Alston & Bird Consumer Finance Blog

Mortgage Loans

Affirmative Action in Lending: The Implications of the Harvard Decision on Financial Institutions

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Early this summer, the U.S. Supreme Court’s ruling in Students for Fair Admissions v. President and Fellow of Harvard College effectively ended race-conscious admission programs at colleges and universities across the country. Specifically, the Supreme Court held that decisions made “on the basis of race” do nothing more than further “stereotypes that treat individuals as the product of their race, evaluating their thoughts and efforts—their very worth as citizens—according to a criterion barred to the Government by history and the Constitution.”

In particular, the Supreme Court reasoned that “when a university admits students ‘on the basis of race, it engages in the offensive and demeaning assumption that [students] of a particular race, because of their race, think alike.’” Such stereotyping purportedly only causes “continued hurt and injury,” contrary as it is to the “core purpose” of the Equal Protection Clause. Ultimately, the Supreme Court reminded us that “ameliorating societal discrimination does not constitute a compelling interest that justifies race-based state action.”

In the context of lending, federal regulatory agencies expect and encourage financial institutions to explicitly consider race in their lending activities. While the Community Reinvestment Act has required banks to affirmatively consider the needs of low-to-moderate-income neighborhoods, regulatory enforcement actions over the last few years have required both bank and nonbank mortgage lenders to explicitly consider an applicant’s protected characteristics such as race and ethnicity—conduct plainly prohibited by fair lending laws.

Could the impact of the Supreme Court holding extend beyond education to lending and housing? Will the Harvard decision serve to undercut federal regulators’ legal theories for demonstrating redlining and present a challenge for special purpose credit programs that explicitly consider race or other protected characteristics?

Fair Lending Laws Prohibit Consideration of Race

The Equal Credit Opportunity Act (ECOA) prohibits a creditor from discriminating against any applicant, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract). Similarly, the Fair Housing Act prohibits discrimination against any person in making available a residential real-estate-related transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.

In March 2022, the Consumer Financial Protection Bureau (CFPB) went as far as to update its Examination Manual to provide that unfair, deceptive, or abusive acts and practices (UDAAPs) “include discrimination” and signaled that the CFPB will examine whether companies are adequately “testing for” discrimination in their advertising, pricing, and other activities. When challenged by various trade organizations, the U.S. District Court for the Eastern District of Texas ruled that the CFPB’s update exceeded the agency’s authority under the Dodd–Frank Act. This decision is limited, however, and enjoins the CFPB from pursuing its theory against those financial institutions that are members of the trade association plaintiffs. It is also unclear if the verdict will be appealed by the CFPB.

Despite federal prohibitions, regulators such as the CFPB and the U.S. Department of Justice (DOJ) expect, and at times even require, lenders to affirmatively target their marketing and lending efforts to certain borrowers and communities based on race and/or ethnicity.

Race-Based Decisions Are Encouraged and Even Required by Regulators

CFPB examiners often ask lenders to describe their affirmative, specialized efforts to target their lending to minority communities. If there have been no such explicit efforts by the institution, the CFPB penalizes these lenders for not explicitly considering race in their marketing and lending decisions. For example, in the CFPB’s redlining complaint against Townstone Financial, the CFPB alleged that “Townstone made no effort to market directly to African-Americans during the relevant period,” and that “Townstone has not specifically targeted any marketing toward African-Americans.”

What’s more, if enforcement culminates in a consent order, the CFPB and DOJ effectively impose race- based action by requiring lenders to fund loan subsidies or discounts that will be offered exclusively to consumers based on the predominant race or ethnicity of their neighborhood. In the CFPB/DOJ settlement with nonbank Trident Mortgage, the lender was required to set aside over $18 million toward offering residents of majority-minority neighborhoods “home mortgage loans on a more affordable basis than otherwise available.”

And in the more recent DOJ settlement with Washington Trust, the consent order required the lender to subsidize only those mortgage loans made to “qualified applicants,” defined in the settlement as consumers who either reside, or apply for a mortgage for a residential property located, in a majority-Black and Hispanic census tract. Such subsidies are a common feature of recent redlining settlements, which have been occurring with increased frequency since the DOJ announced its Combating Redlining Initiative in October 2021.

Not only do the CFPB and DOJ encourage, and in certain cases, even require, race-based lending in potential contravention of fair lending laws, but federal regulators also expect some degree of race-based hiring by lenders. This expectation is based on the stereotypical assumption that lenders need racial and ethnic minorities in their consumer-facing workforce to attract racial and ethnic minority loan applicants. In the Townstone complaint, for example, the CFPB chastised the lender for failing to “employ an African-American loan officer during the relevant period, even though it was aware that hiring a loan officer from a particular racial or ethnic group could increase the number of applications from members of that racial or ethnic group.”

