Alston & Bird Consumer Finance Blog

State Law

New York Amends Contact Requirements for Certain Delinquent Borrowers

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A&B ABstract: On February 24, Governor Kathy Hochul signed into law Assembly Bill 8771 (2022 N.Y. Laws 48), amending single point of contact requirements for certain delinquent borrowers.  What changes does the measure require for servicer protocols?

New York SPOC Requirements: As created effective January 2, 2022, Section 6-o of the New York Banking Law required a lender to provide a single point of contact (“SPOC”) to a borrower who: (a) is 60 or more days delinquent on a “home loan”; and (b) chooses to pursue a loan modification or other foreclosure prevention alternative.  The obligation arose in response to a written or electronic request from the borrower, and required the lender (or a servicer acting on the lender’s behalf) to provide the SPOC within 10 business days of such request.

As amended by AB 8771 retroactive effect to its creation, the section: (a) applies the SPOC obligation to any borrower who is 30 or more days delinquent; and (b) no longer conditions the obligation on an affirmative request from the borrower.  The amended section also authorizes the Superintendent of Financial Services to establish rules and regulations relating to the SPOC requirement.

Impact of the Amendment: The amendment brings Section 6-o of the Banking Law closer to the language of New York’s Mortgage Loan Servicer Business Conduct Regulations (“Part 419” of the Superintendent of Financial Services Regulations).  Since its adoption in final form in December 2019, Rule 419.7 has required a servicer to “assign a single point of contact to any borrower who is at least 30 days delinquent or has requested a loss mitigation application (or earlier at a servicer’s option).”  (Emphasis added.)  As we have discussed, both requirements are in contrast to the CFPB’s Mortgage Servicing Rules, which requires assignment of a SPOC to borrowers who are 45 days delinquent.  However, there are a few notable distinctions.

First, Section 6-o does not define a “single point of contact,” leaving open whether only one individual may serve that role with respect to any particular borrower.  Part 419 provides the SPOC may be either “an individual or designated group of servicer personnel each of whom has the ability and authority to perform the responsibilities” of the SPOC as set forth in Rule 419.7(b).  Part 419 further clarifies, however, that if a servicer designates a group of personnel to fulfill the SPOC responsibilities, “the servicer shall ensure that each member of the group is knowledgeable about the borrower’s situation and current status in the loss mitigation process, including the content and outcome of any communication with the borrower.”

Second, Part 419 specifies the obligations of a servicer and a designated SPOC for a delinquent borrower.  Specifically, Part 419:

  • requires the SPOC to “attempt to initiate contact with the borrower promptly following the assignment of the single point of contact to the borrower;”
  • specifies the responsibilities of the SPOC with respect to the borrower’s participation in loan modification or loss mitigation activities;
  • requires coordination with other servicer personnel (in particular, to ensure that foreclosure proceedings are halted when required by Part 419); and
  • requires the SPOC to remain assigned and available to the borrower until either the borrower’s account becomes current or the servicer determines that the borrower has exhausted all loss mitigation options available from or through the servicer.

Section 6-o, by contrast, does not include such specifications.  However, by granting the Superintendent rulemaking authority, the amended section leaves open the possibility that such requirements may be established by rule.

Finally, the requirement under Rule 419.7 provides broad coverage, extending to any mortgage loan serviced by a servicer within the scope of Part 419 (i.e., all first- and subordinate-lien forward and reverse mortgage loans) where the borrower (a) is 30 days or more delinquent, or (b) has requested a loss mitigation application.  By contrast, the requirement under Section 6-o applies to a narrower subset of residential mortgage loans.  The obligation extends only to a “home loan,” defined under Section 6-l of the Banking law to be limited to forward mortgages secured by one- to four-family residential property that, at origination, do not exceed the Fannie Mae conforming loan limit (among other conditions).  Further, the obligation under Section 6-o requires both that the borrower meet the delinquency threshold (30 or more days) and have chosen to pursue a loan modification or other foreclosure prevention alternative.

Takeaways:  Given the distinctions between the obligations to which a lender is subject under Section 6-o (and which it may delegate to a servicer), and those to which a servicer is subject under Part 419, we recommend careful review and coordination of loss mitigation procedures to ensure the proper fulfillment of SPOC obligations for delinquent borrowers in New York.  Further given the retroactive effective date of the measure, the need for such review is urgent.

