Alston & Bird Consumer Finance Blog

Debt Collection

California Enacts Debt Collector Licensure Law

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A&B Abstract:

On September 25, California Governor Gavin Newsom signed into law Senate Bill 908, which, in part, enacts the California Debt Collection Licensing Act (“Act”). Effective January 1, 2022, the Act will require the licensure of persons that engage in debt collection in California with California residents.   Notably, the Act also applies to entities collecting debt on their own behalf.  The Act’s requirements are in addition to those arising under the California Rosenthal Fair Debt Collection Practices Act (the “Rosenthal Act”), which regulates the practices of debt collectors.

A New Licensing Obligation

The Act provides that “[n]o person shall engage in the business of debt collection in this state without first obtaining a license [from the California Department of Financial Protection and Innovation (“DFPI”), which succeeds the Department of Business Oversight effective January 1, 2021].”

What is debt collection and who is a debt collector?

The Act defines “debt collection” as “any act or practice in connection with the collection of consumer debt.”

“Consumer debt” is defined as “money, property, or their equivalent, due or owning, or alleged to be due or owing, or alleged to be due or owing, from a natural person by reason of a consumer credit transaction,” and specifically includes mortgage debt and “charged-off consumer debt” as defined in Section 1788.50 of the California Civil Code.

“Debt collector” means any person who, “in the ordinary course of business, regularly, on the person’s own behalf or on behalf of others, engages in debt collection.” The term includes any person, “who composes and sells, or offers to compose and sell, forms, letters and other collection media used or intended to be used for debt collection.” The term also includes a “debt buyer” as defined in Section 1788.50 of the California Civil Code.

Exclusions

The Act contains several exclusions from both its licensing obligation and the Act’s substantive provisions. Notably, the Act excludes from its scope, depository institutions, which is defined to include FDIC-insured out-of-state state-chartered banks, licensees under the California Financing Law, licensees under the California Residential Mortgage Lending Act, licensees under the California Real Estate Law, and a trustee performing acts in connection with a nonjudicial foreclosure, among others. Additionally, the Act does not apply to debt collection regulated by California’s Student Loan Servicing Act (Cal. Fin. Code §§ 28000 et seq.).

However, it should be noted that the Act authorizes the Commissioner of the DFPI to take action against those exempt from the Act, for violations of the Rosenthal Act (Cal. Civ. Code §§ 1788 et seq.) or the California Fair Debt Buying Practices Act (Cal. Civ. Code §§ 1788.50 et seq.).  Such actions may include, after notice and an opportunity for a hearing, ordering the person to (1) desist and refrain from engaging in the business of further continuing the violation, or (2) pay ancillary relief, which may include refunds, restitution, disgorgement, and payment of damages, as appropriate, on behalf of a person injured by the conduct or practice that constitutes the subject matter of the assessment.

California Debt Collector Application

Persons wishing to obtain a California Debt Collector License must submit an application to the DFPI. Among other requirements under the Act, applicants must submit:

  • A completed license application signed under the penalty of perjury;
  • An application and an investigation fee; and
  • A sample of the initial consumer debt validation letter required by 15 U.S.C. § 1692g that the licensee will use in correspondence with California consumers.

The DFPI has not yet released an application for this license. However, the Act authorizes the DFPI to require that applications be submitted through the NMLS.  We anticipate the DFPI will require that applications be submitted and processed through the NMLS.

Duties of Debt Collector Licensees

The Act imposes express duties on licensed debt collectors. Specifically, all licensed debt collectors must: (1) develop policies and procedures reasonably intended to promote compliance with the Act; (2) file any required reports with the Commissioner; (3) comply with the provisions of the Act and any regulation or order of the Commissioner; and (4) submit to periodic examination by the DFPI as required by the Act and any regulations promulgated thereunder.

Licensees must also maintain a surety bond in a minimum amount of $25,000.  The Commissioner is authorized to require licensees to submit bonds, riders, and endorsements electronically through the NMLS’s electronic surety bond function.

Additionally, each licensee will be required to pay an annual fee, representing the debt collector’s “pro rata share of all costs and expenses reasonably incurred in the administration of [the Act], as estimated by the commissioner, for the ensuing year and any deficit actually incurred or anticipated in the administration of [the Act] in the year in which the annual fee is levied.”

Licensees are also required to file an annual report with the Commissioner, on or before March 15, that contains all relevant information that the Commissioner reasonably requires concerning the business and operations conducted by the licensee in California during the preceding calendar year, including information regarding collection activity. The report must, at minimum, require disclosure of all of the following:

  • The total number of California debtor accounts purchased or collected on in the preceding year;
  • The total dollar amount of California debtor accounts purchased in the preceding year;
  • The face value dollar amount of California debtor accounts in the licensee’s portfolio in the preceding year;
  • The total dollar amount of California debtor accounts collected in the preceding year, and the total dollar amount of outstanding debt that remains uncollected;
  • The total dollar amount of net proceeds generated by California debtor accounts in the preceding year;
  • Whether or not the licensee is acting as a debt collector, debt buyer, or both; and
  • The case number of any action in which the licensee was held liable by final judgment under the Rosenthal Act (Cal. Civ. Code §§ 1788 et seq.) or the California Fair Debt Buying Practices Act (Cal. Civ. Code §§ 1788.50 et seq.).

