Alston & Bird Consumer Finance Blog

Consumer Finance

Rhode Island Expands Lender Licensing for Retail Installment Contracts, Allows Remote MLO Work, and Makes Other Changes to Financial Institutions Laws

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Rhode Island made a number of amendments to financial institutions statutes with the passage of Senate Bill 2794 / House Bill 7781 Sub A. Changes include the scope of licensing requirements applicable to retail installment contracts and the permissibility of remote work for MLOs and other employees. The changes were effective upon passage on June 29, 2022.

Licensing for Retail Installment Contracts

The law expands the definition of lender to include a person who makes retail installment contracts, thereby necessitating a license to create such contracts. Under existing law, a “lender” is any person who makes or funds a loan, and a license is required to engage in such lending activity. The amendment clarifies that a loan is made or funded within Rhode Island if a retail installment contract is created. The amendments define retail installment contracts to mean “any security agreement negotiated or executed in this state, or under the laws of this state, including, but not limited to, any agreement in the nature of a mortgage, conditional sale contract, or any other agreement whether or not evidenced by any written instrument to pay the retail purchase price of goods, or any part thereof, in installments over any period of time and pursuant to which any security interest is retained or taken by the retail seller for the payment of the purchase price, or any part thereof, of the retail installment contract.” Note that the law previously required a license to purchase or acquire retail installment contracts and defined the term in a separate statutory section.

MLO Remote Work

As with many jurisdictions, Rhode Island has also relaxed rules relating to remote work for employees of a mortgage licensee. Pursuant to the amendments, licensees no longer need to provide the physical premises for employees, as long as they continue to supervise the services provided by the employee to the licensee. Under the amendments, a licensee’s employees, including mortgage loan originators, may work from a remote location if certain conditions are met including that: (1) their residence or other location is identified in the records of the licensee and is within a reasonable distance of a place of business named in the licensee’s license or branch certificate, (2) the licensee maintains policies and procedures for supervision of, and employs appropriate risk-based monitoring and oversight process of work performed by, employees working from remote locations; (3) computer system access is subject to a comprehensive written information security plan; (4) in-person customer interaction does not occur at the remote location; and (5) physical records are not maintained at the remote location. The law also removes previous prohibitions on conducting other business at a licensed location without prior approval but adds a prohibition on tying services to a requirement that the consumer purchase any other product or service from a specified provider including those providers with whom the licensee is sharing office space.

Note that the Rhode Island Division of Banking has also issued guidance clarifying that MLOs are not required to live within a certain distance of a branch office (despite statutory language to the contrary), however, the Division will require that the licensed entity provide proof of effective supervision over all sponsored mortgage loan originators.

Georgia Amends its Residential Mortgage and Installment Loan Laws

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A&B Abstract:

On May 2, 2022, Georgia Governor Brian Kemp signed HB 891 and SB 470 into law.  HB 891, effective July 1, 2022, updates various laws enforced by the Georgia Department of Banking and Finance (the “Department”) including, among other things, by amending (1) certain exemptions from licensure under the Georgia Residential Mortgage Act (“GRMA”), and (2) the Georgia Installment Loan Act (“GILA”) to impose a new licensing obligation to service installment loans subject to the GILA.   Similarly, SB 470, which took effect immediately, amends the GRMA’s provisions regarding felony restrictions for employees of mortgage licensees.

Changes to Licensing of Mortgage Lenders and Brokers

HB 891 made several changes to Title 7 of the Georgia Code, including several amendments to the GRMA, but perhaps one of the most notable changes with respect to mortgage lending involves the creation of a new exemption from licensure under the GRMA for persons holding loans for securitization into a secondary market.  Specifically, as of July 1, 2022, any person who purchases or holds closed mortgage loans for the sole purpose of securitization into a secondary market, is expressly exempt from licensing, provided that such person holds the individual loans for less than seven days. Note that the statute further defines “person” as any individual, sole proprietorship, corporation, LLC, partnership, trust, or any other group, however organized. As written, the new exemption language suggests that persons holding loans as part of the securitization process for longer than 7 days could not rely on the exemption. Note that the GRMA’s existing definition of a “mortgage lender” includes a “person who directly or indirectly…holds, or purchases mortgage loans” and the GRMA contains an existing exemption for any person who purchases mortgage loans from a mortgage broker or mortgage lender solely as an investment and who is not in the business of brokering, making, purchasing, or servicing mortgage loans.

