Alston & Bird Consumer Finance Blog

State Law

Expansion of New York’s Community Reinvestment Act Via New Regulation

By ,

Last week, the New York State Department of Financial Services (DFS) announced a new regulation designed to ensure that licensed nonbank mortgage bankers in New York (“mortgage lenders”) meet the needs of the communities they serve in the state, particularly low- and moderate-income (LMI) neighborhoods and borrowers. Under New York law, “low-income” means income that is less than 50% of the area median income, in the case of an individual, or a median family income that is less than 50% of the area median income, in the case of a geography. Further, “moderate-income” means income that is at least 50% and less than 80% of the area median income, in the case of an individual, or a median family income that is at least 50% and less than 80% of the area median income, in the case of a geography.

By way of background, in November 2021, New York amended the state’s Community Reinvestment Act (CRA), which at the time mirrored the federal Community Reinvestment Act, to expand coverage to New York state-licensed mortgage bankers. This made New York the third state (after Illinois and Massachusetts) to pursue such action.

The new regulation, effective July 7, 2026, takes things further by imposing following parameters and requirements on mortgage lenders as set forth below.

Origination Threshold

Non-depository mortgage bankers that have made at least 200 HMDA-reportable originations in the preceding year are subject to performance evaluation under the new regulation and will receive a rating of Outstanding, Satisfactory, Needs Improvement, or Substantial noncompliance.

No Branches, No Problem

A mortgage banker with one or more branches within the state must delineate one or more branch-based assessment areas for evaluating performance. However, “branchless” lenders will be evaluated based on where they do a substantial portion of their business. Specifically, the lender must delineate a lending-based assessment area in each MSA or nonmetropolitan area in which it originated, in each of the two preceding calendar years, at least 100 mortgage loans outside of any branch-based assessment areas.

Performance Tests

The regulation imposes a lending test and service test on non-bank mortgage lenders, to arrive at a performance rating. Notably, the DFS, when reviewing a mortgage lender’s change of control, branch, or other application, will consider the mortgage lender’s record of CRA performance.

  • Lending test. The lending test assesses how well mortgage bankers serve all borrowers and neighborhoods within their assessment areas, particularly LMI communities. The lending test considers the geographic distribution of loans in LMI tracts and to LMI borrowers. In addition, the lending test considers the lender’s innovative and flexible lending practices, carried out safely and soundly, to meet the needs of these communities.
  • Service test. The service test evaluates whether mortgage lenders offer programs and services that promote community development. Unlike banks, however, mortgage bankers will not be required to make community development investments or grants, recognizing the differences in how these institutions operate. Nevertheless, mortgage lenders will be evaluated on the extent and innovativeness of their community development services, qualified investments, community outreach, marketing, and educational programs; each of which are defined terms under the regulation.

Discrimination and Other Illegal Credit Practices

The evaluation of a mortgage banker’s performance in meeting the credit needs of the community is adversely affected by evidence of discriminatory or other illegal credit practices in any geography by the mortgage lender, including violations of (1) Section 5 of the FTC Act, (2) Section 8 of RESPA, (3) TILA’s right of rescission, (4) HOEPA or New York’s high cost lending law, or (5) ECOA, Fair Housing Act or section 296-a of New York Executive Law.

Given the above, New York-licensed mortgage lenders should prepare for these CRA obligations by conducting preliminary analysis of their lending in LMI census tracts and to LMI borrowers, to ensure that both marketing efforts and loan product offerings are meeting the needs of these communities. While federal redlining enforcement may currently be deprioritized, state-level CRA inquiries and investigations are likely to ramp up. Alston & Bird is able to assist mortgage lenders with proactive efforts to ensure compliance with New York’s CRA law.

President Trump Signs Executive Order Aiming to Curb State AI Regulation

By , , , ,

Originally published December 18, 2025 (source).

Executive Summary

President Trump issued an Executive Order aimed at discouraging state artificial intelligence (AI) regulation through federal agency action and funding conditions, without directly preempting state law. Our Privacy, Cyber & Data Strategy Team discusses the resulting uncertainty and what businesses should watch as agencies begin implementing the Order.

