Alston & Bird Consumer Finance Blog

Consumer Finance

Governor Moore Signs Legislation Exempting “Passive Trusts” from Licensure in Maryland

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What Happened?

In a highly anticipated and welcome development, on April 22, 2025, Maryland Governor Wes Moore signed into law the Maryland Secondary Market Stability Act of 2025 (emergency measures HB 1516 and its companion SB 1026) with an immediate effective date.  The legislation is significant as it has the effect of modifying the formal guidance issued on January 10, 2025 by the Maryland Office of Financial Regulation (OFR) requiring assignees of residential mortgage loans, including passive trusts that acquire or take assignment of residential mortgage loans in Maryland, to become licensed in Maryland by April 10, 2025—later extended to July 6, 2025.  The OFR’s January licensing mandate, which derived from the OFR’s interpretation of a Maryland Appellate Court decision in Estate of Brown v. Ward, 251 Md. App. 385 (2024), would have created a logistical nightmare for, among others, passive trusts holding Maryland loans in residential mortgage-backed securitizations. By custom, passive trusts holding residential mortgage loans do not obtain licenses, and no state legislature has required such licensure for trusts holding these loans. The OFR’s January 10 formal guidance contravenes the plain language of the licensing requirements of the Maryland Mortgage Lender Law and the Maryland Installment Loan Law that do not apply to assignees.

Why Does it Matter?

The legislation addresses the OFR’s overreach by expressly excluding “passive trusts” from Maryland’s mortgage licensing requirements. The legislation defines a “passive trust” as a

trust that

(1) ACQUIRES OR IS ASSIGNED MORTGAGE LOANS IN WHOLE OR IN PART;

(2) DOES NOT MAKE MORTGAGE LOANS;

(3) IS NOT A MORTGAGE BROKER OR A MORTGAGE SERVICER; AND

(4) IS NOT ENGAGED IN THE SERVICING OF MORTGAGE LOANS, WHICH DOES NOT INCLUDE THE ACT OF TRANSMITTING OR DIRECTING PAYMENTS RECEIVED BY A MORTGAGE SERVICER.

The legislation defines “trust” as “any trust established under the laws of the State or any other state.”  Hence, the “passive trust” must be an actual trust and not a non-trust corporate entity.

The legislation also includes a “Maryland Licensing Workshop” that is comprised of members of consumer groups, the banking and non-bank mortgage industry, and others appointed by the Governor to study Maryland’s licensing statutes and make recommendations regarding, among other things, whether expansion of the existing licensing requirements to persons not currently licensed is warranted. The legislation requires the working group to report its findings to the Governor by December 31, 2025.

What Do I Need to Do?

While the legislation spares passive trusts, including trusts in existing residential mortgage-backed securitizations, from having to become licensed in Maryland, secondary market purchasers of loans that do not utilize passive trusts to acquire or take assignment of residential mortgage loans in Maryland must become licensed as Maryland Mortgage Lenders by July 6, 2025.

Federal Banking Agencies Announce Intent to Rescind 2023 Community Reinvestment Act Final Rule and Return to Prior Framework

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What Happened?

The Federal Deposit Insurance Corporation (“FDIC”), Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Office of the Comptroller of the Currency (“OCC”), (collectively, “federal banking agencies”) announced their intent to rescind the 2023 Community Reinvestment Act Final Rule (“Final Rule”) and to reinstate the CRA framework that existed prior to the 2023 CRA Final Rule.

Community Reinvestment Act (“CRA”)

The CRA was enacted in 1977 to address systemic inequities in access to credit in response to concerns that banks were engaging in redlining to deny credit to customers in low-income, minority areas. The CRA requires federal bank regulators to evaluate a financial institution’s record of meeting the credit needs of a given community, with separate evaluations for each area where the bank maintains a branch office, taking a particular focus on low- and moderate- income (“LMI) communities.

Given changes in technology and financial products since the CRA’s enactment, there have been several failed attempts over the past 30 years to revise and modernize CRA regulations. Before the 2023 CRA Final Rule, the last significant interagency revision to the regulations occurred in 1995.

Why Does it Matter?

Criticisms of the Final Rule

The federal banking agencies’ stated purpose for the Final Rule was to modernize CRA to address technological innovations and new product offerings in banking. However, many within the industry asserted that the Final Rule was contrary to the plain language of the CRA and congressional intent. The Final Rule fundamentally altered the determination of a bank’s assessment area, requiring inclusion of areas where the bank does not maintain any physical presence. The Final Rule set forth new tests, applicable to different banks based on asset size. Application and “scoring” under these tests was complicated and difficult to apply. Additionally, the Final Rule sought to evaluate banks’ deposit practices in addition to lending and investment activities.

