Alston & Bird Consumer Finance Blog

State Law

State Community Reinvestment Acts Reaching Beyond Banks

By

A&B ABstract:

When Congress passed the federal Community Reinvestment Act (“CRA”) in 1977 to address redlining, it imposed affirmative requirements on insured depository institutions to serve the credit needs of the communities where they receive deposits. At that time, banks were extending the vast majority of mortgages nationally. However, non-banks have become the dominant mortgage lenders, by some estimates accounting for more than two thirds of residential mortgage loans in 2021.

Indeed, the non-bank mortgage market share has been increasing steadily since 2007, when non-banks were originating approximately 20 percent of mortgage loans. That year, Massachusetts became the first state to extend the scope of its state CRA to non-bank mortgage lenders, notwithstanding the proviso of the federal statute that tied credit obligations to depository activities.  Historically, deposits were gathered primarily from areas surrounding bank branches, and thus a bank’s CRA performance responsibilities were likewise focused on those same areas.  But today, both lending and depository activities can be conducted nationally.  In recognition of the more attenuated connection between bank branches serving the credit needs of communities, the Massachusetts CRA became the first state to impose CRA responsibilities on non-bank lenders.

The Various State CRAs

In March 2021, Illinois passed its CRA which also applies beyond banks to non-bank mortgage lenders, followed shortly by New York in November 2021.  (Note that this expansion has not taken mortgage servicers into the fold, as CRA is more focused on an institution’s loan originations and purchases than its loan servicing.)  Relatedly, other state CRA statutes apply to credit unions and banks, though not to other financial institutions.  Below is a brief update on where various state CRAs currently stand:

  • Connecticut. Connecticut’s CRA initially applied only to banks but was amended in 2001 to cover state credit unions as well.  It does not cover any other financial institutions, however.  Its provisions are similar to the federal CRA.
  • District of Columbia. The District of Columbia’s CRA applies to deposit-receiving institutions, which includes federal, state, or District-chartered banks, savings institutions, and credit unions.  It is also similar to the federal CRA.
  • Illinois. The Illinois CRA applies to financial institutions, which includes state banks, credit unions, and non-bank mortgage entities that are licensed under the state’s Residential Mortgage Lending Act that lent or originated 50 or more residential mortgage loans in the previous calendar year.  Following the expansion of its CRA (205 ILCS 735) last year, Illinois solicited comments and facilitated roundtables to assist the Department of Financial and Professional Regulation in developing rulemaking for non-bank entities. In particular, the Department’s August 31, 2021 Advance Notice of Proposed Rulemaking sought comment on whether the assessment areas of these non-bank entities should include the entire state of Illinois.  Importantly, the Department has referenced the potential suitability of either the federal CRA rules or Massachusetts’ CRA rules as a model for Illinois.  No proposed rule has been published as of the date of this writing.
  • Massachusetts. Despite mortgage lender concerns raised today regarding the feasibility and inapplicability of different elements of the general CRA examination framework, Massachusetts has imposed meaningful CRA requirements on non-bank lenders for more than a decade.  Indeed, Massachusetts has succeeded in implementing and conducting separate CRA examination processes for banks and non-banks. Yet despite this distinction, Massachusetts CRA exams for mortgage companies remain rigorous.
  • New York. In November last year, New York Governor Kathy Hochul signed legislation (S.5246-A/A.6247-A) to expand the scope of the state’s CRA to cover non-bank mortgage lenders. Specifically, the legislation creates a new section, 28-bb of the New York Banking Law, that requires non-depository lenders to “meet the credit needs of local communities.” Further, section 28-bb provides for an assessment of lender performance by the Superintendent that considers the activities conducted by the lender to ascertain the credit needs of its community, along with the extent of the lender’s marketing, special programs, and participation in community outreach, educational programs, and subsidized housing programs. This assessment also may consider the geographic distribution of the lender’s loan applications and originations; the lender’s record of office locations and service offerings; and any evidence of discriminatory conduct, including any practices intended to discourage prospective loan applicants.  The provisions of section 28-bb will go into effect on November 1, 2022.

Worth noting also is that while these state CRAs are generally aligned with the federal CRA requirements, the regulations implementing the federal CRA are expected to change.  The Federal Reserve Board, FDIC, and OCC are currently working on promulgating a modernized interagency CRA framework.  Once the federal CRA regulations change, the state CRAs may follow or risk subjecting their banks and any other covered financial institutions to the burden of complying with two different regulatory regimes.

