Alston & Bird Consumer Finance Blog

Mortgage Loans

Recent Cases Deepen the Divide Among Circuits on Standing to Sue for Violations of FACTA

A&B Abstract:

Recent cases by the Eleventh Circuit and the D.C. Circuit deepen the divide among the courts on the standing of consumers to sue for violations of the Fair and Accurate Credit Transactions Act (“FACTA”).  In Muransky v. Godiva Chocolatier, Inc., 922 F.3d 1175 (11th Cir. 2019) and Jeffries v. Volume Services of America, 2019 WL 2750856 (D.C. Cir. July 2, 2019), the courts of appeal have held that the consumer plaintiff had Article III standing under the Supreme Court’s decision in Spokeo, Inc. v. Robins to sue retailers for violation of FACTA’s truncation requirement.  FACTA prohibits retailers from printing “more than the last 5 digits of the credit card number or the expiration date” on the consumer’s receipt.  Prior decisions from the Second, Third, Seventh and Ninth Circuits held that the consumer plaintiff lacked standing to sue the retailer for a violation of FACTA’s truncation requirement absent a resulting tangible injury.

Discussion:

In Muransky, the Eleventh Circuit recently vacated and reissued an earlier ruling holding that a plaintiff had standing under Spokeo to pursue a putative class action for violation of FACTA’s truncation requirement.  In Muransky, the retailer printed a receipt with the plaintiff’s first six and last four digits of his credit card.  After a short period of discovery, the parties settled the case for $6.3 million.  During the approval process, a class member objected to the settlement on the basis that the plaintiff suffered no harm, and class members who had their identities stolen would have their claims barred.  After the district court approved the settlement, the objector appealed.

On appeal, in addition to the objector’s challenge, an amicus brief was filed on behalf of the National Retail Federation, the U.S. Chamber of Commerce, and the International Franchise Association.  These groups argued that plaintiff’s lawyers had “weaponized” FACTA in recent years to force defendants to settle class actions “despite the absence of any actual harm or risk of harm.”  The groups noted recent, significant FACTA class action settlements in the Eleventh Circuit ranging from $2.5 million to $30.9 million.

The Eleventh Circuit affirmed the district court’s approval of the settlement, and rejected the challenge to the plaintiff’s standing.  The court recognized that prior courts in the Second, Third, Seventh and Ninth Circuits had held that consumers lacked standing to pursue lawsuits for violation of FACTA’s truncation requirement, absent some tangible injury.  In Kamal v. J. Crew Group, Inc., 918, F.3d 102 (3d Cir. 2019), the Third Circuit affirmed the dismissal of the consumer’s putative class action.  The Third Circuit held that printing the first six and last four digits of the credit card, without any additional degree of risk, was “a bare procedural violation” that does not create Article III standing.

The decision in Kamal was consistent with prior decisions from the Second Circuit (Crupar-Weinmann v. Paris Baguette Am., Inc., 861 F.3d 76 (2d Cir. 2017)), Seventh Circuit (Meyers v. Nicolet Restaurant of De Pere, LLC, 843 F.3d 724 (7th Cir. 2016)), and Ninth Circuit (Bassett v. ABM Parking Services, Inc., 883 F.3d 776 (9th Cir. 2018)).  Each of those cases involved a violation of the FACTA truncation requirement involving the printing of the credit card expiration date on the receipt.  In each case, the court held that the plaintiff lacked standing to sue.

Even more recently, in Jeffries, the D.C. Circuit followed the reasoning of the Eleventh Circuit in Muransky to reverse the district court’s dismissal of a consumer’s putative class action for violation of FACTA’s truncation requirement on standing grounds.  In that case, the retailer had printed all 16 digits of the plaintiff’s credit card number and the expiration date of the card on the receipt.  These facts were important because the D.C. Circuit recognized that “not every violation of FACTA’s truncation requirement creates a risk of identity theft” sufficient to constitute a concrete injury in fact.  The court specifically cited with approval the expiration date cases from the Second, Seventh and Ninth Circuits, noting that the mere technical violation of printing the expiration date did not create a risk of identity theft triggering a concrete injury in fact.  However, the D.C. Circuit held that the “egregious” FACTA violation of printing all 16 digits and the expiration date created a real risk of harm to the plaintiff because it provided all of the information necessary for a criminal to defraud the plaintiff.

Takeaways:

First, the procedural posture of Muransky and the “egregious” facts in Jeffries may have helped lead to their respective results.

In Muransky, the retailer did not challenge the plaintiff’s standing in the district court.  Rather, the standing challenge came from an objector to the settlement of the putative class action.  Thousands of class members had already made claims in the settlement, and the court was likely disinclined to unwind such a settlement due to a single objector.  Regardless, Muransky is nonetheless the law in the Eleventh Circuit, and district courts will be bound to follow it.  Muransky will only increase the already significant number of FACTA class actions brought in that jurisdiction.