Industry participants and trade groups asserted that the Final Rule would drastically and unnecessarily increase the regulatory burden placed on banks. The Final Rule could require banks to use deposits gathered from their local communities to make loans in places potentially thousands of miles away. The formulaic approach to scoring could result in decision-making divorced from the actual convenience and needs of a bank’s community. Banks also argued that the unnecessarily complex evaluation could force banks to close branches or reduce product offerings.

In March 2024, after a number of prominent bank trade groups sued to block the new rule, a Texas judge blocked the Final Rule, finding that the rule surpassed its statutory authority. The court found that the regulators exceeded their authority by expanding the lending test to evaluate banks in geographic areas where they did not maintain physical branches. Moreover, the court rejected the agencies contention that “credit needs” could be construed more broadly to include deposit products. The Final Rule has been on hold since the court’s ruling, and the federal banking agencies’ notice of intent to rescind the Final Rule puts an end to the Final Rule from a practical perspective.

Return to Prior Framework

In light of this litigation and the change in Presidential administration, the federal banking agencies decided to rescind the 2023 CRA Final Rule and return to the 1995 framework that existed prior to the Final Rule. Once the federal banking agencies formally rescind the Final Rule, Banks will not be required to comply with the more stringent and complex tests that the Final Rule would have required. However, it is important to note that the problems that the Final Rule sought to address still remain. The old framework still struggles to address the innovations and changes in the banking industry, including internet and mobile banking.

What Do I Need to Do?

Covered financial institutions should monitor further developments and confirm that the federal banking agencies do formally rescind the Final Rule. Banks should also evaluate their compliance with the existing CRA framework and keep abreast of new efforts to modernize CRA regulations moving forward. Alston & Bird’s Financial Services Group is actively monitoring these developments and is able to assist with any compliance concerns regarding these anticipated changes.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from three states:

Arkansas:

  • House Bill 1184, which we expect to take effect on or about August 8, amends the Fair Mortgage Lending Act, Ark. Code Ann. §§ 23-39-501 et seq., to address the use of mortgage trigger leads. Specifically, the measure amends Section 23-39-513 of the Arkansas Code to impose obligations on a loan officer using a mortgage trigger lead in any capacity (such as clearly and conspicuously stating in initial solicitations that the solicitation uses information purchased from a consumer reporting agency without the lender or broker’s knowledge or permission).

Idaho:

  • Effective July 1, House Bill 149 adds Section 26-31-221A to the Idaho Code, addressing consumer private in mortgage applications.  Specifically, the measure imposes obligations on an individual soliciting a consumer for a residential mortgage loan where a mortgage trigger lead is used in any capacity, to include (among other provisions): (a) clearly and conspicuously stating in initial solicitations that the solicitation uses information purchased from a consumer reporting agency without the lender or broker’s knowledge or permission; and (b) avoiding knowing or negligent use of information from a mortgage trigger lead where the consumer opted out of prescreened offers or placed his or her phone number on a federal or state “do-not-call” list.

Nebraska:

  • Effective March 12, Legislative Bill 251 amends surety bond provisions under the Residential Mortgage Licensing Act (“Act”). As amended, Section 45-724 of the Act requires a mortgage banker licensee to include its mortgage servicing portfolio (and not only its origination volume) in the calculation of its required surety bond.
  • Legislative Bill 21, which we expect to take effect on or about August 31, adopts the Uniform Unlawful Restriction in Land Records Act (“Act”). The Act will permit real property owners to unilaterally remove from any document related to the owner’s property “unlawful restrictions” (those that “purport[] to interfere with or restrict the transfer, use, or occupancy of real property”), and will prescribe the process by which an owner may amend a document to remove such restrictions.

HUD Revises Borrower Residency Requirements for FHA-Insured Mortgages

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What Happened?

On March 26, 2025, the U.S. Department of Housing and Urban Development (HUD or the Department) issued Mortgagee Letter 2025-09 (ML 2025-09), which updates HUD’s residency requirements for borrower eligibility for mortgages insured by the Federal Housing Administration (FHA). The provisions of ML 2025-09 apply to all FHA Title II Single Family forward and Home Equity Conversion Mortgage (HECM) programs.

