On December 20, 2019, the President signed into law House Resolution 1865, the Further Consolidated Appropriations Act, 2020, which is now Public Law 116-94. The law extends the deduction for mortgage insurance premiums (“MIP”) retroactive to 2018, applies to amounts paid or accrued after December 31, 2017, and is set to expire once again on December 31, 2020. Mortgage lenders and servicers should take note of this extension for MIP deductibility as they prepare IRS Form 1098 for the 2019 tax year.
Mortgage Loans
New York Enacts HECM Law
A&B ABstract:
Effective March 5, 2020, New York Assembly Bill 5626 (“AB 5626”) regulates the origination and servicing of the federal U.S. Department of Housing and Urban Development (“HUD”) home equity conversion mortgages (“HECMs”).
Significant Impact to Mortgage Lenders and Servicers
With the stated purpose of providing “new regulations on reverse mortgage products pertaining to the marketing, origination, and management” of HECMs, AB 5626 will expand New York’s reverse mortgage law to apply to HECMs. The following provides a brief summary of AB 5626’s substantive provisions:
Applicability:
The measure applies to an “authorized lender,” as defined in section 280 of the Real Property Law. Under current law, authorized lenders of proprietary reverse mortgage loans are subject to additional approval by the Superintendent of the New York Department of Financial Services. It is unclear if such additional approval will now be required to originate or service HECMs.
Advertising and Offering of Reverse Mortgages:
In addition to imposing new disclosure obligations and prohibiting an authorized lender or any other party from engaging in any unfair or deceptive practices in connection with the marketing or offering of reverse mortgage loans, AB 5626 prohibits using the words “government insured” or other similar language representing that reverse mortgage loans are insured, supported and sponsored by any governmental entity in any solicitation, or representing that any reverse mortgage loan is other than a commercial product. This may prove challenging given that HUD characterizes its own HECM loan product as a “reverse mortgage insured by the U.S. Federal Government.”
Periodic Statements:
The measure requires an authorized lender to provide additional disclosures on the borrower’s periodic statement when the authorized lender administers payments for property obligations (such as tax payments or mortgage or homeowners insurance) and when those payments are derived from the proceeds of the mortgage.
Life Expectancy Set Aside (“LESA”):
Under AB 5626, an authorized lender must provide notice to the borrower by telephone and first-class mail when the borrower’s home equity line of credit or LESA is depleted to ten percent or less of its value (and again when the borrower’s line of credit or LESA is depleted entirely). The measure does not specify the timeframe for providing this notice.
Advances:
The measure prohibits an authorized lender from making an advance payment for any obligation arising from the mortgaged real property and, if there is an insurance or tax default, the authorized lender may only pay those premiums and/or taxes which are in arrears. It is unclear if this provision applies to borrowers who have established a LESA, as HUD’s HECM regulations require a mortgagee to make disbursements for property charges before the bills become delinquent.
Occupancy Defaults:
The measure addresses situations where an authorized lender seeks to foreclose on a HECM loan because the property is no longer the primary residence of, or occupied by, the borrower.
If the authorized lender does not receive any responses to mailings related to verification of the borrower’s primary residence and/or occupancy, prior to commencing any foreclosure proceeding the authorized lender must: (a) call the borrower (or, if the borrower cannot be reached by telephone, a designated third party specified by the borrower), and (b) visit the property, in person. During such visit, the authorized lender or its agent must provide clear information as to who they are, that the visit pertains to the reverse mortgage, the reason for the home visit, and the telephone number to call for further information.
Further, the authorized lender must wait at least 30 days following such visit, in addition to any additional time or notice requirements specified by any other provision of law, before initiating a foreclosure action on the basis that the mortgaged property is no longer the primary residence of the borrower. If the borrower contacts the authorized lender and provides proof of residence or occupancy after such visit, but before the commencement of a foreclosure action, the authorized lender is barred from initiating such foreclosure action. Presumably, this provision would not require an authorized lender to violate privacy laws, debt collection laws (which may only permit the authorized lender to obtain contact information and not discuss the debt), or trespassing laws.