Takeaway:

Much like in Massachusetts, non-bank lenders originating a significant number of loans in Illinois and New York should be developing a CRA compliance strategy that makes sense for their size and business model to comply with the state CRAs.  That said, all non-bank lenders would do well to contemplate whether Massachusetts, Illinois, and New York are a harbinger of what is to come.  Finally, state CRA covered financial institutions in Connecticut, the District of Columbia, Illinois, Massachusetts, and New York should be planning for potential compliance framework shifts once the federal CRA regulations are revised.

NMLS Seeks Comments on Proposed Revisions to Company and Individual Disclosure Questions

By , ,

A&B Abstract:

The Nationwide Multistate Licensing System & Registry (NMLS) Policy Committee is inviting comments on the NMLS Disclosure Questions Proposal. The comment period is now open and runs until August 22. Among other revisions, the proposal details suggested revisions to the disclosure questions on the Company (MU1) and Individual (MU2) forms.

Proposed Revisions to NMLS Disclosure Questions

In key part, the proposed revisions include:

Company Disclosure Questions:

  • Adding a new question to incorporate a requirement of the Money Transmission Modernization Act, g., companies disclosing “material litigation” (which would be a newly defined term) in the past 10 years;
  • Expanding the civil judicial disclosures to include whether companies have been found in the past 10 years: (1) to have made a false statement or omission or been dishonest, unfair, or unethical, or (2) to have been a cause of another financial services business having its license or authorization denied, suspended, revoked, or restricted;
  • Amending the civil judicial disclosure question to include whether there are any pending financial services civil actions alleging that a company has made a false statement or omission, or had been dishonest, unfair, or unethical;
  • Requiring the criminal disclosure of any pending felony charges against companies, instead of any past felony charges;
  • Broadening the bankruptcy disclosure to include whether a company or control affiliate filed a bankruptcy petition in the past 10 years (in addition to being the subject of a bankruptcy petition) and clarifying that disclosure of either voluntary or involuntary petitions is required;
  • Adding a question whether companies have ever been denied issuance of a bond;
  • Introducing a new question asking whether a third-party service provider has notified a company of its intent to modify or cancel an arrangement that would materially alter the company’s ability to conduct business activities, and relatedly, defining “third-party service provider” to include lines of credit, whether warehouse or operation, technology solutions, etc.; and
  • Separating out into two sections under the existing regulatory action disclosures for: (1) companies that hold or have ever held an authorization to act as a contractor for a federal, state, or local government entity, (2) companies who have “key individuals” (which would be a newly defined term) or control individuals who are or have been licensed as attorneys or accountants or who hold or have been licensed as financial services professionals, and (3) added that dismissal of an action pursuant to a settlement agreement requires disclosure.
    • Regarding the last point in (3), this proposed revision is added in Question 14.e. which, according to the NMLS Policy Committee, is intended to broaden the question to account for how regulatory actions may be brought, including dismissal of an action pursuant to a settlement agreement. However, by including the term “settlement agreement”, which is not separately defined in the NMLS Policy Guidebook, Question 14.e. may potentially require the disclosure of nonpublic settlement agreements, which would be a significant change and perhaps an unintended result. The original questions are limited by the terms “found” (in Question 14.a-c.) and “order” (in Question 14.e.), both of which are defined terms indicating that only public settlement agreements and orders are required to be disclosed. Thus, we recommend that industry members consider whether to submit comments on this question to seek clarification.

Individual Disclosure Questions:

  • Making conforming proposed revisions relating to civil judicial and financial disclosures as described above in the Company Disclosure Questions;
  • Limiting the time period for the disclosure of misdemeanors to the past 10 years;
  • Making clarifications to require disclosure of judicial and non-judicial foreclosures on either commercial or residential property;
  • Adding new questions relating to pending regulatory actions against a holder of a financial services license or other professional license that could result in the restriction, revocation, debarment, or suspension of the license; and
  • Adding new questions regarding any pending financial services civil actions alleging a violation of a financial services statute or regulation for a company over which an individual exercised control, or a prior finding of the same.

