Alston & Bird Consumer Finance Blog

Consumer Finance

“RESPA Section 8 – the CFPB and President Should Act Now to Restore the Rule of Law”

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The Heritage Foundation recently published “RESPA Section 8 – the CFPB and President Should Act Now to Restore the Rule of Law” by Alston & Bird’s Brian Johnson.  While no substitute for reading the full article, below is a brief summary and key takeaways of the article, as discussed on the Heritage Foundation’s website:

 Summary

For decades, companies providing real estate settlement services relied on well-established rules and guidance from the U.S. Department of Housing and Urban Development to establish business arrangements in accordance with the Real Estate Settlement Procedures Act (RESPA). But when Congress created the Consumer Financial Protection Bureau (CFPB) and made it responsible for RESPA, the new agency used enforcement actions rather than rules to announce new RESPA legal standards and then hold companies retroactively liable for violating them. This was just one manifestation of the “regulation by enforcement” doctrine espoused by the CFPB’s first Director, Richard Cordray.

In its 2016 PHH Corp. v. CFPB decision, the DC Circuit Court of Appeals thoroughly repudiated the CFPB’s approach, finding that the agency flouted RESPA and violated due process. However, nearly four years later, much work remains to be done in order to repair the damage inflicted by the CFPB. The CFPB Director and the President can each take concrete actions now to restore the rule of law at the CFPB.

Key Takeaways
  • The CFPB’s aggressive departure from settled law and long-standing agency guidance in RESPA enforcement actions violated due process and upended the rule of law
  • The DC Circuit Court of Appeals repudiated the CFPB misinterpretation of RESPA, but more must be done to restore the rule of law at the CFPB
  • The CFPB Director and the President can take concrete steps to repair the damage done, such as issuing interpretative rules to clarify the legitimate meaning of RESPA Section 8 and terminating guidance and supervisory or enforcement actions premised upon its prior misinterpretation of law

 

 

New York Laws Require Forbearance for Private Mortgage Loans During COVID Emergency

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A&B ABstract

On June 17, 2020, New York Governor Andrew Cuomo signed into law two measures, effective immediately, providing for mortgage forbearances for privately backed residential mortgage loans during the COVID-19 emergency. Senate Bill 8243 (2020 N. Y. Laws 112) amends the N. Y. Banking Law by adding new Section 9-x, “Mortgage Forbearance.”  Senate Bill 8428 (2020 N. Y. Laws 126) relates to state disaster emergency and, among other provisions, amends Section 9-x as added by Senate Bill 8243. These measures apply during the covered period, beginning on March 7, 2020 and ending when no Executive Order issued in response to the COVID-19 pandemic relating to restricting public or private businesses or required postponement or cancellation of all non-essential gatherings of individuals apply in the county of the borrower’s residence.

Mortgage Forbearance

New Section 9-x of the Banking Law imposes new requirements on any New York regulated banking organization, including banks, trust companies, private bankers, savings banks, savings and loan associations, credit unions, and investment companies) and regulated mortgage servicers  (collectively, “regulated entities”)subject to supervision by the New York Department of Financial Services (the “Department”).

First, regulated entities must make applications for forbearance widely available to any qualified mortgagor who, during the covered period is in arrears or on a trial period plan or who has applied for loss mitigation. A qualified mortgagor is a natural person who (i) demonstrates financial hardship as result of COVID-19 during the covered period, (ii) whose loan is from or serviced by a regulated entity, and (iii) whose loan meets the following criteria: the loan is incurred for personal, family or household purposes, s secured by mortgage on a 1-4 family property located in New York, and is the borrower’s primary residence.  Forward and reverse mortgage as well as co-operative units are within scope.

Second, regulated entities must grant forbearance of all monthly payments due on a New York residential mortgage secured by a qualified mortgagor’s primary residence for up to 180 days with the option to extend the forbearance for up to an additional 180 days provided the borrower continues to demonstrate a financial hardship. Such forbearances may be backdated to March 7, 2020.