  • The Order relies on indirect federal measures, not express preemption, to constrain state AI regulation
  • State laws addressing AI outputs, disclosures, and alleged bias may face increased scrutiny
  • Businesses should continue complying with applicable state AI laws while monitoring federal agency actions

On December 11, 2025, following several unsuccessful congressional attempts to pass a statutory moratorium on state-level artificial intelligence (AI) regulation, President Trump signed an Executive Order that seeks to limit states’ ability to regulate AI under their existing legal frameworks, and to deter them from passing new AI laws. Per the Order, the Trump Administration sees the United States in an AI arms race with adversaries, which it seeks to win—and argues that burdensome state-level AI regulation could impede American innovation, competitiveness, and national security in this effort. The Order also takes the position that a state-by-state AI regulation “patchwork” adds challenging compliance burdens, mandates ideological bias within models, and impermissibly regulates beyond state borders.

The Order seeks to encourage a “minimally burdensome national policy framework for AI” through a variety of measures. Given that an Executive Order applies only to federal agencies, this may raise a key gating question: How, if at all, can an Executive Order impact the effectiveness of state law or the state lawmaking process? However, the Order does not purport to preempt state law. Instead, it adopts various indirect measures—to be implemented by federal agencies—intended to encourage states not to enforce or pass overly burdensome AI regulation, or to penalize them if they do. It also asks certain agencies to use their existing authorities in ways that may preempt state AI laws.

Summary of the Order

The Order takes several actions in pursuit of its goal of a “minimally burdensome” regulatory framework for AI. These broadly fit into two categories. First, the Order establishes a framework through which the Trump Administration can challenge state AI laws or incentivize states not to pass or enforce AI laws. Second, the Order instructs certain agencies to implement policies that the Administration hopes may preempt state AI laws.

Key actions established by the Order include:

  • DOJ AI Litigation Task Force. The Order directs Attorney General Pam Bondi to create an “AI Litigation Task Force” within the Department of Justice DOJ). Its task is to challenge state AI laws inconsistent with the Administration’s policy, or with the goal of “global AI dominance” by the U.S. It remains unclear on what specific AI statutes and regulations would be challenged, or on what basis they would be challenged. The Order’s language seems to give the DOJ broad discretion.
  • Evaluation of “Onerous” State AI Laws. The Order directs Secretary of Commerce Howard Lutnick to publish a report identifying “onerous” existing state AI laws. Per the Order, laws will be deemed onerous if they (1) require AI models to alter truthful outputs; or (2) require AI developers or deployers to engage in impermissible compelled speech or otherwise “disclose or report information in a manner that violates the First Amendment or any other provision of the Constitution.”
  • Restrictions on Broadband Funding. The Order also directs the Department of Commerce (DOC) to issue a policy notice tying states’ receipt of federal broadband funding to their “onerous AI” practices. Specifically, the DOC is directed to specify the conditions under which states that pass “onerous” AI legislation are ineligible for federal broadband funding. This is conceptually similar to the AI moratoria previously proposed in Congress; these tied a state’s receipt of federal broadband funding to a prohibition on it regulating AI. The Order maintains the tie between broadband funding and restrictions on AI regulation, but the tie will now be based on a DOC policy statement, along with a DOC finding that a state is engaged in “onerous” AI regulation. The Order suggests that any state the DOC identifies in its report on “onerous state AI laws” may be deemed ineligible for federal broadband funding.
  • Restrictions on Other Discretionary Spending. Other executive departments and agencies are ordered to assess their discretionary grant programs to determine whether they can condition discretionary funding on states not passing AI laws. For states that have already passed AI laws, agencies are instructed to try to enter into binding agreements with the states that tie receipt of discretionary funding to a commitment not to enforce the AI laws. In these efforts, federal agencies must work together with Special Advisor for AI and Crypto David Sacks.
  • Agency-Created Preemption. The Order directs the Federal Communications Commission to draft a federal reporting and disclosure standard to preempt conflicting state laws that regulate AI. It also directs the Federal Trade Commission (FTC) to publish a policy statement outlining how the FTC Act’s prohibition on unfair and deceptive trade practices preempts any state laws that require alterations to the truthful outputs of AI models. It remains to be seen whether these policy statements could in fact have preemptive effect.