HB 891 also amended an existing exemption from licensure applicable to certain natural persons under an exclusive written independent contract agreement with a mortgage broker who is, or is affiliated with, an insurance company or broker dealer. Under the exemption, as amended, a natural person otherwise required to be licensed is exempt from licensure as a mortgage lender or broker, when under an exclusive written independent contractor agreement with a licensed mortgage broker, so long as the mortgage broker satisfies certain expanded criteria, including, among others  (1) maintaining an active mortgage broker license, (2) maintaining full and direct financial responsibility for the mortgage activities of the natural person, (3) maintaining full and direct responsibility for the natural persons education, handling of consumer complaints, and supervision of the natural person’s mortgage activities, (4) having listed securities for trade and meeting certain market capitalization requirements, (5) being licensed as an insurance company or registered as a broker-dealer, and (6) being licensed as a mortgage lender or broker in ten or more states. The exemption previously applied to certain natural persons employed by the subsidiary of certain financial holding companies. Notably, to maintain the exemption, the natural person must, among other things (1) be licensed as a mortgage loan originator in Georgia and work exclusively for the licensee, the parent company if the licensee is a wholly owned subsidiary, or an affiliate of the licensee if both the affiliate and licensee are wholly owned subsidiaries of the same parent company, and (2) be licensed as an insurance agent or registered as a broker-dealer agent on behalf of the licensee, the parent company if the licensee is a wholly owned subsidiary, or an affiliate of the licensee if both the affiliate and licensee are wholly owned subsidiaries of the same parent company.

HB 891’s amendments to the GRMA’s licensing provisions follow SB 470, which provided welcome changes to the GRMA’s felony restrictions. As amended, Georgia law now provides that the Department may not issue or may revoke a license or registration if it finds that the mortgage loan originator, broker, or lender, or any person who is a director, officer, partner, covered employee or ultimate equitable owner of 10% or more of the mortgage broker or lender or any individual who directs the affairs or establishes policy for the mortgage broker or lender applicant, registrant, or licensee, has been convicted of a felony in any jurisdiction or of a crime which, if committed in Georgia, would constitute a felony under Georgia law.  Previously, Georgia law arguably prohibited a licensee from retaining any individual convicted of a felony that could be deemed an employee or agent of the licensee. As amended, the employee restriction is relaxed to apply only to a “covered employee,” a newly defined term that means an employee of a mortgage lender or broker “involved in residential mortgage loan related activities for property located in Georgia and includes, but is not limited to, a mortgage loan originator, processor, or underwriter, or other employee who has access to residential mortgage loan origination, processing, or underwriting information.” Notably, the restriction no longer applies to an “agent” of a licensee.

Changes to Installment Loan Licensing

HB 891 also amended the GILA to require licensure for persons engaged in servicing of installment loans.  Before the amendments, the GILA only imposed a licensing obligation on persons who advertise, solicit, offer, or make installment loans to individuals in amounts of $3,000 or less.  As amended, any person that services installment loans made by others, excluding loans made by affiliated entities, is also required to obtain a license. HB 891’s amendments also added a number of new exemptions from licensure, including for (1) retail installment transactions engaged in by retail installment sellers and retail sellers, as those terms are defined, and (2) transactions in which a lender offers a consumer a line of credit of more than $3,000 but the consumer utilizes $3,000 or less of the line, so long as there are no restrictions that would limit the consumer’s ability to utilize more than $3,000 of the line at any one time. Additionally, the GILA’s provisions relating to tax on interest has been repealed and reenacted and now requires that installment lenders remit to the Department a fee of 0.125 percent of the gross loan amount on each loan made on or after July 1, 2022, and such fee becomes due on the making of any loan subject to the GILA. This revised fee replaces the prior fee of three (3) percent of the total amount of interest on any loan collected. The statute clarifies that the per loan fee must be paid by the licensee and cannot be passed through to the borrower as an additional itemized fee or charge. The method by which a licensee pays the fee is subject to further clarification via Department regulations.