Inspection Fees:
AB 5626 prohibits an authorized lender from charging the borrower any fee for the visit or inspection, including any and all inspections conducted by the authorized lender to verify the status of the reverse mortgage, or any suspected or actual default condition.
Closing Attorneys:
The measure requires both the authorized lender and the borrower to be represented at closing by an attorney, and to have at least one attorney present to conduct the closing. It is unclear who is responsible for the cost of the borrower’s attorney.
Penalties:
Failure to comply with the requirements of AB 5626 could result in significant penalties. For example, any person injured by new Section 280-b of the Real Property Law (which the measure creates) or HUD’s HECM regulations may bring an individual action to recover treble actual damages plus the prevailing plaintiff’s reasonable attorney’s fees. Moreover, compliance with the provisions is a condition precedent to bringing a foreclosure action; failure to comply is a complete defense to a foreclosure. Accordingly, AB 5626 could have a significant impact on mortgage lenders and servicers of HECMs.
Takeaway:
By adding several new obligations on top of HUD’s existing requirements, this law may impose significant burdens on lenders and servicers. We anticipate amendments to existing Banking Regulation Part 79 that, hopefully, will clarify many ambiguities.
New Jersey Requires License to Hold Mortgage Servicing Rights
A&B ABstract: New Jersey is the latest state to require the licensing of an entity that passively invests in whole residential mortgage loans on a servicing-released basis or in the servicing rights in such loans. The New Jersey Department of Banking and Insurance recently released Bulletin No. 19-13 to elaborate on the state’s new licensing requirement, and to clarify that applications must be submitted by April 13, 2020.
Discussion
New Jersey enacted the Mortgage Servicers Licensing Act, N.J.S.A. 17:16F-27 to -46 (“Act”), on July 28, 2019, to create a new licensing requirement for entities “servicing” New Jersey mortgage loans. Notwithstanding the effective date of the Act, the New Jersey Department of Banking and Insurance (“DOBI”) did not provide a means by which such an entity may apply for a Mortgage Servicer License or clarification regarding the types of activities that constitute “servicing” in the state.
A New Licensing Obligation
In response to the industry’s questions regarding these points, DOBI recently released Bulletin No. 19-13. Bulletin No. 19-13 reiterates that the Act expressly provides that an entity is prohibited from acting, either directly or indirectly, as a mortgage servicer in New Jersey without obtaining a license. The term “mortgage servicer” is broadly defined as:
“[A]ny person, wherever located, who, for the person or on behalf of the holder of a residential mortgage loan, received payments of principal and interest in connection with a residential mortgage loan, records the payments on the person’s books and records and performs the other administrative functions as may be necessary to properly carry out the mortgage holder’s obligations under the mortgage agreement, including, when applicable, the receipt of funds from the mortgagor to be held in escrow for the payment of real estate taxes and insurance premiums and the distribution of the funds to the taxing authority and insurance company.”
The term also includes “a person who makes payments to borrowers pursuant to the terms of a home equity conversion mortgage or reverse mortgage.”
Significantly, Bulletin No. 19-13 states that “[t]he New Jersey Mortgage Servicer License … applies to all holders of mortgage servicing rights, including holders of master servicing rights.” Accordingly, it is now clear that DOBI considers a passive investor in New Jersey whole residential mortgage loans on a servicing-released basis or the servicing rights in such loans to be a “mortgage servicer” and requires such a person to hold a Mortgage Servicer License to conduct business.
Exemptions
Importantly, the Act provides certain exemptions from this licensing requirement, including, but not limited to:
- Any bank, out-of-state bank, credit union chartered in New Jersey, federal credit union, or out-of-state credit union, provided that that bank or credit union is federally insured;
- Any wholly-owned subsidiary of that bank or credit union;
- Any operating subsidiary in situations in which each owner of the operating subsidiary is wholly-owned by the same bank or credit union; and
- Any entity licensed as a Residential Mortgage Lender or Correspondent Residential Mortgage Lender pursuant to the New Jersey Residential Mortgage Lending Act, N.J.S.A. 17:11C-51 to -89 (“RMLA”), as long as it meets mortgage servicer registration requirements under the Act.