Notably, these individual annual reports will be made available to the public for inspection.

DFPI Authority Under the Act

As noted above, the Act grants the Commissioner with broad authority to administer the Act, through investigations and examinations, and to adopt rules and regulations consistent with that authority.

If the Commissioner determines that a person who is required to be licensed under the Act is engaged in business as a debt collector without a license, or a person or licensee has violated any provision of the Act, the Commissioner may, after notice and an opportunity for a hearing, order such person to (1) desist and refrain from engaging in the business of further continuing the violation, or (2) pay ancillary relief, which may include refunds, restitution, disgorgement, and payment of damages, as appropriate, on behalf of a person injured by the conduct or practice that constitutes the subject matter of the assessment.  In addition, the Commissioner has the authority to suspend or revoke licenses issued under the Act.

Takeaway

Effective January 1, 2022, California will require “debt collectors” engaged in the business of debt collection in the state to obtain a debt collection license.  The Act also authorizes the DFPI to enforce the provisions of the Rosenthal Act against “debt collectors,” which the Act defines consistent with the Rosenthal Act.

The Act should be of particular note for persons that service and collect on their own debt, as California joins a growing list of states that require a license for first-party collection activity.  Unlike other state debt collection laws, certain licensees in California may avail themselves of an exemption from the Act’s licensing obligation. Those currently acting as debt collectors in California that do not qualify for an exemption should closely monitor DFPI guidance for the release of application procedures.

District Courts Split on Convenience Fees Under Debt Collection Laws

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A&B ABstract:

In a number of recent decisions, district courts have split on the issue of whether a mortgage servicer violates the Fair Debt Collection Practices Act (“FDCPA”) and related state debt collection statutes by charging a borrower a convenience fee for making a mortgage payment over the phone, interactive voice recording system (“IVR”).

FDCPA Sections 1692(f) and 1692a

Section 1692(f) of the FDCPA prohibits a debt collector from using unfair or unconscionable means to collect any debt, and enumerates specific examples of prohibited conduct.  Such conduct includes the “[c]ollection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement created the debt or permitted by law.  15 U.S.C. § 1692f(1).

The FDCPA defines “debt collector” as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 U.S.C.A. § 1692a(6).  Among other things, the term “debt collector” does not include “any person collecting or attempting to collect any debt owed or due . . . to the extent such activity . . . concerns a debt which was originated by such person” or “concerns a debt which was not in default at the time it was obtained by such person….”  Id.

Overview of Convenience Fees

In addition to offering consumers several no-cost options to make a timely monthly mortgage payment, many servicers also offer borrowers a means to make an immediate payment on their mortgage by phone, IVR, or the Internet.  Servicers who make such services available to their customers may charge a fee, often referred to as a “convenience fee,” in connection with this service.  In a wave of recent cases, borrowers who have elected to use such payment methods and consequently incurred convenience fees have sued their mortgage servicers, alleging that the convenience fees violated the FDCPA.  Frequently, these borrowers also allege that the convenience fees violated other state consumer protection statutes, breached the express terms of their mortgage agreements, and ran afoul of common law.

Recent Decisions

This year, numerous courts across the country have ruled on loan servicers’ motions to dismiss convenience claims asserted by borrowers.  A clear split has now emerged regarding the viability of plaintiffs’ legal theories.

Some Courts Dismiss Plaintiffs’ FDCPA Claims, Finding Plaintiffs’ Allegations Concerning Convenience Insufficient to State a Violation of the FDCPA

Many courts, largely in district courts in Florida, have dismissed borrowers’ claims for failure to state a claim under the FDCPA and related state acts.  According to these courts, a convenience fee is neither a “debt,” nor is it properly characterized as “incidental” to the mortgage debt itself.  Moreover, these courts have also rejected the argument that the servicer is “debt collector” under the FDCPA unless the loan was in default when the borrower became obligated to pay the convenience fee.

One of the key decisions in this recent line of cases in Turner v. PHH Mortgage Corp. No. No. 8:20-cv-00137-T-30SPF (Feb. 24, 2020 M.D. Fla.).  There, PHH charged Turner for making mortgage payments via telephone or online.  Turner alleged those convenience fees violated the FDCPA, and its Florida counterpart, the Florida Consumer Collection Practices Act (“FCCPA”).  PHH responded by moving to dismiss those claims.  The court agreed with PHH, concluding that the convenience fees were not debts owed another as contemplated by the acts.  Further, the court found that even if the fees were debts, PHH’s optional payment services had separate convenience fees that originated with PHH—not with Turner’s mortgage.

Additionally, the court relied on the fact that when Turner became obligated to pay the convenience fees, she was not in default in her obligation to pay it.  Thus, according the court’s analysis, PHH was not acting as a debt collector under the acts because (1) the debt was not in default and (2) the debt originated with PHH.  A number of other courts have since dismissed the borrowers’ claims under similar reasoning, often citing Turner’s analysis as persuasive.  See, e.g. Estate of Derrick Campbel. V. Ocwen Loan Serv., LLC, No. 20-CV-80057-AHS, slip op. at 5 (S.D. Fla. Apr. 30, 2020); Reid v. Ocwen Loan Serv., LLC, No. 20-CV-80130-AHS, 2020 U.S. Dist. LEXIS 79378 (S.D. Fla. May 4, 2020); Bardak v. Ocwen Loan Serv., 2020 U.S. Dist. LEXIS 158874 (M.D. Fla. Aug. 12, 2020).