Third, any mortgage forbearance granted by a regulated entity to a qualified mortgagor as a result of a financial hardship pursuant to Executive Order 202.9 the regulation promulgated thereunder (3 NYCRR Part 119) or Section 9-x of the Banking Law subject to post forbearance repayment requirements. Specifically, the qualified mortgagor shall have the following four options:

  • Extend the term of the loan for the length of the period of forbearance with no additional interest or late fees or penalties incurred on the forborne payment
  • Have the arrears accumulated during the forbearance period payable on a monthly basis for the remaining term of the loan without being subject to penalties or late fees as a result of the forbearance
  • Negotiate a loan modification or any other option that meets the changed circumstances of the borrower, or
  • If the borrower and regulated entity cannot reasonably agree on a mutually acceptable loan modification, the regulated entity must offer to defer arrears accumulated during the forbearance period as a non-interest bearing balloon loan payable at the maturity of the loan, or at the time the loan is satisfied through a refinance or sale of the property.  Late fees accumulated as a result of the forbearance must be waived.

The measure prohibits a regulated entity from reporting negatively to any credit bureau that the borrower has exercised any of the four post forbearance options

Significantly, Section 9-x of the Banking Law does not apply to any mortgage loan made, insured, purchased or securitized by: (i) any agency or instrumentality of the United States (such as FHA, VA or USDA); (ii) any government sponsored enterprise  (such as Fannie Mae or Freddie Mac); (iii) a federal home loan bank;  (iv) a corporate governmental  agency of the state constituted as a political subdivision and public benefit corporation; or (iv) “the rights and obligations of any lender, issuer, servicer or trustee of such obligations, including servicers for” Ginnie Mae.

Privately backed mortgage loans are also subject to New York Executive Order 202.9, which modified Subdivision two of Section 39 of the Banking Law to provide that it is an unsafe and unsound business practice for any financial institution subject to the jurisdiction of the Department to, in response to the COVID-19 pandemic, fail to grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days. The Executive Order also directed the Superintendent of the Department to promulgate emergency regulations to require that the application for such forbearance be made widely available for consumers, and such application shall be granted in all reasonable and prudent circumstances solely for the period of such emergency. These regulations are set forth in new Part 119 to 3 NYCCR. The covered period of Executive Order 202.9 was extended by subsequent executive order to be valid through July 6, 2020, unless further extended.

Capital and Liquidity

New Section 9-x of the Banking Law provides that the obligation to grant the forbearance relief required by Section 9-x is subject to the regulated entity “having sufficient capital and liquidity to meet its obligations and to operate in a safe and sound manner.” If a regulated entity determines it is not able to offer the forbearance to any qualified mortgagor, it must notify the Department within five business days of making such determination. Any such notice filed with the Department must include: (1) information about the mortgagor; (2) the reason the regulated entity determined that it was unable to offer any forbearance relief pursuant to Section 9-x; (3) information about the institution’s financial condition supporting the its determination; and (4) any other information required by the Department. Additionally, when such a notice is provided to the Department, the regulated entity must advise the mortgagor that the application for relief was denied and provide a statement that the applicant may file a complaint with the New York state department of financial services at 1-800-342-3736 or http://www.dfs.ny.gov if the applicant believes the application was wrongly denied.

Defense to Foreclosure

Section 9-x of the Banking Law, provides that adherence with Section 9-x is a condition precedent to commencing a foreclosure action stemming from missed payments which would have otherwise been subject to this section, and that a defendant may raise the violation of this section as a defense to such a foreclosure action commenced on the defendant’s property.

Takeaway

These New York measures provide protections to New York borrowers who aren’t otherwise covered by the CARES Act.  Servicers should take note of these provisions as well as similar ones in other states, such as the District of Columbia, Massachusetts and Oregon.  In the immediate term, servicers will need to quickly operationalize these new protections.  In the longer term, questions may be raised as to whether these types of measures infringe upon any private investors’ rights.