Ultimately, all the recent redlining consent orders announced by the CFPB and DOJ impose at least some race-based requirement, which would seem to run afoul of fair lending laws and Supreme Court precedent.

Racial Quota-Based Metrics Used by Regulators

Further, when assessing whether a lender may have engaged in redlining against a particular racial or ethnic group, the CFPB and DOJ, as a matter of course, employ quota-based metrics to evaluate the “rates” or “percentages” of a lender’s activity in majority-minority geographic areas, specifically majority-minority census tracts (MMCTs). Then the regulators compare such rates or percentages of the lender’s loan applications or originations in MMCTs to those of other lenders. For example, in its complaint against Lakeland Bank, the DOJ focused on the alleged “disparity between the rate of applications generated by Lakeland and the rate generated by its peer lenders from majority-Black and Hispanic areas.” The agency criticized the bank’s “shortfalls in applications from individuals identifying as Black or Hispanic compared to the local demographics and aggregate HMDA averages.”

Undoubtedly, this approach utilizes nothing more than a quota-based metric, which the Supreme Court in Harvard squarely rejected. Indeed, the Supreme Court reasoned that race-based programs amount to little more than determining how “the breakdown of the [incoming] class compares to the prior year in terms of racial identities,” or comparing the racial makeup of the incoming class to the general population, to see whether some proportional goal or benchmark has been reached.

While the goal of meaningful representation and diversity is commendable, the Supreme Court emphasized that “outright racial balancing and quota systems remain patently unconstitutional.” And such a focus on racial quotas means that lenders could attempt to minimize or even eliminate their fair lending risk simply by decreasing their lending in majority-non-Hispanic-White neighborhoods—without ever increasing their loan applications or originations in majority-minority neighborhoods. Of course, this frustrates the essential purpose of ECOA and other fair lending laws.

Potential Constitutional Scrutiny of Race-Based Lending Efforts

If race-based state action, including the use of racial quotas, violates the Equal Protection Clause, it is possible that the race-based lending measures recently encouraged and even required by federal regulators may be constitutionally problematic. In addition to racially targeted loan subsidies and racially motivated loan officer hiring, regulators continue to encourage lenders to implement special purpose credit programs (SPCPs) to meet the credit needs of specific racial or ethnic groups. As the CFPB noted in its advisory opinion, “[b]y permitting the consideration of a prohibited basis such as race, national origin, or sex in connection with a special purpose credit program, Congress protected a broad array of programs ‘specifically designed to prefer members of economically disadvantaged classes’ and ‘to increase access to the credit market by persons previously foreclosed from it.’”

While SPCPs are explicitly permitted by the language of ECOA and its implementing regulation, Regulation B, as an exception to the statute’s mandate against considering a credit applicant’s protected characteristics, it is uncertain whether these provisions, if challenged, would survive constitutional scrutiny by the current Supreme Court.

Takeaways for Lenders

For the time being, lenders that offer SPCPs based on a protected characteristic should ensure that their written plans continue to meet the requirements of Section 1002.8(a)(3). As always, the justifications for lending decisions that could disproportionately affect consumers based on their race, ethnicity, or other protected characteristic should be well documented and justified by legitimate business needs. And if faced with a fair lending investigation or potential enforcement action, lenders should consider presenting to regulators any alternate data findings or conclusions that demonstrate the institution’s record of lending in MMCTs rather than focusing on the rates or percentages of other lenders in the geographic area.

Consumer Finance State Roundup

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The pace of legislative activity during this current year can make it hard to stay abreast of new laws.  The Consumer Finance State Roundup is intended to provide a brief overview of recently enacted legislation of potential interest.

Between the end of July and the first week of August, two states enacted legislation of potential interest to Consumer Finance ABstract readers:

  • District of Columbia:  Effective as an emergency measure from July 31 to October 29, 2023, B 25-357 (Act #25-0189), the “Public Health Emergency Credit Alert Emergency Amendment Act of 2023”, provides certain consumer protections to DC residents in connection with their credit reports under Section 28-3871 of the D.C. Code.  First, Section 28-3871(a)(1) requires a credit reporting agency to accept and include in the consumer’s file a personal statement provided by the consumer indicating that the consumer has been financially impacted by the COVID-19 emergency. Second, Section 28-3871(c) prohibits a user of a credit report from taking into consideration adverse information in a credit report that was a result of an action or inaction by the consumer that occurred during the public health emergency, if the credit report includes a personal statement in the form required by Section 28-3871(a).  Third, Section 28-3871(d) requires that an entity providing a credit report to a DC resident upon that consumer’s request (pursuant to 15 U.S.C. § 1681) must notify the DC resident of the right to request a personal statement to accompany the credit report.  Fourth, the emergency measure addresses the ability of the D.C. Attorney General to remedy violations, including through the imposition of penalties.  (We note that this measure includes provisions identical to those previously enacted by the D.C. Council on a short-term basis while it considers permanent legislation with the same effect.  B 25-358, a temporary measure that would extend the same provisions on a 225-day basis, is currently pending in the D.C. Council.)
  • District of Columbia:  Effective as an emergency measure from July 27 to October 25, 2023, B 25-363 (Act #25-0192), the “Foreclosure Moratorium and Homeowner Assistance Fund Coordination Emergency Amendment Act of 2023”, provides for foreclosure protections to certain DC homeowners.  For the period of July 1 through September 30, 2022, the measure protects homeowners: (a) who applied for funding from the DC Homeowner Assistance Fund (“DC HAF”) program prior to September 30, 2022; and (b) whose applications are under review, pending approval, pending payment, or under appeal.  The measure prohibits: (a) a lender or servicer from initiating or conducting a foreclosure action; (b) the initiation of a sale under the Condominium Act of 1976; or (c) the entry of a judgment foreclosing the right of redemption.  Second, on or after July 25, 2022, the measure prohibits a mortgage lender, condominium association, homeowners’ association, or tax sale purchaser, or an agent acting as a representative for any housing or financing entity of a homeowner, from commencing or proceeding with a foreclosure action until 30 days after sending the homeowner to warn of its intention to initiate or continue a foreclosure.  (Like B 25-357, we note that this measure includes provisions identical to those previously enacted by the D.C. Council on a short-term basis while it considers permanent legislation with the same effect.  B 25-364, a temporary measure that would extend the same provisions on a 225-day basis, is currently pending in the D.C. Council.)
  • Illinois:  Effective January 1, 2024, House Bill 2094 (Public Act 103-0292) amends the Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1) to address requirements for mortgage marketing materials from a mortgage company not connected to the consumer’s mortgage company.  Specifically, the measure adds new subsection 505/2AAA(a-5), under which:
    • No language may be used to state or imply that any response by a consumer who is not an existing customer is required … such as the use of the terms “urgent”, “action required”, “materials inspected”, “time sensitive”, or “important account information enclosed”;
    • The mortgage company’s name of the solicitor must be prominently stated in the body of the text, at the head of the letter or message in a font bigger than the body of the text, and on any envelope;
    • The mortgage company’s name of the consumer may not be used to state or insinuate in any way that the marketing material is from the consumer’s mortgage company rather than the solicitor’s mortgage company and is merely a solicitation;
    • The name of the consumer’s mortgage company must not be visible through an envelope window, appear on the envelope itself, or appear in an email subject line;
    • The text must clearly state if the consumer’s mortgage company had no part in helping the solicitor obtain the homeowner’s mortgage information.

A violation of the new subsection constitutes an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act.

  • Illinois:  Effective July 28, 2023, House Bill 2717 (Public Act 103-0322) amends two sections under the Mortgage Escrow Account Act (765 ILCS 910/1) with respect to higher-priced mortgage loans.  First, the measure amends Section 5 to clarify that a mortgage lender that complies with the escrow account requirements under 12 CFR Part 1026 for a “higher-priced mortgage loan” (as defined therein) is deemed to comply with the requirement under the section to notify a borrower about terminating or continuing that escrow account.  Second, the measure amends Section 7 to provide a borrower does not have the right to terminate any escrow account arrangement for a higher-priced mortgage loan, unless the borrower has met all the conditions for cancellation of an escrow account for a higher-priced mortgage loan under 12 CFR Part 1026.

Consumer Finance State Roundup

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The pace of legislative activity can make it hard to stay abreast of new laws.  The Consumer Finance State Roundup is intended to provide a brief overview of recently enacted measures of potential interest.

