Alston & Bird Consumer Finance Blog

Uncategorized

Highlights of Washington Department of Financial Institutions’ Recent Mortgage Industry Webinar

By

A&B ABstract: In a webinar earlier this month, the Washington Department of Financial Institutions provided updates on licensing, rulemaking, and recent examination findings.

On June 2, the Washington Department of Financial Institutions (“DFI”) held a webinar covering mortgage industry updates in the state.  Among the topics discussed were:

Licensing Updates

Between May 2020 and May 2021, the DFI has seen a substantial increase in licensing activities involving issuances and renewals for both mortgage loan originators and companies, including MLO temporary authority to operate.

Rulemaking Updates

On June 15, the DFI will hold an industry stakeholders meeting to consider amending the rules under the Consumer Loan Act (“CLA,” WAC 208-620) and the Mortgage Broker Practices Act (“MBPA,” WAC 620-660) to allow MLOs to work from home without licensing the residence as a branch office.  The proposed rules will implement enacted Senate Bill 5077 (2021 Wash. Sess. Laws 15), which takes effect on July 25.

Examination Updates

During the first quarter of 2021, the DFI conducted examinations for the review period of October 2020 through April 2021.  Commonly identified violations included:

For mortgage loan servicing:
  • Failure to file accurate annual assessments;
  • Failure to suppress adverse credit reporting for CARES Act forbearances, most often during the initial months of forbearance;
  • Failure to maintain records (typically involving subservicers);
  • Inaccurate adjustable rate change information (i.e., incorrect margin or index); and
  • Inaccurate consolidated annual reports.
For mortgage loan origination, under the CLA:
  • Failure to update surety bond amounts as required by WAC 208-620-320;
  • Failure to date residential mortgage loan applications (initial and revised) as required by WAC 208-620-550(18);
  • Failure to have day-to-day operations managers licensed as an MLO; and
  • Failure to have a written supervisory plan in place.
For mortgage loan origination, under the MBPA:
  • With respect to quarterly mortgage condition reports (“MCRs”), failure to timely file and/or failure to file accurate MCRs;
  • Failure to develop and implement an adequate Anti-Money Laundering program;
  • Failure to provide updated lock-in agreements when lock terms change;
  • Failure to include a link to the company’s NMLS consumer access website on all internet advertisements; and
  • Advertising violations, namely using disallowed phrases (such as “best” or “lowest” when describing rates, fees, and programs) or advertising “no closing costs” or that something is “free”.

Takeaways

The webinar suggests that the pandemic has created both a surge in license applications and renewals, as well as increases in the volume of mortgage loans, for Washington licensees.

The examination findings serve as a reminder to Washington State licensees to be mindful of their own compliance management and quality control processes, in order to ensure that they are conducting business activities in compliance with all statutes and regulations (to include the CLA and MBPA).

The District of Columbia Continues to Fight the “True Lender” Rule in Court

By

A&B ABstract:

Innovative partnerships between banks and nonbanks have expanded lending services to consumers and small businesses. These partnerships, known as marketplace lending arrangements, offer non-traditional loan products to consumers and small businesses. Significantly, state laws establishing interest rate caps do not apply to marketplace lending arrangements where the bank is the true lender. But with this innovation has come debate about whether the bank is the true lender. The Office of the Comptroller of the Currency’s “True Lender” rule, which became effective on December 29, 2020, was intended to address uncertainties in these partnerships.

Under the “True Lender” rule, a bank is deemed the true lender if, at the time of origination, it is named as the lender in the loan agreement or funds the loan. Proponents of the “True Lender” rule argue that marketplace lending arrangements expand access and that the rule provides necessary guidance to enable banks and their non-bank partners to comply with the law. Others, however, have sharply criticized the rule, arguing it allows payday lenders to circumvent state laws prohibiting predatory ultra-high interest-loans.

Several state attorneys general are challenging the “True Lender” rule in the courts. Earlier this year, District of Columbia Attorney General Karl. A. Racine joined eight other Attorneys General in filing a lawsuit against the Office of the Comptroller of the Currency to stop implementation of “True Lender” rule. This month, the D.C. Office of the Attorney General has taken its challenge to the parties themselves by filing its first lawsuit involving a marketplace lending arrangement since the “True Lender” rule’s enactment.

District of Columbia v. Opportunity Financial, LLC

On April 5, 2021, the District of Columbia (“the District”), by and through AG Racine, filed a complaint in the Superior Court of the District of Columbia against Opportunity Financial, LLC (“OppFi”), an online lending company. The District alleges in its complaint that OppFi violated the District of Columbia Consumer Protection Procedures Act and title 16 of the District of Columbia Municipal Regulations.

The Complaint

According to the complaint, OppFi has engaged in predatory lending practices that target the District’s most vulnerable citizens. Specifically, the District alleges that OppFi has been deceptively marketing illegal, high-interest loans. In 2018, OppFi partnered with FinWise Bank to launch a bank-sponsored product called “OppLoans,” which it offers to D.C. residents. However, OppFi has never held a money lender license as required by D.C. law. OppFi also offers loans to D.C. consumers at interest rates of up to 198%, a rate which dramatically exceeds D.C.’s interest rate cap of 24%. The District also alleges that OppFi falsely represents OppLoans as more affordable than payday loans, tells consumers that taking out an OppLoan will help improve the borrower’s credit score despite OppFi’s knowledge to the contrary, does not adequately disclose that OppLoans are high cost, risky loans that should only be used for emergencies, and fails to tell consumers that refinancing a current loan is often more expensive than obtaining a second loan.