CFPB Issues CARES Act Consumer Reporting FAQs

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A&B ABstract

On June 16th, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Aid titled “Consumer Reporting FAQs Related to the CARES Act and COVID-19 Pandemic.” This Compliance Aid clarifies the Bureau’s April 1, 2020 Statement that providing furnishers flexibility in handling disputes during the pandemic is not unlimited, putting consumer reporting agencies and furnishers on notice that the Bureau is enforcing the Fair Credit Reporting Act (“FCRA”), as amended by the CARES Act, and its implementing Regulation V.  The Compliance Aid also addresses questions on reporting CARES Act accommodations.

CFPB Focusing on Credit Reporting Accuracy and Dispute Handling

In its April 1, 2020 statement, the Bureau indicated that while furnishers are expected to comply with the CARES Act, the Bureau “does not intend to cite in examinations or take enforcement actions against those who furnish information to [CRAs] that accurately reflects the payment relief measures they are employing” and will not take enforcement or supervisory actions against furnishers and CRAs for failing to timely investigate consumer disputes. On June 16th the Bureau clarified that it is enforcing FCRA and that while it previously provided some flexibility the April 1st Statement “did not state that the Bureau would give furnishers or CRAs an unlimited time beyond the statutory deadlines to investigate disputes before the Bureau would take supervisory or enforcement action.”  The Bureau warns that it will take public enforcement action against companies or individuals that fail to comply with FCRA, but will consider the unique circumstances that entities face as a result of the COVID-19 pandemic and entities’ good faith efforts to timely investigate disputes.

CARES Act Amendment to FCRA

Section 4021 of the CARES Act amends FCRA by adding a new section providing a special instruction for reporting consumer credit information to credit reporting agencies during the COVID-19 pandemic.  Specifically, if a creditor or other furnisher offers an “accommodation” to a consumer affected by the COVID-19 pandemic in connection with a credit obligation or account, and the consumer satisfies the conditions of such accommodation, the furnisher must:

  • report the credit obligation or account as “current;” or
  • if the credit obligation or account was delinquent before the accommodation maintain the delinquent status during the effective period of the accommodation, or, if the consumer brings the account current during such period, then to report the account as current.

Stated differently by the CFPB, “during the accommodation, the furnisher cannot advance the delinquent status.” The CFPB provides the following example:

If the credit obligation or account was current before the accommodation, during the accommodation the furnisher must continue to report the credit obligation or account as current.

If the credit obligation or account was delinquent before the accommodation, during the accommodation the furnisher cannot advance the delinquent status. For example, if at the time of the accommodation the furnisher was reporting the consumer as 30 days past due, during the accommodation the furnisher may not report the account as 60 days past due. If during the accommodation the consumer brings the credit obligation or account current, the furnisher must report the credit obligation or account as current. This could occur, for example, if the accommodation itself brings the credit obligation or account current (such as a loan modification that resolves amounts past due so the borrower is no longer considered delinquent) or if the consumer makes past due payments that bring the credit obligation or account current.

An “accommodation,” as defined in this section, includes relief granted to impacted consumers such as an agreement to defer a payment, make a partial payment, grant forbearance, modify a loan or contract, or any other assistance or relief granted to a consumer affected by COVID-19. The reporting requirements do not apply to charged-off accounts.  This section applies from January 31, 2020 through the later of 120 days after: (i) enactment of this section, or (ii) termination of the national emergency declaration.

Questions on Reporting Accommodations under FCRA

There has been much confusion in how the CARES Act requirements translate into Metro 2 reporting requirements.  The CFPB offers the following guidance:

  • When furnishers are reporting an account to the CRAs, furnishers are expected to understand all the CRA’s data fields, to ensure that the information reported accurately reflects a consumer’s status as current or delinquent. Specifically, the Bureau provides “information a furnisher provides about an account’s payment status, scheduled monthly payment, and the amount past due may all need to be updated to accurately reflect that a consumer’s account is current consistent with the CARES Act.”
  • With respect to the use of special comment codes, the CFPB provides that “Furnishing a special comment code indicating that a consumer with an account is impacted by a disaster or that the consumer’s account is in forbearance does not provide consumer reporting agencies with this CARES Act-required information.  Left unaddressed is whether servicers are permitted to report special comment codes and other fields as required by CDIA/Metro2.
  • With respect to reporting the status of an account after an accommodation ends, the Bureau provides two instructions.  First, the Bureau states “[a]ssuming payments were not required or the consumer met any payment requirements of the accommodation, a furnisher cannot report a consumer that was reported as current pursuant to the CARES Act as delinquent based on the time period covered by the accommodation after the accommodation end.” Second, “a furnisher also cannot advance the delinquency of a consumer that was maintained pursuant to the CARES Act based on the time period covered by the accommodation after the accommodation ends.”

