraud statute [in 1984] to disapprove prior judicial rulings and thereby expand federal criminal law’s scope[.]” Id. at 360 (emphasis in original).
The context of the statute’s drafting also would lead to a very different original public meaning analysis than that conducted by Justice Thomas in Ciminelli; prosecutors could make a compelling argument that, by the 1980s, the public understanding of “schem[ing] to defraud” a bank extended to more sophisticated operations than a fraudster simply trying to acquire its funds. Further, Section 1344(1) separately breaks out the “scheme to defraud” prong from the “money or property” prong in Section 1344(2), thereby suggesting that Congress intended Section 1344(1) to have a broader meaning.
As an example, the Model Criminal Jury Instructions for the Ninth Circuit regarding Section 1344(1) define a “scheme to defraud” as follows (emphasis added):
[A]ny deliberate plan of action or course of conduct by which someone intends to deceive or cheat a financial institution and deprive it of something of value. It is not necessary for the government to prove that a financial institution was the only or sole victim of the scheme to defraud. It is also not necessary for the government to prove that the defendant was actually successful in defrauding any financial institution. Finally, it is not necessary for the government to prove that any financial institution lost any money or property as a result of the scheme to defraud.
Under Ciminelli, may the “something of value” include complete and accurate information from the defendant to a bank regarding the full AML risks related to conducting business with the defendant, so that the bank may run an adequate and risk-based BSA compliance program – consistent with the goals of the federal government to protect the U.S. financial system? Or, must the “something of value” involve property? Or, will DOJ now try to construct arguments that banks somehow suffer tangible property loss as a consequence of being misled as to AML risks? In the absence of regulatory fines imposed upon a bank, that argument may be difficult to maintain.
The Court’s emphasis in Ciminelli on property rights as the foundation of the fraud statutes, and its unwillingness to consider the deliberate deprivation of potentially valuable economic information as a violation of those rights, has created a new repository of troublesome (and eminently quotable by appellants) case law for federal prosecutors seeking to go after future bad actors in the Danske Bank mold. DOJ will need to prioritize analysis of the merits and pitfalls of continuing in this strategic approach to financial crime enforcement, versus testing the jurisdictional limits of the BSA with regard to foreign banks.
In its decision last week in Sackett v. Environmental Protection Agency, the U.S. Supreme Court issued a unanimous ruling that severely limits the federal government’s jurisdiction over wetlands and tributaries. Specifically, the Court rejected the Environmental Protection Agency’s (EPA) regulatory definition of what constitutes “Waters of the United States” subject to federal jurisdiction under the Clean Water Act (CWA). While the decision’s substance (discussed more fully in a Ballard Spahr legal alert) obviously has no direct relevance to consumer financial services, the decision does have relevance to an issue that directly impacts all federal agencies, including the CFPB, FTC, and federal banking agencies–namely what deference a court should give to agency interpretations of statutes when considering challenges to such interpretations.
Since the Supreme Court’s 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., the “Chevron framework” has typically been invoked by courts when reviewing a federal agency’s interpretation of a statute. Under the Chevron framework, a court will typically use a two-step analysis to determine if it must defer to an agency’s interpretation. In step one, the court looks at whether the statute directly addresses the precise question before the court. If the statute is ambiguous or silent, the court will proceed to step two and determine whether the agency’s interpretation is reasonable. If it determines the interpretation is reasonable, the court will ordinarily defer to the agency’s interpretation.
In a series of recent decisions, most notably its decision last Term in West Virginia et al. v. Environmental Protection Agency et al., the Supreme Court has appeared to cut back on Chevron deference. In West Virginia, without mentioning the Chevron framework, the Court invoked the “major questions doctrine” to strike down an EPA regulation interpreting the Clean Air Act. In Sackett, the Supreme Court also did not mention Chevron in explaining its refusal to defer to the EPA’s interpretation. Instead, it invoked what some commentators have called a “clear statement rule,” which is a rule of statutory construction that requires Congress to speak clearly when it wants to displace certain presumptions. In Sackett, the Supreme Court stated that “this Court ‘require[s] Congress to enact exceedingly clear language if it wishes to significantly alter the balance between federal and state power and the power of the Government over private property.’” (citation omitted). According to the Court, because “[r]egulation of land and water use lies at the core of traditional state authority…[a]n overly broad interpretation of the CWA’s reach would impinge on this authority.” (citations omitted).
As yet another decision in which the Supreme Court has opted not to apply Chevron when considering a challenge to an agency’s interpretation, Sackett reinforces the view of many observers that the Court is moving away from the Chevron framework to an approach that provides greater interpretative authority to the courts. The Supreme Court recently agreed to hear a case next Term (Loper Bright Enterprises, et al. v. Raimondo) in which the petitioners are directly challenging the continued viability of the Chevron framework. There is considerable speculation that the Court’s conservative majority will curtail, if not overrule, Chevron. In any event, it is hoped that the Court’s decision in Loper next Term will resolve the current uncertainty that exists as to the Chevron framework’s continued viability and application.
The Arizona Legislature recently passed House Bill 2010 (HB 2010), which amends certain licensing and record-keeping provisions for Mortgage Broker, Mortgage Banker, and Commercial Mortgage Banker Licensees, among others. A summary of the more salient amendments to existing Arizona mortgage laws is in the article that follows.
Ariz. Rev. Stat. §§ 6-906, 6-946, and 6-983 lay out the State’s recordkeeping requirements for mortgage brokers, mortgage bankers, and commercial mortgage bankers, respectively, including the types of records that must be held, the locations from which such records must be held, and the format in which such records must be held. On September 15, 2023 (the Effective Date), such provisions will be amended to permit any such licensee with multiple locations to maintain all required records:
- At its principal place of business in Arizona without first notifying the deputy director; and
- At a location outside of the state without first obtaining approval from the deputy director.
