Alston & Bird Consumer Finance Blog

State Law

New York Proposes Guidance for Regulated Virtual Currency Licensees

A&B ABstract

Since the New York Department of Financial Services (“NYDFS”) finalized regulations for virtual currency firms in 2015, several regulated virtual currency licensees (“Licensees”) have sought permission to issue new virtual currencies (i.e., coins) in addition to those included in their initial license applications. On December 11, 2019, NYDFS issued Proposed Guidance in response to these requests, and will accept comments until January 27, 2020.

Proposed Model Framework

The Proposed Guidance discusses a proposed model framework for a coin-listing or adoption policy (“Policy”) and a procedure for obtaining NYDFS approval of a Policy.  Specifically, the Proposed Guidance would require each Policy to address, at a minimum, the Licensee’s governance, risk, and monitoring of its coins.

Governance:

The board of directors of the Licensee, or any equivalent governing body, must:

  • Approve the Policy;
  • Independently make decisions to approve or disapprove a new coin;
  • Consider and address any and all conflicts of interest in connection with any review and/or decision-making process for a new coin;
  • Maintain specific minutes for meetings during which a new coin is addressed; and
  • Keep specific records of the application of the Policy to each new coin.
Risk:

The Licensee must conduct and document a full risk assessment of any new coins in a way that is entirely free of conflicts of interest. It must consider operational risks, risks associated with any technology or systems enhancements, cybersecurity risks, risks related to code defects, and legal and regulatory risks. A Licensee also must ensure that an independent audit of all associated risks is conducted.

Monitoring:

A Licensee must maintain policies and procedures to monitor adherence to the Policy.  At a minimum, such policies and procedures must include:

  • Periodic re-evaluation of the coin;
  • Adoption, documentation, and implementation of control measures to manage risks; and
  • A process for de-listing the coin.

Proposed Procedures

A Licensee may submit its Policy to the NYDFS for formal approval.  After receiving approval, the Licensee will be able to self-certify to NYDFS that its proposed adoption or listing of new coins complies with its NYDFS-approved Policy. After self-certification, a Licensee need only provide prior written notice to the NYDFS of its intent to offer and use the new coins. A Licensee with an approved Policy would not be required to obtain the approval of the NYDFS for a new coin, unlike a Licensee that does not maintain an approved Policy.

Significantly, all Licensees, irrespective of whether they maintain a Policy approved by the NYDFS, must inform the NYDFS of all coins used or offered in connection with their business activities no later than at the time of their next quarterly filing.

Comment Deadline

Interested parties should submit their comments to innovation@dfs.ny.gov by January 27, 2020, with the subject line “Proposed Coin Listing Policy Framework.” All such comments may be subject to public inspection.

Takeaway

NYDFS Superintendent Linda Lacewell has indicated that she wants New York to remain at the “jurisdiction of choice” for innovation, and these Proposed Guidelines are indicative of the state’s continued efforts to keep that standing. To that end, we can expect to see the NYDFS provide further regulatory clarity and efficiency for emerging financial services technologies and take steps to ensure that its regulation reflects the industry’s fast-paced, evolving market.

NY DFS unveils Consumer Protection Task Force, adds Former CFPB Deputy Director

A&B ABstract:

Less than one month into the new year, New York’s Department of Financial Services (DFS) has taken strong measures to make good on its proclamation that  “2020 must be the year of the consumer” by: (1) unveiling a 12-member Consumer Protection Task Force to help implement an extensive consumer protection agenda; and (2) adding former CFPB Deputy Director Leandra English as a special policy advisor to the Superintendent.

The Consumer Protection Task Force

On January 9, Superintendent Lacewell announced the roll-out of a 12-member Consumer Protection Task Force to “further DFS’ mission to protect consumer as the federal government rolls back important consumer protections.”  In his annual State of the State, Governor Cuomo expressed his belief that with the current Administration’s “rolling back of consumer protections and regulations, Americans are more exposed to predatory and abusive practices than at any time since the 2008 financial crisis.”  The DFS press release noted that one of the task force’s immediate focuses will be to help bring to fruition “the extensive consumer protections proposals included in Governor Cuomo’s 2020 State of the State agenda” which includes such initiatives as: (1) licensing and regulating debt collection companies; (2) the codification of a Federal Trade Commission rule banning confessions of judgment; (3) strengthening the state’s consumer protection laws to protect against unfair, deceptive, and abusive practices; (4) cracking down on elder financial abuse; and (5) increasing access to affordable banking services.