HUD indicated that it issued its updated residency requirements in response to (and to align with) recent executive actions by the President “that emphasize the prioritization of federal resources to protect the financial interests of American citizens and ensure the integrity of government-insured loan programs.”  The Department stated that “[c]urrently, non-permanent residents are subject to immigration laws that can affect their ability to remain legally in the country,” which “poses a challenge for FHA as the ability to fulfill long-term financial obligations depends on stable residency and employment.” The update “ensures that FHA’s mortgage insurance programs are administered in accordance with [the Trump] Administration[’s] priorities while fulfilling its mission of providing access to homeownership.”

The provisions of ML 2025-09 may be implemented immediately but are required to be implemented for all FHA-insured mortgages with case numbers assigned on or after May 25, 2025.

Why Does it Matter?

ML 2025-09 removes the Non-permanent Resident sections of the FHA Single Family Housing Policy Handbook 4000.1 (the Handbook), in its entirety, eliminating eligibility for non-permanent resident borrowers, and updating the requirements for permanent residents in the following sections of the Handbook:

  • Residency Requirements (II.A.1.b.ii(A)(9));
  • Residency Requirements (II.B.2.b.ii(A)(4));
  • Non-credit Qualifying Exemptions (II.A.8.d.vi(C)(1)(a)); and
  • Special Documentation and Procedures for Non-credit Qualifying Streamline Refinances (II.A.8.d.vi(C)(5)(b)).

The mortgagee letter clarifies that the burden is on the lender to “determine the residency status of the borrower based on information provided on the mortgage application and other applicable documentation” and notes that a Social Security card is insufficient to prove immigration or work status. Rather, “[t]he U.S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security provides evidence of lawful permanent resident status.”

In addition to limiting eligibility to U.S. citizens and lawful permanent U.S. residents, ML 2025-09 clarifies that a borrower with citizenship in the Federated States of Micronesia, the Republic of the Marshall Islands, or the Republic of Palau may also be eligible for FHA-insured financing provided the borrower satisfies the same requirements, terms, and conditions as those for U.S. citizens, and the mortgage file includes evidence of such citizenship.

Under the revised guidance, individuals who may be eligible for FHA-insured loans with case numbers assigned on or after May 25, 2025 are limited to (1) U.S. citizens, (2) lawful permanent U.S. residents, and (3) citizens of the Federated States of Micronesia, the Republic of the Marshall Islands, or the Republic of Palau.

Notably, because ML 2025-09 applies prospectively to FHA-insured mortgages with a case number assigned on or after May 25, 2025, the revised requirements would not appear to impact the servicing of existing FHA-insured mortgages made to non-permanent residents, such as the availability of loss mitigation assistance.

What Do I Need to Do?

FHA-approved mortgage lenders should review their policies, procedures, and controls and make any necessary updates to implement the requirements of ML 2025-09 for all FHA-insured mortgages that will have a case number assigned on or after May 25, 2025. Alston & Bird’s Consumer Financial Services Team is actively engaged and monitoring these developments and can assist with any compliance concerns regarding these changes to HUD requirements.

 

New York State Proposes Consumer Protection Reforms through FAIR Business Practices Act

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What Happened?

On March 13, New York state legislators introduced new legislation called the Fostering Affordability and Integrity Through Reasonable (FAIR) Business Practices Act.  The bill, supported by New York Attorney General Letitia James, aims to strengthen New York’s existing consumer protection law and would expand the law’s scope from only covering “deceptive” acts or practices to also include “unfair” and “abusive” practices.  It would apply in the consumer, as well as the small business context.

Why Is It Important?

The FAIR Act comes at a time when consumer protection at the federal level has stalled, particularly with respect to the activities of the Consumer Financial Protection Bureau (CFPB).   State attorneys general have promised to step in to address any resulting gaps in consumer protection.

The FAIR Act defines unfair and abusive acts and practices expansively, to reach conduct that could be considered unfair or abusive, but arguably not deceptive.  Additionally, it provides for enhanced civil penalties for unfair, deceptive, or abusive practices against “vulnerable persons,” including those under 18 or over 65, active duty servicemembers and veterans, physically or mentally impaired persons, and individuals with limited English proficiency.  The legislation provides for civil penalties of: (a)$5,000 per violation; or (b) for knowing or willful violations, the greater of $15,000 or three times the amount of restitution for each violation.

What To Do Now?

Businesses operating in New York can prepare for potential changes by reviewing current practices to identify those that might be considered unfair or abusive under the broader scope of the FAIR Act.  Additionally, they can:

  • Monitor the progress of this legislation and be prepared to adjust business practices accordingly, especially as state-level enforcement of consumer protection laws is likely to increase in response to reduced federal action​​​​​​​​​​​​​​​; and
  • Pay particular attention to practices that might affect “vulnerable persons” as defined in the legislation, as these could result in enhanced civil penalties.