Since our last update, the following eight states have enacted measures of potential interest to Consumer Finance ABstract readers:

  • Connecticut:  Effective October 1, 2023, Senate Bill 1033 (2023 Conn. Pub. Acts 126) makes various revisions to the Connecticut General Statutes, including mortgage licensing and mortgage servicing statutes.  First, the measure amends licensing requirements under Section 36a-486 (b)(1) to add provisions to prohibit licensed mortgage lenders, mortgage correspondent lenders, mortgage brokers, or mortgage loan originators from using services of a lead generator, unless the lead generator is: (a) licensed under Section 36a-489, or (b) exempt from licensure pursuant to Section 36a-486(5).  (The measure makes corresponding amendments to Section 36a-498e, which addresses prohibited acts.) Second, the measure amends Section 36a-719, which relates to mortgage servicer licensure, to remove requirements relating to in-person (full-time) operations and the geographic location of a qualified individual or branch manager of a mortgage servicer.
  • Connecticut:  Effective October 1, 2023, House Bill 6688 (2023 Conn. Acts 45) (Reg. Sess.)) amends foreclosure mediation and mortgage release provisions of the Connecticut General Statutes.  First, the measure amends Section 49-31o to require a mortgagee that agrees to modify a mortgage pursuant to the Ezequiel Santiago Foreclosure Mediation Program to send the modification of mortgage to the mortgagor for execution at least 15 business days prior to the first modified payment due date under the modification.  The mortgagee (or mortgagee’s attorney) may satisfy this requirement by delivering the modification to: (a) the mortgagor, or (b), if the mortgagor is represented by an attorney, to both the mortgagor and that attorney. Second, the measure amends Section 49-8 to require the mortgagee or a person authorized by law to release the mortgage, to executive and deliver, or cause to be delivered, to the town clerk of the town in which the real estate is situated or, if so requested in writing by the mortgagor or designated representative of the mortgagor, to the mortgagor or the designated representative of the mortgagor.  Third, the measure amends Section 49-8a to require a mortgagee to accept, as payment tendered for satisfaction or partial satisfaction of a mortgage loan, either one of the following forms of payment:  i) a bank check; ii) a certified check; iii) an attorney’s clients’ funds account check; iv) title insurance company check, v) wire transfer; or vi) any other form of payment authorized under federal law.
  • Illinois:  Effective January 1, 2024, House Bill 2325 (Public Act 103-0156) amends the Residential Mortgage License Act of 1987 (“RMLA”) to permit remote work by mortgage loan originators (MLOs), provided that:
    • The RMLA licensee must have in place written policies and procedures for the supervision of MLOs working from a remote location.
    • The licensee must provide MLOs working remotely with access to company platforms and customer information, which access must be in accordance with licensee’s comprehensive written information security plan.
    • An MLO working remotely may not have any in-person customer interaction at their residence, unless that residence is a licensed location.
    • An MLO working remotely must not maintain any physical records at the remote location.
    • An MLO working remotely must keep customer interactions and conversations with consumers confidential and must comply with all federal and state privacy and security requirements (including applicable provisions of the Gramm-Leach Bliley Act and the FTC’s Safeguards Rule).
    • An MLO working remotely must have secure access to the licensee’s system when working from a remote location, such as accessing by utilizing a cloud-base system, vpn, or other compatible system to ensure secure connectivity.
    • The RMLA licensee must ensure that security updates, patches or alterations to security of all devices used at a remote location are installed and maintained.
    • The licensee must be able to remotely lock or erase company-related contents from any device or can otherwise remotely limit all access to a company’s secure systems.
    • The NMLSR record of an MLO working remotely must designate the principal place of business as the mortgage loan originator’s registered location, unless the MLO chooses another licensed branch office as a registered location.

Illinois:  Effective June 9, 2023, Senate Bill 201 (Public Act 103-0061) amends the Mortgage Foreclosure Article of the Code of Civil Procedure (735 Ill. Comp. Stat. 5/1 et seq.).  First, the measure amends provisions related to the delivery of notice of foreclosure and publication of the notice on the county or municipality’s website.  Second, effective until June 1, 2025, the measure adds Section 5/15-1515 to: (a) address the COVID-19 emergency sealing of court file when a foreclosure action is filed with the court; and (b) clarify what actions occurred within the “COVID-19 emergency and economic recovery period.”  The new section applies to any foreclosure action relating to: (a) “residential real estate” (as defined in Section 15-1219); or (b) real estate improved with a one- to six-unit dwelling, for “families living independently of each other in which the mortgagor is a natural person landlord renting the dwelling units, even if the mortgagor does not occupy any of the dwelling units as the mortgagor’s personal residence.”