Some Courts Find that Borrowers’ Allegations Concerning Convenience Fees Are Sufficient to State a Claim Under the FDCPA

A number of other courts across the country, from California to Florida to Texas, have concluded that a borrower does state a claim for violation of the FDCPA (or an equivalent state statute) by alleging that the borrower was charged a convenience fee in connection with a mortgage payment made over the phone, IVR, or Internet.

In contrast to the decisions discussed above, these courts find that the convenience fee is “incidental” to the mortgage debt under FDCPA section 1692f(1).  These courts have rejected the servicers’ arguments that convenience fees are not incidental to the mortgage because they arise from separate services and obligations voluntarily undertaken by the borrower.  They have found instead that, regardless of the fact that the payment method is optional, it is still incidental to the mortgage debt because the servicers only collect convenience fees when borrowers make debt payments.  See, e.g., Glover v. Owen Loan Servicing, LLC, 2020 U.S. Dist. LEXIS 38701 (S.D. Fla. Mar. 2, 2020).

Similarly, the court in Glover further found that the convenience fees were not permitted by Florida law because the court could not identify any statute or law expressly permitting such fees, nor were they explicitly allowed by the mortgage agreement.  A number of other courts have employed similar reasoning and refused to dismiss borrowers’ convenience fee claims under the FDCPA or corollary state statutes.  See, e.g., Torliatt v. Ocwen Loan Serv., No. 19-cv-04303-WHO, 2020 U.S. Dist. LEXIS 141261 (N.D. Cal. Jun. 22, 2020) (refusing to dismiss claims under the Rosenthal Fair Debt Collection Practices Act—California’s equivalent of the FDCPA—and California’s Unfair Competition Law); Caldwell v. Freedom Mortg. Corp., No. 3:19-cv-02193-N (N.D. Tex. Aug. 14, 2020) (refusing to dismiss plaintiffs’ claims under the Texas Debt Collection Act).

Takeaway

There is a growing split among district courts regarding whether a borrower who is charged a convenience fee has a viable claim under the FDCPA.  This division is particularly acute within the Eleventh Circuit, and is one unlikely to be resolved in the Court of Appeals any time soon.  So, for the foreseeable future, we expect to see more lawsuits where borrowers seek to take advantage of the current state of legal uncertainty around convenience fees.

Delaware Governor Issues Order Modifying Restrictions on Residential Foreclosures and Evictions

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A&B Abstract:

On June 30, 2020, Delaware Governor, John Carney, issued a Twenty-Third Modification (the “Order”) to the Declaration of a State of Emergency (the “State of Emergency”), initially issued on March 12, 2020. The Order became fully effective July 1, 2020. The Order addresses a number of issues that impact residential mortgage loan servicers, including restrictions on residential foreclosure and evictions and certain fees or charges, which modifies guidance issued under the Sixth Modification of the State of Emergency (the “Sixth Modification”), which we previously discussed.

Restrictions on Late Fees and Excess Interest for Missed Payments

Under the Sixth Modification, with respect to any missed payment on a residential mortgage occurring during the State of Emergency, no late fee or excess interest could be charged or accrued on the account for such residential mortgage during the State of Emergency. Under the Order, these provisions have been removed in their entirety.

Foreclosure Restrictions

The Order continues to impose restrictions on a mortgage servicer’s ability to initiate or complete a foreclosure action or sale, however, the Order replaces Paragraph C of the Sixth Modification and makes certain other significant changes thereto.

Notably, the Order lifts the stay of deadlines in any action pursuant to paragraphs C.2, C.3, and C.4 of the Sixth Modification.  Paragraph C.2 of the Sixth Modification had extended all deadlines in residential mortgage foreclosure actions, including those related to the Automatic Residential Mortgage Foreclosure Mediation Program established pursuant to § 5062C of Title 10 of the Delaware Code.  Paragraph C.3 prohibited residential properties subject to a residential mortgage foreclosure action, for which a judgment of foreclosure was issued prior to the State of Emergency, from proceeding to a sheriff’s sale until 31 days after the State of Emergency.  Paragraph C.4 prohibited any residential property that was the subject of a residential mortgage foreclosure action, and which was sold at sheriff’s sale, from being subject to an action of ejectment or write of possession until 31 days following the termination of the State of Emergency. The Order lifts these restrictions, unless a court determines that a longer period is needed in the interest of justice.

With the lift of the stay of deadlines, the Order allows a party to act to remove individuals from residential properties, subject to a residential mortgage foreclosure action, where a judgment of foreclosure was issued prior to the declaration of the State of Emergency. However, individuals still cannot act to, and sheriffs, constables, and their agents, cannot remove individuals from their homes unless a judgment of foreclosure was obtained before March 13, 2020. All other provisions of Chapter 49 of Title 10 of the Delaware Code remain in effect in accordance with their terms.

Restrictions on Evictions

Similarly, with respect to evictions, the Order replaces paragraph B of the Sixth Modification and makes significant additional changes thereto.

