Alston & Bird Consumer Finance Blog

Consumer Finance

California Requires Interest on Hazard Insurance Proceeds Immediately to Protect Wildfire Victims

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What Happened?

Effective immediately upon enactment on August 29 as an urgency measure, California Assembly Bill 493 (2025 Cal. Stat. 103) (the “Bill”) requires financial institutions making or purchasing residential mortgage loans to pay interest on hazard insurance proceeds in a loss draft account pending the rebuilding or repair of property.

Why Does it Matter?

Previously, California law required a financial institution to pay interest on amounts held in escrow for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property. The Bill’s goal is to provide critical safeguards to protect wildfire victims by extending that requirement to loss drafts.

Specifically, the Bill adds new Section 2954.85 to the Civil Code, which imposes new requirements on financial institutions. The Bill defines the term “financial institution” broadly as “a bank, savings and loan association, or credit union chartered under the laws of [California] or the United States, or any other person or organization making loans upon the security of real property containing only a one- to four-family residence.”

The new section requires any financial institution that makes or purchases such loans and holds hazard insurance proceeds in a loss draft account pending property rebuilding or repair to pay interest on those funds at a rate of at least 2% simple interest per year. The financial institution must credit that amount to the draft account annually or upon termination of the account (whichever is earlier). Further, the financial institution cannot impose any fee or charge for the maintenance or disbursement of hazard insurance proceeds held in a loss draft account pending the rebuilding or repair of the collateral property, if such fee will result in payment of a lower interest rate on such hazard insurance proceeds.

A financial institution may place loss draft funds in an interest-bearing account in a federally insured depository institution, federal home loan bank, federal reserve bank, or similar institution.

For any funds a financial institution holds in a loss draft account as of the Bill’s effective date, interest must begin accruing on such funds as of that date. However, the requirement to pay interest on such accounts does not apply to any hazard insurance proceeds held in a loss draft account required under federal or state law to be placed by a financial institution (other than a bank) in a non-interest-bearing account.

The Bill also amends Section 50202 of the Financial Code, which otherwise governs the maintenance of client trust accounts, to reference the new Civil Code section’s requirements for loss draft accounts.

What To Do Now?

Lenders and purchasers of residential mortgage loans must ensure that any hazard insurance funds held in a loss draft account, pending the rebuilding or repair of the property securing the loan, began accruing interest at a rate of 2% per year as of the effective date of the new law. Further, given that it is common practice for the servicer who is acting as the agent of a “financial institution” to comply with the requirement regarding the payment of interest on escrow accounts, the same may become true for loss draft accounts; accordingly, servicers should be aware of the requirement.

Fannie, Freddie Update ROV Requirements

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Mortgage lenders who do business with the Government Sponsored Enterprises (“GSEs”) should note recent updates to their reconsideration of value (“ROV”) requirements.

 What Happened?

On September 3, Fannie Mae and Freddie Mac announced updates to their ROV requirements relating to disclosures and documentation. Specifically, Fannie Mae and Freddie Mac have updated their guidance to sellers (the Selling Guide and the Single-Family Seller/Servicer Guide, respectively) to: (a) no longer require a lender to provide an initial ROV disclosure at the time of loan application, and instead to require delivery of the disclosure with the appraisal report; and (b) no longer require a lender to retain documentation relating to the initiation of an ROV, and instead to require retention only of documentation relating to the outcome of an ROV).

Why Does it Matter?

The GSEs’ announcement follows back and forth on ROVs at the federal level. In May 2024, the Department of Housing and Urban and Development issued a mortgagee letter addressing ROV requirements; that guidance was rescinded in March of this year. The GSE announcements represent a smaller-scale reduction in the regulatory compliance obligations associated with offering ROVs to borrowers.

What To Do Now?

Our team is happy to assist lenders in reviewing their ROV processes to ensure compliance with federal agency and GSE requirements.

AVM Quality Control Rule Takes Effect October 1, 2025: Are You Ready?