According to the DFS, task force members will “provide formal input on the [DFS’] consumer engagement, policy development and research” in order to “ensure that consumer’s always come first as the [DFS] develops policies and regulates the financial services industry.”  The 12-member committee consists of: (1) Chuck Bell, Programs Director for the advocacy division of Consumer Reports; (2) Elisabeth Benjamin, Esq., Vice President of Health Initiatives at the Community Service Society; (3) Carolyn Coffee, Esq., Director of Litigation for Economic Justice at Mobilization for Justice; (4) Beth Finkel, State Director for the New York State Office of the AARP; (5) Jay Inwald, Esq., Director of Foreclosure Prevention at Legal Services NYC; (6) Paul Kantwill, Esq., Distinguished Professor in Residence and Executive Director, Rule of Law Program at Loyola University Chicago School of Law; (7) Neha Karambelkar, Esq., Staff Attorney at Western New York Law Center; (8) Kristen Keefe, Esq., Senior Staff Attorney with the Consumer Finance and Housing Unit at Empire Justice Center; (9) Peter Kochenburger, Esq., Executive Director of the Insurance LLM Program and Deputy Director of the Insurance Law Center at the University of Connecticut Law School; (10) Sarah Ludwig, Esq., Co-Director of New Economy Project; (11) Frankie Miranda, Executive Director at the Hispanic Federation; and (12) Cy Richardson, Senior Vice President at the National Urban League.

Superintendent Lacewell noted that, as the federal government, in her words, “dismantles consumer protections across the board, New York has intensified its commitment” to “further solidify New York’s reputation as the consumer protection capital of America.” Lacewell added that, “[w]ith the federal government stepping down and refusing to enforce critical consumer protection law, we must make 2020 the Year of the Consumer.”

NY DFS Adds Former CFPB Deputy Director Leandra English

On January 14, 2020 the DFS announced that former CFPB Deputy Director Leandra English would be joining the DFS as a special policy advisor reporting directly to Linda Lacewell.  According to the press release, Ms. English will “help develop policy initiatives and manage DFS’ consumer protection agenda” and her appointment “strengthens the mission of the [DFS] to protect and empower New York consumers as Washington continues to roll back on consumer protections.”  Ms. English is well known for leaving the CFPB after having been appointed acting director by departing director Richard Cordray only to see the President’s administration issue a dual appointment, naming Mick Mulvaney as acting director.  The ensuing legal dispute reached the U.S. Court of Appeals for the D.C. Circuit before Ms. English ultimately resigned.

Ms. English’s most recent work was as Director of Financial Services Advocacy for the Consumer Federation of America (CFA), a “national nonprofit organization dedicated to advancing the consumer interest through research, advocacy, and education.”  One of Ms. English’s initiatives in that role was to support the Forced Arbitration Injustice Repeal Act (H.R. 1423), known as the “FAIR” Act, which would eliminate compulsory arbitration in consumer contracts and was passed by the House of Representatives in the Fall by a 225-186 vote.  Upon the bills passage, Ms. English commented that, “Americans deserve their day in court, but when companies force consumers into signing away their rights, the chances of a fair outcome diminish drastically. We thank the House for taking this important step in eliminating these clauses from contracts for products consumers use every day including credit cards and checking accounts. We now need the Senate to act to protect consumers.”

Takeaway

As the DFS continues its push to strengthen protections for New York consumers in 2020, it will be interesting to watch how such initiatives impact the DFS’ investigative and enforcement priorities.  Moreover, as New York is a bellwether state, it will be interesting to see whether other states follow suit.