Analysis of Impact on State AI Laws

The Order does not define what constitutes “minimally burdensome” or “onerous” AI regulation, giving wide interpretive discretion to the various agencies within the Administration empowered to enforce the Order (and leaving uncertainty for affected businesses). However, it gives clues on the types of AI laws that the Administration is likely to prioritize in any future actions.

First, the Order takes aim at state AI laws that require models to “alter their truthful outputs.” The Order explicitly calls out the Colorado AI Act and its provisions banning “algorithmic discrimination.” The Order takes the position that it—and similar laws— may induce AI models to produce “false results in order to avoid a ‘differential treatment or impact’ on protected groups.” Although not named in the Order, similar state AI laws banning algorithmic discrimination or bias, such as Illinois’s HB 3773, or new California privacy regulations on “automated decisionmaking technology,” may also be in the crosshairs.

The Order explicitly references state AI laws that require disclosure or reporting of information in violation of the First Amendment or other constitutional provisions. As an example of a law that may be targeted, California recently passed the Transparency in Frontier AI Act, which is a first-in-the-nation “frontier” AI regulation requiring developers of powerful AI models to publish a safety framework and report certain safety incidents to regulators. This law and similar legislation that imposes significant safety obligations on, or requires publication or disclosure of information by, frontier model developers (e.g., New York’s Responsible AI Safety & Education (RAISE) Act) and other AI companies may be targets of the Order.

In citing the First Amendment as a potential bar to such statutes, the Trump Administration may be thinking of prior constitutional challenges on “compelled speech” grounds. One example was a successful challenge to California’s Age-Appropriate Design Code, which required companies that provide digital services “likely to be accessed by minors” to draft detailed “data protection impact assessments” (DPIAs) and produce them to regulators upon request. The Ninth Circuit found the DPIAs were unconstitutional compelled speech and also deputized businesses to become “censors for the state.”

The Order’s broad, discretionary language casts a wide net of uncertainty over what state AI laws the Administration may challenge under the Order. For example, the AI Litigation Task Force is directed to sue states with AI laws “on grounds that such laws unconstitutionally regulate interstate commerce, are preempted by existing Federal regulations, or are otherwise unlawful in the Attorney General’s judgment.” This type of language gives wide discretion to the Administration to enforce the Order. At the same time, in its legislative recommendation provision, the Order expressly excludes laws that relate to children’s safety, AI computing and data center infrastructure, and state government procurement and use of AI, which suggests these types of laws may not be targeted.

Reactions and Legal Challenges

The Order has been praised by various industry groups, such as the Consumer Technology Association, while also receiving pushback from advocacy groups like the American Civil Liberties Union. It remains to be seen whether the Order will face legal challenges, or whether these will be reserved for the agency actions it requires, such as a DOC policy restricting federal broadband funding to states that pass “onerous” AI laws—or an FTC policy statement stating that states cannot use their UDAP statutes on AI.

The Order also calls on Congress to establish a single “minimally burdensome national standard” and tasks Sacks and Assistant to the President for Science and Technology Michael Kratsios with creating a proposed federal AI statute—including its preemption provisions. Congressional action would ameliorate many of the legal concerns that stem from a broad unilateral executive action; however, there is increased skepticism on federal deregulation of AI from Republicans, both on Capitol Hill and in state governments.

What Should Businesses Do?

Governors in California, Colorado, and New York issued statements indicating the Order will not stop them from passing, or enforcing, their local AI statutes and regulations. The DOC’s report on “onerous” AI will not be issued until spring 2026, and it has no effect on its own; any impact on the effectiveness of AI statutes will require challenges by the DOJ, agreements between states and executive agencies, or similar resolutions with significant lead times. Businesses should continue endeavoring to comply with AI laws, rules, and regulations that may apply to their operations.