Takeaway

Mortgage lenders and brokers should review the GRMA, as amended, to determine whether, and if so how, the amendments impact their licensing obligations or their policies with respect to employee background checks in Georgia. Additionally, entities servicing installment loans subject to the GILA, which are originated by non-affiliates, must now obtain a license. Licensees should also take note of the new per loan fee requirements in lieu of prior tax payment regulations.

CFPB and DOJ Announce Redlining Settlement Against Non-Bank Mortgage Lender

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A&B Abstract:

On July 27, 2022, the Consumer Financial Protection Bureau (“CFPB”) and the US Department of Justice (“DOJ”) entered into a settlement with Trident Mortgage Company (“Trident”), resolving allegations under the Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act that the non-bank mortgage lender intentionally discriminated against majority-minority neighborhoods in the greater Philadelphia area. This settlement is the first redlining enforcement action against a non-bank mortgage lender and evidences the government’s continued focus on “modern-day redlining.”

The Settlement Terms

The Trident settlement, which requires the lender to pay over $22 million, resolves allegations that Trident, through its marketing, sales, and hiring actions, “discouraged” prospective applicants in the greater Philadelphia area’s majority-minority neighborhoods from applying for mortgage and refinance loans. However, much like the CFPB’s lawsuit against Townstone Financial, Inc. (“Townstone”), the settlement does not indicate that Trident treated neighborhoods or applicants differently based on race or ethnicity. Instead, the crux of the settlement is that Trident did not take sufficient affirmative action to target majority-minority neighborhoods. This, coupled with Trident’s mortgage lending reporting under the Home Mortgage Disclosure Act (“HMDA”), ultimately subjected the lender to enforcement.

Specifically, the CFPB’s press release notes that: (1) only 12% of Trident’s mortgage loan applications came from majority-minority neighborhoods, even though “more than a quarter” of neighborhoods in the Philadelphia MSA are majority-minority; (2) 51 out of Trident’s 53 offices in the Philadelphia area were located in majority-white neighborhoods; and (3) all models displayed in Trident’s direct mail marketing campaigns “appeared to be white;” (4) Trident’s open house flyers were “overwhelmingly concentrated” in majority-white neighborhoods; and (5) Trident’s online advertisements appeared to be for home listings “overwhelmingly located” in majority-white neighborhoods.

Similar to the Townstone lawsuit, the settlement does not indicate that Trident explicitly excluded certain neighborhoods or prospective applicants or actually discouraged applicants from majority-minority neighborhoods, only that such applicants “would have been discouraged.” While both the Townstone lawsuit and the Trident settlement reference remarks made by employees in their internal communications, there is no indication that employees ever made offensive or discouraging statements to prospective applicants of any neighborhood. Nevertheless, the CFPB settlement requires Trident to pay $18.4 million into a loan subsidy program to increase the credit extended in majority-minority neighborhoods in the Philadelphia MSA; $4 million in civil money penalties; $875,000 toward advertising in majority-minority neighborhoods in the Philadelphia MSA; $750,000 toward partnerships with community-based organizations; and $375,000 toward consumer financial education. The settlement also requires Trident to open and maintain four (4) branch offices in majority-minority neighborhoods of the MSA.

Takeaways

The Trident settlement is noteworthy for various reasons. In addition to being the first government redlining settlement with a non-bank mortgage lender, the resolution involves a variety of parties, including the CFPB, DOJ, and the states of Pennsylvania, New Jersey, and Delaware. Further, the settlement once again highlights that insufficient marketing and outreach in minority neighborhoods may be considered sufficient  actionable under ECOA and the Fair Housing Act. Indeed, it appears that a lender’s failure to precisely align its lending patterns with the geography’s demographics may serve as the basis of a redlining claim, even absent specific allegations of intentional exclusion or other discrimination. Finally, the settlement demonstrates that even a lender no longer in operation (Trident stopped accepting loan applications in 2021) is still a worthy defendant in the government’s eyes.