The Order now provides that actions for summary possession may be filed with respect to any residential unit located within Delaware, but must be stayed to permit the Justice of the Peace Court to determine whether the parties would benefit from court supervised dispute resolution. Previously, no party could bring an action for summary possession for any residential rental unit located in Delaware. Actions that were brought before the State of Emergency, for which no final judgment had been entered, are further stayed.

Sheriffs, constables, and their agents continue to be prohibited from removing individuals from residential properties during the time the Order is in effect, unless a court determines on its own motion, or upon the motion of the parties, that it is necessary in the interest of justice. Additionally, the Order continues to prohibit the charging late fees or interest with respect to any past due balance for any residential unit during the State of Emergency.

Takeaway

The Order makes significant changes to the Sixth Modification to the Declaration of the State of Emergency, which significantly impacts mortgage servicing in Delaware. Servicers should carefully review the Order to fully determine their rights and obligations with respect to Delaware borrowers.

Federal and State Guidance Regarding the COVID-19 Pandemic

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A&B Abstract:

The Alston & Bird Consumer Finance team recognizes that this is a period of great uncertainty both for the nation and our clients. We have received numerous questions and concerns regarding what federal and state regulators are doing in light of the COVID-19 pandemic and how their response may affect day-to-day business. We have been monitoring both the federal and state guidance that has been released in response to the COVID-19 pandemic and have provided a summary of what has been released thus far.  We are continuing to monitor for new developments and will update this blog post accordingly.

Federal Guidance

Federal Administrative Agencies:

  • HUD/FHA: On March 18, 2020, HUD released Mortgage Letter 2020-4, which placed a foreclosure and eviction moratorium on all FHA-insured Single Family mortgages for a period of 60 days. The moratorium applies both to the initiation of foreclosures and to the completion of foreclosures in process.  Similarly, evictions of persons from properties secured by FHA-insured single-family mortgages are suspended for 60 days.  Deadlines of the first legal action and reasonable diligence timelines for Home Equity Conversion Mortgages are extended by 60 days.  In light of the broad language of the Mortgagee Letter, it does not appear that HUD intended to carve out vacant and abandoned properties from the foreclosure moratorium.  HUD has informally confirmed this interpretation.
  • USDA: On March 19, 2020, the USDA issued SFH Guaranteed Servicing Notice (March 19, 2019) which, effective immediately, provides that borrowers with USDA guaranteed loans are subject to a moratorium on foreclosure for a period of 60 days. The moratorium applies to the initiation of foreclosures and to the completion of foreclosures in process.  In addition, deadlines of the first legal action and reasonable diligence timelines are extended by 60 days. Similarly, evictions of persons from properties secured by USDA guaranteed loans are also suspended for a period of 60 days.
  • VA: On March 18, 2020, the VA issued Circular 26-20-8, which strongly encourages loan holders to establish a sixty-day moratorium beginning March 18, 2020, on completing pending foreclosures or imitating new foreclosures on loans.  Additionally, due to the widespread impact of COVID-19, loan holders should consider the impact of completing an eviction action when choosing to retain the property instead of conveying to VA.  VA requests holders not to expose Veterans and their families to additional risk through an eviction, if at all feasible.  Previously, on March 16, 2020, the VA issued Circular 26-20-7, which provides, in relevant part, that (1) lenders should have continuity of operation plans in place to support its ongoing ability to conduct business operations in the event of an interruption to business operations and processes; (2) servicers may employ the following relief to veterans impacted by COVID-19: (a) forbearance, (b) late charge waivers on affected loans, and (c) suspension of credit bureau reporting on affected loans; and (3) appraisers should continue to conduct business as outlined in Chapter 10 of the M26-7, Lenders Handbook.

Federal Government-Sponsored Entities:

  • Fannie Mae: Fannie Mae released a Bulletin for borrowers detailing its response to the COVID-19. Fannie Mae has placed a moratorium on foreclosure sales and evictions for sixty (60) days. In conjunction with the Bulletin, Fannie Mae also issued Lender Letter LL-2020-02, which sets forth guidance for lenders in responding to COVID-19.  The letter provides guidance for lenders concerning topics such as (1) forbearance plan eligibility for borrowers, (2) evaluating borrowers for mortgage modifications, (3) credit bureau reporting, and (4) suspension of foreclosure sales.
  • Freddie Mac: Freddie Mac released a Bulletin for mortgage servicers detailing its response to the COVID-19 and new guidelines for Freddie Mac mortgage servicers during the COVID-19 pandemic. Similar to Fannie Mae, the Bulletin provides guidance for lenders concerning topics such as (1) forbearance plan eligibility for borrowers, (2) evaluating borrowers for mortgage modifications, (3) credit bureau reporting, and (4) suspension of foreclosure sales.