New York Enacts HECM Law

A&B ABstract:

Effective March 5, 2020, New York Assembly Bill 5626 (“AB 5626”) regulates the origination and servicing of the federal U.S. Department of Housing and Urban Development (“HUD”) home equity conversion mortgages (“HECMs”).

Significant Impact to Mortgage Lenders and Servicers

With the stated purpose of providing “new regulations on reverse mortgage products pertaining to the marketing, origination, and management” of HECMs, AB 5626 will expand New York’s reverse mortgage law to apply to HECMs.  The following provides a brief summary of AB 5626’s substantive provisions:

Applicability:

The measure applies to an “authorized lender,” as defined in section 280 of the Real Property Law. Under current law, authorized lenders of proprietary reverse mortgage loans are subject to additional approval by the Superintendent of the New York Department of Financial Services. It is unclear if such additional approval will now be required to originate or service HECMs.

Advertising and Offering of Reverse Mortgages:

In addition to imposing new disclosure obligations and prohibiting an authorized lender or any other party from engaging in any unfair or deceptive practices in connection with the marketing or offering of reverse mortgage loans, AB 5626 prohibits using the words “government insured” or other similar language representing that reverse mortgage loans are insured, supported and sponsored by any governmental entity in any solicitation, or representing that any reverse mortgage loan is other than a commercial product.  This may prove challenging given that HUD characterizes its own HECM loan product as a “reverse mortgage insured by the U.S. Federal Government.”

Periodic Statements:

The measure requires an authorized lender to provide additional disclosures on the borrower’s periodic statement when the authorized lender administers payments for property obligations (such as tax payments or mortgage or homeowners insurance) and when those payments are derived from the proceeds of the mortgage.

Life Expectancy Set Aside (“LESA”): 

Under AB 5626, an authorized lender must provide notice to the borrower by telephone and first-class mail when the borrower’s home equity line of credit or LESA is depleted to ten percent or less of its value (and again when the borrower’s line of credit or LESA is depleted entirely).  The measure does not specify the timeframe for providing this notice.

Advances:

The measure prohibits an authorized lender from making an advance payment for any obligation arising from the mortgaged real property and, if there is an insurance or tax default, the authorized lender may only pay those premiums and/or taxes which are in arrears.  It is unclear if this provision applies to borrowers who have established a LESA, as HUD’s HECM regulations require a mortgagee to make disbursements for property charges before the bills become delinquent.

Occupancy Defaults:

The measure addresses situations where an authorized lender seeks to foreclose on a HECM loan because the property is no longer the primary residence of, or occupied by, the borrower.

If the authorized lender does not receive any responses to mailings related to verification of the borrower’s primary residence and/or occupancy, prior to commencing any foreclosure proceeding the authorized lender must: (a) call the borrower (or, if the borrower cannot be reached by telephone, a designated third party specified by the borrower), and (b) visit the property, in person.  During such visit, the authorized lender or its agent must provide clear information as to who they are, that the visit pertains to the reverse mortgage, the reason for the home visit, and the telephone number to call for further information.

Further, the authorized lender must wait at least 30 days following such visit, in addition to any additional time or notice requirements specified by any other provision of law, before initiating a foreclosure action on the basis that the mortgaged property is no longer the primary residence of the borrower.  If the borrower contacts the authorized lender and provides proof of residence or occupancy after such visit, but before the commencement of a foreclosure action, the authorized lender is barred from initiating such foreclosure action.  Presumably, this provision would not require an authorized lender to violate privacy laws, debt collection laws (which may only permit the authorized lender to obtain contact information and not discuss the debt), or trespassing laws.

Inspection Fees: 

AB 5626 prohibits an authorized lender from charging the borrower any fee for the visit or inspection, including any and all inspections conducted by the authorized lender to verify the status of the reverse mortgage, or any suspected or actual default condition.

Closing Attorneys: 

The measure requires both the authorized lender and the borrower to be represented at closing by an attorney, and to have at least one attorney present to conduct the closing.  It is unclear who is responsible for the cost of the borrower’s attorney.