We will continue to monitor developments arising from the Order, including any legal challenges and the complex state AI law landscape. Please contact our team if you have questions about the impact of the Order or the applicability of state AI laws to your company.

Ransomware Fusion Center

Stay ahead of evolving ransomware threats with Alston & Bird’s Ransomware Fusion Center. Our Privacy, Cyber & Data Strategy Team offers comprehensive resources and expert guidance to help your organization prepare for and respond to ransomware incidents. Visit Alston & Bird’s Ransomware Fusion Center to learn more and access our tools.

Executive Order, Action & Proclamation Task Force

Alston & Bird’s multidisciplinary Executive Order, Action & Proclamation Task Force advises clients on the business and legal implications of President Trump’s Executive Orders.

Learn more about administrative actions on our tracker.

If you have any questions, or would like additional information, please contact one of the attorneys on our Privacy, Cyber & Data Strategy team.

You can subscribe to future advisories and other Alston & Bird publications by completing our publications subscription form.

Ohio Mortgage Rules Have Changed: Servicing Now Covered

By ,

What Happened?

Effective September 19, 2025, the Division of Financial Institutions (“Division”) of the Ohio Department of Commerce adopted amended rules (the “Amended Rules”) under the Ohio Residential Mortgage Lending Act (“RMLA”) to add and clarify obligations for mortgage servicers.

Why Does it Matter?

The Amended Rules are largely intended to provide clarity to mortgage servicers regarding the application of the RMLA to mortgage servicing businesses, and to implement procedures to prevent servicing problems. For entities licensed under the RMLA, the Amended Rules address registration of offices, unlicensed activity, recordkeeping, prohibited practices, servicing transfers, escrow payments, payment processing, error resolution, borrower requests for information, and a servicer’s obligations upon loss of license. The Amended Rules largely mirror the CFPB’s mortgage servicing rules (i.e., 12 C.F.R. Part 1024, Subpart C (Regulation X) and, to some extent, 12 C.F.R. Part 1026 (Regulation Z)).

Notably, an entity that violates the Amended Rules may be subject to penalties under the RMLA, which are up to $1,000 per day for each day a violation of law or rule is committed, repeated, or continued (and up to $2,000 a day of there is a pattern of repeated violations of law or rule).

Below, we highlight some of the most impactful provisions of the Amended Rules.