Additional Proposed Revisions

In addition to proposed revisions to Company (MU1) and Individual (MU2) disclosure questions, the proposed revisions include amendments to the NMLS Policy Guidebook Glossary Terms.  Significantly, definitions for nine new terms are proposed: (1) Consumer Protection; (2) Court; (3) Efforts to Foreclose; (4) Governmental Entity; (5) Key Individual; (6) Lien; (7) Material Litigation; (8) Third Party Service Provider; and (9) Unsatisfied.  Amendments to existing terms include revising “financial services” to include consumer protection laws or regulations that pertain to enumerated financial services items, and clarifying the term “found” to cover agreements or settlements that are a matter of public record including those in which the findings are neither admitted or denied. The existing term “order” would be amended to add language to cover orders agreed to by the parties such as consent orders and stipulated orders, and to clarify that agreements relating to payments, limitations on activity, or other restrictions are excluded from the definition unless they are in a written directive that otherwise qualifies as an order.

Takeaway

We recommend that industry members, both licensees and applicants on NMLS, review the proposed revisions to the disclosure questions and consider whether to submit comments.  In particular, and as highlighted above, the proposed changes to Question 14.e. would appear to potentially require the disclosure of nonpublic settlement agreements, which would be a significant change from Question 14.e as currently worded.  If so, this may require companies to update their responses to the disclosure questions and submit additional information to NMLS regarding nonpublic settlement agreements.  Comments may be submitted via e-mail to comments@csbs.org by August 22.

Rhode Island Expands Lender Licensing for Retail Installment Contracts, Allows Remote MLO Work, and Makes Other Changes to Financial Institutions Laws

By

Rhode Island made a number of amendments to financial institutions statutes with the passage of Senate Bill 2794 / House Bill 7781 Sub A. Changes include the scope of licensing requirements applicable to retail installment contracts and the permissibility of remote work for MLOs and other employees. The changes were effective upon passage on June 29, 2022.

Licensing for Retail Installment Contracts

The law expands the definition of lender to include a person who makes retail installment contracts, thereby necessitating a license to create such contracts. Under existing law, a “lender” is any person who makes or funds a loan, and a license is required to engage in such lending activity. The amendment clarifies that a loan is made or funded within Rhode Island if a retail installment contract is created. The amendments define retail installment contracts to mean “any security agreement negotiated or executed in this state, or under the laws of this state, including, but not limited to, any agreement in the nature of a mortgage, conditional sale contract, or any other agreement whether or not evidenced by any written instrument to pay the retail purchase price of goods, or any part thereof, in installments over any period of time and pursuant to which any security interest is retained or taken by the retail seller for the payment of the purchase price, or any part thereof, of the retail installment contract.” Note that the law previously required a license to purchase or acquire retail installment contracts and defined the term in a separate statutory section.

MLO Remote Work

As with many jurisdictions, Rhode Island has also relaxed rules relating to remote work for employees of a mortgage licensee. Pursuant to the amendments, licensees no longer need to provide the physical premises for employees, as long as they continue to supervise the services provided by the employee to the licensee. Under the amendments, a licensee’s employees, including mortgage loan originators, may work from a remote location if certain conditions are met including that: (1) their residence or other location is identified in the records of the licensee and is within a reasonable distance of a place of business named in the licensee’s license or branch certificate, (2) the licensee maintains policies and procedures for supervision of, and employs appropriate risk-based monitoring and oversight process of work performed by, employees working from remote locations; (3) computer system access is subject to a comprehensive written information security plan; (4) in-person customer interaction does not occur at the remote location; and (5) physical records are not maintained at the remote location. The law also removes previous prohibitions on conducting other business at a licensed location without prior approval but adds a prohibition on tying services to a requirement that the consumer purchase any other product or service from a specified provider including those providers with whom the licensee is sharing office space.

Note that the Rhode Island Division of Banking has also issued guidance clarifying that MLOs are not required to live within a certain distance of a branch office (despite statutory language to the contrary), however, the Division will require that the licensed entity provide proof of effective supervision over all sponsored mortgage loan originators.

Georgia Amends its Residential Mortgage and Installment Loan Laws

By , ,

A&B Abstract:

On May 2, 2022, Georgia Governor Brian Kemp signed HB 891 and SB 470 into law.  HB 891, effective July 1, 2022, updates various laws enforced by the Georgia Department of Banking and Finance (the “Department”) including, among other things, by amending (1) certain exemptions from licensure under the Georgia Residential Mortgage Act (“GRMA”), and (2) the Georgia Installment Loan Act (“GILA”) to impose a new licensing obligation to service installment loans subject to the GILA.   Similarly, SB 470, which took effect immediately, amends the GRMA’s provisions regarding felony restrictions for employees of mortgage licensees.

Changes to Licensing of Mortgage Lenders and Brokers

HB 891 made several changes to Title 7 of the Georgia Code, including several amendments to the GRMA, but perhaps one of the most notable changes with respect to mortgage lending involves the creation of a new exemption from licensure under the GRMA for persons holding loans for securitization into a secondary market.  Specifically, as of July 1, 2022, any person who purchases or holds closed mortgage loans for the sole purpose of securitization into a secondary market, is expressly exempt from licensing, provided that such person holds the individual loans for less than seven days. Note that the statute further defines “person” as any individual, sole proprietorship, corporation, LLC, partnership, trust, or any other group, however organized. As written, the new exemption language suggests that persons holding loans as part of the securitization process for longer than 7 days could not rely on the exemption. Note that the GRMA’s existing definition of a “mortgage lender” includes a “person who directly or indirectly…holds, or purchases mortgage loans” and the GRMA contains an existing exemption for any person who purchases mortgage loans from a mortgage broker or mortgage lender solely as an investment and who is not in the business of brokering, making, purchasing, or servicing mortgage loans.

HB 891 also amended an existing exemption from licensure applicable to certain natural persons under an exclusive written independent contract agreement with a mortgage broker who is, or is affiliated with, an insurance company or broker dealer. Under the exemption, as amended, a natural person otherwise required to be licensed is exempt from licensure as a mortgage lender or broker, when under an exclusive written independent contractor agreement with a licensed mortgage broker, so long as the mortgage broker satisfies certain expanded criteria, including, among others  (1) maintaining an active mortgage broker license, (2) maintaining full and direct financial responsibility for the mortgage activities of the natural person, (3) maintaining full and direct responsibility for the natural persons education, handling of consumer complaints, and supervision of the natural person’s mortgage activities, (4) having listed securities for trade and meeting certain market capitalization requirements, (5) being licensed as an insurance company or registered as a broker-dealer, and (6) being licensed as a mortgage lender or broker in ten or more states. The exemption previously applied to certain natural persons employed by the subsidiary of certain financial holding companies. Notably, to maintain the exemption, the natural person must, among other things (1) be licensed as a mortgage loan originator in Georgia and work exclusively for the licensee, the parent company if the licensee is a wholly owned subsidiary, or an affiliate of the licensee if both the affiliate and licensee are wholly owned subsidiaries of the same parent company, and (2) be licensed as an insurance agent or registered as a broker-dealer agent on behalf of the licensee, the parent company if the licensee is a wholly owned subsidiary, or an affiliate of the licensee if both the affiliate and licensee are wholly owned subsidiaries of the same parent company.

HB 891’s amendments to the GRMA’s licensing provisions follow SB 470, which provided welcome changes to the GRMA’s felony restrictions. As amended, Georgia law now provides that the Department may not issue or may revoke a license or registration if it finds that the mortgage loan originator, broker, or lender, or any person who is a director, officer, partner, covered employee or ultimate equitable owner of 10% or more of the mortgage broker or lender or any individual who directs the affairs or establishes policy for the mortgage broker or lender applicant, registrant, or licensee, has been convicted of a felony in any jurisdiction or of a crime which, if committed in Georgia, would constitute a felony under Georgia law.  Previously, Georgia law arguably prohibited a licensee from retaining any individual convicted of a felony that could be deemed an employee or agent of the licensee. As amended, the employee restriction is relaxed to apply only to a “covered employee,” a newly defined term that means an employee of a mortgage lender or broker “involved in residential mortgage loan related activities for property located in Georgia and includes, but is not limited to, a mortgage loan originator, processor, or underwriter, or other employee who has access to residential mortgage loan origination, processing, or underwriting information.” Notably, the restriction no longer applies to an “agent” of a licensee.

Changes to Installment Loan Licensing

HB 891 also amended the GILA to require licensure for persons engaged in servicing of installment loans.  Before the amendments, the GILA only imposed a licensing obligation on persons who advertise, solicit, offer, or make installment loans to individuals in amounts of $3,000 or less.  As amended, any person that services installment loans made by others, excluding loans made by affiliated entities, is also required to obtain a license. HB 891’s amendments also added a number of new exemptions from licensure, including for (1) retail installment transactions engaged in by retail installment sellers and retail sellers, as those terms are defined, and (2) transactions in which a lender offers a consumer a line of credit of more than $3,000 but the consumer utilizes $3,000 or less of the line, so long as there are no restrictions that would limit the consumer’s ability to utilize more than $3,000 of the line at any one time. Additionally, the GILA’s provisions relating to tax on interest has been repealed and reenacted and now requires that installment lenders remit to the Department a fee of 0.125 percent of the gross loan amount on each loan made on or after July 1, 2022, and such fee becomes due on the making of any loan subject to the GILA. This revised fee replaces the prior fee of three (3) percent of the total amount of interest on any loan collected. The statute clarifies that the per loan fee must be paid by the licensee and cannot be passed through to the borrower as an additional itemized fee or charge. The method by which a licensee pays the fee is subject to further clarification via Department regulations.

Takeaway

Mortgage lenders and brokers should review the GRMA, as amended, to determine whether, and if so how, the amendments impact their licensing obligations or their policies with respect to employee background checks in Georgia. Additionally, entities servicing installment loans subject to the GILA, which are originated by non-affiliates, must now obtain a license. Licensees should also take note of the new per loan fee requirements in lieu of prior tax payment regulations.

Connecticut and Maryland Adopt Model Mortgage Servicer Prudential Standards

By , ,

A&B Abstract:

On May 24, 2022, Connecticut enacted legislation that, among other things, adds financial condition and corporate governance requirements for certain licensed mortgage servicers (the “CT Standards”). In similar fashion, the Maryland Commissioner of Financial Regulation (the “Commissioner”) issued a notice of final action on March 25, 2022 adopting similar standards by regulation (the “MD Standards”).  In both instances, the CT and MD Standards are intended to implement the Model State Regulatory Prudential Standards for Nonbank Mortgage Servicers (the “Model Standards”) drafted and released by the Conference of State Bank Supervisors (“CSBS”) last July.

The CSBS Model Standards

As mentioned in our prior blog post, the CSBS initially proposed standards for mortgage servicers in 2020. In July 2021, after substantial revision to the proposed standards, the CSBS adopted the Model Standards to provide states with uniform financial condition and corporate governance requirements for nonbank mortgage servicer regulation while preserving local accountability to consumers and to “provide a roadmap to uniform and consistent supervision of nonbank mortgage servicers nationwide.”

The Model Standards cover two major categories that comprise prudential standards: financial condition and corporate governance. The financial condition component consists of capital and liquidity requirements. Corporate governance components include separate categories for establishment of a board of directors (or “similar body”); internal audit; external audit; and risk management.

The Model Standards apply to nonbank mortgage servicers with portfolios of 2,000 or more 1 – 4-unit residential mortgage loans serviced or subserviced for others and operating in two or more states as of the most recent calendar year end, reported in the Nationwide Multistate Licensing System (“NMLS”) Mortgage Call Report. For purposes of determining coverage under the Model Standards, “residential mortgage loans serviced” excludes whole loans owned and loans being “interim” serviced prior to sale. Additionally, the financial condition requirements in the Model Standards do not apply to servicers solely owning and/or conducting reverse mortgage servicing or the reverse mortgage portfolio administered by forward mortgage servicers that may otherwise be covered under the standards. The capital and liquidity requirements also have limited application to entities that only perform subservicing for others. Moreover, the whole loan portion of portfolios are not included in the calculation of the capital and liquidity requirements.

While CSBS drafted the Model Standards, they are implemented only through individual state legislation or other rulemaking.