Fourth Circuit Rules That a Mortgage Servicer Can Be Liable for FDCPA Violations Even if Not Subject to the FDCPA

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A&B ABstract:

Putative class action plaintiffs recently prevailed on appeal in a case involving mortgage servicing fees charged to Maryland borrowers. In doing so, the opinion opens the door for FDCPA liability for all mortgage servicing activity and other collection activity in Maryland, even if such activity is otherwise exempt from FDCPA liability.

The Maryland Consumer Debt Collection Act

The case is a putative class action challenging certain fees charged by the borrowers’ mortgage servicer in the ordinary course of business. Among other claims, the plaintiffs alleged that the servicer violated the Maryland Consumer Debt Collection Act (MCDCA). Specifically, the MCDCA prohibits a “collector” from “engag[ing] in any conduct that violates §§ 804 through 812 of the federal Fair Debt Collection Practices Act.” The plaintiffs alleged that the attempt to collect certain mortgage servicing fees violated the FDCPA’s proscription for a “debt collector” to engage in “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”

The MCDCA applies to any “collector,” defined as any “person collecting or attempting to collect an alleged debt arising out of a consumer transaction.” The FDCPA, on the other hand, uses the term “debt collector” which is defined with several limitations and exceptions, including for debt that was not in default when obtained. Despite the narrower scope of the FDCPA, plaintiffs in the case argued that a servicer could engage in conduct that violated the FDCPA, and thereby be in violation of the MCDCA, even if the servicer was not a “debt collector” subject to the FDCPA.

The district court dismissed the case before considering class certification, determining that the servicer was not a “collector” under the MCDCA and, likewise, was not a “debt collector” under the FDCPA.

The Fourth Circuit’s Decision

On appeal, the Fourth Circuit reversed and remanded the case for further proceedings, finding that the servicer was a collector under the MCDCA. Critically, the court determined that the servicer could be held liable for engaging in conduct that violated the FDCPA, even if it was not actually subject to the FDCPA. The court reasoned that even though the FDCPA only applies to “debt collectors” and, even though the MCDCA, in turn, only prohibits conduct that violates the FDCPA, an entity could still be in violation of the MCDCA even if it was not engaging in debt collection under the FDCPA. The court concluded that “[t]he MCDCA’s broader definition controls here, as it is not displaced by the federal definition.” The court stated that the MCDCA only incorporated the FDCPA’s “substantive provisions” contained in §§ 804 through 812, thus the FDCPA’s applicable definitions and exemptions, contained in §§ 803, 818 were to be disregarded in determining if a violation of the FDCPA occurred for purposes of the Maryland law.

Takeaway

This decision subjects several otherwise exempt and excluded actors to potential liability for FDCPA violations via the MCDCA within Maryland. In addition to mortgage servicers, who are typically exempt from the FDCPA under normal circumstances, the FDCPA contains a number of other exemptions including for entities collecting their owns debts, process servers, and certain nonprofit organizations performing credit counseling. Under the reasoning of the Fourth Circuit’s decision, all of these actors could now potentially be held liable under the MCDCA for FDCPA violations within Maryland. Furthermore, all such actors arguably need to comply with the strictures of the FDCPA in communicating with consumers. This would include restrictions on the timing, frequency, and format of communications with consumers that do not apply to communications outside the scope of the FDCPA. On February 15, 2022, the court denied a Motion for Rehearing and Rehearing En Banc, thus finalizing the decision.

Following this decision, recent legislation introduced in the Maryland General Assembly may delay foreclosure proceedings in Maryland. On February 3, 2022 a delegate introduced HB 803, which would allow borrowers to file counterclaims in response to foreclosure proceedings, would make additional procedural requirements applicable to such actions, and would prevent a foreclosure from proceeding if a borrower files such a counterclaim. Under the Fourth Circuit’s decision, servicers could experience increased MCDCA challenges alleging violations of the FDCPA that would otherwise not apply, and, combined with the additional procedural requirements and delays contemplated by HB 803, foreclosure proceedings could face significant delays as a result.

While some state laws offer state remedies for a violation of federal law, we are unaware of any case that has interpreted such a law to expand the scope of liability under the incorporated federal law. While states can and have adopted consumer statutes that are more expansive than federal law, it remains to be seen if other courts will now interpret simple incorporation of federal law as something more expansive as well.

New Proposed Registration Requirements for Covered Financial Products and Services Under the California Consumer Financial Protection Law

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Last year, California passed the California Consumer Financial Protection Law (“CCFPL”), which renamed the Department of Business Oversight as the Department of Financial Protection and Innovation (“DFPI”) and expanded the authority of the department, including increased regulatory authority related to certain financial products. Under that widened purview, the DFPI has now proposed regulations requiring registration for certain financial product providers, including education financing and wage-based advances.

The CCFPL as Enacted

Under the statute, certain regulatory burdens apply to “covered persons” and “service providers” that broadly encompass entities offering extensions of credit and other consumer financial services and products, with certain exceptions and exemptions. With respect to the currently proposed regulations, the CCFPL allows the DFPI, with certain exemptions, to prescribe rules regarding registration requirements applicable to a covered person engaged in the business of offering or providing a consumer financial product or service. The CCFPL also states, however, that registration will not be required for any covered person licensed by the department under another law and who is providing a financial product or service within the scope of that license. The DFPI has sought comments regarding the proposed regulations including specifically “to clarify whether and when the registration requirements apply to Department licensees and licensees and registrants of other state agencies.” Comments on this and other potential issues with the proposed regulations may be submitted by December 20.

The Proposed Regulations

The proposed regulations, if finalized, would require registration for “subject products,” including for covered persons providing wage-based advances or education financing. Waged-based advances are defined in the proposed regulations as “funds paid to workers by a provider other than an obligor that are based on wages or compensation that a worker or the worker’s obligor has represented, and that a provider has reasonably determined, have been earned but have not, at the time of the advance, been paid to the worker for work performed for or on behalf of an obligor or obligors.” Education financing is defined to include any credit “extended for the purpose of funding postsecondary education and costs of attendance at a postsecondary institution, including, but not limited to, tuition, fees, books and supplies, room and board, transportation, and miscellaneous personal expenses.”

The proposal contemplates registration through the Nationwide Multistate Licensing System (NMLS), including use of uniform forms (“MU1”). Applicants are not required to complete Section 10 (“Bank Account Information”) or Section 17 (“Qualifying Individuals”) of Form MU1. With respect to described business activities, in addition to any other relevant activities, education financers would need to designate “private student loan lending,” while those providing wage-based advances fall into the category of “other – consumer finance” on the form. Registrants would also need to disclose other trade names, designate contact employees, provide organizational charts (including indirect owners), management charts, and detailed business descriptions. Registrants would also need identify certain individuals, including principal officers, directors, managing members, general partners, individuals controlling (directly or indirectly) 10% or more, and responsible individuals. Identified individuals do not need to complete fingerprinting. Branch offices would also be registered, including identification of branch managers, separately using form MU3. Changes in information submitted would also be updated in NMLS. Annual financial reporting and disclosures, as well as fees are proposed too.

Outside of NMLS, the regulations, if finalized as proposed, would require an applicant for registration to submit directly to DFPI supplemental information including sample forms. Education financers would need to include copies of third-party contracts and agreements as well as marketing material and additional sample documents. With respect to those providing wage-based advances, the supplemental application would also include additional sample contracts and agreements used to provide the service as well as additional information regarding the product cycle.

Conclusion  

The registration requirements are not effective until DFPI completes the comment period and other rulemaking procedures. It is unclear what the effective date of any future finalized regulations would be. It is also not clear if current industry participants will be able to continue to operate while registrations are pending once the rules are finalized. We will continue to monitor the situation as the regulations proceed.

Application Deadline Looms Under California Debt Collection Licensing Act

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On September 25, 2020, California Governor Gavin Newsom approved Senate Bill 908 – enacting the Debt Collection Licensing Act (DCLA). The DCLA, which takes effect January 1, 2022, requires a person or entity engaging in the business of debt collection in California to be licensed and provides for regulatory oversight of debt collectors by the Department of Financial Protection and Innovation (DFPI). Pursuant to the DCLA, debt collectors who submit an application by Dec. 31, 2021 may continue to operate in California pending the denial or approval of their application. On April 23, 2021, the Commissioner of the DFPI (the Commissioner) issued proposed regulations (the Regulations) to adopt procedures for applying for a debt collection license under the DCLA. On June 23, 2021, after consideration of public comments, the Commissioner issued a Notice of Modifications to the Regulations (the Modifications). On November 15, 2021, the Commissioner issued a second Notice of Modifications to the Regulations (the Additional Modifications).

The Regulations

The Regulations – among other things –  define relevant terms, include information regarding application procedures, and contain other miscellaneous information regarding licensing. The definition of “debt collector” was substantially the same as the broad definition under the enacted DCLA (which in turn is very similar to the Rosenthal FDCPA definition) and encompasses a wide array of activity in relation to consumer debt, including mortgage debt. Likewise, the regulations define “debt buyer” identical to the existing definition in Section 1788.50 of the Civil Code, which contains an exception for purchasers of a loan portfolio predominantly consisting of consumer debt that has not been charged off. See our prior post on the DCLA for more information regarding the scope of the licensure requirement.

The Regulations designate NMLS for the submission and processing of applications and reference and rely upon uniform NMLS forms and procedures. The application process includes completion of the NMLS uniform licensing form (MU1), including by any affiliates to be licensed under the same license. The application process includes collection of information regarding other trade names, web addresses used by the applicant, contact employees, organizational information (including information on any indirect owners), a detailed statement of business activities, certificates of good standing, and sample dunning letters. Applicants do not need to provide bank account information in Section 10 of Form MU1 or information on a qualifying individual in Section 17 of Form MU1. Fingerprinting (which is processed outside of NMLS), criminal history checks, and credit report authorizations are required for certain related individuals, including officers, directors, managing members, trustees, responsible individuals, and any individual owning directly or indirectly 10% or more of the applicant. An investigative background report is also required for any such individual who is not residing in the United States. Branches must also be licensed through NMLS uniform forms (MU3). Notice and additional filing requirements apply upon any change in the information submitted. The Regulations also contain surety bond requirements and outline the Commissioner’s authority in reviewing and examining applicants.

First Notice of Modification to the Regulations

On June 23, 2021 the Commissioner issued the Modifications which made several changes to the Regulations including, revising the definition of “applicant” to make clear that an affiliate who is not applying for a license is not an “applicant” – this revision, however, does not seem to impact the ability of applicants to include affiliates under a single license. Further, the Modifications added an English language requirement for documents filed with the DFPI. The Modifications also eliminated certain requirements to provide the Commissioner with additional copies of documents submitted through NMLS and otherwise revised requirements to allow information to be processed predominately through NMLS. The Modifications also eliminated the need to file certain fingerprinting documents in NMLS. Additionally, the Modifications added a requirement to explain derogatory credit accounts for any individual subject to credit reporting requirements. The Modifications also removed requirements that applicants provide information concerning compliance reporting and audit structure, the extent to which they intend to use third parties to perform any of their debt collection functions, that applicants file a copy of their policies and procedures with the NMLS, and certain annually collected financial information. The Modifications also eliminate the Commissioner’s ability to modify surety bond amounts.

Second Notice of Modification to the Regulations

On November 15, 2021 the Commissioner issued the Additional Modifications to the Regulations which amended the definitions of “branch office” and “debt collector.” “Branch office” was amended to mean any location other than the applicant’s or licensee’s principal place of business so long as “activity related to debt collection occurs” at that location and that the location is “held out to the public as a business location or money is received at the location or held at the location.” The Additional Modifications state that “holding a location out to the public” includes the receipt of postal correspondence and meeting with the public at the location, placing the location on letterhead, business cards, and signage, or making “any other representation to the public that the location is a business location.”

The definition of “debt collector” was amended to reference the definition set forth in the DCLA, rather than actually defining the term. Thus, any future revisions to the DCLA definition will automatically apply to the regulations as well.

Conclusion  

Debt Collection agencies and participants in California should anticipate additional regulations from the DFPI as aspects of the DCLA continue to be hammered out – in the interim any entity subject to licensing who has not done so already should submit an application before end of year to ensure continued operations.

