Alston & Bird Consumer Finance Blog

Mortgage Servicing

Fourth Circuit Rules That a Mortgage Servicer Can Be Liable for FDCPA Violations Even if Not Subject to the FDCPA

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A&B ABstract:

Putative class action plaintiffs recently prevailed on appeal in a case involving mortgage servicing fees charged to Maryland borrowers. In doing so, the opinion opens the door for FDCPA liability for all mortgage servicing activity and other collection activity in Maryland, even if such activity is otherwise exempt from FDCPA liability.

The Maryland Consumer Debt Collection Act

The case is a putative class action challenging certain fees charged by the borrowers’ mortgage servicer in the ordinary course of business. Among other claims, the plaintiffs alleged that the servicer violated the Maryland Consumer Debt Collection Act (MCDCA). Specifically, the MCDCA prohibits a “collector” from “engag[ing] in any conduct that violates §§ 804 through 812 of the federal Fair Debt Collection Practices Act.” The plaintiffs alleged that the attempt to collect certain mortgage servicing fees violated the FDCPA’s proscription for a “debt collector” to engage in “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”

The MCDCA applies to any “collector,” defined as any “person collecting or attempting to collect an alleged debt arising out of a consumer transaction.” The FDCPA, on the other hand, uses the term “debt collector” which is defined with several limitations and exceptions, including for debt that was not in default when obtained. Despite the narrower scope of the FDCPA, plaintiffs in the case argued that a servicer could engage in conduct that violated the FDCPA, and thereby be in violation of the MCDCA, even if the servicer was not a “debt collector” subject to the FDCPA.

The district court dismissed the case before considering class certification, determining that the servicer was not a “collector” under the MCDCA and, likewise, was not a “debt collector” under the FDCPA.

The Fourth Circuit’s Decision

On appeal, the Fourth Circuit reversed and remanded the case for further proceedings, finding that the servicer was a collector under the MCDCA. Critically, the court determined that the servicer could be held liable for engaging in conduct that violated the FDCPA, even if it was not actually subject to the FDCPA. The court reasoned that even though the FDCPA only applies to “debt collectors” and, even though the MCDCA, in turn, only prohibits conduct that violates the FDCPA, an entity could still be in violation of the MCDCA even if it was not engaging in debt collection under the FDCPA. The court concluded that “[t]he MCDCA’s broader definition controls here, as it is not displaced by the federal definition.” The court stated that the MCDCA only incorporated the FDCPA’s “substantive provisions” contained in §§ 804 through 812, thus the FDCPA’s applicable definitions and exemptions, contained in §§ 803, 818 were to be disregarded in determining if a violation of the FDCPA occurred for purposes of the Maryland law.

Takeaway

This decision subjects several otherwise exempt and excluded actors to potential liability for FDCPA violations via the MCDCA within Maryland. In addition to mortgage servicers, who are typically exempt from the FDCPA under normal circumstances, the FDCPA contains a number of other exemptions including for entities collecting their owns debts, process servers, and certain nonprofit organizations performing credit counseling. Under the reasoning of the Fourth Circuit’s decision, all of these actors could now potentially be held liable under the MCDCA for FDCPA violations within Maryland. Furthermore, all such actors arguably need to comply with the strictures of the FDCPA in communicating with consumers. This would include restrictions on the timing, frequency, and format of communications with consumers that do not apply to communications outside the scope of the FDCPA. On February 15, 2022, the court denied a Motion for Rehearing and Rehearing En Banc, thus finalizing the decision.

Following this decision, recent legislation introduced in the Maryland General Assembly may delay foreclosure proceedings in Maryland. On February 3, 2022 a delegate introduced HB 803, which would allow borrowers to file counterclaims in response to foreclosure proceedings, would make additional procedural requirements applicable to such actions, and would prevent a foreclosure from proceeding if a borrower files such a counterclaim. Under the Fourth Circuit’s decision, servicers could experience increased MCDCA challenges alleging violations of the FDCPA that would otherwise not apply, and, combined with the additional procedural requirements and delays contemplated by HB 803, foreclosure proceedings could face significant delays as a result.

While some state laws offer state remedies for a violation of federal law, we are unaware of any case that has interpreted such a law to expand the scope of liability under the incorporated federal law. While states can and have adopted consumer statutes that are more expansive than federal law, it remains to be seen if other courts will now interpret simple incorporation of federal law as something more expansive as well.

Application Deadline Looms Under California Debt Collection Licensing Act

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On September 25, 2020, California Governor Gavin Newsom approved Senate Bill 908 – enacting the Debt Collection Licensing Act (DCLA). The DCLA, which takes effect January 1, 2022, requires a person or entity engaging in the business of debt collection in California to be licensed and provides for regulatory oversight of debt collectors by the Department of Financial Protection and Innovation (DFPI). Pursuant to the DCLA, debt collectors who submit an application by Dec. 31, 2021 may continue to operate in California pending the denial or approval of their application. On April 23, 2021, the Commissioner of the DFPI (the Commissioner) issued proposed regulations (the Regulations) to adopt procedures for applying for a debt collection license under the DCLA. On June 23, 2021, after consideration of public comments, the Commissioner issued a Notice of Modifications to the Regulations (the Modifications). On November 15, 2021, the Commissioner issued a second Notice of Modifications to the Regulations (the Additional Modifications).

The Regulations

The Regulations – among other things –  define relevant terms, include information regarding application procedures, and contain other miscellaneous information regarding licensing. The definition of “debt collector” was substantially the same as the broad definition under the enacted DCLA (which in turn is very similar to the Rosenthal FDCPA definition) and encompasses a wide array of activity in relation to consumer debt, including mortgage debt. Likewise, the regulations define “debt buyer” identical to the existing definition in Section 1788.50 of the Civil Code, which contains an exception for purchasers of a loan portfolio predominantly consisting of consumer debt that has not been charged off. See our prior post on the DCLA for more information regarding the scope of the licensure requirement.

The Regulations designate NMLS for the submission and processing of applications and reference and rely upon uniform NMLS forms and procedures. The application process includes completion of the NMLS uniform licensing form (MU1), including by any affiliates to be licensed under the same license. The application process includes collection of information regarding other trade names, web addresses used by the applicant, contact employees, organizational information (including information on any indirect owners), a detailed statement of business activities, certificates of good standing, and sample dunning letters. Applicants do not need to provide bank account information in Section 10 of Form MU1 or information on a qualifying individual in Section 17 of Form MU1. Fingerprinting (which is processed outside of NMLS), criminal history checks, and credit report authorizations are required for certain related individuals, including officers, directors, managing members, trustees, responsible individuals, and any individual owning directly or indirectly 10% or more of the applicant. An investigative background report is also required for any such individual who is not residing in the United States. Branches must also be licensed through NMLS uniform forms (MU3). Notice and additional filing requirements apply upon any change in the information submitted. The Regulations also contain surety bond requirements and outline the Commissioner’s authority in reviewing and examining applicants.

First Notice of Modification to the Regulations

On June 23, 2021 the Commissioner issued the Modifications which made several changes to the Regulations including, revising the definition of “applicant” to make clear that an affiliate who is not applying for a license is not an “applicant” – this revision, however, does not seem to impact the ability of applicants to include affiliates under a single license. Further, the Modifications added an English language requirement for documents filed with the DFPI. The Modifications also eliminated certain requirements to provide the Commissioner with additional copies of documents submitted through NMLS and otherwise revised requirements to allow information to be processed predominately through NMLS. The Modifications also eliminated the need to file certain fingerprinting documents in NMLS. Additionally, the Modifications added a requirement to explain derogatory credit accounts for any individual subject to credit reporting requirements. The Modifications also removed requirements that applicants provide information concerning compliance reporting and audit structure, the extent to which they intend to use third parties to perform any of their debt collection functions, that applicants file a copy of their policies and procedures with the NMLS, and certain annually collected financial information. The Modifications also eliminate the Commissioner’s ability to modify surety bond amounts.

Second Notice of Modification to the Regulations

On November 15, 2021 the Commissioner issued the Additional Modifications to the Regulations which amended the definitions of “branch office” and “debt collector.” “Branch office” was amended to mean any location other than the applicant’s or licensee’s principal place of business so long as “activity related to debt collection occurs” at that location and that the location is “held out to the public as a business location or money is received at the location or held at the location.” The Additional Modifications state that “holding a location out to the public” includes the receipt of postal correspondence and meeting with the public at the location, placing the location on letterhead, business cards, and signage, or making “any other representation to the public that the location is a business location.”

The definition of “debt collector” was amended to reference the definition set forth in the DCLA, rather than actually defining the term. Thus, any future revisions to the DCLA definition will automatically apply to the regulations as well.

Conclusion  

Debt Collection agencies and participants in California should anticipate additional regulations from the DFPI as aspects of the DCLA continue to be hammered out – in the interim any entity subject to licensing who has not done so already should submit an application before end of year to ensure continued operations.

New CFPB Chief Rohit Chopra Confirmed by Senate and Takes Immediate Action Against Big Tech Firms

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A&B Abstract:

On September 30, 2021, the Senate confirmed Rohit Chopra to serve as director of the Consumer Financial Protection Bureau (CFPB) in a 50-48 vote along party lines. He had been serving as a member of the Federal Trade Commission (FTC) where he had been a vocal critic of big tech companies and advocated for increased restitution for consumers. He previously served as the CFPB’s private education loan ombudsman under former CFPB Director Richard Cordray. Prior to that, he had worked closely with Sen. Elizabeth Warren on the CFPB’s establishment. Consistent with his past practices, Chopra’s CFPB has now ordered six Big Tech companies to turn over information regarding their payment platforms.

Expectations for Chopra’s CFPB

President-elect Biden announced Chopra as his choice to lead the CFPB before Inauguration Day, and the Biden Administration subsequently referred his nomination to the Senate in February. Chopra succeeds Kathy Kraninger, who became Director in December 2018 after having served as a senior official at the Office of Management and Budget. She led the CFPB for two years before the incoming Biden Administration demanded her resignation on January 20. It is expected that Chopra will aggressively lead the CFPB and unleash an industry crack down. The October 21, 2021 order issued to Big Tech regarding payment products appears to be the first step in that plan. Additionally, credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage servicers are among the financial institutions expected to face scrutiny from Chopra’s CFPB. Prior to the Big Tech inquiry, the CFPB, under interim leadership, had already taken initial steps to implement pandemic-era regulations and to advance the Biden administration’s priorities. It is also expected that the enforcement practices under former-Director Cordray will be revived under a Chopra-led CFPB.

After his confirmation, Chopra stated an intent to focus on safeguarding household financial stability, echoing prior statements regarding his commitment to ensuring those under foreclosure or eviction protections during the pandemic are able to regain housing security. He has also declared an intent to closely scrutinize the ways that banks use online advertising, as well as take a hard look at data-collection practices at banks. In his remarks related to the market-monitoring order issued to Big Tech, Chopra was critical of the way companies may collect data and his concern that it may be used to “profit from behavioral targeting, particularly around advertising and e-commerce.”

Just one week later, Chopra delivered remarks in his first congressional hearing as Consumer Financial Protection Bureau director. In his prepared statements before both the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs, he cited mortgage and rent payments, small business continuity, auto debt, and upcoming CARES Act forbearance expirations as problems he plans to address. He also stated an intent to closely monitor the mortgage market and scrutinize foreclosure activity. And, echoing his action from a week earlier, Chopra reiterated an intent to closely look at Big Tech and emerging payment processing trends. Chopra also noted a lack of competition in the mortgage refinance market and stated an intent to promote competition within the market.

Although appointed to a five year term, the CFPB director serves at the pleasure of the president after a landmark decision last year from the Supreme Court.

Takeaway

Industry participants, including credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage lenders and servicers can anticipate additional scrutiny in the coming months and years from the CFPB. As Chopra gets settled into his new role, we will be keenly watching where he turns his attention to next.

Biden-Harris Administration Announces Extension of COVID-19 Foreclosure Moratorium

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A&B Abstract:

Today, the Biden Administration announced an extension of the foreclosure moratorium for federally-backed mortgage loans (the “Presidential Announcement”). To implement the Presidential Announcement, the federal agencies (i.e., HUD/FHA, USDA, and VA) and GSEs (i.e., Fannie Mae and Freddie Mac) have announced (or are anticipated to announce) extensions of the foreclosure moratorium until July 31, 2021.

Presidential Announcement

According to the Presidential Announcement, the three federal agencies that back mortgages – the Department of Housing and Urban Development (HUD), Department of Veterans Affairs (VA), and Department of Agriculture (USDA) – will extend their respective foreclosure moratorium for one, final month, until July 31, 2021. Similarly, the Federal Housing Finance Agency (FHFA) will announce that it has extended the foreclosure moratorium for mortgages backed by Fannie Mae and Freddie Mac until July 31, 2021.

The Presidential Announcement goes on to provide that once the moratoria end, HUD, VA, and USDA will take additional steps to prevent foreclosures on mortgages backed by those agencies until borrowers are reviewed for COVID-19 streamlined loss mitigation options that are affordable, while FHFA will continue to work with Fannie Mae and Freddie Mac to ensure that borrowers are evaluated for home retention solutions prior to any referral to foreclosure.

In addition, the Presidential Announcement notes that HUD, VA, and USDA will also continue to allow homeowners who have not taken advantage of forbearance to date to enter into COVID-related forbearance through September 30, 2021, while homeowners with Fannie Mae or Freddie Mac-backed mortgages who have COVID-related hardships will also continue to be eligible for COVID-related forbearance.

Finally, the Presidential Announcement indicates that HUD, VA, and USDA will be announcing additional steps in July to offer borrowers payment reduction options that will enable more homeowners to stay in their homes.

Federal Agency and GSE Announcements

In addition to the foregoing, the USDA and the GSEs issued the following guidance today implementing the Presidential Announcement:

  • USDA:  Today, the USDA issued a brief press release announcing a one-month extension, through July 31, 2021, of the moratorium on foreclosure from properties financed by USDA Single-Family Housing Direct and Guaranteed loans. Beyond July 31, 2021, the USDA indicated that it would continue to support homeowners experiencing financial hardship due to the pandemic by making loss mitigation options available to help keep them in their homes.
  • Fannie Mae LL-2021-02:  Today, Fannie Mae updated LL-2021-02 to extend the moratorium on foreclosures with respect to Fannie Mae loans through July 31, 2021.  Specifically, servicers must continue the suspension of the following foreclosure-related activities through July 31, 2021. Servicers may not, except with respect to a vacant or abandoned property: (1) initiate any judicial or non-judicial foreclosure process, (2) move for a foreclosure judgment or order of sale, or (3) execute a foreclosure sale.  All other guidance set forth in LL-2021-02 remains the same.
  • Freddie Mac Guide Bulletin 2021-23:  Similarly, today Freddie Mac issued Guide Bulletin 2021-23, which announces an extended effective date for the COVID-19 foreclosure moratorium.  Specifically, Freddie Mac is extending the foreclosure moratorium last announced in Guide Bulletin 2021-8. Servicers must suspend all foreclosure actions, including foreclosure sales, through July 31, 2021. This includes initiation of any judicial or non-judicial foreclosure process, motion for foreclosure judgment or order of sale. This foreclosure suspension does not apply to mortgages on properties that have been determined to be vacant or abandoned.

As of today, we are not aware of any formal announcement by HUD or VA regarding the implementation of the Presidential Announcement. However, we anticipate that both HUD and VA will issue guidance consistent with the above announcement in short order.

Takeaway 

The takeaway from today’s announcements is that, except with respect to vacant and abandoned properties, all foreclosure-related activities that could constitute the initiation of any judicial or non-judicial foreclosure process, movement for a foreclosure judgement or order of sale, or execution of a foreclosure sale should continue to be paused until the expiration of the extended foreclosure moratorium.  Moreover, the Presidential Announcement suggests that additional guidance will be issued by the federal agencies permitting borrowers who have not yet taken advantage of a COVID-19 forbearance to do so through September 30, 2021 and announcing additional steps in July to offer borrowers additional payment reduction options to enable more homeowners to stay in their homes. Accordingly, servicers should continue to monitor for any additional guidance from the federal agencies and GSEs regarding the foreclosure moratorium or other COVID-19-related borrower relief.

Highlights of Washington Department of Financial Institutions’ Recent Mortgage Industry Webinar

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A&B ABstract: In a webinar earlier this month, the Washington Department of Financial Institutions provided updates on licensing, rulemaking, and recent examination findings.

On June 2, the Washington Department of Financial Institutions (“DFI”) held a webinar covering mortgage industry updates in the state.  Among the topics discussed were:

Licensing Updates

Between May 2020 and May 2021, the DFI has seen a substantial increase in licensing activities involving issuances and renewals for both mortgage loan originators and companies, including MLO temporary authority to operate.

Rulemaking Updates

On June 15, the DFI will hold an industry stakeholders meeting to consider amending the rules under the Consumer Loan Act (“CLA,” WAC 208-620) and the Mortgage Broker Practices Act (“MBPA,” WAC 620-660) to allow MLOs to work from home without licensing the residence as a branch office.  The proposed rules will implement enacted Senate Bill 5077 (2021 Wash. Sess. Laws 15), which takes effect on July 25.

Examination Updates

During the first quarter of 2021, the DFI conducted examinations for the review period of October 2020 through April 2021.  Commonly identified violations included:

For mortgage loan servicing:
  • Failure to file accurate annual assessments;
  • Failure to suppress adverse credit reporting for CARES Act forbearances, most often during the initial months of forbearance;
  • Failure to maintain records (typically involving subservicers);
  • Inaccurate adjustable rate change information (i.e., incorrect margin or index); and
  • Inaccurate consolidated annual reports.
For mortgage loan origination, under the CLA:
  • Failure to update surety bond amounts as required by WAC 208-620-320;
  • Failure to date residential mortgage loan applications (initial and revised) as required by WAC 208-620-550(18);
  • Failure to have day-to-day operations managers licensed as an MLO; and
  • Failure to have a written supervisory plan in place.
For mortgage loan origination, under the MBPA:
  • With respect to quarterly mortgage condition reports (“MCRs”), failure to timely file and/or failure to file accurate MCRs;
  • Failure to develop and implement an adequate Anti-Money Laundering program;
  • Failure to provide updated lock-in agreements when lock terms change;
  • Failure to include a link to the company’s NMLS consumer access website on all internet advertisements; and
  • Advertising violations, namely using disallowed phrases (such as “best” or “lowest” when describing rates, fees, and programs) or advertising “no closing costs” or that something is “free”.

Takeaways

The webinar suggests that the pandemic has created both a surge in license applications and renewals, as well as increases in the volume of mortgage loans, for Washington licensees.

The examination findings serve as a reminder to Washington State licensees to be mindful of their own compliance management and quality control processes, in order to ensure that they are conducting business activities in compliance with all statutes and regulations (to include the CLA and MBPA).