  •  Maine:  Effective September 28, 2023, Senate Paper 449/Legislative Document 1080 (2023 Me. Laws 258) requires supervised lenders or mortgage loan servicers to notify mortgagors of their right to cancel or terminate private mortgage insurance (“PMI”) under the federal Homeowners Protection Act of 1998 (“HOPA”).  Specifically, this measure adds new Section 9-315 to Title 9-A of the Maine Revised Statutes (under the Maine Consumer Credit Code), which:
    • Requires a supervised lender, or a mortgage loan servicer acting on behalf of a supervised lender, must provide an annual written statement to the mortgagor that discloses: (a) the mortgagor’s rights under HOPA to cancel or terminate their PMI; and (b) the address and telephone number that the mortgagor may use to contact the supervised lender or mortgage loan servicer to determine whether the mortgagor may cancel the PMI;
    • Defines the terms “private mortgage insurance” and “residential mortgage transaction”;
    • Incorporates by reference HOPA’s annual notice requirement for a residential mortgage transaction; and
    • Applies to PMI created or renewed, and to residential mortgage transactions entered into, on or after the measure’s effective date.
  • Missouri:  Effective August 28, 2023, Senate Bill 101 amends the Missouri Revised Statutes to add provisions related to lender-placed insurance.  First, the measure’s provisions apply to any insurer or any insurance producer involved in lender-placed insurance, who must comply with all requirements set forth under new Section 379.1859.  Second, the measure requires that lender-placed insurance coverage amounts and premium amounts be based on the replacement cost value of the property, as calculated under new Section 379.1855.  Further, the measure requires that if any replacement cost coverage provided by the insurer is in excess of the unpaid principal balance on the mortgage loan, that excess must be paid to the mortgagor.  Third, the measure adds new Section 379.1857, which prohibits an insurer or an insurance producer from engaging in conduct including: (a) issuing lender-placed insurance if the entity or an affiliate thereof owns, performs servicing for, or owns the servicing right to, the mortgage property; or (b) compensating a lender, insurer, investor, or servicer, including through the payment of commissions, for lender-placed insurance policies issued by the insurer. Fourth, the measure adds new Section 379.1861 to require: (a) lender-placed insurance to be set forth in an individual policy or certificate of insurance; and (b) proof of coverage to be delivered by mail to the mortgagor’s last known address, or delivered in person.
  • New Hampshire:  Effective June 20, 2023, House Bill 520 (2023 N. H. Laws 89) amends provisions related to escrow accounts maintained by licensed nondepository mortgage bankers, brokers, and servicers.  First, the measure amends Section 397-A:9, IV of the New Hampshire Revised Statutes to provide that nondepository licensees that require the maintenance of a mortgagor’s escrow account for loans on single family homes secured by real estate mortgages on property located in New Hampshire must pay interest on moneys held in such account, so as to be consistent with interest rates credited by depository entities.   Second, the measure makes the same amendment to the Depository Bank ACt.  Both types of entities must pay interest on escrow accounts at six-month intervals (beginning April 1 and October 1) “at a rate of not less than the National Deposit Rate for Savings Accounts as published … by the Federal Deposit Insurance Corporation” in January (for the April adjustment) or July (for the October adjustment).
  • Nevada:  Effective October 1, 2023, Senate Bill 276 (2023 Nev. Stat. 534) amends the collection agencies provisions in Chapter 559 of the Nevada Revised Statutes.  First, the measure requires a collection agency to display certain information on its website.  Second, the measure requires a collection agency to maintain: (a) its license number issued by the Commissioner pursuant to Section 649.135; and (b) the certificate identification number of the certificate issued to the entity’s compliance manager under Section 649.225.  Third, the measure sets forth the conditions collections agents must satisfy in order to conduct activity from a remote location.  Specifically, a collection agent engaging in remote work must sign a written agreement that it will:
    • maintain data concerning debtors in a confidential manner, and refrain from printing or otherwise reproducing such data into a physical record while working from the remote location;
    • read and comply with (a) the entity’s security policy, and (b) any policy to ensure the safety of the equipment of the collection agency that the collection agent is authorized to use;
    • review a description of the work that the collection agent is authorized to perform from the remote location and only perform work included in that description;
    • refrain from disclosing to a debtor that the collection agent is working from a remote location or that the remote location is a place of business of the collection agency;
    • authorize the employer to monitor the collection agent’s remote activities (including without limitation, by recording any calls to and from the remote location relating to collection activities); and
    • refrain from conducting any activities related to his or her work with the collection agency with a debtor or customer in person at the remote location.

Further, the measure requires a collection agent working remotely to complete a program of training regarding compliance with applicable laws and regulations, privacy, confidentiality, monitoring, security, and any other issue relevant to the work the collection agent will perform from the remote location.  A collection agent engaged in remote work must work for the collection agency under direct oversight and mentoring from a supervisor for at least seven days.  Finally, the measure requires a collection agent who works from a remote location to comply with any applicable federal or state laws (e.g., the Fair Debt Collection Practices Act).

