Alston & Bird Consumer Finance Blog

State Law

Maryland Regulator Puts Lenders and Servicers on Notice Regarding the Assessment of So-Called “Convenience Fees”

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A&B Abstract:

On May 12, 2022, the Maryland Office of the Commissioner of Financial Regulation (the “OCFR”) issued an Industry Advisory (the “Advisory”) “put[ting] [the] industry on notice” of the recent decision issued by the 4th Circuit Court of Appeals in Ashly Alexander, et. al. v. Carrington Mortgage Services, LLC.  The Advisory directs lenders and servicers to review their practices in charging consumer borrowers loan payment fees (referred to herein as “convenience fees”) both to ensure on-going compliance with the law and to determine whether any improper fees have previously been assessed so that they can undertake appropriate reimbursements to affected borrowers.

The Carrington Decision

In Carrington, the 4th Circuit Court of Appeals held that the Maryland Consumer Debt Collection Act (“MCDCA”) incorporates §§ 804 through 812 of federal Fair Debt Collection Practices Act (“FDCPA”), including the FDCPA’s prohibition on “[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,” under § 808(1). Because Maryland law does not expressly permit or authorize the assessment of convenience fees, the court held that such fees must be expressly authorized by the loan documents in order to be permitted under § 808(1).

The Carrington court further clarified that the FDCPA’s substantive provisions apply to any person who meets the broad definition of a “collector” under the MCDCA, even if such person would not be considered a “debt collector” under the FDCPA. Notably, the FCDPA contains important exclusions from the definition of “debt collector”, such as when a person is collecting a debt that was obtained prior to default, or if the person collecting the debt was the original creditor.  On the other hand, as amended effective October 1, 2018, the MCDCA defines a “collector” broadly to include all persons collecting or attempting to collect an alleged debt arising out of a consumer transaction and does not provide for similar exclusions.  We discussed the Carrington decision in greater detail in a prior blog post.

The Advisory

The Advisory reminds Maryland “collectors” of the Carrington court’s ruling, that collecting fees on any form of loan payment violates the MCDCA if the fees are not set forth in the loan documents. As a result, Maryland lenders and servicers are cautioned “that any fee charged, whether for convenience or to recoup actual costs incurred by lenders and servicers for loan payments made through credit cards, debit cards, the automated clearing house (ACH), [or other payment methods], must be specifically authorized by the applicable loan documents.” The Advisory makes clear that “[i]f such a fee is not provided for in the applicable loan documents, it would be deemed illegal.” Further, attempts to circumvent this fee restriction by directing consumers to a payment platform associated with the lender or servicer that collects a loan payment fee or requiring consumers to amend their loan documents for the purposes of inserting such fees could also violate Maryland law.”

The Advisory anticipates that some lenders or servicers may discontinue offering certain payment options as a result of the Carrington decision. However, the Commissioner expressly requests that such lenders or servicers promptly notify their customers of such change and encourages lenders and servicers “to work with consumers to minimize the impact any change in payment options could have, including where possible, continuing such payment options without fees, especially when consumers are attempting to pay their obligations in a timely manner.”

Lenders and servicers are directed to review their records to determine whether any improper fees have previously been assessed and, if so, make appropriate reimbursements to affected borrowers. The OCFR intends to monitor the impact that the Carrington decision has on lender and servicer fee practices and lenders and servicers can expect a follow-up on this topic from the OCFR in the coming months.

Takeaway

The implications of the Carrington decision are numerous. First, lenders and servicers must immediately cease the collection of convenience fees from Maryland borrowers, unless such fees are expressly authorized by the loan documents. Lenders and servicers choosing to discontinue certain payment services as a result of the Carrington decision, must also ensure that affected consumers are promptly notified of such change.  In addition, lenders and servicers who meet the definition of a “collector” under the MCDCA must ensure compliance with §§ 804 through 812 of the federal FDCPA, regardless of whether they meet the FDCPA’s definition of a “debt collector.” Finally, while the Carrington decision was focused on the permissibility of convenience fees, we note that the court also held that “[t]he FDCPA’s far-reaching language [under § 808(1)] straightforwardly applies to the collection of ‘any amount.’” Thus, the implications of the Carrington decision go beyond convenience fees to arguably any other fee that is not expressly authorized by the loan documents or permitted by law, and we understand that Maryland regulators have informally indicated as much.  Accordingly, lenders and servicers should carefully review all fees that are, or may be, assessed to Maryland borrowers to ensure such fees are either expressly authorized by the loan documents or permitted by law.

Utah to regulate smaller commercial non-real estate secured financings

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A&B Abstract:

We wanted to apprise you of a significant development impacting the commercial non-real estate secured lending arena which until recently has been lightly regulated by the states.  On March 24, 2022, Utah Governor Spence Cox signed into law S.B. 183, the “Commercial Financing Registration and Disclosure Act” (the “Act”) which, commencing on January 1, 2023, requires certain “providers” of non-real estate secured loans in amounts of $1 million or less (referred to as “commercial financing transactions”) to (i) register with the Utah Department of Financial Institutions (the “UDFI”) and (ii) provide certain disclosures to borrowers prior to the consummation of the transaction. Utah becomes the third state to regulate smaller commercial non-real estate secured financings, joining California and New York State which have enacted similar type of laws, but neither of which are yet effective, pending implementing regulations. Further, Utah becomes a rare state to require registration in connection with the origination of commercial purpose transactions.

Applicability of the Utah Law:

As a threshold matter, the Act applies to “providers” of “commercial financing transactions.” The Act defines “provider” as “a person who consummates more than five “commercial financing transactions” in Utah during any calendar year, including certain brokers who assist depository institutions offer “commercial financing products via an online platform.” Depository institutions and Utah-licensed money transmitters are exempt from the Act. The Act defines “commercial financing transaction” as a “business purpose transaction under which a person extends a business or commercial loan or a commercial open-end credit plan; or that is an accounts receivable purchase transaction [i.e., merchant cash advance transaction].” Notably, the Act does not apply to consumer purpose transactions, commercial transactions secured by real estate, transactions in excess of $1 million or transactions of at least $50,000 where the recipient of the funding is a motor vehicle dealer.

Notable Requirements of the Utah Law:

Effective January 1, 2023, the Act requires “providers” to register with the UDFI and maintain such registration annually. Further, prior to consummation of the commercial financing, “providers” must, among other things, disclose to borrowers: (i) the total amount of funds provided to the business; (ii) the total amount of funds disbursed to the business; (iii) the total amount paid to the “provider” under the financing; (iv) the manner, frequency and amount of each payment (or if the amount of each payment may vary, the manner, frequency and estimated amount of the initial payment); (v) information regarding prepayment of the financing; and (vi) the amount the “provider” paid to the broker, if applicable. It is anticipated that the UDFI will prescribe the specific form of the disclosures in a forthcoming rulemaking.

A person who violates the Act is subject to a civil penalty of $500 per violation, not to exceed $20,000 for all violations arising from use of the same transaction documentation or materials. Violators are exposed to civil penalties of up to $50,000 for repeat offenses after receiving notice of a prior violation.  However, violations do not impair the enforceability of the financings or create a private right of action.

Again, the Act does not apply to consumer purpose transactions, real estate-secured transactions or transactions with loan amounts greater than $1 million—or if the “provider” makes five or fewer Utah commercial financings in any calendar year.

Takeaway:

Notwithstanding these broad exemptions, this development in Utah is part of a growing trend among states to regulate small balance commercial purpose lending. Several other state legislatures are considering similar legislation which should be monitored carefully.

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.