Alston & Bird Consumer Finance Blog

Mortgage Loans

Carter State Funeral is not a “Legal Public Holiday” for Purposes of Certain Regulation Z Disclosure Requirements

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What Happened?

President Biden has proclaimed January 9, 2025, a federal holiday for the state funeral of former President Jimmy Carter; as a result, Federal government agencies and departments will be closed that day.  Is this federal holiday proclaimed by executive order a “legal public holiday” for purposes of certain disclosure timing requirements of Regulation Z?

Why is it Important?

Under the Truth in Lending Act (TILA) Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure Rule (TRID), generally, the creditor is responsible for ensuring that it delivers or places in the mail the loan estimate (LE) no later than the third business day after receiving the consumer’s application. Further, a creditor must ensure that the consumer receives the closing disclosure (CD) at least three business days before consummation of the transaction. In addition, for certain refinancings, Regulation Z permits the consumer to rescind (cancel) the transaction within three business days after consummation.

For purposes of providing the LE, a business day is a day on which the creditor’s offices are open to the public for carrying out substantially all of its business functions. However, the term “business day” is defined differently for other purposes, such as counting days to ensure the consumer receives the CD on time and the consumer’s exercise of the right to rescind the transaction. For these purposes, “business day” means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. § 6103(a): New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.

What to do Now?

Because the Carter state funeral on January 9, 2025, is not a “legal public holiday” within the meaning of 5 U.S.C. § 6103(a), it is a business day for counting days to ensure the consumer receives the CD on time and for the consumer’s exercise of the right to rescind the transaction.  Further, January 9, 2025, is also a business day for purposes of providing the LE as long as the creditor’s offices are open to the public for carrying out substantially all of its business functions.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from three states:

Delaware: 

  • Effective August 9, Senate Bill 245 amends mortgage foreclosure provisions of the Delaware Code.  Principally, the measure updates the content of the pre-foreclosure notice that a mortgagee must send – as set forth in Section 5062B of Title 10 of the Code – to reflect that the Delaware State Housing Authority is the appropriate group to contact for financial assistance, and to permit alteration of the statutory language as recommended by the administrator of the Residential Mortgage Foreclosure Mediation Program.  The measure also eliminates the previously scheduled January 1, 2025, expiration date of provisions including Sections 5062A (loss mitigation affidavit), 5062C (Residential Mortgage Foreclosure Mediation Program), and 5062D (complaints) of Title 10; those sections now apply to any foreclosure action initiated on or after January 19, 2012.

Illinois: 

  •  Effective August 9, 2024, Senate Bill 3550 amends the Consumer Installment Loan Act by: (a) clarifying that licensees thereunder have authority to make a loan with a maximum principal amount of $40,000 and to charge, contract for, and receive an annual percentage rate of no more than 36% (rather than charges at an APR of more than 36%); and (b) amending disciplinary provisions, including those applicable to persons engaged in unlicensed activity.  The measure also establishes the “Financial Institutions Act” (20 ILCS 1205/1) from existing provisions of the Financial Institutions Code.
  • Effective January 1, 2025, Senate Bill 2919 amends the Mortgage Foreclosure article of the Illinois Code of Civil Procedure to provide for online foreclosure sales, among other topics.  First, the measure amends Section 15-1507 to permit a mortgagee to request that a judge, sheriff, or other person to conduct the sale of a foreclosed home either in-person and/or online, and to add corresponding content to the public notice of sale that the mortgagee must provide.  Second, the measure adds Section 15-1507.2 to establish procedures for the conduct of online judicial sales, addressing applicable fees, bid procedures, proper information security controls, and the engagement of third-party purchasers.  Finally, the measure adds Section 15-1510.1, prohibiting the charging of any fee beyond the winning bid amount to a third-party bidder or purchaser who is not a party to the case in a residential real estate sale.
  •  Effective January 1, 2025, Senate Bill 3551 amends the Residential Mortgage License Act of 1987 (RMLA) and the Residential Real Property Disclosure Act (RRPDA).  First, the measure adds the term “shared appreciation agreement” to the definitions section of the RMLA, and amends related terms (“mortgage loan”, “residential mortgage loan”, and “home mortgage loan”) to “include a loan in which funds are advanced through a shared appreciation agreement.”  Second, the measure adds to the RMLA a new section addressing counseling and disclosure requirements for shared appreciation agreements.  Third, the measure adds to the RRPDA provisions relating to counseling, such that: (a) counseling is required to be provided in person, or by remote electronic or telephonic means, with the permission of all borrowers; (b) counseling must be provided in a private session; and (c) the counselor must verify the identity of each borrower, as well as document the counseling session, subject to any implementing regulations.

