Alston & Bird Consumer Finance Blog

State Law

NYDFS Issues Guidance to Mortgage Servicers Regarding Assessment of Registration Fees

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A&B ABstract:

On September 1, 2020, the Deputy Superintendent of the New York Department of Financial Services (“NYDFS”), issued guidance (the “Guidance”) to New York State regulated mortgage lenders and servicers (collectively referred to as “Servicers”) regarding fees paid to register mortgages in default. The Guidance reminds Servicers of the restrictions on fees and charges set forth under Part 419 of the Superintendent of Financial Services Regulations (“Part 419”) and directs Servicers to reverse and/or refund and credit registration fees impermissibly charged to New York borrowers and to create a log of all borrowers who were either charged, or paid any registration fee to a Servicer.

Part 419 Fee Restrictions

In December 2019, the NYDFS finalized amendments to Part 419, nearly 10 years after its initial adoption. Part 419, which sets forth business conduct requirements for mortgage loan servicers operating in the state, was amended to include expansive obligations that, in certain instances, exceed obligations under the Consumer Financial Protection Bureau’s mortgage servicing rules.

Under Section 419.5 of the amended regulations, servicers may only collect certain specified types of fees from a borrower, subject to certain conditions.  Such fees include attorney’s fees, late and delinquency fees, and property valuation fees.  In addition, a servicer may collect a fee if it is for a service that is actually rendered to the borrower, reasonably related to the cost of rendering that service, and is: (1) expressly authorized and clearly and conspicuously disclosed by the loan instruments and not prohibited by law; (2) expressly permitted by law and not prohibited by the loan instruments; or (3) not prohibited by law or the loan instruments and is for a specific service requested by the borrower that is assessed only after disclosure of the fee is provided and the borrower expressly consents to pay the fee in exchange for the service.

NYDFS Guidance

The Guidance indicates that the NYDFS has become aware that “certain counties, cities and other municipalities in New York State, by ordinance or otherwise, are requiring mortgage lenders and servicers…to register mortgages declared to be in default…with the county, city or other municipality in which the real property is situated” and that some Servicers have charged borrowers, or collected from their account, the fee for such registrations.

The Guidance reminds Servicers that Section 419.5 of Part 419 “only permits [a servicer] to collect certain specified types of fees from a [borrower], consisting of attorney’s fees, late and delinquency fees, property valuation fees, and fees for services actually rendered to a mortgagor when such fees are reasonably related to the cost of rendering the service to the borrower.” Because a “[r]egistration [f]ee is neither an attorney fee, late or delinquency fee, property valuation fee, or fee for a service rendered to a [borrower],” Servicers are prohibited from charging or collecting such a fee from a borrower under Part 419.

Servicers subject to the requirements of Part 419 who, at any time, collected any registration fees from a borrower, are directed to refund and credit the full amount of such registration fees to the account of the borrower. If the registration fee was charged to a borrower’s account, but was not collected, the Servicer must remove and reverse any and all registration fees charged to the borrower’s account.

Finally, Servicers are directed to create a log of all borrowers that were either charged, or paid any registration fee to the servicer “at any time.” The log must contain details of the full amounts of the registration fees, whether such fees were collected or charged, and the date(s) the full amounts of collected registration fees were refunded and credited to or, in instances where the fee was charged but not collected, removed and reversed from borrowers’ accounts.  The Guidance indicates that the NYDFS plans to inspect the log during its next examination of Servicers.

 Takeaway

The Guidance is a reminder to Servicers to ensure compliance with the fee restrictions under the amended Part 419 regulations.  Servicers should review their portfolio of New York loans to ensure borrowers who paid, or were charged, a registration fee are provided appropriate remediation, as the NYDFS has already flagged this as an issue that will be scrutinized in upcoming servicing examinations.

Colorado “True Lender” Matters Settle

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A&B ABstract:

As we have previously reported, the Administrator of the Colorado Uniform Consumer Credit Code has been engaged in litigation against certain marketplace lending programs, alleging the marketplace lenders were the true lenders and could not enforce contracts in excess of Colorado’s statutory interest rate cap.