DOBI intends to release an application for this license on the Nationwide Multistate Licensing System & Registry this month. Further, DOBI will require all entities that are not exempt from the Act to apply for a Residential Mortgage Servicer License by April 13, 2020. Any entity claiming an exemption on the grounds that it is already licensed under the RMLA should ensure that it is appropriately registered by that date.
Other Provisions of Note
The Act also subjects licensees and other entities engaging in “mortgage servicing” to various regulatory obligations, restrictions, and prohibitions. Specifically, it creates new operational requirements for some mortgage servicers, and creates a list of prohibited activities for all mortgage servicers. Further, the Act provides DOBI with investigative, examination, and enforcement authority, including the power to impose civil monetary penalties of up to $25,000 per violation. DOBI anticipates proposing new rules under the Act to further assist mortgage servicers in meeting their obligations.
Takeaway
As Bulletin No. 19-13 provides that entities operating without a Mortgage Servicer License will be deemed to be engaging in unlicensed activities and may be subjected to an enforcement action, we encourage all persons engaging in “mortgage servicing” in the state to consider whether a license is required early on in the application cycle. This is an area of focus for DOBI, and we expect its continued attention in the months ahead.
CFPB Issues Its Fall 2019 Rulemaking Agenda
A&B Abstract:
On November 20, 2019, the Consumer Financial Protection Bureau (the “Bureau” or “CFPB”) published its Fall 2019 Rulemaking Agenda (the “Rulemaking Agenda”) as part of the Fall 2019 Unified Agenda of Federal Regulatory and Deregulatory Actions. The Rulemaking Agenda sets forth the matters that the Bureau reasonably anticipates having under consideration during the period from October 1, 2019 to September 30, 2020. The Rulemaking Agenda is the first Unified Agenda prepared by the CFPB since Director Kraninger embarked on her “listening tour” shortly after taking office in December 2018. Below we highlight some of the key agenda items discussed in the Rulemaking Agenda.
Implementing Statutory Directives
In the Rulemaking Agenda, the Bureau indicates that it is engaged in a number of rulemakings to implement directives mandated in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“EGRRCPA”), the Dodd-Frank Act and other statutes. For example:
Truth in Lending Act
In March 2019, the Bureau published an Advanced Notice of Proposed Rulemaking (“ANPR”) seeking public comment relating to the implementation of section 307 of the EGRRCPA, which amends the Truth in Lending Act (“TILA”) to mandate that the Bureau prescribe certain regulations relating to “Property Assessed Clean Energy” (“PACE”) financing. The Bureau indicated that it is reviewing the comments it has received in response to the ANPR as it considers next steps to facilitate the development of a Notice of Proposed Rulemaking (“NPRM”).
TRID Rule Guidance
The Bureau has also been engaged in several other activities to support its rulemaking to implement the EGRRCPA. For example, the Bureau noted that it has (i) updated its small entity compliance guides and other compliance aids to reflect the EGRRCPA’s statutory changes; and (ii) issued written guidance as encouraged by section 109 of the EGRRCPA, which provides that the Bureau “should endeavor to provide clearer, authoritative guidance” on the CFPB’s TILA/RESPA Integrated Disclosure rule.
Implementation of Section 1071 of Dodd-Frank
Additionally, the Bureau is undertaking certain activities to facilitate its mandate to prescribe rules implementing Section 1071 of the Dodd-Frank Act, which amended the Equal Credit Opportunity Act to require financial institutions to collect, report, and make public certain information concerning credit applications made by women-owned, minority-owned, and small businesses. For example, on November 6, 2019, the Bureau hosted a symposium on small business data collection in order to facilitate a discussion with outside experts on the issues implicated by creating such a data collection and reporting regime.
We have previously issued an advisory in which we discuss the key mortgage servicing takeaways from the EGRRCPA.