  • Nevada:  Effective and January 1, 2024, Senate Bill 355 (2023 Nev. Stat. 527) amends the Mortgage Companies and Mortgage Loan Originators Law (Chapter 645B of the Nevada Revised Statutes) to permit remote operations, among other provisions.  Specifically, the measure adds a new section under which a mortgage company may authorize its employees to conduct mortgage business at a remote location, provided that the entity:
    • has adopted written policies and procedures for the supervision of its employees working at a remote location to ensure that each employee complies with all statutory and regulatory requirements applicable to remote operations;
    • exercises reasonable control and supervision over the activities of its mortgage loan originators; and
    • has adopted a comprehensive written plan for its security and information systems of the mortgage company and any information collected and maintained by the mortgage company regarding customer data, must contain specific provisions for cybersecurity and use of secure connection (i.e. VPN) that meets the criteria specified in the measure, while working from the remote location.

Second, the measure amends Section 645B.080 relating to require a mortgage company to keep and maintain complete and suitable records of all mortgage transactions made by its employee at a remote location in accordance with the requirements established by the Commissioner of Mortgage Lending by regulation.

  • North Carolina:  Effective October 1, 2023, Senate Bill 331 (2023 N. C. Sess. Laws 61) amends the North Carolina Consumer Finance Act (“CFA”).  First, the measure Section 53-165 of the General Statutes by removing the term “cash advance” and definitions for “amount financed” “electronic payment”, “loan amount”, and “servicing loans”.  Second, the measure amends Section 53-166 by increasing the amount that a licensee can lend to a borrower from $15,000 to $25,000.  Third, the measure amends Section 53-168 to:
    • increase application fees for consumer finance licensees from $250 to $500;
    • permit a licensee to post its license on its website; and
    • require at least 30 days’ notice to the Commissioner of Banks for any proposed transfer of a CFA license.

Fourth, the measure amends Section 53-173 to require that interest be computed on the unpaid portion of the amount financed (rather than the principal balance or principal amount).  Fifth, the measure amends Section 53-177 to:

    • increase late fees from $15 to $18;
    • permit a licensee to apply a borrower’s most recent payment to the oldest installment due;
    • prohibit a licensee from collecting more than one late fee per installment owed, whether a partial or full payment was made;
    • permit the collection of late fees on installment payment past due for 10 days or more if the licensee places the borrower in default;
    • permit a licensee to include late payment fees on installment payments past due 10 days or more of the amount of a loan that is refinanced;
    • permit a licensee to include late fees for installment payments past due for 10 or more days in the final balance when a loan reaches maturity; and
    • permit a licensee to assess a deferral charge for each moth of the remaining loan term on each installment owed after the date of deferral.

Sixth, the measure amends Section 53-184 by requiring licensees to:  (a) maintain separate loan ledgers and accounts related to the making and collecting of loans under the CFA; (b) allocate expenses monthly according to generally accepted accounting principles; and (c) retain all required books and records for a period of two years after the last transaction. The amended section also outlines the books and records (general ledger, loan documents, judgements, repossessions) that a licensee must keep.

Rhode Island:   Effective June 14, 2023, companion measures House Bill 5761 (2023 R. I. Pub. Laws 75) and Senate Bill 163 (2023 R. I. Pub. Laws 76) removed the July 1, 2023, sunset date for provisions of the Rhode Island General Statutes requiring a mediation conference coverage prior to mortgage foreclosure.

Consumer Finance State Roundup

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The pace of legislative activity from this year’s current session can make it hard to stay abreast of new laws.  The Consumer Finance ABstract’s “Consumer Finance State Roundup” is intended to provide a brief overview of recently enacted measures of potential interest.  

During this current legislative session, the following three states have enacted measures of potential interest to Consumer Finance ABstract readers:

  • Colorado:  Effective August 8, 2023, Senate Bill 248 (2023 Colo. Sess. Laws 360) amends collection agency licensure requirements under the Colorado Fair Debt Collection Practices Act.  First, the measure amends Section 5-16-119 of the Colorado Revised Statutes to allow licensees to work from remote locations under certain conditions.  Specifically, the licensee must: (a) ensure that no in-person customer interactions are conducted at the remote location; (b) not designate the remote location as a business location to the consumer; (c) maintain appropriate safeguards for licensee data and consumer data, information, and records, including utilizing a secure VPN for secure access; (d) employ appropriate risk-based monitoring and oversight processes of work performed from a remote location that includes maintaining records of the monitoring and oversight processes; (e) ensure that consumer information and records are not maintained at a remote location; (f) provide appropriate employee training to ensure employees keep conversations confidential about and with consumers that are conducted from a remote location, and ensure that employees work in an environment that is conducive to ensure privacy and confidential conversations; and (g) ensure that consumer and licensee information and records are available for regulatory oversight and examination.  Second, the measure defines “remote location” as “a private residence of an employee of a licensee or another location selected by the employee and approved by the licensee.”
  • Colorado:  Effective June 7, 2023, House Bill 1266 (2023 Colo. Sess. Laws 440) amends the reverse mortgages provisions of the Colorado Revised Statutes to address an exception to repayment requirements of reverse mortgage transactions when a subject property is uninhabitable.  First, the measure defines the term “force majeure” in Section 11-38-102, describing certain criteria that would designate a subject property as uninhabitable as a principal residence of the reverse mortgage borrower.  Second, the measure amends Section 11-38-107 to create exceptions to repayment requirements of a reverse mortgage transaction when a home is not occupied due to a “force majeure”.   When the home is temporarily uninhabitable, the measure establishes that the reverse mortgage will not become due and payable to the lender (to the extent allowable by HUD’s regulations and policies), provided that all of the following conditions are met:  (a) the borrower must be engaged in repairing the home with the intent to reoccupy the home as a principal residence, or must sell the home; (b) the borrower must stay in communication with the lender while the home is being repaired and must reasonably respond to any lender inquiries; (c) the borrower must comply with all other terms and conditions of the reverse mortgage; and (d) the repairing or rebuilding of the home must not reduce the lender’s security.  Further, the amended section requires the lender to disclose these requirements to the borrower at closing.
  • Nebraska:  Effective June 7, 2023, Legislative Bill 92 amends various provisions of the Nebraska Revised Statutes, including the Nebraska Residential Mortgage Licensing Act (the “Mortgage Act”) and the Nebraska Installment Loan Act (the “Installment Act”).  First, the measure amends Section 45-735 under the Mortgage Act, to authorize the Department of Banking and Finance (“Department”) to adopt and promulgate rules, regulations, and orders to regarding the use of remote work arrangements conducted outside of a main office location or branch office by employees or agents, including mortgage loan originators, of licensed mortgage bankers, registrants, or installment loan companies.  (Current law prohibits a mortgage loan originator from conducting mortgage loan origination activities at any location that is not the main office of a licensed mortgage banker, registrant, or installment loan company, or a branch office of a licensed mortgage banker or registrant.)  Second, the measure amends the Installment Act by: (a) in Section 45-1002, adding definitions for the terms “consumer” and “loan”; (b)in Section 45-1003, adding a licensure requirement  for persons that are not financial institutions; and (c) in in Section 45-1006, permitting the Director of the Department to waive hearing requirements for any applicant that does not originate loans under the statute.
  • Texas:  Effective September 1, 2023, House Bill 219 adds provisions relating to lien release to Chapter 343 of the Texas Finance Code.  First, this measure requires that no later than the 60th day after receiving the correct payoff amount for a home loan from a mortgagor, a mortgage servicer or mortgagee must: (a) deliver to the mortgagor a release of lien for the home loan; or (b) file the release of lien with the appropriate county clerk’s office for recording in the real property records of the county.  Second, the measure requires a mortgage servicer or mortgagee to deliver or file the release of lien not later than the 30th day after receipt of the written request from the mortgagor, if on or before the 20th day after the date of the home loan payoff, the mortgagor delivers a written request to the mortgage servicer or mortgagee for the release of lien to be delivered to the mortgagor or filed with the county clerk.  Third, the measure requires a mortgage servicer or mortgagee to comply with these new requirements only if the entity has the authority to deliver or file a release of lien for the home loan. Fourth, in the event of a conflict between the new requirements and a home loan agreement entered prior to the measure’s effective date, the provisions of the home loan agreement would prevail.  Fifth, the measure provides relevant definitions, namely:  (a) that the terms “mortgage servicer”, “mortgagee” and “mortgagor” have the same meaning as under  Section 51.0001 of the Texas Property Code; and (b) the term “release of lien” means “a release of a deed of trust or other lien securing a home loan”.