In Jeffries, the retailer had printed all 16 digits of the plaintiff’s credit card number and the expiration date of the card on the receipt.  In finding standing, the D.C. Circuit noted the “egregious” nature of the FACTA violation.  Therefore, less “egregious” violations of FACTA can be distinguished from Jeffries, such that the D.C. Circuit may not necessarily become a safe haven for FACTA lawsuits.

Second, the divide among the courts of appeal continues to justify the Supreme Court clarifying the scope of Spokeo.

Nevada Adopts Regulations for Licensure by Endorsement

A&B Abstract:

Nevada recently adopted new regulations allow a natural person to obtain a license by endorsement to engage in business as a mortgage broker or mortgage agent, mortgage loan servicer, or escrow agent or agency, so long as such person holds a corresponding valid and unrestricted license to engage in such business in another jurisdiction upon meeting certain conditions.

New Regulations:

On June 26, 2019, the Nevada Commissioner of Mortgage Lending (“Commissioner”) adopted new regulations R177-18, R178-18 and R180-18, which introduce standards that permit the issuance of licenses by endorsement for natural persons to engage in business as: (1) a mortgage broker or mortgage agent; (2) a mortgage servicer or a covered service provider (including a foreclosure and loan modification consultant); and (3) an escrow agent or agency, respectively.

Eligibility Criteria:

In order to be eligible for a license by endorsement, a natural person must:

  • hold a corresponding valid and unrestricted license to engage in the relevant occupation or profession in another jurisdiction;
  • submit proof to the Commissioner of his or her corresponding valid and unrestricted license in another jurisdiction; and
  • possess qualifications that are largely similar to the qualifications required for a Nevada license,

in addition to meeting other qualifications set forth in the new regulations.

Other Changes to Licensing Requirements:

The amendments also modify existing licensing requirements for mortgage brokers, mortgage bankers and mortgage agents by:

  • Authorizing the Commissioner to waive any monthly reporting requirements under Nevada law if substantially similar information is available from another source; and
  • Reducing the annual continuing education required to be completed by a mortgage broker or mortgage agent.

North Carolina Enacts Servicemember Protections

A&B Abstract:

North Carolina is the latest state to extend the protections of the federal Servicemembers Civil Relief Act (“SCRA”), 50 U.S.C. §§ 3901 et seq., to active duty members of its National Guard.  What does the new law require?

North Carolina Servicemembers Civil Relief Act

On July 25, North Carolina Governor Roy Cooper signed into law the North Carolina Servicemembers Civil Relief Act, which extends the protections of the federal SCRA to North Carolina residents serving on active National Guard duty.  Although the statute generally mirrors federal law, a few distinctions are worth note.

Who is a Servicemember?

For purposes of the new law, a “servicemember” has the same meaning as under the federal SCRA.  The term also includes a member of the North Carolina National Guard (or a resident of North Carolina in another state’s National Guard) called to active duty by the governor for more than 30 consecutive days.  However, for the statute’s protections to apply, a member of the National Guard must provide the lender or servicer with a written or electronic copy of the order to military service no later than 30 days after the termination of such service.  As a result, some servicemembers must act affirmatively in order to receive the law’s protections.

The law also grants a dependent of a servicemember the same rights and protections as are provided to a servicemember under Subchapter II of the federal SCRA.  Thus, dependents are eligible for protection against default judgments, stays of proceedings, and restrictions on the maximum rate of interest an obligation may bear.

Who Can Enforce the Statute?

The new North Carolina law provides various enforcement mechanisms.  First, a violation of the federal SCRA is a violation of the North Carolina law.  Second, a violation of the North Carolina law is an unfair or deceptive trade practice for purposes of Chapter 75 of the North Carolina General Statutes.  Finally, either the North Carolina Attorney General or an aggrieved servicemember (through a private right of action) may bring an action to enforce the statute.

QM Patch Update: CFPB Proposes to Let Patch Expire

A&B Abstract

The CFPB has issued an Advance Notice of Proposed Rulemaking regarding the fate of the “QM Patch,” indicating that it will not extend the “QM Patch” permanently.

Advanced Notice of Proposed Rulemaking

In a surprise development, on July 25, 2019, the Consumer Financial Protection Bureau (“CFPB”) issued an advance notice of proposed rulemaking (“ANPR”) seeking public comment regarding the fate of the “QM Patch,” which is scheduled to expire no later than January 10, 2021.   The comment period is short, reflecting the urgency of promulgating a final rulemaking before the impeding “QM Patch” termination.  Comments must be received by the CFPB within 45 days after publication of the ANPR in the Federal Register.

Background

The CFPB created the “QM Patch” as a temporary provision of the qualified mortgage (“QM”)/ability-to-repay (“ATR”) regulations adopted pursuant to the Dodd-Frank Act.  It exempts lenders from having to underwrite loans with debt-to-income (“DTI”) ratios not exceeding 43% in accordance with the exacting standards of Appendix Q to Regulation Z if the loans otherwise meet the definition of a QM and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.