Connecticut’s and Maryland’s Implementation of the Model Standards

The CT and MD Standards both track the Model Standards in many respects, including the following:

  • Covered servicers are required to satisfy the Federal Housing Finance Agency’s (“FHFA”) Eligibility Requirements for Enterprise Single-Family Seller/Servicers for minimum capital ratio, net worth and liquidity, whether or not the mortgage servicer is approved for servicing by the government sponsored enterprises (i.e., Fannie Mae and/or Freddie Mac) (the “GSEs”), as well maintain policies and procedures implementing such requirements; these requirements do not apply to servicers solely owning and/or conducting reverse mortgage loan servicing, or the reverse mortgage loan portfolio administered by covered institution that may otherwise be covered under the standards, and do not include the whole loan portion of servicers’ portfolios.
  • With respect to corporate governance, covered servicers are required to establish and maintain a board of directors responsible for oversight of the servicer; however, for covered servicers that are not approved to service loans by one of the GSEs, or Ginnie Mae, or where a federal agency has granted approval for a board alternative, a covered servicer may establish a similar body constituted to exercise oversight and fulfill the board of directors’ responsibilities.
  • A covered mortgage servicer’s board of directors, or approved board alternative, must (1) establish a written corporate governance framework, including appropriate internal controls designed to monitor corporate governance and assess compliance with the corporate governance framework, (2) monitor and ensure institutional compliance with certain established rules, and (3) establish internal audit requirements that are appropriate for the size, complexity and risk profile of the servicer, with appropriate independence to provide a reliable evaluation of the servicer’s internal control structure, risk management and governance.
  • Covered mortgage servicers must receive an annual external audit, which must include audited financial statements and audit reports, conducted by an independent accountant, and which must include: (1) annual financial statements, (2) internal control assessments, (3) computation of tangible net worth, (4) validation of MSR valuation and reserve methodology, (5) verification of adequate fidelity and errors and omissions insurance, and (6) testing of controls related to risk management activities, including compliance and stress testing, as applicable.
  • Covered mortgage servicers must establish a risk management program under the oversight of the board of directors, or the approved board alternative, that addresses the following risks: credit, liquidity, operational, market, compliance, legal, and reputation.
  • Covered mortgage servicers must conduct an annual risk assessment, concluding with a formal report to the board of directors, which must include evidence of risk management activities throughout the year including findings of issues and the response to address those findings.

Notwithstanding the foregoing, the CT Standards appear to deviate from the Model Standards in a few notable ways. First, with respect to coverage, the CT Standards differ from the Model Standards, in that the CT Standards can apply to a servicer who only services Connecticut residential mortgage loans, whereas the Model Standards do not apply unless the servicer operates “in two or more states as of the most recent calendar year end, reported in the [NMLS] Mortgage Call Report.” Additionally, the capital and liquidity requirements under the Model Standards have limited application to entities that only perform subservicing for others, including limiting the definition of “servicing liquidity or liquidity” to entities who own servicing rights. The comments to the Model Standards explain that “[f]inancial condition requirements for subservicers are limited under the FHFA eligibility requirements due to the lack of owned servicing. For example, net worth add-on and liquidity requirements apply only to UPB of servicing owned, thereby limiting the financial requirements for subservicers, and servicers who own MSRs and also subservice for others. However, the base capital and operating liquidity requirements … apply to subservicers.” On the other hand, the capital and liquidity requirements under the CT Standards explicitly do not apply to an entity that solely “performs subservicing for others with no responsibility to advance moneys not yet received in connection with such subservicing activities.”

The MD Standards, on the other hand, largely adopt the Model Standards. However, with respect to internal audit requirements, the MD Standards contain additional guidance, specifying that “[u]nless impracticable given the size of the licensee, internal audit functions shall be performed by employees of the licensee who report to the licensee’s owners or board of directors and who are not otherwise supervised by the persons who directly manage the activities being reviewed.” That said, it is worth noting that in an accompanying notice to servicers and lenders, the Maryland Commissioner of Financial Regulation clarified that the purpose of the MD Standards is “aligning Maryland regulations with nationwide model standards and creating uniform standards regarding safety and soundness, financial responsibility, and corporate governance for certain mortgage service providers.”

Takeaway

Connecticut and Maryland are the first two states to adopt implementing laws or regulations following the CSBS’s adoption of the Model Standards. Connecticut-licensed mortgage servicers subject to the CT Standards must comply by October 1, 2022, the section’s effective date. The MD Standards took effect on June 27, 2022. Servicers subject to the CT and/or MD Standards should review the standards and ensure their business satisfies the applicable requirements. As with any model law, the Model Standards require states to adopt implementing laws or regulations. Accordingly, we expect to see additional states begin to adopt similar measures.