Questions remain on how to address a consumer’s delinquency after an accommodation ends if the delinquency hasn’t been resolved through loss mitigation or otherwise.  Also unaddressed is whether furnishers are permitted to report (i) a “special comment code” for natural disaster or forbearance or (ii) the “terms frequency” field (each of which can indicate an account is in forbearance or deferment, even while the “account status code” field is marked “current”), without violating the CARES Act requirement to report borrowers in forbearance as “current.”

Takeaway

CFPB has put furnishers on notice that the Bureau will begin to enforce the CARES Act credit reporting requirements.  Companies should pay attention to credit reporting complaint trends in the coming months.  Companies should also document good faith efforts to comply and respond to disputes as soon as possible.  Last, with the CFPB’s revised Responsible Business Conduct Policy, companies may consider getting in front of any issues while the environment is still favorable. Once forbearance ends and foreclosures resume, and given where we are in the election cycle, the situation could turn political this Fall and the enforcement posture could change.

CFPB Seeks Public Comment on the Advisory Opinion Program

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A&B Abstract:

On June 18, 2020, the Consumer Financial Protection Bureau (“Bureau”) announced the launch of a pilot advisory opinion program (“Pilot Program”) to publicly address regulatory uncertainty in the Bureau’s existing regulations.  The Bureau also announced that the public can now comment on the proposed advisory opinion program, which the Bureau intends to implement at the conclusion of the Pilot Program. As we previously covered, on March 6, 2020, the Bureau announced the creation of the advisory opinion program.

Pilot Advisory Opinion Program

According to the Bureau, “[t]he primary purpose of the [Pilot Program] is to provide a mechanism through which the Bureau may more effectively carry out its statutory purposes and objective by better enabling compliance in the face of regulatory uncertainty.”

The Bureau issued a Procedural Rule detailing the parameters of the Pilot Program. The Bureau expects that the Pilot Program will focus on four key priorities: (1) providing consumers with timely and understandable information to make responsible decisions; (2) identifying outdated, unnecessary, or unduly burdensome regulation to reduce regulatory burden; (3) creating consistency in enforcement of federal consumer financial law to promote fair competition; and (4) ensuring markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.

Submission and Content of Requests

The Pilot Program is limited to covered persons or service providers that are subject to the Bureau’s supervisory authority under sections 1024, 1025, or 1026(e) of the Dodd-Frank Act or are subject to the Bureau’s enforcement authority under subtitle E of the Dodd-Frank Act.

Such persons may submit requests to the Bureau via email, and requests must identify the requestor. For purposes of the Pilot Program, the Bureau will not accept requests from third parties, such as trade associations or law firms, on behalf of unnamed entities. This differs from the proposed advisory opinion program, under which “[o]utside counsel or a trade association, for example, could submit a request for AOs on behalf of one or more client or members, and those entities would not need to be named.”

If a requestor wants to have any information remain confidential, the Bureau encourages the requestor to identify any such information to the extent it is included in a submission.  The Bureau will treat information as confidential in accordance with its Disclosure of Records and Information Rule.

A person submitting a request under the Pilot Program need not include many of the items required under the proposed advisory opinion program. For example, the Pilot Program does not require a requestor to provide a proposed interpretation, identify potential uncertainty or ambiguity that the interpretation would address, or to explain why the requested interpretation is an appropriate resolution of the ambiguity or uncertainty.