Joint Trade Associations Reject the CFPB’s “Discrimination-Unfairness” Theory

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In a June 28 letter to Director Chopra and accompanying White Paper and press release, the ABA, CBA, ICBA, and the U.S. Chamber of Commerce have called on the Consumer Financial Protection Bureau (CFPB or Bureau) to rescind recent revisions made to its UDAAP examination manual that had effectuated the CFPB’s controversial theory that alleged discriminatory conduct occurring outside the offering or provision of credit could be addressed using “unfairness” authority. The White Paper characterized the primary legal flaws in the CFPB’s action as follows:

  • The CFPB’s conflation of unfairness and discrimination ignores the text, structure, and legislative history of the Dodd-Frank Act. For example, the Dodd-Frank Act discusses “unfairness” and “discrimination” as two separate concepts and defines “unfairness” without mentioning discrimination. The Act’s legislative history refers to the Bureau’s antidiscrimination authority in the context of ECOA and HMDA, while referring to the Bureau’s UDAAP authority separately.
  • The CFPB’s view of “unfairness” is inconsistent with decades of understanding and usage of that term in the Federal Trade Commission Act and with the enactment of ECOA. Congress gave the CFPB the same “unfairness” authority that it gave to the Federal Trade Commission in 1938, which has never included discrimination. It makes no sense that Congress would have enacted ECOA in 1974 to address discrimination in credit transactions if it had already prohibited discrimination through the FTC’s unfairness authority. For the same reason, Congress could not have intended in 1938 for unfairness to “fill gaps” in civil rights laws that did not exist.
  • The CFPB’s view is contrary to Supreme Court precedent regarding disparate impact liability. The CFPB’s actions and statements indicate it conflates unfairness with disparate impact, or unintentional discrimination. The Supreme Court has recognized disparate impact as a theory of liability only when Congress uses certain “results-oriented” language in antidiscrimination laws, e.g., the Fair Housing Act. The Dodd Frank Act neither contains the requisite language, nor is it an antidiscrimination law.
  • The CFPB’s action is subject to review by courts because it constitutes final agency action – a legislative rule – that is invalid, both substantively and procedurally. The CFPB’s action carries the force and effect of law and imposes new substantive duties on supervised institutions. However, the Bureau did not follow Administrative Procedure Act requirements for notice-and-comment rulemaking. Additionally, the CFPB’s interpretation is not in accordance with law and exceeds the CFPB’s statutory authority. The CFPB’s action should be held unlawful and set aside.
  • The CFPB’s action is subject to Congressional disapproval under the Congressional Review Act. A Member of Congress can request a GAO opinion on whether the CFPB’s actions are a rule, which can ultimately trigger Congressional review using the procedures established in the Congressional Review Act.

The White Paper concludes:

“Such sweeping changes that alter the legal duties of so many are the proper province of Congress, not of independent regulatory agencies, and the CFPB cannot ignore the requirements of the Administrative Procedures Act and Congressional Review Act. The CFPB may well wish to ‘fill gaps’ it perceives in federal antidiscrimination law. But Congress has simply not authorized the CFPB to fill those gaps. If the CFPB believes it requires additional authority to address alleged discriminatory conduct, it must obtain that authority from Congress, not take the law into its own hands. The associations and our members stand ready to work with Congress and the CFPB to ensure the just administration of the law.”

Take-away:

The position taken in the White Paper that the CFPB’s actions were contrary to law may be an indication that the trade groups intend to mount an APA legal challenge. Alternatively, the arguments made could in theory form a defense to any CFPB supervisory or enforcement action premised upon its new “discrimination-unfairness” theory. Financial institutions subject to CFPB examination would be well-advised to consider the arguments raised by the groups.