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Mortgage originators, servicers, and secondary market participants should take note that the October 1 implementation date for the Interagency AVM Quality Control Rule (the “Rule”)  is fast approaching.

What Happened?

As mandated by the Dodd-Frank Act, on June 20, 2024, the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration and the Federal Housing Finance Agency (collectively, the Agencies) adopted a rule addressing the use of AVMs in mortgage origination and secondary market transactions. At a high level, the Rule (mirroring the language of Section 1125 of FIRREA) requires 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, must adopt and maintain policies, practices, procedures, and control systems to ensure that automated valuation models used in [subject] transactions adhere to quality control standards designed to:

  1. Ensure a high level of confidence in the estimates produced;
  2. Protect against the manipulation of data;
  3. Seek to avoid conflicts of interest;
  4. Require random sampling testing and reviews; and
  5. Comply with applicable nondiscrimination laws.

Why Does it Matter?

Please see our prior blog post for a more fulsome summary of the Rule.

What To Do Now?

With implementation fast approaching, we have been fielding a lot of implementation questions, such as:

  • How does the rule apply to secondary market issuers, sponsors, or underwriters?
  • Do I need to comply if I rely on a GSE’s property inspection waiver?
  • More broadly, what do I need to do to comply given that the Rule is not prescriptive, but provides entities with flexibility to set quality control standards for AVMs based on the size, complexity, and risk profile of the entity and the transactions covered by the Rule?

Our team is happy to assist companies in prepare and to ensure that your entity has appropriate policies, practices, procedures, and controls in place to ensure compliance with the Rule’s requirements.

Texas Commercial Sales- Based Financing Law Poses Unique Challenges to Financial Services Industry

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What Happened?

Following the path of nine other states that have enacted laws to regulate commercial non real estate secured financing, on May 28, 2025, the Texas legislature passed a “commercial sales-based financing” bill, known as House Bill 700[1], and the Governor Greg Abbott signed the bill into law on June 20, 2025. Unlike other state laws that have required providers of commercial financing to make Truth-in-Lending-type disclosures to borrowers, and in some instances, register with state authorities, the Texas legislation caps the cost of “sales-based financing,” which is defined as “a transaction that is repaid by the recipient to the provider of the financing as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient or according to a fixed payment mechanism that provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.” Most provisions of the law become effective on September 1, 2025, except for the provider and broker registration requirement, discussed below, which takes effect on December 31, 2026.

Why It Matters

Notably, the Texas legislation includes a provision that prohibits sales-based financing providers from establishing a “mechanism for automatically debiting a recipient’s deposit account” unless the provider obtains and perfects a security interest in the recipient’s account with “first priority” against the claims of “all other persons.” As a practical matter, no provider is likely to meet this standard. Under the Uniform Commercial Code, a security interest in a deposit account can only be perfected by entering into a deposit account control agreement with the bank at which the account is maintained. These control agreements typically provide a creditor with lien priority against the claims of other secured creditors, but not against the claims of the bank itself. Because the claims of the bank will be superior to the claims of the sales-based financing provider, no provider would be able to satisfy the Texas requirement that the provider’s interest have priority against the claims of “all other persons.” This requirement is significant because most sales-based financing transactions require payment via automated clearing house (ACH) debit entries to the recipient’s deposit account. It is unclear whether providers will be able to devise alternative payment methods or whether such alternative payment methods will negatively impact the performance of sales-based finance transactions.

Further, the legislation amends Texas law to exclude “sales-based financing” from Texas’s usury exemption. Under the new legislation, fees and charges paid or charged under a “sales-based financing” transaction count as interest under state usury law, regardless of the amount financed. However, the legislation does not require disclosure of an APR or interest rate, and it is not clear how the interest rate of a “sales-based financing transaction” would be determined for usury purposes.