Characteristics of Advisory Opinions

Advisory opinions will be interpretative rules under the Administrative Procedures Act that will respond to specific requests for clarity on an interpretive question. As such, the Bureau’s advisory opinions will provide further clarity regarding the Bureau’s statutes and regulations, but the Bureau will not impose new requirements or provide changes to the law that would require a notice and comment process. The Bureau will publish advisory opinions in the Federal Register and on consumerfinance.gov. Each advisory opinion will be applicable to the requestor and to similarly situated parties to the extent that their situations conform to the Bureau’s summary of material facts in the advisory opinion.

Factors in Bureau Selection of Topics for Advisory Opinions

When selecting topics for advisory opinions, the Bureau will prioritize open questions within its purview that can legally be addressed through an interpretive rule. When selecting topics for an advisory opinion the Bureau intends to evaluate potential topics for: (i) alignment with the Bureau’s statutory objectives; (ii) the size of the benefit offered to consumer by resolution of the interpretive issue; (iii) the known impact on the actions of other regulations; and/or (iv) the impact on the Bureau’s resources.

Factors Supporting Advisory Opinion Issuance

Initial factors that weigh into the appropriateness of issuing an advisory opinion include whether: (i) the interpretive issue has been noted during prior Bureau examinations as one that would benefit from additional regulatory clarity; (ii) the issue is of substantive importance or impact or is one whose clarification would provide significant benefit; and/or (iii) the issue concerns an ambiguity that the Bureau has not previously addressed through an interpretive rule or other administrative source.

Factors Opposing Advisory Opinion Issuance

Factors weighing against issuing an advisory opinion include that: (i) the issue is the subject of an ongoing investigation or enforcement action; (ii) the issue is the subject of an ongoing or planned rulemaking; (iii) the issue is better suited for the notice-and-comment process; (iv) the issue could be addressed by a Compliance Aid; and/or (v) there is clear Bureau or court precedent that is already available to the public on the issue.

For example, the Bureau does not intend to issue an advisory opinion that would change a regulation. Similarly, where a regulation or statute establishes a general standard that can be only applied through a factual analysis, the Bureau does not intend to replace it with a bright-line standard that eliminates required analysis. The Bureau anticipates that highly fact-specific interpretations, such as requests for advisory opinions for UDAAP interpretations, may present challenges.  However, according to the Bureau, “there may be times when the Bureau is able to offer advisory opinions that provide additional clarity on the meaning of such standards.”

Takeaway

This is a measured step forward in developing the Advisory Opinion program that the Bureau first announced on March 6, 2020. The Bureau is seeking public comment on its proposed procedural rule for a period of 60 days from publication in the Federal Register, and in addition will gain practical knowledge of how to process requests for advisory opinions through its pilot program.

If finalized, this program holds real promise as a demand-driven mechanism for resolving areas of regulatory uncertainty through the issuance of public, agency-level interpretive rules that can be relied upon in good faith as definitive statements of the Bureau’s view of what a law or regulation means. Over time, greater regulatory certainty afforded by successive Bureau advisory opinions can be positive for financial institutions and consumers alike.

Colorado Court Rejects “Valid When Made” Doctrine

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A&B Abstract:

As we have previously reported, effective August 3 the Office of the Comptroller of the Currency’s (“OCC”) has issued a final rule affirming the “valid-when-made” doctrine while dismissing the Second Circuit decision in Madden v. Midland Finding, LLC.

On June 9, 2020, however, a Colorado state court handed down an unexpectedly negative ruling in the long-standing litigation between Marlette Funding LLC (“Marlette”) and the Colorado Uniform Consumer Credit Code Administrator (“Administrator”) involving an on-line consumer bank partnership program.  While the OCC affirmed the valid-when-made doctrine in its final rule, the Colorado court rejected the doctrine when applied to non-bank assignees of loans.

Marlette Decision

In Martha Fulford, Administrator Uniform Consumer Credit Code v. Marlette, Wilmington Trust, NA, solely as trustee for certain trusts, Wilmington Savings Fund Society, and intervenor Cross River Bank, a Colorado state court expressly declined to adhere to the valid-when-made doctrine.  The court held that “the non-bank purchasers are prohibited under C.R.S. § 5-2- 201 from charging interest rates in the designated loans in excess  of Colorado’s interest caps and, further, that [Cross River Bank (“CRB”), a state chartered bank] cannot export its interest rate to a nonbank such as Defendant Marlette, and finally, that the [Colorado] statute is not preempted.”