Did the CFPB Have Authority to Issue its RFI Regarding Employer-Driven Debt?

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A&B Abstract

The CFPB’s statutory authority to issue a recent request for information (RFI) regarding employer-driven debt is in doubt, which may affect the utility of any comments submitted in response to its request.

Background

On June 9, the CFPB issued an RFI Regarding Employer-Driven Debt. The RFI seeks comment on several areas of inquiry relating to “employer-driven debts,” including prevalence, pricing and other terms of the obligations, disclosures, dispute resolution, and the servicing and collection of these debts.

The CFPB defines employer-driven debts as “debt obligations incurred by consumers in the context of an employment or independent contractor arrangement.” The CFPB further states that these debts “appear to involve deferred payment to the employer or an associated entity for employer-mandated training, equipment, and other expenses.” The CFPB provides two examples of such debts:

  • Training Repayment Agreements that require workers to pay their employers or third-party entities for previously undertaken training provided by an employer or an associated entity if they separate voluntarily or involuntarily within a set time period.
  • Debt owed to an employer or third-party entity for the up-front purchase of equipment and supplies essential to their work or required by the employer, but not paid for by the employer.

The CFPB states that it is seeking input from the public as part of its mandate to “monitor[] markets for consumer financial products and services to ensure that they are fair, transparent, and competitive.” This statement is an amalgamation of two separate statutory provisions. The first, found in Section 1021(a) of the Dodd-Frank Act states that the CFPB shall use its authorities consistently for the purpose of ensuring that “markets for consumer financial products and services are fair, transparent, and competitive.” The second, found in Section 1022(c), states that in order to support its rulemaking and other functions, the CFPB shall “monitor for risks to consumers in the offering or provision of consumer financial products or services, including developments in markets for such products or services.” Note that both provisions refer to consumer financial products and/or services. Sections 1002(5) and (15) define a “consumer financial product or service” in the context of extending credit as a loan that is “offered or provided for use by consumers primarily for personal, family, or household purposes.”

The CFPB’s RFI does not explain how debts incurred by employees for the purchase of essential work training or equipment constitute consumer credit. However, the CFPB’s own rules are illustrative. For instance, Regulation Z, which implements the Truth In Lending Act, defines consumer credit as credit “offered or extended to a consumer primarily for personal, family, or household purposes.” 12 C.F.R. 1026.2(a)(12). Regulation Z further sets forth factors for distinguishing business-purpose loans from consumer-purpose loans. 12 C.F.R. 1026.3(a) and Official Interpretation 3(a)-3. For example, one factor to be considered is the relationship of the borrower’s primary occupation to a financed acquisition. According to the CFPB, “the more closely related, the more likely it is to be business purpose.” Also, according to another factor, credit extensions by a company to its employees constitute consumer-purpose credit only “if the loans are used for personal purposes.”

As described by the CFPB, debts incurred by employees to defer payment to employers for employer-mandated training, equipment, and other expenses do not appear to be consumer-purpose loans because they finance acquisitions that are directly related to the employees’ jobs and are not used for personal purposes. Accordingly, employer-driven debt does not appear to be either consumer credit or a consumer financial product or service. Because the CFPB’s statutory purpose and market monitoring authority are limited to “consumer financial products and services,” and because the CFPB referred to no other legal authority in its RFI, the CFPB does not appear to have articulated an adequate statutory basis for its issuance.

If the CFPB lacks jurisdiction over the subject matter of the RFI, then it is also prohibited from expending funds to issue the RFI. Section 1017(c) provides that CFPB funds can only be used to pay for expenses incurred in “carrying out its duties and responsibilities.” If employer-driven debt is not a consumer financial product or service, then monitoring such debt is not within the duties or responsibilities of the CFPB, and the CFPB may not expend funds in issuing its RFI.

Takeaway

Monitoring the operation of labor markets or the effects of the emergence of employer-driven debt may be useful. However, Congress appears not to have assigned the CFPB this task, which raises questions about the legality of the CFPB’s RFI and the utility of any comments submitted in response.