State Guidance

State Legislatures:

  • Enacted Legislation and Executive Orders
    • District of Columbia: On March 17, 2020 Mayor Bowser signed the COVID-19 Response Emergency Amendment Act of 2020, which expires on June 15, 2020. The act provides for, among other things, a prohibition on evictions for as long D.C. is under a public health emergency.
    • New Hampshire: On March 17, 2020, New Hampshire Governor Christopher Sununu issued Emergency Order #4 pursuant to Executive Order 2020-04, which (1) prohibits an owner of non-restricted property or restricted property, as those terms are defined in RSA 540:1-a, from initiating eviction proceedings under RSA 540, and (2) prohibits all judicial and non-judicial foreclosure actions under RSA 479 or any other applicable law, rule or regulation, during the State of Emergency declared in Executive Order 2020-04.
    • New Jersey: The New Jersey Legislature passed Assembly Bill 3859, which allows the New Jersey governor to issue an executive order during a Public Health Emergency, pursuant to the New Jersey Emergency Health Powers Act, prohibiting the removal of any lessee, tenant, or homeowner from a residential property as the result of an eviction or foreclosure action.  Governor Philip Murphy subsequently issued Executive Order No. 106, which prohibits any lessee, tenant, homeowner or any other person from being removed from a residential property as a result of an eviction or foreclosure proceeding.
    • Kansas: On March 17, 2020, Governor Laura Kelly issued Executive Order No. 20-06, which orders all financial institutions operating in Kansas to temporarily suspend the initiation of any mortgage foreclosure efforts or judicial proceedings and any commercial or residential eviction efforts or judicial proceedings until May 1, 2020.
  • Pending Legislation
    • Massachusetts: The Massachusetts Legislature is considering House Docket No. 4935, which, if enacted, would impose a moratorium on evictions and foreclosures during the COVID-19 emergency.
    • Virginia: Currently, Virginia House Bill 340 is on Governor Northam’s desk, and he has until April 11th to take action on the bill. If passed, the bill would provide foreclosure and eviction protections for federal workers upon the closure of the federal government.

State Regulators:

In addition to state legislation and executive order, state regulators across the country have released guidance to regulated entities concerning the COVD-19 pandemic and indicating what the state regulators are doing in response. The Nationwide Multistate Licensing System (“NMLS”) has compiled state regulator guidance issued in response to COVID-19. The NMLS has posted this document to their website, and it is updated regularly. Below, we have included a summary of the information released by state regulators as of (March 20, 2020):