Continuation of the CFPB’s Spring 2019 Rulemaking Agenda
The Rulemaking Agenda notes that the Bureau will continue with certain other rulemakings that were described in its Spring 2019 Agenda that are intended to “articulate clear rules of the road for regulated entities that promote competition, increase transparency, and preserve fair markets for financial products and services.” Such rulemakings include:
HMDA and Regulation C
In May 2019, the Bureau issued a NPRM to (i) reconsider the thresholds for reporting data about closed-end mortgage loans and open-end lines of credit under the Bureau’s 2015 Home Mortgage Disclosure Act (“HMDA”) Rule and to incorporate into Regulation C an interpretive and procedural rule that the Bureau issued in August 2018 in order to implement certain partial HMDA exemptions created by the EGRRCPA. In summer 2020, the Bureau is expecting to issue an NPRM to follow-up on an ANPR issued in May 2019 related to data points and coverage of certain business- or commercial-purpose loans. The Bureau also anticipates issuing a NPRM addressing the public disclosure of HMDA data in light of consumer privacy interests to allow the Bureau to concurrently consider the collection and reporting of data points and the public disclosure of those data points.
Proposed Regulation F
In May 2019, the Bureau issued a NPRM which would, for the first time, prescribe substantive rules under Regulation F, which implements the Fair Debt Collection Practices Act, to govern the activities of debt collectors (the “Proposed Rule”). The Proposed Rule would address several issues related to debt collection, such as (i) addressing communications in connection with debt collection; (ii) interpreting and applying prohibitions on harassment or abuse, false or misleading representations, and unfair practices in debt collection; and (iii) clarifying requirements for certain consumer-facing debt collection disclosures. The Bureau noted that it is also engaged in testing of consumer disclosures relating to time time-barred debt disclosure issues that were not part of the Proposed Rule. The results of the CFPB’s testing will inform the Bureau’s assessment of whether to issue a supplemental NPRM seeking comments on any disclosure proposals related to the collection of time-barred debt.
We previously published a five-part blog series in which we discussed the provisions of the Proposed Rule that are under consideration. We will continue to monitor and report on any developments related to the Proposed Rule.
Payday, Vehicle Title, and Certain High-Cost Installment Loans (the “Payday Rule”)
The Bureau is expecting to take final action in April 2020 on the NPRM issued in February 2019 related to the reconsideration of the mandatory underwriting requirements of the 2017 Payday Rule. That said, we note that the U.S. District Court for the Western District of Texas has stayed the Payday Rule’s August 19, 2019 compliance date. The parties before the court have a status hearing on December 6, 2019 which could affect the stay and the effective date of the Payday Rule.
Remittance Rule
In addition, the Rulemaking Agenda notes that the Bureau is planning to issue a proposal this year to amend the CFPB’s Remittance Rule to address the effects of the expiration in July 2020 of the Rule’s temporary exception allowing institutions to estimate fees and exchange rates in certain circumstances.
New Rulemakings and Review of Existing Regulations
Expiration of the “GSE Patch”
In January 2019, the Bureau completed an assessment of certain rules that require mortgage lenders to make a reasonable and good faith determination that consumers have a reasonable ability to repay certain mortgage loans and that define certain “qualified mortgages” that a lender may presume comply with the statutory ability-to-repay requirement. The “GSE Patch” is set to expire in January 2021, meaning that loans eligible to be purchased or guaranteed by GSEs that are originated after that date would not be eligible for qualified mortgage status under its criteria. In July 2019, the Bureau issued an ANPR to amend Regulation Z, regarding the scheduled expiration of the GSE Patch, and is currently reviewing the comments it received since the comment period closed on September 2019.
As noted in a previous blog post, the CFPB announced in its ANPR, that the Bureau does not intend to extend the GSE patch permanently. It will be interesting to see whether the Bureau will allow the patch to expire in January 2021 as planned of if the Bureau will use this as an opportunity to possibly extend the expiration date.
Addition of New Regulatory Agenda Items
In response to feedback received in response to the Bureau’s 2018 Call for Evidence and other outreach efforts, the Bureau is adding two new items to its long-term regulatory agenda to address concerns related to (i) loan originator compensation; and (ii) the use of electronic channels of communication in the origination and servicing of credit card accounts.
Review of Existing Regulations
The Rulemaking Agenda also highlights the Bureau’s active review of existing regulations. For example, the CFPB will be assessing its so-called TRID Rule pursuant to Section 1022(d) of the Dodd-Frank Act, which requires the CFPB to publish a report assessing the effectiveness of each “significant rule or order” within five years of it taking effect. The Bureau must issue a report with the results of its assessment by October 2020.