 

Consumer Finance State Roundup

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The pace of legislative activity from this year’s current session can make it hard to stay abreast of new laws.  The Consumer Finance ABStract’s “Consumer Finance State Roundup” is intended to provide a brief overview of recently enacted measures of potential interest.  For this first installation, we are including additional measures enacted during the current legislative session that will take effect in short order:

During this current legislative session, the following five states have enacted measures of potential interest to Consumer Finance ABstract readers:

  • Arkansas:  Effective July 31, 2023, House Bill 1439 (2023 Ark. Acts 325) amends the Fair Mortgage Lending Act to clarify the sponsorship process and amend licensing requirements.  First, the measure defines the term “[s]ponsor” to mean “a mortgage broker or mortgage banker licensed under [the Act] that has assumed the responsibility for and agrees to supervise the actions of a loan officer or transitional loan officer.”  Second, the measure clarifies that the termination of a sponsorship of a loan officer or transitional loan officer license under the Act extinguishes the right of that individual to engage in any mortgage loan activity.  Finally, the measure amends provisions related to renewal of a loan officer license to change a license status from “approved-inactive” to “approved” so long as, prior to the loan officer license termination, a licensed mortgage broker or mortgage banker meets certain requirements.

 

  • Arkansas:  Effective July 31, 2023, Senate Bill 321 (2023 Ark. Acts 360) amends provisions of the Arkansas Code relating to collection agencies.  Among other provisions, the measure amends Section 17-24-101 to clarify that the term “collection agency” means any person or entity that “(1) Engages in the collection of delinquent accounts, bills, or other forms of indebtedness owed or due or asserted to be owed or due to another; (2) Uses a fictitious name or any name other than its own to collect their own accounts receivable; (3) Solicits claims for collection; or (4) Purchases and attempts to collect delinquent accounts or bills.”

 

  • Montana:  Effective July 1, 2023, House Bill 30 (2023 Mont. Laws 4) amends the Montana Mortgage Act (“Act”) to adopt prudential standards for non-bank mortgage servicers and allow remote work for mortgage loan originators (“MLOs”), among other provisions.  First, the measure establishes capital and liquidity requirements for servicers. Second, the measure requires certain entities (that are “covered institutions”) to establish and maintain corporate governance standards, including for internal and external audits and risk management.  Third, the measure amends the definition of “mortgage servicer” to add the servicing of forward mortgages and home equity conversion mortgages or reverse mortgages for receiving payments. Fourth, the measure requires a licensee under the Act to have one MLO serve as a designated manager responsible for mortgage origination activity across the entire entity;.  Finally, the measure requires a licensee under the Act to file a written report with the Department of Administration within 15 business days after learning of a cybersecurity incident affecting business operations or potentially exposing personal information of customers.  For a detailed summary analysis on the measure’s provisions addressing remote work by MLOs, please see our previous post.

 

  • North Dakota:  Effective August 1, 2023, Senate Bill 2090 amends the North Dakota Code with respect to the licensing of residential mortgage lenders and money brokers.  First, the measure enacts a new Chapter 13-12 of the North Dakota Century Code to address the licensing of residential mortgage lenders.  Under current law, mortgage lender licensing falls within the scope of the money broker statutes in Chapter 13-04 of the Code.  Second, the measure provides that any residential mortgage lender that holds a valid North Dakota money broker license as of August 1, 2023, will not be required to obtain a residential mortgage lender license under new Section 13-12-03 until December 31, 2023.

 

  • Ohio:  Effective December 29, 2023, Senate Bill 131 (2022 Ohio Laws 156) amends mortgage (and other industry) licensing standards to address license reciprocity requirements.  Under the Ohio Residential Mortgage Lending Act (Ohio. Rev. Code § 1322.01 et seq.), the measure provides for an applicant to obtain a registration for a mortgage lender or broker or a license for a mortgage loan originator (“MLO”) by reciprocity under Section 1322.10 or Section 1322.21, respectively, of the Ohio Revised Code if the applicant: (i) holds a license or certificate of registration in another state; or (ii) has satisfactory work experience, a government certification, or a private certification (as described in that chapter) as a mortgage broker, mortgage lender, or MLO in a state that does not issue that license or certificate of registration.

 

  • Virginia:  Effective July 1, 2023, House Bill 2389 (2023 Va. Acts 573) amends provisions of the Mortgage Lenders and Mortgage Brokers Act (Va. Code Ann. § 6.2-1600 et seq.) to permit licensed mortgage lenders and mortgage brokers to allow employees and exclusive agents to work from a remote location provided that certain criteria are met.   Specifically, the measure adds to Section 6.2-1607 a list of conditions that must be met in order for a licensee’s employees to work from a remote location, including that: (a) the licensee has written policies and procedures for the supervision of employees or exclusive agents working from a remote location; (b) access to the licensee’s platforms and customer information through a VPN or comparable system, and is in accordance with the licensee’s comprehensive written information security plan; (b) no in-person customer interaction occurs at an employee’s or exclusive agent’s residence, unless such residence is an approved office; and (d) the licensee employs appropriate risk-based monitoring and oversight processes, and any employee or exclusive agent who works from a remote location must comply with the licensee’s established practice.