Amended Rules

  • Registration Requirements: The Division amended Section 1301:8-7-02 of the Ohio Administrative Code (the “OAC”) to require entities subject to the RMLA (mortgage brokers, lenders and servicers) to register each office location at which it transacts business.
  • Standards for Applications, License, and Registration: The Division amended Section 1301:8-7-03 of the OAC, to clarify that a mortgage broker, mortgage servicer, or loan originator cannot conduct business if they fail to renew their registration on or before December 31. (The Division indicated that it was amending the renewal date to correct a drafting error that incorrectly identified January 31 as the renewal date.)
  • Recordkeeping: The Division amended Section 1301:8-7-06 of the OAC, which relates to recordkeeping, to require a mortgage servicer to retain records that document actions taken with respect to a borrower’s account for four years following the date the loan is discharged or transferred to another servicer; and to maintain specified documents and data in a manner that facilitates compiling the documents and data into a servicing file within five days. (The rule does not expressly address maintenance of records of telephone calls with borrowers.) While the rule requires retention of the same records required under Regulation X (12 C.F.R. § 1024.38(c)), note that the retention period is much longer than Regulation X’s and does not exempt small servicers under Regulation X.
  • Prohibited Practices: The Division amended Section 1301:8-7-16 of the OAC, to add a list of actions specific to servicing that constitute improper, fraudulent, or dishonest dealings under Ohio Revised Code section 1322.40.  Specifically, the rule prohibits a servicer from, among other things:
    • assessing a borrower any premium or charge related to force-placed insurance unless the servicer: (i) has a reasonable basis to believe that the borrower has failed to comply with the residential mortgage loan contract’s requirement to maintain hazard insurance; and (ii) delivers or mails to the borrower a written notice at least 45 days before assessing such charge or fee;
    • misrepresenting or omitting any material information in connection with the servicing of a residential mortgage loan, including misrepresenting the amount, nature, or terms of any fee or payment due or claimed to be due on a residential mortgage loan, the terms and conditions of the servicing agreement, or the borrower’s obligations under the residential mortgage loan;
    • failing to apply payments in accordance with a servicing agreement or the terms of a note; (d) making payments in a manner that causes a policy of insurance to be canceled or causes property taxes or similar payments to become delinquent;
    • failing to credit a periodic payment to the borrower’s account as of the date of receipt, except when a delay in crediting does not result in any charge to the borrower or in the reporting of negative information to a consumer reporting agency (except where the servicer specifies in writing requirements for the borrower to follow in making payments, but accepts a payment that does not conform to the requirements, where the servicer has five days to credit the payment);
    • requiring any amount of money to be remitted by means which are more costly to the borrower than a bank or certified check or attorney’s check from an attorney’s account to be paid by the borrower;
    • charging a fee for handling a borrower dispute, facilitating routine borrower collection, arranging a forbearance or repayment plan, sending a borrower a notice of nonpayment, or updating records to reinstate a loan; or
    • pyramiding late fees.
  • Mortgage Servicing Definitions: The Division added Section 1301:8-7-35 to the OAC, which defines terms relevant for the provisions of other new sections (as discussed below), including: (a) “confirmed successor in interest,” “escrow account,” and “qualified written request,” which are consistent with Regulation X; and (b) “federal lending law” and “residential mortgage loan,” the latter of which is defined to limit the Amended Rules’ application to closed-end loans, consistent with Regulation X and Regulation Z.
  • Mortgage Servicing Transfers: The Division added Section 1301:8-7-36 to the OAC, to prohibit a transferee servicer from treating an on-time payment made to the old servicer within the 60-day period following the transfer of servicing. It also requires the old servicer to either forward the payment to the new servicer, or return it to the borrower and notify the borrower of the proper recipient. This rule generally mirrors 12 C.F.R. § 1024.33(c).
  • Escrow Accounts: The Division added Section 1301:8-7-37 to the OAC, which requires a mortgage servicer to: (i) make all required escrow payments in a timely manner, and (ii) timely return any payments due to the borrower. It also allows a servicer, if the borrower agrees, to credit any amount remaining in a borrower’s account to a new escrow account for a new loan. This rule generally mirrors 12 C.F.R. §§ 1024.34 and 1024.17(k).
  • Error Resolution Procedures: The Division added Section 1301:8-7-38 to the OAC, which establishes error resolution procedures that mirror the requirements of the CFPB mortgage servicing rules (12 C.F.R. § 1024.35).
  • Requests for Information: The Division added Section 1301:8-7-39 to the OAC, which establishes information request procedures that mirror the requirements of the CFPB mortgage servicing rules (12 C.F.R. § 1024.34).
  • Mortgage Servicer Obligations upon Loss of License: Finally, the Division added Section 1301:8-7-40 to the OAC, which provides that the revocation, suspension, or failure of a servicer to obtain or maintain a license does not affect a servicer’s obligations under a preexisting contract with a lender or borrower.

What To Do Now?

The Amended Rules significantly expand the requirements applicable to mortgage servicers subject to the RMLA. While many of the Amended Rules mirror those under the CFPB’s mortgage servicing rules, certain provisions impose additional obligations on mortgage servicers and/or apply to servicers that may otherwise be exempt from certain requirements under the CFPB’s mortgage servicing rules (e.g., small servicers). Accordingly, mortgage servicers should carefully review the Amended Rules and ensure that their policies, procedures, and controls are updated as appropriate to ensure compliance. Alston & Bird’s Consumer Financial Services Team is actively engaged and monitoring these developments and can assist with any compliance concerns regarding the changes imposed by the Amended Rules.

New York’s FAIR Act: What Financial Services Compliance Teams Must Know

By

What Happened?