The Texas legislation requires providers who extend specific offers of commercial “sales-based financing” of less than $1,000,000 to disclose to Texas-based recipients, among other things, (1) the total amount of the financing; (2) the disbursement amount; (3) the finance charge; (4) the total repayment amount; and (5) the estimated period for the periodic payments to equal the total repayment amount under the terms of the financing.

The legislation requires financers (i.e., “providers”) and brokers of “sales-based financing” transactions to register with the Texas Office of Consumer Credit Commissioner and to renew their registrations annually by January 31. The legislation exempts from its requirements banks (specifically including out-of-state banks) and their subsidiaries and affiliates, certain companies that provide tech services to exempt entities, lenders regulated under the Farm Credit Act, real property secured sales-based financing, true (operating) leases, and certain a commercial sales-based financing agreement or commercial open-end credit plan of $50,000 or more.

Again, most provisions of the law become effective on September 1, 2025, except for the provider and broker registration requirement, which takes effect on December 31, 2026.

A person who violates the law would be subject to a civil penalty of $10,000 for each violation, but the legislation does not authorize a private right action for violations arising under the law.

What To Do Now

The Texas legislation, while part of a growing trend of augmented state regulation of commercial non real estate secured lending, is far more burdensome than other similar state laws enacted to date, and at first blush, absent an exemption, may render it extremely difficult, if not impossible, to conduct sales-based financing in Texas. Only time will tell whether lenders can devise alternative financing methods that are not ensnared by the legislation or whether the legislature amends the law.

[1] https://legiscan.com/TX/text/HB700/2025

 

Pennsylvania: What is a Bona Fide Discount Point?

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What Happened?

Effective August 29, 2025, Pennsylvania enacted House Bill 1103 (the “Bill”) impacting discount points on residential mortgage loans by making amendments to Pennsylvania’s usury code (the Loan Interest and Protection Law (“Law”)), and the Mortgage Licensing Act.  First, the Bill amends the Law by repealing the definition of discount points in section 101 and repealing all of section 402, which prohibits lenders from collecting discount points from sellers on non-government mortgages. Second, the Bill amends the Mortgage Licensing Act to permit licensed mortgage lenders of first and secondary mortgage loans to offer “discount points,”  which the measure defines as “fees knowingly paid by the consumer for the purpose of reducing, and which result in a bona fide reduction of, the interest rate or time-price differential applicable to the mortgage.”

Why is it Important?

The Legislative history states that the purpose of these amendments is to allow borrowers to buy down their interest rate and align with the majority of states that do not restrict lenders from charging discount points.  It is worth noting that the usury’s law restriction on discount points was very narrowly drafted to apply only to points paid by the seller with several exclusions and was arguably preempted for first-lien residential mortgage loans under the Depository Institutions Deregulation and Monetary Control Act. Moreover, in the context of residential mortgages the usury law applies only to residential mortgage loans with an original principal amount of the base figure or less (currently, $319,777 and adjusted annually for inflation).

As amended, mortgage lenders licensed under the Mortgage Licensing Act have the power to charge discount points on a “mortgage loan,” which includes both first or secondary mortgage loans, irrespective of the dollar amount, provided such discount points are for the purpose of reducing the rate and result in a “bona fide” reduction of rate.  The statute does not define “bona fide.”  While not dispositive, it is worth noting that the federal Truth in Lending Act (“TILA”) defines the term “bona fide” discount point in the context of high cost residential mortgage loans. More specifically, under TILA, “[t]he term bona fide discount point means an amount equal to 1 percent of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer.”  Absent concrete guidance from the regulators, it is not clear what constitutes “bona fide” for purposes of Pennsylvania law.  With that said, Pennsylvania regulators have informally suggested that any actual reduction in rate would be deemed bona fide.

What to do now?

Given that violations of the Mortgage Licensing Act could result in fines of $10,000 per offense, licensed mortgage lenders should ensure that any discount points charged on first or secondary mortgage loans meet the Pennsylvania’s Department of Banking’s interpretation of “bona fide” and result in an actual reduction of the rate.