Despite OppFi’s partnership with FinWise Bank, the District asserts that OppFi is the true lender because it has the predominant economic risk, bears the risk of poor performance, and funds the expenses for the provision of OppLoans. Meanwhile, FinWise’s fees and expenses related to OppLoans are capped per its agreements with OppFi. In support, the District also alleges that OppFi is the servicer for OppLoans, controls and pays for all OppLoans marketing, and owns the OppLoans trademark and associated intellectual property rights. Further, potential borrowers are screened using OppFi’s proprietary scorecard and can only obtain an OppLoan through opploans.com. Interested consumers attempting to obtain an OppLoan directly through FinWise Bank’s website are redirected to OppFi’s website.

The District seeks a court order voiding improperly made loans, as well as injunctive relief, restitution for consumers, civil penalties, and costs.

Takeaway

While states challenge the “True Lender” rule in court, Senate Democrats have mounted an attack aimed at overturning it. President Biden has yet to announce his nominee to lead the Office of the Comptroller of the Currency, which could provide additional insight on the administration’s direction with the rule. Financial institutions involved in marketplace lending arrangements should pay close attention to litigation that can provide insight into the practical effects of the “True Lender” rule’s bright-line test on state litigation.

Consolidated Appropriations Act Includes Temporary Provisions That May Affect Servicers

By

Among the myriad provisions of H.R. 133, the Consolidated Appropriations Act, 2021, is Division FF, Title X, Section 1001, of which mortgage holders and servicers should take note because it may affect activities with respect to borrowers in bankruptcy.  These temporary provisions expire December 27, 2021.

First, Section 1001 provides that a debtor under a Chapter 13 plan may seek (and a court may grant) a discharge if (1) the debtor has missed three or fewer mortgage payments on or after March 13, 2020 because of a “material financial hardship due, directly or indirectly, by the coronavirus disease 2019 COVID-19) pandemic”; or (2) the debtor’s plan provides for the curing of a default and maintenance of payments, and the debtor has entered into a loan forbearance or modification agreement, and. Importantly, unpaid mortgage payments are not discharged if the debtor is granted a discharge, and thus remain owed to the mortgage holder or servicer.

Second, Section 1001 provides that a consumer cannot be denied a CARES Act forbearance or other applicable CARES Act relief if they are a debtor in a pending bankruptcy case.

Third, Section 1001 permits servicers of federally backed mortgage loans to file supplemental proofs of claim for the amounts forborne under a CARES Act forbearance, provided that they are filed no later than 120 days after the expiration of the forbearance. Mortgage holders or servicers may also move to modify the debtor’s bankruptcy plan to provide for the supplemental CARES forbearance claim within thirty days after filing the supplemental claim.

Takeaway

Servicers may wish to consult counsel to determine whether these provisions will affect 2021 operations.

Texas Court Strikes Down Federal Eviction Moratorium

By

A&B ABstract: On February 25, 2021, Judge J. Campbell Barker of the U.S. District Court for the Eastern District of Texas entered a declaratory judgment that the nationwide eviction moratorium ordered by the U.S. Centers for Disease Control and Prevention (“CDC”) in response to the COVID-19 pandemic is invalid under Article I of the U.S. Constitution.

The CARES ACT Moratorium

As we previously wrote, the CARES Act imposed a 120-day moratorium on certain residential evictions that elapsed on August 25, 2020.  With this date impending, on August 8, President Trump directed executive agencies to “take all lawful measures to prevent residential evictions and foreclosures resulting from financial hardships caused by COVID-19.” He also ordered the CDC and the Department of Health and Human Services (“HHS”) to consider whether any measures “temporarily halting residential evictions” are “reasonably necessary to prevent further spread of COVID-19” between states.

The CDC Emergency Order

In response, on September 4, the CDC issued an emergency order imposing a nationwide moratorium on certain residential evictions through December 31, 2020 (“CDC Order”).  In doing so, the CDC coordinated with HHS and the Department of Housing and Urban Development (“HUD”). The CDC Order prevents the eviction of any tenant who certifies that he or she: (1) is “using best efforts to obtain all governmental assistance for housing”; (2) earns no more than $99,000 per year in income; (3) cannot pay rent in full due to a substantial loss in income or extraordinary medical expenses; (4) is “using best efforts to make timely partial payments”; and (5) would likely become homeless, or be forced to live in a shared living setting, if evicted.

Significantly, the CDC Order does not provide any compensation for landlords or property owners who are prevented from evicting non-paying tenants, nor does it establish any hearing process for challenges to a tenant’s Declaration.  Conversely, the Order also does not exempt tenants from their legal obligation to pay outstanding rent they accumulate.  The CDC has since extended the moratorium to March 31, 2021.

The Constitutional Challenge

One individual landlord and six property management companies operating in Texas filed suit to challenge the constitutionality of the CDC order.  They claimed that it exceeds the federal government’s power to regulate “commerce” under Article I of the U.S. