Alston & Bird Consumer Finance Blog

Mortgage Loans

State Community Reinvestment Acts Reaching Beyond Banks

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A&B ABstract:

When Congress passed the federal Community Reinvestment Act (“CRA”) in 1977 to address redlining, it imposed affirmative requirements on insured depository institutions to serve the credit needs of the communities where they receive deposits. At that time, banks were extending the vast majority of mortgages nationally. However, non-banks have become the dominant mortgage lenders, by some estimates accounting for more than two thirds of residential mortgage loans in 2021.

Indeed, the non-bank mortgage market share has been increasing steadily since 2007, when non-banks were originating approximately 20 percent of mortgage loans. That year, Massachusetts became the first state to extend the scope of its state CRA to non-bank mortgage lenders, notwithstanding the proviso of the federal statute that tied credit obligations to depository activities.  Historically, deposits were gathered primarily from areas surrounding bank branches, and thus a bank’s CRA performance responsibilities were likewise focused on those same areas.  But today, both lending and depository activities can be conducted nationally.  In recognition of the more attenuated connection between bank branches serving the credit needs of communities, the Massachusetts CRA became the first state to impose CRA responsibilities on non-bank lenders.

The Various State CRAs

In March 2021, Illinois passed its CRA which also applies beyond banks to non-bank mortgage lenders, followed shortly by New York in November 2021.  (Note that this expansion has not taken mortgage servicers into the fold, as CRA is more focused on an institution’s loan originations and purchases than its loan servicing.)  Relatedly, other state CRA statutes apply to credit unions and banks, though not to other financial institutions.  Below is a brief update on where various state CRAs currently stand:

  • Connecticut. Connecticut’s CRA initially applied only to banks but was amended in 2001 to cover state credit unions as well.  It does not cover any other financial institutions, however.  Its provisions are similar to the federal CRA.
  • District of Columbia. The District of Columbia’s CRA applies to deposit-receiving institutions, which includes federal, state, or District-chartered banks, savings institutions, and credit unions.  It is also similar to the federal CRA.
  • Illinois. The Illinois CRA applies to financial institutions, which includes state banks, credit unions, and non-bank mortgage entities that are licensed under the state’s Residential Mortgage Lending Act that lent or originated 50 or more residential mortgage loans in the previous calendar year.  Following the expansion of its CRA (205 ILCS 735) last year, Illinois solicited comments and facilitated roundtables to assist the Department of Financial and Professional Regulation in developing rulemaking for non-bank entities. In particular, the Department’s August 31, 2021 Advance Notice of Proposed Rulemaking sought comment on whether the assessment areas of these non-bank entities should include the entire state of Illinois.  Importantly, the Department has referenced the potential suitability of either the federal CRA rules or Massachusetts’ CRA rules as a model for Illinois.  No proposed rule has been published as of the date of this writing.
  • Massachusetts. Despite mortgage lender concerns raised today regarding the feasibility and inapplicability of different elements of the general CRA examination framework, Massachusetts has imposed meaningful CRA requirements on non-bank lenders for more than a decade.  Indeed, Massachusetts has succeeded in implementing and conducting separate CRA examination processes for banks and non-banks. Yet despite this distinction, Massachusetts CRA exams for mortgage companies remain rigorous.
  • New York. In November last year, New York Governor Kathy Hochul signed legislation (S.5246-A/A.6247-A) to expand the scope of the state’s CRA to cover non-bank mortgage lenders. Specifically, the legislation creates a new section, 28-bb of the New York Banking Law, that requires non-depository lenders to “meet the credit needs of local communities.” Further, section 28-bb provides for an assessment of lender performance by the Superintendent that considers the activities conducted by the lender to ascertain the credit needs of its community, along with the extent of the lender’s marketing, special programs, and participation in community outreach, educational programs, and subsidized housing programs. This assessment also may consider the geographic distribution of the lender’s loan applications and originations; the lender’s record of office locations and service offerings; and any evidence of discriminatory conduct, including any practices intended to discourage prospective loan applicants.  The provisions of section 28-bb will go into effect on November 1, 2022.

Worth noting also is that while these state CRAs are generally aligned with the federal CRA requirements, the regulations implementing the federal CRA are expected to change.  The Federal Reserve Board, FDIC, and OCC are currently working on promulgating a modernized interagency CRA framework.  Once the federal CRA regulations change, the state CRAs may follow or risk subjecting their banks and any other covered financial institutions to the burden of complying with two different regulatory regimes.

Takeaway:

Much like in Massachusetts, non-bank lenders originating a significant number of loans in Illinois and New York should be developing a CRA compliance strategy that makes sense for their size and business model to comply with the state CRAs.  That said, all non-bank lenders would do well to contemplate whether Massachusetts, Illinois, and New York are a harbinger of what is to come.  Finally, state CRA covered financial institutions in Connecticut, the District of Columbia, Illinois, Massachusetts, and New York should be planning for potential compliance framework shifts once the federal CRA regulations are revised.

Alston & Bird Adds Consumer Finance Partner Aldys London in Washington, D.C.

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Alston & Bird has strengthened and expanded its capabilities for advising companies on state and federal consumer finance regulatory compliance issues with the addition of partner Aldys London in the firm’s Washington, D.C. office. Her clients include mortgage companies, consumer finance and FinTech companies, secondary market investors, real estate companies, home builders, insurance companies, banks, and other financial institutions and settlement service providers.

“It’s a pleasure to welcome Aldys, who brings deep experience and a sterling reputation for counseling consumer financial service entities as they navigate complex regulatory issues, including licensing, the intersection of state and federal regulatory compliance, and key approvals for transactions,” said Nanci Weissgold, Alston & Bird partner and co-chair of the firm’s Financial Services & Products Group. “With our shared emphasis on collaboration and excellent service, we are confident that she will successfully draw on our firm’s vast resources and expertise to benefit her clients.”

London provides advice on state licensing for mortgage lenders and related service providers, mortgage brokers, FinTech companies, lead generators, servicers, debt collectors, and investors. She is well versed in federal registration and licensing requirements imposed by the SAFE Act, as well as state laws and regulations concerning fees, disclosures, loan documentation, interest rates, privacy, advertising, data breach, and telemarketing.  Her practice also covers seeking and maintaining approvals from state and federal agencies and GSEs.  She is adept at federal laws governing real estate mortgage transactions, including preemption, privacy, fair lending and consumer protection.

In addition, London assists a variety of consumer financial services companies in obtaining regulatory approvals for complex acquisitions, mergers, and asset transfer transactions. She performs due diligence reviews for proposed acquisitions and IPOs, reviews and prepares policies and procedures, conducts regulatory compliance audits of financial institutions, and assists with structuring and developing compliance and training programs. She also assists clients with responses to regulatory audits and investigations by state and federal regulators.

“Clients rely on Aldys’ sound counsel because of her technical rigor and thorough understanding of the consumer finance market,” said Stephen Ornstein, Alston & Bird partner and co-leader of the firm’s Consumer Financial Services Team. “Her legal skills, combined with her excellent business sense and ability to develop strong relationships, make her a valuable asset to our firm and our clients.”

Alston & Bird’s Consumer Financial Services Team focuses on the regulation of consumer credit and real estate, with a broad emphasis on origination, servicing, and secondary mortgage market transactions. This team addresses the compliance challenges of major Wall Street financial institutions, federal- and state-chartered depository institutions, hedge funds, private equity funds, national mortgage lenders and servicers, mortgage insurers, due diligence companies, ancillary service providers, and others.

Rhode Island Expands Lender Licensing for Retail Installment Contracts, Allows Remote MLO Work, and Makes Other Changes to Financial Institutions Laws

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Rhode Island made a number of amendments to financial institutions statutes with the passage of Senate Bill 2794 / House Bill 7781 Sub A. Changes include the scope of licensing requirements applicable to retail installment contracts and the permissibility of remote work for MLOs and other employees. The changes were effective upon passage on June 29, 2022.

Licensing for Retail Installment Contracts

The law expands the definition of lender to include a person who makes retail installment contracts, thereby necessitating a license to create such contracts. Under existing law, a “lender” is any person who makes or funds a loan, and a license is required to engage in such lending activity. The amendment clarifies that a loan is made or funded within Rhode Island if a retail installment contract is created. The amendments define retail installment contracts to mean “any security agreement negotiated or executed in this state, or under the laws of this state, including, but not limited to, any agreement in the nature of a mortgage, conditional sale contract, or any other agreement whether or not evidenced by any written instrument to pay the retail purchase price of goods, or any part thereof, in installments over any period of time and pursuant to which any security interest is retained or taken by the retail seller for the payment of the purchase price, or any part thereof, of the retail installment contract.” Note that the law previously required a license to purchase or acquire retail installment contracts and defined the term in a separate statutory section.

MLO Remote Work

As with many jurisdictions, Rhode Island has also relaxed rules relating to remote work for employees of a mortgage licensee. Pursuant to the amendments, licensees no longer need to provide the physical premises for employees, as long as they continue to supervise the services provided by the employee to the licensee. Under the amendments, a licensee’s employees, including mortgage loan originators, may work from a remote location if certain conditions are met including that: (1) their residence or other location is identified in the records of the licensee and is within a reasonable distance of a place of business named in the licensee’s license or branch certificate, (2) the licensee maintains policies and procedures for supervision of, and employs appropriate risk-based monitoring and oversight process of work performed by, employees working from remote locations; (3) computer system access is subject to a comprehensive written information security plan; (4) in-person customer interaction does not occur at the remote location; and (5) physical records are not maintained at the remote location. The law also removes previous prohibitions on conducting other business at a licensed location without prior approval but adds a prohibition on tying services to a requirement that the consumer purchase any other product or service from a specified provider including those providers with whom the licensee is sharing office space.

Note that the Rhode Island Division of Banking has also issued guidance clarifying that MLOs are not required to live within a certain distance of a branch office (despite statutory language to the contrary), however, the Division will require that the licensed entity provide proof of effective supervision over all sponsored mortgage loan originators.

Georgia Amends its Residential Mortgage and Installment Loan Laws

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A&B Abstract:

On May 2, 2022, Georgia Governor Brian Kemp signed HB 891 and SB 470 into law.  HB 891, effective July 1, 2022, updates various laws enforced by the Georgia Department of Banking and Finance (the “Department”) including, among other things, by amending (1) certain exemptions from licensure under the Georgia Residential Mortgage Act (“GRMA”), and (2) the Georgia Installment Loan Act (“GILA”) to impose a new licensing obligation to service installment loans subject to the GILA.   Similarly, SB 470, which took effect immediately, amends the GRMA’s provisions regarding felony restrictions for employees of mortgage licensees.

Changes to Licensing of Mortgage Lenders and Brokers

HB 891 made several changes to Title 7 of the Georgia Code, including several amendments to the GRMA, but perhaps one of the most notable changes with respect to mortgage lending involves the creation of a new exemption from licensure under the GRMA for persons holding loans for securitization into a secondary market.  Specifically, as of July 1, 2022, any person who purchases or holds closed mortgage loans for the sole purpose of securitization into a secondary market, is expressly exempt from licensing, provided that such person holds the individual loans for less than seven days. Note that the statute further defines “person” as any individual, sole proprietorship, corporation, LLC, partnership, trust, or any other group, however organized. As written, the new exemption language suggests that persons holding loans as part of the securitization process for longer than 7 days could not rely on the exemption. Note that the GRMA’s existing definition of a “mortgage lender” includes a “person who directly or indirectly…holds, or purchases mortgage loans” and the GRMA contains an existing exemption for any person who purchases mortgage loans from a mortgage broker or mortgage lender solely as an investment and who is not in the business of brokering, making, purchasing, or servicing mortgage loans.

HB 891 also amended an existing exemption from licensure applicable to certain natural persons under an exclusive written independent contract agreement with a mortgage broker who is, or is affiliated with, an insurance company or broker dealer. Under the exemption, as amended, a natural person otherwise required to be licensed is exempt from licensure as a mortgage lender or broker, when under an exclusive written independent contractor agreement with a licensed mortgage broker, so long as the mortgage broker satisfies certain expanded criteria, including, among others  (1) maintaining an active mortgage broker license, (2) maintaining full and direct financial responsibility for the mortgage activities of the natural person, (3) maintaining full and direct responsibility for the natural persons education, handling of consumer complaints, and supervision of the natural person’s mortgage activities, (4) having listed securities for trade and meeting certain market capitalization requirements, (5) being licensed as an insurance company or registered as a broker-dealer, and (6) being licensed as a mortgage lender or broker in ten or more states. The exemption previously applied to certain natural persons employed by the subsidiary of certain financial holding companies. Notably, to maintain the exemption, the natural person must, among other things (1) be licensed as a mortgage loan originator in Georgia and work exclusively for the licensee, the parent company if the licensee is a wholly owned subsidiary, or an affiliate of the licensee if both the affiliate and licensee are wholly owned subsidiaries of the same parent company, and (2) be licensed as an insurance agent or registered as a broker-dealer agent on behalf of the licensee, the parent company if the licensee is a wholly owned subsidiary, or an affiliate of the licensee if both the affiliate and licensee are wholly owned subsidiaries of the same parent company.

HB 891’s amendments to the GRMA’s licensing provisions follow SB 470, which provided welcome changes to the GRMA’s felony restrictions. As amended, Georgia law now provides that the Department may not issue or may revoke a license or registration if it finds that the mortgage loan originator, broker, or lender, or any person who is a director, officer, partner, covered employee or ultimate equitable owner of 10% or more of the mortgage broker or lender or any individual who directs the affairs or establishes policy for the mortgage broker or lender applicant, registrant, or licensee, has been convicted of a felony in any jurisdiction or of a crime which, if committed in Georgia, would constitute a felony under Georgia law.  Previously, Georgia law arguably prohibited a licensee from retaining any individual convicted of a felony that could be deemed an employee or agent of the licensee. As amended, the employee restriction is relaxed to apply only to a “covered employee,” a newly defined term that means an employee of a mortgage lender or broker “involved in residential mortgage loan related activities for property located in Georgia and includes, but is not limited to, a mortgage loan originator, processor, or underwriter, or other employee who has access to residential mortgage loan origination, processing, or underwriting information.” Notably, the restriction no longer applies to an “agent” of a licensee.

Changes to Installment Loan Licensing

HB 891 also amended the GILA to require licensure for persons engaged in servicing of installment loans.  Before the amendments, the GILA only imposed a licensing obligation on persons who advertise, solicit, offer, or make installment loans to individuals in amounts of $3,000 or less.  As amended, any person that services installment loans made by others, excluding loans made by affiliated entities, is also required to obtain a license. HB 891’s amendments also added a number of new exemptions from licensure, including for (1) retail installment transactions engaged in by retail installment sellers and retail sellers, as those terms are defined, and (2) transactions in which a lender offers a consumer a line of credit of more than $3,000 but the consumer utilizes $3,000 or less of the line, so long as there are no restrictions that would limit the consumer’s ability to utilize more than $3,000 of the line at any one time. Additionally, the GILA’s provisions relating to tax on interest has been repealed and reenacted and now requires that installment lenders remit to the Department a fee of 0.125 percent of the gross loan amount on each loan made on or after July 1, 2022, and such fee becomes due on the making of any loan subject to the GILA. This revised fee replaces the prior fee of three (3) percent of the total amount of interest on any loan collected. The statute clarifies that the per loan fee must be paid by the licensee and cannot be passed through to the borrower as an additional itemized fee or charge. The method by which a licensee pays the fee is subject to further clarification via Department regulations.

Takeaway

Mortgage lenders and brokers should review the GRMA, as amended, to determine whether, and if so how, the amendments impact their licensing obligations or their policies with respect to employee background checks in Georgia. Additionally, entities servicing installment loans subject to the GILA, which are originated by non-affiliates, must now obtain a license. Licensees should also take note of the new per loan fee requirements in lieu of prior tax payment regulations.

Eleventh Circuit Finds Monthly Mortgage Statement Containing Boilerplate “This Is An Attempt To Collect A Debt” Language Constitutes A Communication “In Connection With The Collection of A Debt” Under The FDCPA

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A&B Abstract:

In Daniels v. Select Portfolio Servicing, Inc., 2022 U.S. App. LEXIS 14013 (11th Cir. May 24, 2022) a panel of the Eleventh Circuit addressed the question “whether a required monthly mortgage statement that generally complies with the TILA and its regulations can plausibly be a communication ‘in connection with the collection of a debt’ under the FDCPA…if it contains additional debt-collection language.”  Relying almost exclusively on the single sentence in the monthly mortgage statement that read “[t]his is an attempt to collect a debt,” the panel in a 2-1 decision said “yes” and reversed the granting of a motion to dismiss in favor of the mortgage servicer.  While the majority explained that the decision was not contrary to those from other circuit courts and within its own circuit, the dissent pointed out how this decision was arguably inconsistent with such precedent.  Going forward, mortgage servicers face a risk (at least in the Eleventh Circuit) that monthly mortgage statements that otherwise comply with TILA and its regulations could subject the servicer to liability under FDCPA if the statement contains errors and includes language that “this is an attempt to collect a debt.”

Discussion:

In Daniels, the borrower sued the mortgage servicer under the FDCPA and the Florida Consumer Collection Practices Act alleging that several monthly mortgage statements contained errors.  In particular, the borrower alleged that the statements contained errors in the deferred principal balance, outstanding principal balance and the amount of the interest-only payment that was due.  The statements were consistent with the requirements of TILA and its regulations.  The statements, however, also included the following language – “This is an attempt to collect a debt.  All information obtained will be used for that purpose.”  The district court granted the servicer’s motion to dismiss, and dismissed the case with prejudice on the grounds that the mortgage statements were not communications in connection with the collection of a debt under the FDCPA.

In reversing that decision on appeal, the majority first noted that communications can have “dual purposes” – providing a consumer with information and demanding payment of a debt.  The majority then discussed two prior decisions involving letters from law firms, Reese v. Ellis, Painter, Ratterree & Adams, 678 F.3d 1211 (11th Cir. 2012) and Caceres v. McCalla Raymer, LLC, 755 F.3d 1299 (11th Cir. 2014), where the court concluded that the letters were related debt collection for purposes of the FDCPA.

After reviewing the monthly mortgage statements in Daniels, the majority concluded that “viewed holistically, a communication that expressly states that it is ‘an attempt to collect a debt,’ that asks for payment of a certain amount by a certain date, and that provides for a late fee if the payment is not made on time is plausibly ‘related to debt collection.’”  In several places in the opinion, the majority reiterated that the servicer included the “this is an attempt to collect a debt” language that was not required by TILA or its regulations.  It is clear from the opinion that the inclusion of such language was the critical factor in the decision.  The majority noted that, while some portions of the monthly mortgage statements may have been for informational purposes, the communication can have “dual purposes.”  As such, the mere fact that the monthly mortgage statements were otherwise consistent with TILA and its regulations was not dispositive.

The majority recognized that two prior unpublished district court cases from the Southern District of Florida held that the inclusion of “this is an attempt to collect a debt” language did not convert a monthly mortgage statement into a communication in connection with the collection of a debt under the FDCPA.  See Jones v. Select Portfolio Servicing, Inc., 2018 U.S. Dist. LEXIS 75886 (S.D. Fla. 2018) and Zavala v. Select Portfolio Servicing, Inc., 2018 U.S. Dist. LEXIS 201259 (S.D. Fla. 2018).  The majority, however, “respectfully disagree[d]” with the decision in both cases.

Notably, in a prior unpublished decision, Green v. Specialized Loan Servicing LLC, 766 Fed. App’x 777 (11th Cir. 2019), a prior panel of the Eleventh Circuit held that a servicer’s monthly mortgage statement did not “rise to the level of being unlawful debt collection language” when the statement did not contain any language “beyond what is required by TILA.”  The majority in Daniels distinguished Green by noting that it was unpublished and, most importantly, did not contain the “this is an attempt to collect a debt” language.  (Furthermore, the majority noted that Green reached the merits and held that the statement did not constitute an “unlawful” debt collection language, whereas the decision in Daniels merely held that the plaintiff had plausibly alleged an FDCPA violation.).

The dissent in Daniels took issue with the majority’s reliance on the “this is an attempt to collect a debt” language contained in a monthly mortgage statement that otherwise complied with the TILA and its regulations.  The dissent noted that this language “appears once on each statement, is not physically separated from other information in the statement, is not capitalized or otherwise emphasized and is printed using the same font and font size as the rest of the information contained in the statement.”

The dissent discussed Green and other prior decisions (including the district court decisions in Jones and Zavala) and concluded that the mere inclusion of the “collect a debt” language was not enough to render an otherwise TILA-compliant monthly mortgage statement a communication “in connection with the collection of a debt” for purposes of the FDCPA.  “[T]he majority’s conclusion that, by including this extra language – which is not required but is neither inconsistent with nor materially additive to TILA’s requirements – the periodic mortgage statements have become communications subject to the FDCPA is far too broad.”

The dissent in Daniels then discussed decisions from other circuits, including the Seventh Circuit and Eighth Circuit.  The dissent cited Gburek v. Litton Loan Servicing LP, 614 F.3d 380 (7th Cir. 2010), in which the court held that a communication stating that it was an attempt to collect a debt “does not automatically trigger the protections of the FDCPA, just as the absence of such language does not have dispositive significance.”  The dissent also discussed Heinz v. Carrington Mortgage Services, LLC, 3 F.4th 1107 (8th Cir. 2021).  In Heinz, the court addressed “so-called Mini-Miranda statements” where the communication notes that it is from a debt collector and for the purpose of collecting a debt.  Relying on Gburek, the court in Heinz held that such “boilerplate Mini-Miranda statements” do not trigger the protections of the FDCPA.

Therefore, according to the dissent in Daniels and consistent with these decisions in other circuits, the mortgage servicer’s inclusion of “this is an attempt to collect a debt” language in the monthly mortgage statement should not trigger the protections of the FDCPA.  Instead, the dissent would require “stronger demands for full or partial payment and threats of consequences for failure to do so” before a monthly mortgage statement would give rise to a claim under the FDCPA.

On June 14, 2022, the servicer filed a petition for rehearing and rehearing en banc asking the panel for a rehearing of the case.  In the petition, the servicer recognized that “the majority holds that inclusion of the statement, ‘this is an attempt to collect a debt,’ transforms federal-required mortgage statements into debt-collection communications under the FDCPA.”  The servicer argued that the decision conflicts with prior case law inside and outside of the Eleventh Circuit, and “the well-reasoned dissent” was correct to conclude that such language should not render TILA-compliant monthly mortgage statements subject to the FDCPA.

Takeaway:

A mortgage servicer should strongly consider removing from its monthly mortgage statements any language that reads “this is an attempt to collect a debt.”  The relevant language is not required by the TILA or the CFPB.  At least in the Eleventh Circuit now after Daniels, the inclusion of such language will give borrowers pursuing FDCPA claims a much better chance to survive a motion to dismiss and move the case into the expensive discovery phase.

It should be noted that the majority decision in Daniels included an important qualification in a footnote – “We do not hold that the statements are, as a matter of law, communications in connection with the collection of a debt.  Our ruling is that [the borrower] has plausibly alleged that they are.”  Therefore, the mere inclusion of the “this is an attempt to collect a debt” language does not mean, even in the Eleventh Circuit, that a mortgage servicer’s monthly mortgage statements are necessarily subject to the FDCPA as a matter of law.  That said, as a practical matter, it will be difficult for a mortgage servicer to convince a district court that has already denied a motion to dismiss to change its mind at the summary judgment stage and conclude that the inclusion of such language does not render the mortgage statement a communication in connection with the collection of a debt.

Of course, even if the mortgage statement is a communication in connection with the collection of a debt, the borrower must still establish that the statement otherwise was and violated the substantive provisions of the FDCPA.  See, e.g., 15 U.S.C. §§ 1692d, 1692e and 1692f.  Daniels, however, is likely to help borrowers clear the threshold hurdle at the motion to dismiss stage.