The Rulemaking Agenda further notes that, in 2020, the Bureau expects to conduct a 610 RFA review of the Regulation Z rules that implemented the Credit Card Accountability Responsibility and Disclosure Act of 2009. Section 610 of the RFA requires federal agencies to review each rule that has or will have a significant economic impact on a substantial number of small entities within 10 years of publication of the final rule.
Takeaway
The Bureau’s Rulemaking Agenda gives industry an advanced look at what to expect from the CFPB in the coming months. We expect the Bureau to be active in working through their agenda and will provide further updates as they become available.
* We would like to thank Associate, David McGee, for his contributions to this blog post.
Federal Court Inspects Maryland’s Restrictions on Inspection Fees
A&B Abstract:
Maryland’s inspection fee statute has been interpreted by the Maryland Court of Appeals and the Maryland Office of the Commissioner of Financial Regulation (“OCFR”) to apply both at the time of origination and throughout the servicing of a residential mortgage loan. More recently, a lower federal district court decision came to a different interpretation.
Maryland’s Inspection Fee Restriction
Maryland Commercial Law Section 12-121 provides that, subject to limited exceptions, a lender may not impose a “lender’s inspection fee” in connection with a loan secured by residential real property. A “lender’s inspection fee” means a fee imposed by a lender to pay for a visual inspection of real property. A lender’s inspection fee may be charged only if the inspection is needed to ascertain the completion of (i) the construction of a new home; or (ii) repairs, alternations, or other work required by the lender. A “lender” is defined as a licensee or a person who makes a loan subject to Maryland’s Interest and Usury subtitle. In turn, a “licensee” is defined as a person that is required to be licensed to make loans subject to Maryland’s Interest and Usury subtitle, regardless of whether the person is actually licensed.
Prior Guidance
Previously, the Court of Appeals of Maryland held, in Taylor v. Friedman, 689 A.2d 59 (Md. Ct. App. 1997), that, unless permitted by Section 12-121(c), the prohibition on inspection fees was not limited to inspections for closings, but extended to any inspections throughout the life of the loan. In 2014, the OCFR released an advisory opinion stating that Taylor remains good law in Maryland and applies to circumstances where a servicer orders a visual inspection of property following default on the terms of the mortgage.
Roos vs. Seterus
More recently, the U.S. District Court for the District of Maryland in Roos v. Seterus held, despite previous decisions indicating otherwise, that non-lenders may charge inspection fees to mortgagors. The defendants in Roos argued that they did not charge illegal inspection fees because (1) the deed of trust specifically authorized inspection fees; (2) Section 12-121 is inapplicable to the defendants; and (3) Section 12-121 does not have a blanket prohibition on the imposition of inspection fees. The defendants believed that since they were a servicer, and the plain language of the statute only prohibited lenders from charging inspection fees, the statute did not prohibit them from charging inspection fees. The court agreed with defendants that the plain meaning of the statute only prohibits a “lender” from imposing or collecting inspection fees. Although the court in Roos did not itself provide a definition of “lender,” the court pointed to a Montgomery Circuit Court case, Kemp v. Seterus, Inc., No. 441428-V, 2018 Md. Cir. Ct. LEXIS 9 (Md. Cir. Ct. Oct. 19, 2018), which addressed the issue. In that case, the court stated that “the meaning of the statute [wa]s plain; only ‘persons’ which make loans to ‘borrowers’ are lenders and thus covered by the statute.” The court in Roos adopted the Kemp court’s definition of lender, finding it well reasoned and applicable since it involved the same issue and defendant.
Takeaway
It is unclear if this decision will convince the OCFR to change its long-standing position or if plaintiffs will appeal this decision. Moreover, we note that this decision was issued by a federal district court interpreting Maryland state law and, as such, will not have precedential value in Maryland state courts. While defendants may have prevailed in this federal district court case, servicers should still remain cautious in charging inspection fees when servicing a loan secured by residential real estate in Maryland.
* We would like to thank Associate, David McGee, for his contributions to this blog post.