The CFPB’s Proposal

In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently.  This shocking pronouncement has potentially profound ramifications for the residential mortgage lending markets.  A substantial proportion of the markets have relied extensively on the “QM Patch” in underwriting qualified mortgages, not to mention significantly reducing the role of the GSEs in these markets.  For years, GSE critics have complained about Fannie Mae’s and Freddie Mac’s dominance of the residential lending markets.  Yet the January 2021 “QM Patch” expiration would raise critical questions:  Will the private markets be able to absorb the GSE’s large share of qualified mortgage lending?  If not, what are the possible detrimental impacts on consumers, especially those in distressed communities?

Other QM Changes?

In the ANPR, the CFPB indicates that it may make other significant changes to the qualified mortgage regulations, based in part on the public comments it receives.  For example, the CFPB is considering whether the general QM definition should retain a direct measure of a consumer’s personal finances, such as DTI or residual income and how that measure should be structured. The CFPB is also seeking comment on whether the definition should: (1) include an alternative method for assessing financial capacity, or (2) be limited to the express statutory criteria.  Under one approach that seems to be attracting the CFPB’s interest, bright-line pricing delineation would replace the DTI criteria altogether.   Under such an approach, loans with APRs exceeding the average prime offer rate by certain thresholds would be deemed rebuttable presumption QM loans or non-QM loans, as the case may be.  Loans not exceeding certain thresholds would receive safe harbor QM status.   Under such a bright line pricing delineation method, the loans would have to comply with other statutory criteria in order to retain QM status.

Takeaway

The 45-day deadline for comments seems rushed, especially considering the dramatic effect that changes to the qualified mortgage rules could have on the residential mortgage finance and housing markets.  Further, in an ideal world, the CFPB should be considering amendments of the qualified mortgage/ability-to-repay rules in tandem with the federal high cost mortgage, the residential mortgage risk retention, and the loan originator compensation rules as a holistic approach rather than in isolation.

Maryland Clarifies New Net Worth Requirements for Mortgage Servicers

A&B Abstract:

Effective October 1, 2019, the Maryland Commissioner of Financial Regulation will impose new net worth requirements on licensees. Importantly, Maryland servicing licensees without GSE approvals may not use a line of credit to satisfy the net worth requirements. However, mortgage servicers may include mortgage servicing rights in the calculation of tangible net worth.  The minimum net worth requirements for mortgage lender and broker licensees remain unchanged, but must be met with tangible net worth (excluding intangible assets such as copyright, trademark or goodwill).

Background

Since the financial crisis, the rapid growth of nonbank mortgage servicers has led regulators to call for enhanced oversight of such entities.  The Financial Stability Oversight Council (charged under the Dodd-Frank Act with identifying risks to the stability of the U.S. market) recommended in its 2014 annual report that state regulators work collaboratively to develop prudential and corporate governance standards.

In 2015, state regulators through CSBS and AARMR, proposed baseline and enhanced prudential regulatory standards (including capital and net worth requirements) for nonbank mortgage servicers. Although those standards were not finalized, several states – including Oregon and Washington – have imposed new net worth requirements on nonbank servicers.  Maryland is the latest state to update its law.

Maryland House Bill 61 and Advisory Notice

Maryland House Bill 61 takes effect October 1, 2019, and, among other changes adds net worth requirements for licensed mortgage servicers.  This means that current licensees must meet the revised requirements during the 2020 renewal cycle of November 1  to December 31, 2019.  Licensed servicers that meet the capital requirements of and are approved by a government sponsored entity (such as Fannie Mae or Freddie Mac) satisfy Maryland’s net worth requirements.

Maryland licensees without GSE approval must maintain a minimum tangible net worth that varies according to portfolio volume.  Specifically, the minimum net worth requirements are:

  • $100,000 if the unpaid principal balance of the entire servicing portfolio is less than or equal to $50,000,000;
  • $250,000 if the unpaid principal of the entire servicing portfolio is greater than $50,000,000  but less than or equal to $100,000,000
  • $500,000 if the unpaid principal balance of the entire servicing portfolio is greater than $100,000,000 but less than or equal to $250,000,000, or
  • $1,000,000 if the unpaid principal balance of the entire servicing portfolio is great than $250,000,000.

Limitations on Net Worth

Importantly, a servicer may not use a line of credit to satisfy the net worth requirements of a licensed mortgage servicer.  This is an important distinction from the requirements for mortgage lenders and broker net worth requirements, where a working line of credit (but not a warehouse line of credit) can be used to satisfy a portion of the net worth requirements.  It is also important to recognize that the new law requires tangible net worth for licensees.  The calculation of tangible net worth excludes intangible assets, such as copyrights, trademarks or goodwill.

Takeaway

The regulators have clarifies that mortgage servicing rights may be included in the calculation of tangible net worth. With the continued focus on nonbank mortgage servicers, capital and net worth requirements are worthy of attention.