Alston & Bird Consumer Finance Blog

State Law

NYDFS Proposes Overhaul to Mortgage Loan Servicer Business Conduct Rules

The New York Department of Financial Services has proposed significant changes to the mortgage servicer business conduct rules found in Part 419 of the Superintendent’s Regulations.  The proposed changes represent the first major changes to Part 419 since its adoption nearly 10 years ago.  Some of the significant proposed changes to Part 419 include:

  • Adding new provisions governing affiliated business arrangements, which would include a requirement that such relationships be negotiated at market rate, restrictions on certain kick-backs and a requirement to provide borrowers with a written disclosure of the relationship;
  • Restricting a servicer from charging a property valuation fee to a borrower more than once in a 12-month period;
  • Broadening a servicer’s duty of fair dealing to include ability to repay requirements for loan modifications and that a servicer consider foreclosure alternatives;
  • Broadening the protections available to delinquent borrowers and borrowers seeking loss mitigation assistance to more closely align with the CFPB’s Mortgage Servicing Rules, including a requirement that acknowledgment notices be delivered more quickly than under the current rules and providing borrowers with additional time to accept or reject a loss mitigation offer; and
  • Detailed third party vendor management requirements, which would require a servicer to maintain policies and procedures overseeing third party providers generally and more specific requirements for overseeing counsel and trustees of foreclosure proceedings.

Our June 20 client advisory provides greater detail on the proposed changes to Part 419.  In the meantime, we note that the deadline for comment on the proposal is June 29, 2019.  Mortgage servicers should take this opportunity to review the proposed changes to Part 419 against their current operations to determine the impact these rules would have if adopted in their current form.

New York DFS Unveils Two New Divisions Focused on Consumer Protection, Financial Enforcement and Cybersecurity

New York State’s Department of Financial Services (DFS) recently unveiled two new divisions with broad enforcement authority focused on consumer protection, financial enforcement, and cybersecurity.  Financial service providers should take note as New York and other states continue to shore up their enforcement capabilities.

Consumer Protection & Financial Enforcement

DFS’ highly touted Consumer Protection and Financial Enforcement (“CPFE”) division was launched on April 29, 2019.  The CPFE’s debut marks the latest DFS action to solidify the Department’s position as “a leader in financial services regulation.”

Heralded by acting Superintendent Linda Lacewell as a “powerhouse”, the CPFE is tasked with broad responsibility, specifically: (1) protecting and educating consumers; (2) combating consumer fraud; (3) ensuring that DFS-regulated entities serve the public in compliance with state and federal law; (4) developing investigative leads and intelligence in the banking, insurance, and financial services arenas, with a particular focus on cybersecurity events; and (5) developing and directing supervisory, regulatory and enforcement policy regarding financial crimes.

The Department created its new mega group by merging its enforcement operation with the division which conducts DFS’ civil and criminal investigations (formerly known as the Financial Frauds and Consumer Protection or “FFCP”).  The CPFE’s creation follows DFS’ pronouncement last year that it was prepared to step in to “fill voids” in areas where consumer and market protections are rolled back on the federal level.  The announcement also follows the news that the Consumer Finance Protection Bureau (“CFPB”) will adjust its focus from enforcement to “preventing harm”.  The Bureau’s shift in approach was announced by Kathleen L. Kraninger during her first policy address as the CFPB’s new Director on April 17, 2019.  Director Kraninger expressed the “hope that our emphasis on prevention will mean that we need our enforcement tool less often.”

The CPFE division will be headed by Katherine A. Lemire, who is expected to draw upon her decade of prosecutorial experience at the federal (Assistant United States Attorney in the Southern District of New York) and state (Assistant District Attorney in the New York County District Attorney’s Office) levels.  During her time in the Manhattan U.S. Attorney’s office, Ms. Lemire’s work included the prosecution of disgraced political donor Norman Hsu – sentenced to over 24 years in prison – and the corruption conviction of City Council Member Miguel Martinez.  Referred to by the NY Daily News as a “legal Howitzer,” Ms. Lemire also served as special counsel to then-NYPD Commissioner Raymond Kelly.

Upon entering the private sector, Ms. Lemire founded an international compliance and investigative services firm.  As part of a 2017 roundtable discussion on “How to Conduct Internal Investigations Efficiently and Effectively,” the new CPFE head shared the following insights on effectively working with government investigators to “narrow the scope” of subpoena requests in order to minimize client costs and business disruption:

Remember that prosecutors are people too … they can be reasonable. If confronted with a very broad subpoena seeking, for example, a large swath of documents over the course of years, it may make sense to call the prosecutor and find out whether you may narrow the scope of responsive documents. Often, prosecutors will provide specifics regarding the target of the investigation, and work with you to produce documents in a time-efficient manner. Prosecutors typically have investigative priorities, and if you can provide a proposed schedule for document/materials production, they will often work with you so that they can get what they need the most in a rapid fashion. Relatedly, you may be able to spare yourself producing materials that are not within the actual scope of materials needed. While they are the “expert” in the investigation, you are the “expert” in your business — prosecutors may be asking for materials they do not actually need, and with some education from you, you may be able to narrow the scope of the investigation.

The unveiling of its new “mini CFPB” marks yet another recent DFS milestone, highlights of which include over three billion dollars in fines imposed as a result of investigations into foreign exchange trade rigging, and the issuance of “whistleblower” guidance to all DFS-regulated entities.  The whistleblower guidance is especially significant in light of the Department’s position that “a robust whistleblowing program is an essential element of a comprehensive compliance program for regulated financial service companies”.  And, while not intended to provide a “one size fits all” model, the guidance sets forth ten “important principles and practices” of an “effective whistleblowing program”:

  • Whistleblower reporting channels are independent, well-publicized, easy to access, and consistent;
  • Strong protections to guard whistleblower anonymity;
  • Procedures to identify and manage potential conflicts of interest;
  • Adequate staff training on how to receive and act upon whistleblower complaints, as well as manage investigations, referrals and escalations;
  • Procedures to investigate allegations of wrongdoing;
  • Procedures to ensure valid complaints are followed-up appropriately;
  • Protections against whistleblower retaliation;
  • Confidential process;
  • Appropriate internal and external oversight of the whistleblowing function; and
  • Culture of top-down support for the whistleblowing function.

Cybersecurity

On May 22, 2019 the Department launched a new Cybersecurity division, advertised as the “first of its kind at a banking or insurance regulator” which will focus on “protecting consumers and industries from cyber threats.”  The emergence of DFS’ new Cybersecurity division follows the Department’s signature enactment, its 2018 cybersecurity law (23 NYCRR 500) upon which the FTC has “primarily based” its latest proposed information security program requirements.  The new division’s emergence “builds upon DFS’ nation-leading efforts to protect consumers and financial markers from cyberattacks” and also follows the March 1, 2019 deadline by which all DFS-regulated institutions were required to submit comprehensive risk-based cybersecurity programs for protecting consumer’s private data.

Justin Herring will head the new Cybersecurity division, joining DFS from the New Jersey U.S. Attorney’s Office where he served as Chief of the Cyber Crimes Unit and also worked as a member of the U.S. Attorney’s Economic Crimes Unit.  The DFS signaled its intention to continue its efforts to combat cybercrime by “hiring additional experts as necessary,” in addition to utilizing and developing its personnel’s existing subject-matter expertise.

According to the DFS’ announcement, the role of the new Cybersecurity division will be to “enforce the Department’s cybersecurity regulations, advise on cybersecurity examinations, issue guidance on DFS’ cybersecurity regulations, and conduct cyber-related investigations in coordination with the Consumer Protection and Enforcement Division.”

Alston & Bird Issues Client Alert on a California Supreme Court Case Regarding When a Consumer Loan May Be Deemed “Unconscionable” Under California Law

On March 20, Alston & Bird Partner Stephen Ornstein issued a Client Alert to inform clients regarding a somewhat obscure California court case that contains very significant consequences for the financial services industry in connection with California consumer loans exempt from the state’s usury law.   In a 2018 California Supreme Court case, the Client Alert explains how consumer loans that are exempt from usury may be deemed “unconscionable” under California law.

The Client Alert highlights the California Supreme Court’s decision on August 13, 2018 in Eduardo De La Torre et al. v. CashCall, Inc. (S. Cal. 5th 966 (2018)) in a usury case that the interest rate on consumer loans of $2,500 or more may render the loan “unconscionable” under the California Financial Code, even though such a loan would not be deemed usurious under California law.   The Client Alert advises clients in the financial services industry to carefully review their contracts to eliminate potentially unduly harsh provisions that could render the loan product as unconscionable.

The Client Alert can be found here on our website.

Alston & Bird Issues Client Alert on Ohio Division of Financial Institution Guidance Requiring Mortgage Loan Servicer Registration for Passive Secondary Market Investors in Ohio MSRs

On March 12, Alston & Bird Partner Nanci Weissgold, and Senior Associate Lisa Lanham issued a Client Alert on Ohio Division of Financial Institution’s (“Division”) guidance on clarification of legislative amendments (as enacted by HB 489 and currently in effect as of March 20, 2019) to the Ohio Residential Mortgage Lending Act (“RMLA”), that requires mortgage loan servicers to be registered under the RMLA.  The Division answered the industry’s question as to whether the registration requirement would apply to passive secondary market investors in Ohio Mortgage Servicing Rights (“MSRs”).  Accordingly, the Division issued answers to its Frequently Asked Questions to provide guidance and explicitly stated that even though a passive secondary market investor in MSRs is not conducting any direct servicing activities, it is still required to be licensed or registered as a mortgage servicer under the RMLA amendments.

The Client Alert can be found here on our website.