  • Alaska Department of Commerce, Community & Economic Development (“Department”): The Department posted guidance on its website stating that licensed mortgage-broker lenders may require licensed mortgage loan originators to work and undertaken licensed activities from home. The Department stated that it would not take administrative or other punitive action against a licensed mortgage loan originator or the sponsoring licensed company if the mortgage loan originator conducts activities requiring licensure from home. This guidance does not have an expiration date but is subject to revision.
  • Alabama State Banking Department (“Department”): The Department released guidance for any entity licensed by the Department. The Department instructed that licensees need to comply with all applicable statutes, regulations, and data security regulations. The Department noted that not all licenses may be able to work from home if their home location does comply with the applicable statutes, regulations, and data security regulations. This guidance does not have an expiration date but is subject to revision.
  • Arkansas Securities Department (“Department”): The Department released guidance for licensed mortgage loan companies, mortgage loan officers, and branch managers. The Department stated that mortgage loan companies may have mortgage loan officers work from home at unlicensed locations as long as state and federal data security standards are upkept. This guidance is in effect until June 1, 2020 but is subject to revision.
  • Colorado Department of Real Estate (“Department”): The Department released guidance that since Colorado law is silent as to the location at which mortgage loan originators are required to work. Therefore, the Department instructed that licensed mortgage loan originators may work from home. This guidance does not have an expiration date but is subject to revision.
  • Connecticut Department of Banking (“Department”): The Department released guidance for all consumer credit licensees. The Department is allowing consumer credit licensees to work from home during the CORVID-19 pandemic as long as the licensee follows applicable law, notifies the Department in writing, and that no licensable activity can take place at home with a member of the public. This guidance is in effect until April 30, 2020.
  • Iowa Division of Banking (“Division”): The Division released guidance for all entities that it regulates. The Division stated that all licensees may work from home during the CORVID-19 pandemic even if their home is an unlicensed office as long as appropriate data security measures are put into place. This guidance does not have an expiration date but is subject to revision.
  • Idaho Department of Finance (“Department”): The Department released guidance for all entities that it regulates. The Department is allowing licensed and registered entities to allow their employees to work from home even if that location is not a licensed location. Licensed and registered entities must keep up data security, may not advertise the unlicensed location as a licensed location, and may not meet with consumers or have consumers come to an unlicensed location. This guidance is in effect until June 30, 2020 but is subject to revision.
  • Indiana Department of Financial Institutions (“DFI”): The DFI issued temporary guidance offering licensees the ability to take precautions deemed necessary to avoid the risk of exposure or to comply with requirements of voluntary or mandated quarantines and is effective through June 30, 2020, unless otherwise modified or withdrawn.
  • Kansas Office of the State Bank Commissioner (“Commissioner”): The Commissioner released guidance for all entities that it regulates. The Commissioner is allowing licensed and registered entities to allow employees to work from home even if that location is not a licensed location. Licensed and registered entities must keep up adequate data security protection and may not take physical records out of the licensed location if they have confidential information. This guidance does not have an expiration date but is subject to revision.
  • Kentucky Department of Financial Institutions (“DFI”): The DFI released guidance to Kentucky-chartered financial institutions recommending that such institutions take certain actions in response to the COVID-19 pandemic.  Such actions include, among others, (1) working with customers affected by the coronavirus to meet their financial needs, which may include waiving overdraft and/or minimum balance fees, restructuring existing loans, extending loan repayment terms, and easing terms for new loans, (2) managing COVID-19 related staffing issues, and (3) making sure business continuity plans include pandemic planning.
  • Louisiana Office of Financial Institutions Non-Depository Division (“Division”): The Division released guidance for all licensed mortgage lenders, brokers, and originators. The Division is allowing entities to close their licensed locations and work from home, but entities that do so much provide the Division with notice of the new location. This guidance is in effect until April 9, 2020, but is subject to revision.
  • Massachusetts Division of Banks (“Division”): The Division released guidance for all licensed entities. The Division is allowing licensed entities to work from home as long as the unlicensed location is not advertised to the public and licensed entities do not meet with consumers at unlicensed locations. This guidance does not have an expiration date but is subject to revision.
  • Maryland Commissioner of Financial Regulation (“Commissioner”): The Commissioner released guidance for all licensed mortgage brokers, lenders, and servicers. The Commissioner is allowing licensed mortgage brokers, lenders, and servicers to work from home provided that the work would not require the location to be licensed as a branch office under Maryland law. This guidance does not have an expiration date but is subject to revision.  In addition, the Commissioner issued an Industry Advisory on March 19, 2020, advising the industry of Maryland Court of Appeals Chief Judge Mary Ellen Barbera’s March 18, 2020 order, which immediately stays all residential foreclosure and eviction actions in Maryland.
  • Michigan Department of Insurance and Financial Services (“DIFS”): The DIFS is seeking information regarding responses to the COVID-19 pandemic from all Michigan consumer finance licensees and registrants.  Responses were due on Friday, March 20, 2020 by 5:00pm and were required to address  whether (1) the licensee/registrant had temporarily or permanently reduced any services provided in their office locations or by your business, (2) whether the licensee/registrant had implemented a program to allow staff to work remotely and, if so, certain additional information about such program, (3) whether and in what way the licensee/registrant had communicated with their customers to provide them with information regarding any changes the licensee/registrant had implemented in response to the pandemic and how those changes may affect them, and (4) whether the licensee/registrant had proactively reached out to their customers to provide them with information concerning what they should do if they are having trouble making their loan payment.
  • Minnesota Department of Commerce (“Department”): The Department has issued separate guidance to Minnesota Industrial Loan & Thrift Companies, Licensed Mortgage Originators and Servicers (companies and individuals), Licensed Non-Depository Financial Institutions, and Regulated Loan Companies.  The guidance is intend to address certain issues and questions related to changes in branch locations or employees working from home as a result of the COVID-19 pandemic.
  • Mississippi Department of Banking and Consumer Finance (“DBCF”): The DBCF released guidance for licensed mortgage loan originators. The DBCF is allowing licensed mortgage loan originators to work from home provided that data security measures are put in place and the licensed mortgage loan originator does not have consumers meet with the licensed mortgage loan originator at their home. This guidance does not have an expiration date but is subject to revision. The DBCF also issued separate guidance to Mississippi Mortgage Licensees and Consumer Finance Licensees regarding industry pandemic preparedness and outline flexibility in DBCF processes in response to the COVID-19 pandemic.
  • Montana Division of Banking and Financial Institutions (“DBFI”): On March 19, 2020, the DBFI issued a Supervisory Memorandum on Operations During Novel Coronavirus Situation, in which the DBFI provides the industry with answers to FAQs regarding preferred methods of communication as well as notification requirements for branch and loan production office closures and hours changes during the COVID-19 pandemic.