On August 18, 2020, the parties filed Stipulations to Dismiss the two matters – Martha Fulford, Administrator Uniform Consumer Credit Code v. Marlette, Wilmington Trust, NA, solely as trustee for certain trusts, Wilmington Savings Fund Society, and intervenor Cross River Bank, and Martha Fulford, Administrator Uniform Consumer Credit Code v. Avant of Colorado LLC d/b/a Avant, Avant Inc. n/k/a Avant, LLC, Wilmington Trust, N.A., not in its individual capacity, but solely as a trustee for certain trusts, Wilmington Saving Fund Society, FSB, not in its individual capacity, but solely as trustee for certain trusts, and Avant PB SPV, LLC.  The Stipulation included a copy of the actual settlement agreement as an Exhibit.

Settlement Terms

The settlement is being hailed by the parties as a win for Colorado borrowers as well as all parties to the litigation.  Under the settlement, responsible lending programs can continue to offer Colorado borrowers liquidity while protecting them from higher cost credit programs, while preserving the State’s right to supervise such programs.  It also maintains the enforceability of those loans originated by the banks under these programs, whether retained by the banks or transferred to a non-bank purchaser.  And it provides access to innovative products designed to meet the needs of underserved consumers.

Safe Harbor

In resolving the litigation, the settlement provides a safe harbor for loans originated to Colorado borrowers under the programs, and at least some other similar programs, if certain conditions are met.  Those terms include that:

  • The maximum APR not exceed 36%;
  • The non-bank platforms obtain or maintain a Colorado license and file regular reports;
  • All aspects of the program be subject to active supervision by the banks consistent with applicable banking guidelines;
  • The bank will fund all loans at origination; and
  • Certain limitations on the platforms’ ability to commit to purchase certain loans originated by the banks in advance.
Loan Deferral

In addition, the platforms have agreed to make available to Colorado borrowers with loans having interest rates above 21% a loan deferral program that allows them to defer installments for up to 60-days.  This first of its kind settlement may provide a framework for similar programs throughout the United States, allowing underserved consumers to obtain responsible credit on terms that give them the financial freedom to meet their needs from lenders who provide a transparent and cost effective means of accessing those credit markets.

Alston & Bird represented the Avant and Wilmington defendants in the Avant matter, led by John Redding, a partner in the firm’s Los Angeles office.

Delaware Governor Issues Order Modifying Restrictions on Residential Foreclosures and Evictions

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A&B Abstract:

On June 30, 2020, Delaware Governor, John Carney, issued a Twenty-Third Modification (the “Order”) to the Declaration of a State of Emergency (the “State of Emergency”), initially issued on March 12, 2020. The Order became fully effective July 1, 2020. The Order addresses a number of issues that impact residential mortgage loan servicers, including restrictions on residential foreclosure and evictions and certain fees or charges, which modifies guidance issued under the Sixth Modification of the State of Emergency (the “Sixth Modification”), which we previously discussed.

Restrictions on Late Fees and Excess Interest for Missed Payments

Under the Sixth Modification, with respect to any missed payment on a residential mortgage occurring during the State of Emergency, no late fee or excess interest could be charged or accrued on the account for such residential mortgage during the State of Emergency. Under the Order, these provisions have been removed in their entirety.

Foreclosure Restrictions

The Order continues to impose restrictions on a mortgage servicer’s ability to initiate or complete a foreclosure action or sale, however, the Order replaces Paragraph C of the Sixth Modification and makes certain other significant changes thereto.

Notably, the Order lifts the stay of deadlines in any action pursuant to paragraphs C.2, C.3, and C.4 of the Sixth Modification.  Paragraph C.2 of the Sixth Modification had extended all deadlines in residential mortgage foreclosure actions, including those related to the Automatic Residential Mortgage Foreclosure Mediation Program established pursuant to § 5062C of Title 10 of the Delaware Code.  Paragraph C.3 prohibited residential properties subject to a residential mortgage foreclosure action, for which a judgment of foreclosure was issued prior to the State of Emergency, from proceeding to a sheriff’s sale until 31 days after the State of Emergency.  Paragraph C.4 prohibited any residential property that was the subject of a residential mortgage foreclosure action, and which was sold at sheriff’s sale, from being subject to an action of ejectment or write of possession until 31 days following the termination of the State of Emergency. The Order lifts these restrictions, unless a court determines that a longer period is needed in the interest of justice.

With the lift of the stay of deadlines, the Order allows a party to act to remove individuals from residential properties, subject to a residential mortgage foreclosure action, where a judgment of foreclosure was issued prior to the declaration of the State of Emergency. However, individuals still cannot act to, and sheriffs, constables, and their agents, cannot remove individuals from their homes unless a judgment of foreclosure was obtained before March 13, 2020. All other provisions of Chapter 49 of Title 10 of the Delaware Code remain in effect in accordance with their terms.

Restrictions on Evictions

Similarly, with respect to evictions, the Order replaces paragraph B of the Sixth Modification and makes significant additional changes thereto.

The Order now provides that actions for summary possession may be filed with respect to any residential unit located within Delaware, but must be stayed to permit the Justice of the Peace Court to determine whether the parties would benefit from court supervised dispute resolution. Previously, no party could bring an action for summary possession for any residential rental unit located in Delaware. Actions that were brought before the State of Emergency, for which no final judgment had been entered, are further stayed.

Sheriffs, constables, and their agents continue to be prohibited from removing individuals from residential properties during the time the Order is in effect, unless a court determines on its own motion, or upon the motion of the parties, that it is necessary in the interest of justice. Additionally, the Order continues to prohibit the charging late fees or interest with respect to any past due balance for any residential unit during the State of Emergency.

Takeaway

The Order makes significant changes to the Sixth Modification to the Declaration of the State of Emergency, which significantly impacts mortgage servicing in Delaware. Servicers should carefully review the Order to fully determine their rights and obligations with respect to Delaware borrowers.

State Courts Require Strict Compliance with Foreclosure Procedures

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A&B ABstract: In response to the economic fallout of the COVID-19 pandemic, state executives and legislatures have seriously restricted residential foreclosures and evictions.  These restrictions have included requiring forbearance for private mortgage loans and placing moratoria on foreclosures.

While these restrictions generally apply to residential mortgages lapsed in the wake of the global pandemic, they do not protect consumers who were facing foreclosure prior to the crisis.  To pick up the slack in this area, various state judiciaries are tightening the reigns on mortgage servicers, demanding servicers’ strict compliance with the notice provisions of mortgage agreements and state foreclosure procedures.  Courts have even gone so far as to void foreclosure actions where the breach notices sent to consumers were technically deficient but substantively sound.

Alabama Court of Civil Appeals Decision

In June 2020, the Alabama Court of Civil Appeals voided a foreclosure sale because of a servicer’s failure to strictly comply with the notice provision in the mortgage agreement.  In Barnes v. U.S. Bank N.A., as Trustee for NRZ Pass-Through Trust V, No. CV-17-901127, the mortgage agreement required any notice of default to inform the borrower of “the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale” of the mortgaged property.

The servicer’s notice, however, employed equivocal language concerning the borrower’s rights, informing the borrower only that they “may have the right” to challenge the default.  As a result, the court found the foreclosure sale was void, cementing the law in Alabama that a defect in the form of a default notice vitiates the legality of an ensuing foreclosure.

Rhode Island Supreme Court Decision:

Similarly in June 2020, in a matter of first impression, the Rhode Island Supreme Court vacated a foreclosure because the notice of default did not strictly comply with the requirements set forth in the mortgage agreement.  In Woel v. Christiana Trust, as Trustee for Stanwhich Mortgage Loan Trust Series 2017-17, et al., No. 2018-347-Appeal (PM 16-921), the mortgage agreement contained a nonuniform covenant developed for Rhode Island mortgages.  According to the covenant, in the event of a default, the mortgagee must provide a notice of default informing the borrower of “the right to reinstate after acceleration.”

The borrower defaulted and received a notice of default informing the borrower that they had “the right to cure the default after acceleration,” not the specific right to reinstate.  Based on this minor discrepancy in language, the Rhode Island Court concluded that there had not been strict compliance with the covenant’s notice requirements, rendering the foreclosure a nullity.

New York Appellate Division Decision:

Finally, in July 2020, the Second Department of the New York Appellate Division reversed a judgment of foreclosure and sale because the notice the borrowers received did not strictly comply with New York’s Real Property Actions and Proceeds Law (“RPAPL”).  The version of RPAPL at issue required notices to provide a list of five housing counseling agencies serving the region where the borrowers reside.  The notice to the borrower, however, included three agencies serving the region and two agencies serving different regions.