Penalties:

Failure to comply with the requirements of AB 5626 could result in significant penalties.  For example, any person injured by new Section 280-b of the Real Property Law (which the measure creates) or HUD’s HECM regulations may bring an individual action to recover treble actual damages plus the prevailing plaintiff’s reasonable attorney’s fees.  Moreover, compliance with the provisions is a condition precedent to bringing a foreclosure action; failure to comply is a complete defense to a foreclosure. Accordingly, AB 5626 could have a significant impact on mortgage lenders and servicers of HECMs.

Takeaway:

By adding several new obligations on top of HUD’s existing requirements, this law may impose significant burdens on lenders and servicers.  We anticipate amendments to existing Banking Regulation Part 79 that, hopefully, will clarify many ambiguities.

New Jersey Requires License to Hold Mortgage Servicing Rights

A&B ABstract: New Jersey is the latest state to require the licensing of an entity that passively invests in whole residential mortgage loans on a servicing-released basis or in the servicing rights in such loans. The New Jersey Department of Banking and Insurance recently released Bulletin No. 19-13 to elaborate on the state’s new licensing requirement, and to clarify that applications must be submitted by April 13, 2020.

Discussion

New Jersey enacted the Mortgage Servicers Licensing Act, N.J.S.A. 17:16F-27 to -46 (“Act”), on July 28, 2019, to create a new licensing requirement for entities “servicing” New Jersey mortgage loans. Notwithstanding the effective date of the Act, the New Jersey Department of Banking and Insurance (“DOBI”) did not provide a means by which such an entity may apply for a Mortgage Servicer License or clarification regarding the types of activities that constitute “servicing” in the state.

A New Licensing Obligation

In response to the industry’s questions regarding these points, DOBI recently released Bulletin No. 19-13. Bulletin No. 19-13 reiterates that the Act expressly provides that an entity is prohibited from acting, either directly or indirectly, as a mortgage servicer in New Jersey without obtaining a license. The term “mortgage servicer” is broadly defined as:

“[A]ny person, wherever located, who, for the person or on behalf of the holder of a residential mortgage loan, received payments of principal and interest in connection with a residential mortgage loan, records the payments on the person’s books and records and performs the other administrative functions as may be necessary to properly carry out the mortgage holder’s obligations under the mortgage agreement, including, when applicable, the receipt of funds from the mortgagor to be held in escrow for the payment of real estate taxes and insurance premiums and the distribution of the funds to the taxing authority and insurance company.”

The term also includes “a person who makes payments to borrowers pursuant to the terms of a home equity conversion mortgage or reverse mortgage.”

Significantly, Bulletin No. 19-13 states that “[t]he New Jersey Mortgage Servicer License … applies to all holders of mortgage servicing rights, including holders of master servicing rights.” Accordingly, it is now clear that DOBI considers a passive investor in New Jersey whole residential mortgage loans on a servicing-released basis or the servicing rights in such loans to be a “mortgage servicer” and requires such a person to hold a Mortgage Servicer License to conduct business.

Exemptions

Importantly, the Act provides certain exemptions from this licensing requirement, including, but not limited to:

  • Any bank, out-of-state bank, credit union chartered in New Jersey, federal credit union, or out-of-state credit union, provided that that bank or credit union is federally insured;
  • Any wholly-owned subsidiary of that bank or credit union;
  • Any operating subsidiary in situations in which each owner of the operating subsidiary is wholly-owned by the same bank or credit union; and
  • Any entity licensed as a Residential Mortgage Lender or Correspondent Residential Mortgage Lender pursuant to the New Jersey Residential Mortgage Lending Act, N.J.S.A. 17:11C-51 to -89 (“RMLA”), as long as it meets mortgage servicer registration requirements under the Act.

DOBI intends to release an application for this license on the Nationwide Multistate Licensing System & Registry this month. Further, DOBI will require all entities that are not exempt from the Act to apply for a Residential Mortgage Servicer License by April 13, 2020. Any entity claiming an exemption on the grounds that it is already licensed under the RMLA should ensure that it is appropriately registered by that date.

Other Provisions of Note

The Act also subjects licensees and other entities engaging in “mortgage servicing” to various regulatory obligations, restrictions, and prohibitions. Specifically, it creates new operational requirements for some mortgage servicers, and creates a list of prohibited activities for all mortgage servicers. Further, the Act provides DOBI with investigative, examination, and enforcement authority, including the power to impose civil monetary penalties of up to $25,000 per violation. DOBI anticipates proposing new rules under the Act to further assist mortgage servicers in meeting their obligations.

Takeaway

As Bulletin No. 19-13 provides that entities operating without a Mortgage Servicer License will be deemed to be engaging in unlicensed activities and may be subjected to an enforcement action, we encourage all persons engaging in “mortgage servicing” in the state to consider whether a license is required early on in the application cycle. This is an area of focus for DOBI, and we expect its continued attention in the months ahead.

Federal Court Inspects Maryland’s Restrictions on Inspection Fees

A&B Abstract:

Maryland’s inspection fee statute has been interpreted by the Maryland Court of Appeals and the Maryland Office of the Commissioner of Financial Regulation (“OCFR”) to apply both at the time of origination and throughout the servicing of a residential mortgage loan.  More recently, a lower federal district court decision came to a different interpretation.

Maryland’s Inspection Fee Restriction

Maryland Commercial Law Section 12-121 provides that, subject to limited exceptions, a lender may not impose a “lender’s inspection fee” in connection with a loan secured by residential real property.   A “lender’s inspection fee” means a fee imposed by a lender to pay for a visual inspection of real property. A lender’s inspection fee may be charged only if the inspection is needed to ascertain the completion of (i) the construction of a new home; or (ii) repairs, alternations, or other work required by the lender.  A “lender” is defined as a licensee or a person who makes a loan subject to Maryland’s Interest and Usury subtitle. In turn, a “licensee” is defined as a person that is required to be licensed to make loans subject to Maryland’s Interest and Usury subtitle, regardless of whether the person is actually licensed.

Prior Guidance

Previously, the Court of Appeals of Maryland held, in Taylor v. Friedman, 689 A.2d 59 (Md. Ct. App. 1997), that, unless permitted by Section 12-121(c), the prohibition on inspection fees was not limited to inspections for closings, but extended to any inspections throughout the life of the loan. In 2014, the OCFR released an advisory opinion stating that Taylor remains good law in Maryland and applies to circumstances where a servicer orders a visual inspection of property following default on the terms of the mortgage.

Roos vs. Seterus

More recently, the U.S. District Court for the District of Maryland in Roos v. Seterus held, despite previous decisions indicating otherwise, that non-lenders may charge inspection fees to mortgagors.  The defendants in Roos argued that they did not charge illegal inspection fees because (1) the deed of trust specifically authorized inspection fees; (2) Section 12-121 is inapplicable to the defendants; and (3) Section 12-121 does not have a blanket prohibition on the imposition of inspection fees. The defendants believed that since they were a servicer, and the plain language of the statute only prohibited lenders from charging inspection fees, the statute did not prohibit them from charging inspection fees.  The court agreed with defendants that the plain meaning of the statute only prohibits a “lender” from imposing or collecting inspection fees. Although the court in Roos did not itself provide a definition of “lender,” the court pointed to a Montgomery Circuit Court case, Kemp v. Seterus, Inc., No. 441428-V, 2018 Md. Cir. Ct. LEXIS 9 (Md. Cir. Ct. Oct. 19, 2018), which addressed the issue. In that case, the court stated that “the meaning of the statute [wa]s plain; only ‘persons’ which make loans to ‘borrowers’ are lenders and thus covered by the statute.” The court in Roos adopted the Kemp court’s definition of lender, finding it well reasoned and applicable since it involved the same issue and defendant.

Takeaway

It is unclear if this decision will convince the OCFR to change its long-standing position or if plaintiffs will appeal this decision.  Moreover, we note that this decision was issued by a federal district court interpreting Maryland state law and, as such, will not have precedential value in Maryland state courts. While defendants may have prevailed in this federal district court case, servicers should still remain cautious in charging inspection fees when servicing a loan secured by residential real estate in Maryland.

* We would like to thank Associate, David McGee, for his contributions to this blog post.