New Hampshire: 

  • On August 23, New Hampshire Governor Chris Sununu signed into law House Bill 1241, which amends provisions of the New Hampshire statutes relating to the regulation of money transmitters and mortgage licensees, among other topics beyond the scope of our reporting.   First, effective October 22, the measure repeals New Hampshire’s existing money transmission laws and adopts the model Money Transmission Modernization Act.  The Act requires the licensing of persons engaged in money transmission and establishes licensing application requirements, licensee reporting obligations, and enforcement provisions, among others. Second, the measure amends Chapters 397-A and 399-A with respect to license renewals for mortgage loan originators; mortgage bankers, brokers, and servicers; small loan lenders; and debt adjustment services. Going forward, a license term will run from the date of approval of an application December 31 of the year in which the license term began; however, if the initial license date is between November 1 and December 31, the initial license term will run through December 31 of the following year.

VA Issues Guidance on Processing Assumptions with Secondary Financing

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What Happened?

On August 11, 2024 the Department of Veterans Affairs (the “VA”) released Circular 26-24-17, clarifying how a servicer should process an assumption when there is secondary financing.  Significantly, the VA clarified an open question of whether a junior mortgage obtained simultaneously with the assumption of a first-lien VA-guaranteed loan must also be assumable.

Why Does it Matter?

Assumable mortgage loans have been gaining in popularity in our current high interest rate environment.  Often, however, buyers will need secondary financing to make up the difference between the mortgage to be assumed and the purchase price of the property.  There has been a lack of guidance on how to process the assumption of a first-lien VA-guaranteed loan that involves secondary financing, as well as the question of whether such secondary financing must also be an assumable loan.

VA Circular 26-24-17 clarifies that the VA does not prohibit an assumer (regardless of whether a Veteran) of a VA-guaranteed loan from obtaining secondary financing (i.e., a junior lien) in conjunction with an assumption of the VA-guaranteed loan, and that such secondary financing does not need to be an assumable mortgage.  However, if the secondary financing is not assumable, “the holder of the VA-guaranteed loan should counsel the assumer that this may restrict their ability to sell the property to another creditworthy assumer through an assumption in the future.”

Additionally, to protect the VA-guaranteed loan priority, holders are expected to ensure:

  • The secondary financing is subordinate to the VA-guaranteed loan, such as through a subordination agreement.
  • Documentation exists in the loan file that provides the name of the secondary lender, the amount of the secondary borrowing, and the repayment terms of the secondary borrowing agreed to by the assumer.
  • Proceeds of the secondary financing are used for amounts due to the seller at closing as part of the assumption process or allowable closing costs.  Note, that the assumer cannot receive cash back from the secondary financing.
  • Contract terms of the secondary financing include a reasonable grace period before a late charge is assessed and, in the event of default, before the secondary lender may commence foreclosure proceedings. The interest rate can be negotiated between the assumer and the lender and can be higher than the rate on the VA-guaranteed loan.
  • Underwriting decisions include the recurring payment of any secondary financing.

What Do I Need to Do?

Servicers that process assumptions of VA-guaranteed loans should review the circular closely and ensure the requirements are implemented into servicers’ compliance management systems, as this circular took effect immediately when issued on August 11, 2024.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights three recently enacted measures of potential interest from California, Missouri, and North Carolina:

  • California: Effective upon approval by Governor Gavin Newsom on July 18, Assembly Bill 295 amends provisions of the California Civil Code applicable to mortgages. Among other changes, first, the measure amends Section 2924(b) to clarify that when responding to a request for payoff or reinstatement information, a trustee is not liable for good faith error resulting from reliance on information provided in good faith by the beneficiary, or subject to the provisions of the Rosenthal Fair Debt Collection Practices Act. Second, the measure amends Section 2924c to allow a trustee to recover reasonable costs and expenses that “will be incurred as a direct result of the payment being tendered,” instead of limiting recovery to expenses actually incurred.  Third, the measure amends Section 2924m, which relates to the sale of tenant-occupied residential property, to clarify that if the winning bidder at a sale is not required to submit an affidavit or declaration regarding eligibility to bid, the trustee must attach as an exhibit to the trustee’s deed a statement that no such affidavit or declaration is required, and that the lack thereof does not preclude recording of the deed or invalidate the transfer of title pursuant to the trustee’s deed.Finally, the measure amends Section 3273.10, under the COVID-19 Small Landlord and Homeowner Relief Act, to clarify that the requirement for the mortgage servicer to provide a notice as prescribed by Section 2923.5(b) after denial of a forbearance applies only to a request made between August 30, 2020, and December 1, 2021.
  • Missouri: Effective August 28, 2024, Senate Bill 1359 enacts the “Money Transmission Modernization Act of 2024” (“Act,” Mo. Rev. Stat. §§ 361.900 to 361.1035) and the “Commercial Financing Disclosure Law” (“Law,” Mo. Rev. Stat. 427.300).First, the Act replaces Missouri’s existing money transmission laws and requires the licensing of persons engaged in money transmission (e.g., selling or issuing stored value, or receiving money for transmission from a person located in the state).  The Act sets forth relating regulatory processes such as license application requirements, licensee reporting obligations, compliance management system requirements (for supervision of delegates), and the relationship between the Act’s provisions and federal law.Second, the Law addresses obligations applicable in connection with a “commercial financing transaction” meaning “any commercial loan, accounts receivable purchase transaction, commercial open-end credit plan or each to the extent the transaction is a business purpose transaction.”  The Law requires a provider of such transaction to provide a disclosure of the terms prior to or at consummation of the transaction that includes, among other information, the total amount of funds provided to the business, the total amount of payments that will be due to the provider, and the manner, frequency, and amount of each payment.  Among others, the Law does not apply to: (a) a depository institution providing commercial financing; or (b) a commercial financing transaction that is secured by real property, a lease, or a purchase money obligation that is incurred as all or part of the price of the collateral (or for value given to enable the business to acquire rights in or the use of the collateral, if the collateral is so used).
  • North Carolina: Effective October 1, 2024, Senate Bill 319 (2024 N. C. Sess. Laws 29) amends provisions of the North Carolina General Statutes relating to powers of sale.  First, the measure amends Section 45-21.4 to permit a sale pursuant to a power of sale in a mortgage or deed of trust to occur at any public location within the county where the land is situated (or, for properties located in more than one county, in one of the counties in which the land is situated) as an alternative to the county courthouse. If permitted by the mortgage or deed of trust, the mortgagee or trustee may designate the alternative location; if the instrument does not contain such authority for the mortgagee or trustee, the clerk of the county superior court may do so.  Second, the measure amends Section 45-21.23, which relates to time of sale, to require a sale to begin no later than three hours (as opposed to one hour, under existing law) after the designated start time in the notice of sale, unless a delay occurs by other sales held at the same place.  Third, the measure adds new Section 45-21.25A establishing the procedure for placing remote bids at foreclosure sales.

CFPB and Other Federal Agencies Finally Adopt AVM Rule

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What Happened?

On June 20, 2024, a group of federal regulators published a rule addressing for the use of automated valuation models (AVMs) in mortgage origination and secondary market transactions.

The rule adoption – by the Consumer Financial Protection Bureau, Office of Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Federal Housing Finance Agency (collectively, the Agencies) – comes more than 13 years after the enactment of the Dodd-Frank Act.  Section 1473 of the Dodd-Frank Act mandated the promulgation of a rule to implement quality control standards for the use of automated valuation models by mortgage originators and secondary market issuers in valuing the collateral worth of a mortgage secured by a consumer’s principal dwelling – even one made for business, commercial, agricultural, or organizational purposes.  The rule will take effect October 1, 2025 (the first day of a calendar quarter following the 12 months after publication in the Federal Register).

Section 1473(q) of the Dodd-Frank Act amended the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), addressing the use of AVMs to estimate the collateral value of a mortgage for mortgage lending purposes in new section 12 U.S.C. § 3354.  The statute sets forth the framework for developing quality control standards to which AVMs must adhere and directs the Agencies to promulgate regulations implementing the standards.

What AVMs does the Rule Cover?

An AVM is any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer’s principal dwelling collateralizing a mortgage.  The rule’s quality control standards apply only to AVMs used in connection with making credit decisions or covered securitization determinations regarding a mortgage.  For example, the standards apply when determining a new value before originating, modifying terminating a mortgage, or making other changes to a mortgage including a decision whether to extend new or additional credit or change the credit limit on a home equity line of credit (including reductions or suspensions), or placing a loan in a securitization pool.  The rule treats assumptions as credit events.  By contrast, the rule does not cover other uses such as monitoring collateral in mortgage-backed securitizations after they have already been issued or validating an already completed valuation.

Why Is It Important?

The rule requires institutions that engage in covered credit decisions or securitization determinations – whether themselves, or through or in cooperation with a third party affiliate – to adopt policies, practices, procedures and control systems to ensure that the use of AVMs adheres to quality control standards.

“Control systems” are the functions (such as internal or external audits, risk review, quality control and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulators.

