Alston & Bird Consumer Finance Blog

Mortgage Loans

FHFA Announces UDAP Compliance Expectations

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What Happened?

On November 29, 2024, the Federal Housing Finance Agency (“FHFA”) released Advisory Bulletin AB 2024-06 (the “Advisory Bulletin”), which sets forth FHFA’s expectations and guidance for Fannie Mae and Freddie Mac (the “GSEs”) and the Federal Home Loan Banks (collectively, the “Regulated Entities”) regarding compliance with the prohibition against unfair and deceptive acts or practices under Section 5 of the Federal Trade Commission Act (“FTC Act”). The Advisory Bulletin follows the FHFA Final Rule on Fair Lending, Fair Housing, and Equitable Housing Finance Plans published in the Federal Register in May 2024 (“Final Rule”).

Why It Is important?

While the Advisory Bulletin applies directly to the Regulatory Entities, any company that does business with the GSEs or the Federal Home Loan Banks should take note, as there likely will be downstream implications. The Regulated Entities are required to certify compliance with Section 5 of the FTC Act.  The Advisory Bulletin, however, raises several concerns.

First, the Advisory Bulletin conflates Section 5 UDAP compliance and fair lending principles. The Bulletin cautions that Regulated Entities are not only subject to the prohibition in Section 5 of the FTC Act against “unfair or deceptive acts or practices in or affecting commerce” but also the Fair Housing Act, the Equal Credit Opportunity Act (“ECOA”) and implementing regulations. To that end, the Final Rule requires the Board of Directors of Regulated Entities to bring their operations into compliance with these obligations in their “oversight of the [R]egulated [E]ntity and its business activities.” However, while the stated intent of the Advisory Bulletin is to provide guidance to the Regulated Entities consistent with the FTC Act, the Advisory Bulletin lumps together UDAP and discrimination, reminiscent of the CFPB’s similar attempt in 2022. In carefully worded language, FHFA states that its UDAP expectations “complement FHFA’s expectations regarding compliance with applicable fair lending laws.” And, specifically with respect to “unfairness,” FHFA states that its “duty to affirmatively further fair housing” may be considered when determining whether an act or practice is unfair. Yet any rule or bulletin by the FHFA providing that a violation of Section 5 of the FTC Act may be a violation of other federal and state laws (including fair housing, fair lending, and other consumer protection laws) undoubtedly extends fair lending laws beyond the bounds carefully set by Congress. See American Bankers Association, Unfairness and Discrimination: Examining the CFPB’s Conflation of Distinct Statutory Concepts (June 2022).

Second, the Advisory Bulletin suggests various theories of liability for violations of Section 5 of the FTC Act. In particular, the Advisory Bulletin points out that, in addition to direct liability for UDAP violations, the Regulated Entities may be held vicariously liable for UDAPs resulting from the conduct of their employees, agents, or third parties (depending on the Entity’s control or other legal responsibility over the third party’s conduct) regardless of whether such Entity knew or should have known of that conduct consistent with agency law. Moreover, the Regulated Entity may be liable for failing to take prompt action to correct UDAP violations in certain circumstances. Here again, the Advisory Bulletin conflates UDAP with fair lending, as the Bulletin delves into liability principles typically applicable to the Fair Housing Act and ECOA.

Finally, given the potential liability to the Regulated Entities for the conduct of its agents or other third parties, the Advisory Bulletin may serve to further incentivize the Agencies to act as de facto regulators in their oversight of single-family and multi-family seller servicer relationships. Not surprisingly, the Advisory Bulletin reminds the Regulated Entities of the importance of “assessing, monitoring, and taking corrective action related to legal, compliance, and reputation risks associated with potential sellers and servicers, including risks associated with compliance programs, records of compliance, and other relevant information related to compliance with all applicable laws.” Yet, if the GSEs were to exit conservatorship, it remains uncertain what kind of authority they would have to enforce and remediate compliance deficiencies.

What Do I Need To Do?

The Regulated Entities are directed to identify, assess, monitor, and mitigate risks associated with UDAP, including legal, compliance, operational, strategic and reputational risks. Given that the Regulated Entities are required to certify compliance with Section 5 of the FTC Act, companies should expect downstream implications and should work to ensure it has sufficient controls in place to mitigate UDAP risks and avoid unwelcome repurchase demands or rep and warrant breaches.

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.