Background

The Marlette ruling is the latest development in the long-running litigation brought by the Administrator against two online consumer bank partnership lending platforms – one run by Avant of Colorado (“Avant”) with its bank partner, WebBank, and the other by Marlette with its bank partner, CRB.

The thrust of the Administrator’s allegation is that both of these online lending platforms violated the Colorado Uniform Consumer Credit Code because WebBank and CRB are not the “true lenders” who are actively engaged in the lending programs and receive the benefits or assume the risks of a typical loan originator.  The Administrator asserts that Avant and Marlette are performing the critical development, marketing and underwriting associated with these programs, and that the bank partners’ respective roles are nominal. If the banks are not found to be the “true lender”, then the non-bank parties are required to have state consumer lending (and related) licenses, and the loans may be subject to the state usury laws applicable to the non-bank party (rather than the bank)—possibly render the loans unenforceable.

Non-Bank Assignees

Oddly, the Marlette decision does not directly address the “true lender” issues raised by the Administrator,  that Avant and Marlette are the “true lenders” in their bank partnership programs.  For the purposes of the motion, however, the Administrator argues that even if CRB is a true lender, it may not export the rate of its home state (New Jersey) to a non-bank loan assignee, Marlette.

Instead, the court in Marlette focused on whether a non-bank assignee, such as Marlette, stands in the shoes of the assignor state chartered bank who has the right to charge interest on loans in the state where it is located.  Section 5-2-201 of the Colorado Revised Statutes establishes a maximum rate of 12% per annum for consumer loans that are not “supervised loans” and 21% per annum for “supervised loans”.

Court’s Analysis

The court held that while Section 27 of the Federal Deposit Insurance Act (“Section 27”) [12 U.S.C. § 1831(d)(a)]] permits a state-chartered bank such as CRB to export the interest rate of its home state (or a state where it is “located”), thereby allowing CRB to preempt the 12% interest rate limit for Colorado consumer loans, “Section 27 applies to state banks only and does not extend the privilege of interest exportation to non-banks such as Marlette and other defendant trust banks” (namely, the securitization vehicles that currently hold the loans).

The court, analogizing to the Madden court’s analysis of Section 85 of the National Banking Act, reasoned that Section 27 should not be interpreted as creating an end-run around  state usury laws for non-bank entities.  Therefore, the preemption afforded by Section 27 should not be extended to loans originated by state-chartered banks and assigned to non-bank assignees.

In dismissing the valid-when-made doctrine, the Colorado court not only cited Madden as precedent, but indicated that it is not bound by rulemakings by the OCC and the Federal Deposit Insurance Corporation regarding valid-when-made.

Departure from Precedent

Notably, the Marlette decision is a narrower ruling than Madden in that it ignores Krispin v. May Department Stores (218 F. 3d 999 (8th Cir. 2000), in which the Eighth Circuit indicated that if the bank originator retains an interest in the loans being sold, such keeping credit card accounts, but selling the receivables, the non-bank assignee is able to avail itself of the rate charged by the bank.   Further, the court in Marlette makes no exception for state-chartered banks that retain an interest in the loans.  It is also troubling that the court does not appear to confer bank status to the loans held by statutory trusts with national bank trustees.

Takeaways:

Marketplace lending programs have thrived in large part due to the participating bank lender’s ability to export a favorable interest rate—and fees—of its home state or a state where it is located to borrowers in other states, and the sale or transfer of these loans to various secondary market players, including non-bank assignees and securitization trusts.

Absent a reversal  of the precedent by an appeals court, the Marlette decision strikes a dagger in the heart of these marketplace lending programs in Colorado unless the loans conform to the state usury limit,  are retained by the bank originator, or are sold only to other banks, which apparently do not include securitization trusts. In following the Second Circuit in Midlands, and not adhering to the OCC’s recent rule on valid-when-made, the Colorado court severely restricts the salability of loans made under these market lending  arrangements.