As we highlighted in March following its introduction, the New York’s Fostering Affordability and Integrity through Reasonable Business Practices (“FAIR”) Act represents a fundamental transformation of the state’s consumer protection framework, expanding enforcement authority beyond “deceptive” practices to include “unfair” and “abusive” acts. The FAIR Act has passed the legislature and awaits the governor’s signature.  The Fair Act will take effect 60 days following its enactment.

Legislative Changes

The FAIR Act transforms the New York’s consumer protection framework by expanding General Business Law (“GBL”) Section 349 beyond “deceptive” practices to include “unfair” and “abusive” acts. The amendments include several critical changes:

Expanded Scope of Prohibited Conduct

The GBL will now include and define three categories of unlawful business practices:

  • Deceptive practices: Under the existing standard, deceptive practices include acts that involve misleading or false representations.
  • Unfair practices: Under the FAIR Act, unfair practices include acts or practices that cause or are likely to cause substantial injury to consumers, which is not reasonably avoidable and not outweighed by countervailing benefits to consumers or competition.
  • Abusive practices: Under the FAIR Act, abusive practices include acts or practices that materially interfere with a person’s understanding of terms or conditions or take unreasonable advantage of a person’s lack of understanding, inability to protect their interests, or reasonable reliance by a person on a person engaging in the act or practice to act in the relying person’s interests.

Broader Protected Classes

The FAIR Act extends protections under Section 349 of the GBL to “businesses and non-profits as well as individuals,” recognizing that “small business or non-profit” entities need protection equivalent to consumers.

Elimination of Court-Imposed Limitations

The FAIR Act makes any prohibited act or practice under Section 349 of the GLB “actionable by the attorney general regardless of whether or not that act or practice is consumer-oriented,” overturning decades of judicial precedent that limited enforcement to consumer-facing conduct.

Enhanced Enforcement Authority

The Attorney General also gains expanded powers to bring actions against any person conducting business in New York, with broader jurisdiction and streamlined enforcement procedures. The Attorney General has the power to enjoin and seek restitution from any person conducting any business, trade or commerce or furnishing a service in New York, “whether or not the person is without the state.”

Why Does it Matter?

Federal Enforcement Vacuum

The legislation emerges as federal consumer protection enforcement has recently taken a sharp turn towards less regulation and enforcement, with states working to fill the gap left by the federal pullback. As the CFPB undergoes significant transition, certain state financial regulators and attorneys general appear poised to step into the CFPB’s shoes. New York’s legislation represents the most comprehensive state-level response to this federal retreat, potentially serving as a model for other jurisdictions. It is also worth noting that in March 2024, the CFPB, under then-Director Rohit Chopra, issued a letter to New York Governor Hochul supporting amendments to New York’s consumer protection laws to address unfairness and abusiveness.

Business Impact and Compliance Challenges

The legislation creates significant new compliance obligations for businesses operating in New York:

  • The “unfair” and “abusive” standards adopt federal concepts but apply them more broadly, creating uncertainty about compliance boundaries.
  • The law creates liability for the first time for “unfair” and “abusive” acts and practices while abrogating case law limiting the scope of the statute to allegedly consumer-oriented deception.
  • Removal of the “consumer-oriented” limitation means B2B transactions, internal business practices, and commercial relationships now face potential enforcement actions.

What Do I Need to Do?

In reviewing customer-facing and business-to-business practices against the new “unfair” and “abusive” standards, industry participants should bear in mind that the broad definitions require analysis beyond traditional deceptive practice frameworks.

First, despite federal changes, consumer protection compliance remains crucial, particularly as state enforcement intensifies. Companies should:

  • Ensure compliance policies address the broader unfair and abusive practice definitions;
  • Train personnel on the expanded standards;
  • Enhance monitoring systems for the broader range of prohibited conduct; and
  • Review and ensure documentation protocols for business practice justifications. The “unfair” standard includes a balancing test considering “countervailing benefits to consumers or to competition.” Companies should document legitimate business justifications for practices that might otherwise appear harmful.