In keeping with FIRREA, the rule’s quality control standards are designed to:

  • Ensure a high level of confidence in the estimates produced by the AVMs;
  • Protect against the manipulation of data;
  • Seek to avoid conflicts of interest;
  • Require random sample testing and reviews; and
  • Comply with applicable nondiscrimination laws.

In the rule, the Agencies take the standards one step further than the Dodd-Frank Act mandate, by requiring AVM quality control standards to comply with applicable nondiscrimination laws.  Exercising their statutory authority to account for other appropriate quality control factors, the Agencies’ inclusion of this fifth factor addresses concerns about the potential for AVMs to produce property estimates that reflect discriminatory bias.  In doing so, the Agencies have acted consistent with the Biden administration’s focus on appraisal bias, as exhibited in the PAVE initiative.

In adopting the rule, the Agencies remind institutions that the Equal Credit Opportunity Act and Regulation B, as well as the Fair Housing Act, apply to appraisals and AVMS.  Further, “institutions have a preexisting obligation to comply with all Federal laws including Federal nondiscrimination laws.” To that end, this fifth factor creates an independent obligation for institutions to establish policies, procedures, and control systems to ensure compliance with nondiscrimination laws.

The rule does not include specific requirements on how institutions are to structure their policies and procedures.  The Agencies intend this nonprescriptive approach to provide institutions the flexibility to set quality controls for AVMs as appropriate, based on the size of the institution and the risk and complexity of the transactions for which AVMs will be used.

Rule Applicability

Key to understanding the rule’s impact is an evaluation of what persons and loans are within its scope.

  • Mortgage Originators, Brokers, and Servicers: For purposes of the rule, the term “mortgage originator” has the same definition as under the Truth in Lending Act: any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain, takes a mortgage application, assists a consumer in obtaining or applying to obtain a mortgage, or offers or negotiates terms of a mortgage secured by a consumer’s principal dwelling, even if the mortgage is primarily for business, commercial agricultural or organizational purposes.  That definition includes a mortgage broker; however, the rule does not apply to mortgage brokers if they do not engage in making covered credit decisions or securitization determinations.  The rule generally does not cover mortgage servicers, unless they are engaged in covered origination activity (for example, in connection with an assumption or a refinancing).  A mortgage originator does not include an individual who engages in “modifying, replacing and subordinating principal or existing mortgages where borrowers are behind in their payments, in default or have a reasonable likelihood of being in default of falling behind.”
  • Secondary Market Issuers: The rule applies to secondary market participants, including the GSEs or “any other party that creates, structures or organizes a mortgage-backed securities transaction,” which includes coverage of entities that are responsible for determining the collateral worth of a mortgage when issuing mortgage-backed securities. This encompasses secondary market participants in the securitization process that make these types of determinations, as opposed to verifying or monitoring such determinations.
  • Loan Applicability: The rule applies when a mortgage is secured by a consumer’s principal dwelling even if the mortgage is primarily for business, agricultural, or organizational purposes.  For purposes of the rule, a “dwelling” means a residential structure that contains one to four units, regardless of whether the structure is attached to real property.
Use of AVMs by Appraisers Not Subject to the Rule

The rule excludes from its scope a certified or licensed appraiser using AVMs in the development of an appraisal.  In creating this exclusion, the Agencies recognize that to comply with the Uniform Standards of Professional Appraisal Practice, appraisers must make valuation conclusions that are supportable independently and do not rely on the results produced by AVMs. Moreover, the rule excludes reviews of completed determinations from the scope of the rule: “if an AVM is being used solely to review the completed determination, the AVM is not covered by the [r]ule regardless of when the AVM is used after that determination.”

Additionally, the Agencies’ existing guidance regarding AVMs remains applicable separately from the rule.  For example, the OCC, Board, FDIC, and NCUA have issued guidance about prudent appraisal and evaluation programs in Appendix B to the Interagency Appraisal and Evaluation Guidelines.

What To Do Now?

Largely as proposed, the rule requires regulated mortgage originators and secondary market issuers to take appropriate steps and adopt policies, practices, procedures, and control systems to ensure that the use of AVMs in valuing real estate collateral securing mortgage loans adhere to the specified quality control standards, including compliance with nondiscrimination laws to avoid potential valuation bias. The rule requires institutions to create their own policies and procedures to ensure the credibility and integrity of valuation determinations produced by AVMs.

While AVM developers and vendors are not covered by the rule, covered institutions will need to work with their AVM developers and vendors to ensure compliance with its obligations.  It is likely that third party AVM testing entities will emerge to assist with these obligations. Vendor management oversight will be important.  Institutions will need to start thinking through their existing policies, practices,  procedures, and control systems now to identify what changes are necessary to ensure compliance on or before the rule’s effective date.