  • Nebraska Department of Baking and Finance (“DBF”): The DBF released guidance for licensed mortgage bankers and sponsored/licensed mortgage loan originators. The DBF is allowing mortgage bankers and mortgage loan originators to work from home provided that they notify the DBF and the DBF approves the new location. All physical documents must remain at a licensed location, but licensees may access information digitally. This guidance is in effect until December 31, 2020 but is subject to revision.
  • New Hampshire Banking Department (“Department”): The Department released guidance for licensed mortgage loan originators. The Department is allowing licensed mortgage loan originators to work from home even if that location further than 100 miles from their supervisory office as would otherwise be required under New Hampshire law. This guidance does not have an expiration date but is subject to revision.
  • New Mexico Financial Institutions Division (“Division”): The Division released guidance for all mortgage licensees. The Division is allowing all mortgage licensees to work from home provided that data security measures are put in place and no mortgage licensee advertise from or meet with consumers from their home if it is an unlicensed location. This guidance is in effect until May 31, 2020 but is subject to revision.
  • Nevada Division of Mortgage Lending (“Division”): The Division released guidance for all licensed mortgage companies and mortgage loan originators. The Division is allowing licensed mortgage companies and mortgage loan originators to work from home even if it would be considered an unlicensed location. This guidance is in effect until May 31, 2020 but is subject to revision.
  • New York Department of Financial Services (“NY DFS”): The NY DFS has asked licensees to submit plans to the NY DFS on how they plan to address the CORVID-19 pandemic. In addition, the NY DFS issued guidance to New York State regulated and exempt mortgage servicers regarding support for borrowers impacted by COVID-19.
  • Oklahoma Department of Consumer Credit (“Department”): The Department has released guidance for licensed mortgage loan originators and their employees. The Department has stated that licensed mortgage loan originators and their employees may work from home as long as they put in place appropriate data security measures. This guidance is in effect until April 30, 2020 but is subject to revision.
  • Oregon Division of Financial Regulation (“Division”): The Division has released guidance for all licensed entities. Licensed entities can work from home provided that the entity provides notice to the department, the entity has procedures in place for data security and more broadly for working from home, and no consumers at met with at unlicensed locations. Mortgage loan originators must keep all physical records at a licensed location. This guidance is in effect until April 30, 2020 but is subject to revision.
  • Pennsylvania Department of Banking and Securities (“Department”): The Department issued FAQs related to compliance with Governor Wolf’s Order that non-life-sustaining businesses shut down their physical operations.
  • Puerto Rico Office of the Commissioner of Financial Institutions (“OCFI”): The OCFI issued Circular Letter CIF Number CC-2020-002 to all financial institutions required to file reports with the OCFI, which extends the deadlines for filing such reports in light of the governmental closure ordered by Governor Garced, due to the State of Emergency declared in response to COVID-19.
  • Rhode Island Division of Banking (“Division”): The Division has released guidance for licensed mortgage loan originators, mortgage lenders, loan brokers, and exempt company registrants. The Division is allowing licensed mortgage loan originators to work from home if they and their sponsoring entities have adequate data security measure in place. Consumers are not allowed to visit any unlicensed location including the home of a mortgage loan originator if it is not a licensed location. This guidance is in effect until April 30, 2020 but is subject to revision.
  • South Carolina Consumer Finance Division of the Board of Financial Institutions (“Division”): The Division has released guidance for licensed mortgage origination and servicing companies. Licensed mortgage origination and servicing companies can work from home provided that they have a contingency plan in place, adequate data security measures, and do not remove any physical records from licensed offices. This guidance is in effect until April 30, 2020 but is subject to revision.
  • South Dakota Division of Banking (“Division”): The Division had released guidance for licensed mortgage loan originators and their sponsoring entities. Licensed mortgage loan originators can work from home provided that they have adequate data security measures in place and do not take any physical records out of licensed locations. This guidance is in effect until June 5, 2020 but is subject to revision.
  • Texas Office of Consumer Credit Commissioner (“Commissioner”): The Commissioner has released guidance for licensed regulated lenders. All licensed regulated lenders can work from home provided that they prepare a written plan describing the steps it is taking, have adequate data security measures, and ensure that all physical records remain in a licensed location. This guidance is in effect until May 31, 2020 but is subject to revision.
  • Texas Department of Savings and Mortgage Lending (“Department”): The Department has issued guidance temporarily suspending any requirement that a physical office be open to the public during posted normal business hours.  Additionally, licensed mortgage loan originators may work from home or another remote location, whether located in Texas or another state, even if the home or remote location is not a licensed branch.  The guidance provides certain requirements in the event that a licensed residential mortgage loan originator or mortgage loan staff work remotely.  These allowances do not amend Texas Financial Code, Chapter 156 and/or 157 and are being allowed strictly due to the COVID-19 pandemic.
  • Vermont Department of Financial Regulation (“Department”): The Department has released guidance for licensed mortgage loan originators and their sponsoring entities. All licensed mortgage loan originators may work from home provided that no licensable activity is taken place with a consumer at an unlicensed location, adequate data security measures are put into place, and a plan is contingency plan is put in place. This guidance does not have a current expiration date but is subject to revision.
  • Washington Department of Financial Institutions (“Department”): The Department released guidance for licensed mortgage loan originators and their sponsoring entities. All licensed mortgage loan originators may work from home provided that adequate data security measures are put in place. Consumers are not allowed to visit licensed mortgage loan originators at unlicensed locations. This guidance is effective until June 5, 2020 but is subject to change.  The DFI also issued guidance to Washington regulated and exempt residential mortgage loan servicers regarding support for borrowers impacted by COVID-19.  The guidance urges such institutions to take reasonable and prudent actions, subject to the requirements of any related guarantees or insurance policies, to support those adversely impacted by COVID-19.
  • Wisconsin Department of Financial Institutions (“Department”): The Department released guidance for licensed mortgage loan originators. All licensed mortgage loan originators may work from home provided that their sponsoring entity notify the Department, a list is kept of all mortgage loan originators who elect to work from home where the home is not a licensed branch, appropriate data security measures are taken, and no physical records are present at unlicensed locations. Consumers are not allowed to visit unlicensed locations. This guidance does not have a current expiration date but is subject to revision.
  • West Virginia Division of Financial Institutions (“DFI”): The DFI issued guidance to West Virginia Regulated Financial Institutions allowing employees of regulated entities to temporarily work from home or some other remote location approved by the financial institutions, whether located in West Virginia or another state. Regulated financial institutions may permit employees to work at home or from a designated remote location, to the extent that the position allows, as long as privacy and security issues may be adequately addressed.  The guidance is in effect from March 13, 2020 through May 1, 2020.