Additionally, amended Ariz. Rev. Stat. § 6-946 will permit mortgage bankers to store their records exclusively in a digital format without first obtaining approval from the deputy director. Significantly, the remaining provisions of Ariz. Rev. Stat. §§ 6-906, 6-946, and 6-983 remain largely the same, with the exception of some minor changes for grammar and clarity of existing law.
Ariz. Rev. Stat. § 6-991.04, which discusses the State’s requirements for mortgage licensees and exempt persons to employ loan originators, will be amended on the Effective Date, as well. Ariz. Rev. Stat. § 6-991.04 presently obligates an employer to provide written notice to the deputy director that it has hired a loan originator. This written notice must be contain a written request for the loan originators license and must be signed by an officer or other authorized person, dated, and notarized. Moreover, § 6-991.04 also provides that the deputy director must forward the loan originator’s license to the employer upon receipt of this notice before the loan originator may begin working for his or her new employer. Amended § 6-991.04 removes the requirement that the notice be signed, dated, and notarized, as well as the requirement that the deputy director forward the loan originator’s license to the employer before the loan originator commences his or her employment. All other previous requirements for employing loan originators remain in effect.
Lastly, as such changes relate to the aforementioned mortgage licensees, Ariz. Rev. Stat. § 6-908, which provides for written testing procedures for mortgage brokers, is amended on the Effective Date to permit individuals to attempt to pass the State’s required written test four times within a twelve month period. Before the amendment, such individuals were limited to two attempts to pass within a 12-month period.
Importantly, we note that HB 2010 also amends certain requirements related to Premium Finance Company, Consumer Lender, and Collection Agency Licensees. An entity engaged in any business activities covered in HB 2010, including those related to the mortgage business, should consult the full text of HB 2010 in order to determine how such changes will affect its business operations.
- Lisa M. Lanham & Preston J. Spadaro
On February 16, 2023, Gov. Gianforte signed House Bill 30 (HB 30) into law, which made changes to the Montana Mortgage Act (the Act). Effective on July 1, 2023 (the Effective Date), the Act will be amended to include the following:
- Remote Work Permissibility. HB 30 allows for remote work as long as the following requirements are met:
- The licensed mortgage entity’s employees and independent contractors do not meet with the public at an unlicensed personal residence;
- No physical or electronic business records are maintained at the remote location;
- The licensed mortgage entity has written policies and procedures for working remotely and the entity supervises and enforces the policies and procedures;
- No signage or advertising of the entity or the mortgage loan originator is displayed at any remote work location;
- The licensed mortgage entity maintains the computer system and customer information in accordance with the entity’s information technology security plan and all state and federal laws;
- Any device used to engage in mortgage business has appropriate security, encryption, and device management controls to ensure the security and confidentiality of customer information as required by rules and regulations adopted by the department;
- The licensed mortgage entity’s employees and independent contractors take reasonable precautions to protect confidential information in accordance with state and federal laws;
- The NMLS record of a mortgage loan originator that works remotely designates a properly licensed location as the mortgage loan originator’s official workstation and a designated manager as a supervisor; and
- The licensed mortgage entity annually reviews and certifies that the employees and independent contractors engaged in mortgage business at a remote location meet the requirements of the Act. A licensee may be required to provide written documentation of its review to the Montana regulator upon request.
- Designated Managers. On and after the Effective Date, a lender or broker may have one Designated Manager who is responsible for the mortgage origination activity conducted by all mortgage loan originators, employees, contractors, and agents assigned to the entity. This is a departure from the previous requirement, which required every location with a lender or broker license to be overseen by a Designated Manager. The Designated Manager must be a Montana mortgage loan originator with three years of experience. Licensed branch offices are no longer required to have separate branch managers; however, it is still allowed under the statute.
- Prudential Standards for Nonbank Mortgage Servicers. HB 30 requires Montana to adopt CSBS’s “Model State Regulatory Prudential Standards for Nonbank Mortgage Servicers.” The new sections of the Act that incorporate these standards generally require mortgage servicers to maintain capital, liquidity, and corporate governance standards as set forth by the Division by rule. Importantly, while HB 30 is effective on July 1, 2023, administrative rulemaking will take place in the latter part of 2023, and the Montana regulator has been granted authority by HB 30 to add financial conditions for high-risk servicers and to remove conditions for low-risk servicers.
- Reporting Cybersecurity Incidents. On and after the Effective Date, a licensee must file a written report to the Montana regulator within 15 business days after the licensee has reason to know of a cybersecurity incident that affects the licensee’s ability to do business or involves access or potential access to a customer’s personal information.
- Reverse Mortgage Transactions. On and after the Effective Date, the definition of “mortgage servicer” will be expanded to include reverse mortgage transactions.
The above represents a high-level summary of the changes to the Act that will impact the industry. As always, the full text of the law should be consulted in order to understand all changes. Ballard will be tracking the administrative rulemaking for Montana’s prudential standards for nonbank mortgage servicers, and will update the industry one it learns any additional information.
- Lisa M. Lanham
Did You Know?
As of June 3, a warning message will appear on a company’s NMLS home screen if they list an expired business activity. The relevant activities include: (1) Other – Mortgage; (2) Other – Consumer Finance; (3) Other – Debt; and (4) Other – Money Services. While removal of these business activities is encouraged by NMLS, companies are not currently required to remove them.
- John Georgievski
A Ballard Spahr Webinar | June 15, 2023, 12:00 PM – 1:00 PM ET
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