Even though there was no evidence that any of the three compliant agencies denied the borrowers service, the Appellate Division held that under a strict compliance standard, a technical deficiency in the notice was dispositive, regardless of its substantive effect.

Takeaway:

These decisions are not necessarily groundbreaking, as courts have generally required strict compliance in the foreclosure context.  However, the above decisions indicate a growing willingness among the judiciary to prevent foreclosure on even the narrowest technical grounds.  As such, servicers should ensure that any notice of default sent to a borrower strictly complies with the terms of the mortgage agreement and state foreclosure proceedings because in a post-COVID-19 world, any technical deficiency will likely be fatal to a servicer’s efforts.

Louisiana Enacts Virtual Currency Company Law

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A&B ABstract:  On June 13, Louisiana enacted a comprehensive new law imposing a licensing obligation on entities that engage in virtual currency business activity.

Effective August 1, 2020, House Bill 701 (the “Law”) will require the licensure of entities that engage in virtual currency business activity in Louisiana with Louisiana residents. The Law provides that an application will be provided through the Nationwide Mortgage Licensing System and Registry (“NMLS”), and we have confirmed with the regulator that the application will become live on the NMLS on August 1.

A New Licensing Obligation

The Law provides that “[a] person shall not engage in virtual currency business activity, or hold itself out as being able to engage in virtual currency business activity, with or on behalf of a resident…”

What is Virtual Currency Business Activity?

“Virtual currency business activity” means:

  1. “Exchanging, transferring, or storing virtual currency or engaging in virtual currency administration, whether directly through an agreement with a virtual currency control services vendor.
  2. Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals.
  3. Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
    1. Virtual currency offered by or on behalf of the same publisher from which the original digital representation of value was received.
    2. Legal tender or bank credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.”

Exemptions/Applicability

Notably, the licensure provision excludes activity governed by the Electronic Fund Transfer Act, the Securities Exchange Act, the Commodities Exchange Act, and the Louisiana securities laws. Regulated financial institutions, attorneys providing escrow services, and title insurance companies providing escrow services are among the entities exempt from licensure.

Additionally, we note that not every virtual currency business may have to obtain a licensure under the Law. A person whose volume of virtual currency business activity in the United States dollar equivalent of virtual currency will not exceed $35,000 annually may engage in business without a license provided that they meet the statutory requirements and notify the Louisiana Office of Financial Institutions.

Enforcement/Violations

The Law grants the Office of Financial Institutions (“Office”) enforcement authority against licensees, registrants, and unlicensed persons.

First, the Office may bring an enforcement action against any such person who “materially violates any provision of this [Law], a rule adopted pursuant to the [Law], or any other law of [Louisiana] which applies to virtual currency business activity of a violator with, or on behalf of, a resident.”

Second, the Office may bring an enforcement action against such a person who “does not cooperate substantially with an investigation by the [Office], fails to pay a fee, or fails to submit a report or documentation.”

Third, the Office may bring an enforcement action against any such person who “in the conduct of its virtual currency business activity with, or on behalf, of a resident” engages in an unsafe or unsound act or practice, an unfair or deceptive act or practice, fraud or intentional misrepresentation, or misappropriation of legal tender, virtual currency, or other value held by a fiduciary, among other conduct.

Fourth, the Office may take enforcement action if a federal or state agency takes an action against the licensee, registrant, or person that would constitute an enforcement measure if the Office had taken the action.

Finally, a licensee. registrant, or unlicensed person may be subject to enforcement action for being “convicted of a crime related to its virtual currency business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by [the Office], makes the licensee, registrant, or person unsuitable to engage in virtual currency business activity.”

We do not note any private right of action under the Law or any remedies for consumers for a licensee that has violated any provisions of the Law.

Takeaway:

Louisiana’s passage of the Law is a state’s latest foray into cryptocurrency licensing, and signals the state’s willingness to continue to regulate cryptocurrency businesses.

Entities that will be required to obtain a license under the Law should be ready to apply on August 1, 2020, when the application becomes live on the NMLS.