Takeaway

As the federal government and the states work feverishly to address the growing concerns surrounding the COVID-19 pandemic, members of the financial services industry must stay abreast of the rapid changes in the legal and regulatory landscape.  We will continue to monitor for new developments and will update this post to highlight additional federal or state guidance that is issued.

CFPB Issues Winter 2020 Supervisory Highlights

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A&B ABstract:

The Winter 2020 Supervisory Highlights identifies the CFPB’s findings from recent examinations, noting violations that resulted in compliance management system weakness.

CFPB Issues New Edition of Supervisory Highlights:

The Winter 2020 edition of the Consumer Financial Protection Bureau (“CFPB”) Supervisory Highlights details recent examination findings relating to debt collection, mortgage servicing, and student loan servicing, among other topics.

Debt Collection

 With respect to debt collection, the CFPB focused on:

  • Failure to disclose in communications subsequent to the initial written communication that the communication is from a debt collector, in violation of Section 807(11) of the FDCPA; and
  • Failure to send a written validation notice within five days after the initial communication with the consumer, in violation of Section 809(a) of the FDCPA.

As a result of these deficiencies, the CFPB reported that servicers revised their policies and procedures, and monitoring and training programs.

Mortgage Servicing and Loss Mitigation

With a focus on compliance with the loss mitigation provisions of Regulation X, the CFPB’s first finding was that servicers failed to notify borrowers in writing of the servicer’s determination that the loss mitigation application is complete or incomplete within five business days of receiving a loss mitigation application.  Second, the CFPB found that servicers failed to provide borrowers with a written notice of available loss mitigation options within 30 days of receiving the complete loss mitigation application.

Finally, the CFPB cited servicers’ failure to comply with Regulation X’s requirements, including providing a written notice to borrowers, for offering a short term loss mitigation option to a borrower based on an evaluation of an incomplete loss mitigation application. In this instance, the servicers granted short-term forbearance if the borrower in a disaster area experienced home damage or loss of income from the disaster. The borrowers received such accommodation after speaking with the servicer over the phone and responding to certain questions.

In response to that finding, the CFPB reminded servicers that an application for loss mitigation can be oral or written.   Because the servicer’s efforts to respond to a natural disaster were the partial cause of violations, the CFPB only required the servicer to develop plans to ensure staffing capacity in response to any future disaster-related increases in loss mitigation applications. The CFPB also reminded servicers of its September 2018 Statement on Supervisory Practices Regarding Financial Institutions and Consumers Affected by a Major Disaster or Emergency, which provides flexibility for servicers to assist borrowers during a major disaster or emergency but does not lift the Regulation X requirements.

Payday Lending

With a focus on Regulation Z, Regulation B, and unfair acts or practices, the CFPB found that lenders engaged in unfair acts or practices when they: (1) processed borrowers’ payments, but did not apply such payments to borrowers’ loan balances in lenders’ systems; (2) lacked systems to detect unapplied payments; and (3) incorrectly treated borrowers accounts as delinquent. The CFPB found that the injury was not reasonable avoidable by the borrowers because lenders conveyed incorrect information to them about their accounts and failed to follow up on borrower’s complaints. Furthermore, because the cost to lenders to implement appropriate accounting controls to reconcile payments would have been reasonable, countervailing benefits did not outweigh the injury.

Additionally, the CFPB found that a payday lender engaged in unfair acts or practices by assessing consumers a fee as a condition of paying or settling a delinquent loan when the underlying loan contract required the lender to pay that particular fee. The lender mischaracterized the fee as a court cost (which would have been paid by the borrower) or did not disclose it. According to the CFPB, a lack of monitoring and/or auditing of the lender’s collection practices caused the error. In response to this finding, the lender refunded the fee to affected consumers and made changes to its compliance management system.

Other Payday Lending Observations

Further, the CFPB found that payday lenders:

  • Violated Regulation Z by relying on employees to manually calculate APRs when the lender’s loan origination system was unavailable. The CFPB found that errors made in calculating the term of the loan, which resulted in misstated APRs, were caused by weaknesses in employee training.
  • Violated Regulation Z by charging a loan renewal fee to consumers who were refinancing delinquent loans and omitted such fee from the finance charge, resulting in inaccurate disclosure of the APR and finance charge. The CFPB found that a lack of detailed policies and procedures and training contributed to the Regulation Z violations. In response, the lender refunded the fee to the consumer explaining the reason for the refund and strengthened its policy and procedures and training program.
  • Violated record retention requirements of Regulation Z by failing to maintain evidence of compliance for two years. The CFPB found that the violation resulted in part from a lack of training and detailed policies and procedures on record retention.
  • Violated Regulation B by providing consumers with an adverse action notice that incorrectly stated the principal reason for taking an adverse action as a result of a coding error. In response, the lenders sent corrected adverse action notices to consumers and made changes to the system that generate the notices.

Student Loan Servicing

With a focus on unfair practices, the CFPB found that servicers engaged in an unfair act or practice caused by a data mapping errors during the transfer of private loans between servicing systems that resulted in inaccurate calculations of monthly payment amounts. As a result, borrowers may have made payments based on the inaccurate amounts, incurred late fees on such inaccurate amounts, or had inaccurate amounts debited from their account. In response to the examination findings, the CFPB required servicers to remediate affected consumers and implement new processes to eliminate data mapping errors.

 Takeaways

Highlighting debt collection, mortgage servicing, payday lending and student loan servicing, the Supervisory Observations in the Winter 2020 Supervisory Highlights showcase the importance of adequate policies and procedures, training, monitoring and auditing and system controls to avoid consumer harm and violation of consumer financial laws.  Although they cut across multiple industries, the CFPB’s findings highlight common themes – such as entities’ liability for violations that result from system errors or the assessment of unauthorized fees, and the need for careful monitoring in connection with servicing transfers.