California, New York Create Disclosure Requirements for Commercial Financing Transactions

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A&B ABstract:

As a general matter, state regulation of commercial lending is relatively light, and few states impose licensing requirement on commercial loan origination.  In two noteworthy state developments, however, California and New York will require loan “providers” to furnish certain consumer-like disclosures to prior to the consummation of commercial financing transactions.

The California requirements will not take effect until the effective date of final implementing regulations promulgated by the California Department of Financial Protection and Innovation (DFPI), which has not yet occurred.  The New York requirements take effect on January 1, 2022.  Notably, both laws exempt commercial financing secured by real property, but it is unclear whether mezzanine lending is included in such exemptions.

The New York Law

The New York law requires “providers” of commercial credit to provide Truth-in-Lending Act-like disclosures to applicants at the time it extends a specific offer of the commercial financing in amounts of $2,500,000 or less.  “Providers” include both lenders and brokers.  The NY law applies to closed end financing, open-end financing, sales- based financing, including merchant cash advances and factoring transactions.

Exemptions:

The NY Law provides a de minimis exemption, “for any person or provider who makes no more than five commercial financing transactions in [New York] in a twelve-month period.” Further, “Financial institutions”, which include banks, and certain other chartered depository institutions authorized to conduct business in New York, are also exempt from the new commercial loan disclosure law, but the subsidiaries or affiliates of such exempt financial institutions are not exempt.     Commercial mortgage financings over $2,500,000 are exempt from the law as are transactions secured by real property.  It is unclear whether mezzanine lending in amounts of $2,500,000 or less would be covered by the new law.

Required disclosures:

The NY law requires providers to furnish the following type of disclosures, depending upon the form of the transaction:

  • The total amount of the commercial financing (or maximum amount of available credit) and, if different, the disbursement amount;
  • The finance charge;
  • The annual percentage rate or APR, calculated largely in accordance with TILA and Regulation Z;
  • The total repayment amount;
  • The term of the financing;
  • The amounts and frequency of payments;
  • A description of all other potential fees and charges;
  • A description of any prepayment charges; and
  • A description of any collateral requirements or security interests.

The California Law

The California law  (SB 1235), which was signed into law on September 18, 2018 but is not effective until the DFPI promulgates final regulations, amends the California Finance Lenders Law (CFL) to require “providers” licensed under the CFL who facilitate “commercial financing” to a “recipient” to disclose to the recipient at the time of extending a specific offer of commercial financing specified information relating to the transaction and to obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction.

Applicability:

The California law otherwise applies to, among other things, commercial loans, certain commercial open-end plans, factoring, merchant cash advances, and commercial asset- based lending.  Unlike the NY law which applies to brokers as well as lenders,  under the California law “provider”  is primarily limited to entities extending credit, such as lender/originators, but also includes a non-bank partner in a market place lending arrangement who facilitates the arrangement of financing through a financial institution.   Further, the California law defines “recipient” as the applicant of commercial credit of $500,000 or less.

Exemptions:

The California law exempts, among others, depository institutions and entities that make no more than one commercial financing in a 12 month period or who make five or fewer commercial financing transactions in California in a 12 month period that are incidental to the business of the entity relaying on the exemption.

Further, the California law does NOT apply to transactions greater than $500,000 or to real estate-secured commercial loans or financings.  It is unclear, however, whether mezzanine lending in amounts of $500,000 or less would be covered by the California law.

Required disclosures:

Once implemented, the California law will require the provider to disclose, among other information:

  •  The total amount of funds provided;
  • The total cost of the financing;
  • The term or estimated term;
  • The method, frequency and amount of payments; and
  • A description of prepayment penalties.
Implementation:

The DFPI has issued several sets of proposed regulations and has solicited public comment on these regulations.  The DFPI issued its most recent version of the regulations for public comment on October 12, 2021, and the comment period ended on October 27, 2021.  It is uncertain when the DFPI intends to promulgate final regulations with a mandated effective date.

The link to the California law is below:

Takeaway:

Up to this point, state regulation of commercial lending has been relatively light.  The California and New York laws are not only burdensome to lenders, they could be harbingers of developments to come in this area.