Second, New York Attorney General Letitia James has been actively leading multistate coalitions on consumer protection issues, suggesting coordinated enforcement strategies. With CFPB enforcement curtailed, New York’s expanded authority makes the state a primary regulatory battleground. Financial institutions should expect heightened scrutiny of:

  • Fee structures and disclosure practices;
  • Lending practices and underwriting standards;
  • Customer communications and marketing materials; and
  • Digital platform interfaces and user experience design.

Third, the legislation’s focus on addressing “new and emerging technologies” suggests that companies should pay particular attention to:

  • Digital platforms and user interface design;
  • Data collection and usage practices;
  • Algorithmic decision-making processes; and
  • Subscription and recurring billing practices.

The FAIR Act represents a significant shift in the consumer protection landscape, with New York positioning itself as the primary regulatory authority as federal enforcement retreats. Businesses should assess their practices against these expanded standards while preparing for a more aggressive state enforcement environment. Other states are considering similar legislation, suggesting this may represent a broader trend requiring multi-state strategic planning. For example, California has introduced legislation to broaden its already robust and aggressive California Consumer Financial Protection Law to expand the authority of the Department of Financial Protection and Innovation to enforce consumer financial protection laws.

Companies operating in New York or considering New York operations must develop comprehensive compliance strategies that address not only the immediate requirements of the FAIR Act but also the evolving landscape of state-level consumer protection enforcement.

The elimination of traditional limitations on enforcement scope, combined with the broad definitions of unfair and abusive acts or practices, creates both compliance challenges and strategic opportunities for businesses that proactively adapt to this new regulatory environment.

Alston & Bird’s Consumer Financial Services Team is actively engaged and monitoring these developments and can assist with any compliance concerns regarding these changes to New York law.

Pennsylvania: What is a Bona Fide Discount Point?

By

What Happened?

Effective August 29, 2025, Pennsylvania enacted House Bill 1103 (the “Bill”) impacting discount points on residential mortgage loans by making amendments to Pennsylvania’s usury code (the Loan Interest and Protection Law (“Law”)), and the Mortgage Licensing Act.  First, the Bill amends the Law by repealing the definition of discount points in section 101 and repealing all of section 402, which prohibits lenders from collecting discount points from sellers on non-government mortgages. Second, the Bill amends the Mortgage Licensing Act to permit licensed mortgage lenders of first and secondary mortgage loans to offer “discount points,”  which the measure defines as “fees knowingly paid by the consumer for the purpose of reducing, and which result in a bona fide reduction of, the interest rate or time-price differential applicable to the mortgage.”

Why is it Important?

The Legislative history states that the purpose of these amendments is to allow borrowers to buy down their interest rate and align with the majority of states that do not restrict lenders from charging discount points.  It is worth noting that the usury’s law restriction on discount points was very narrowly drafted to apply only to points paid by the seller with several exclusions and was arguably preempted for first-lien residential mortgage loans under the Depository Institutions Deregulation and Monetary Control Act. Moreover, in the context of residential mortgages the usury law applies only to residential mortgage loans with an original principal amount of the base figure or less (currently, $319,777 and adjusted annually for inflation).

As amended, mortgage lenders licensed under the Mortgage Licensing Act have the power to charge discount points on a “mortgage loan,” which includes both first or secondary mortgage loans, irrespective of the dollar amount, provided such discount points are for the purpose of reducing the rate and result in a “bona fide” reduction of rate.  The statute does not define “bona fide.”  While not dispositive, it is worth noting that the federal Truth in Lending Act (“TILA”) defines the term “bona fide” discount point in the context of high cost residential mortgage loans. More specifically, under TILA, “[t]he term bona fide discount point means an amount equal to 1 percent of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer.”  Absent concrete guidance from the regulators, it is not clear what constitutes “bona fide” for purposes of Pennsylvania law.  With that said, Pennsylvania regulators have informally suggested that any actual reduction in rate would be deemed bona fide.

What to do now?

Given that violations of the Mortgage Licensing Act could result in fines of $10,000 per offense, licensed mortgage lenders should ensure that any discount points charged on first or secondary mortgage loans meet the Pennsylvania’s Department of Banking’s interpretation of “bona fide” and result in an actual reduction of the rate.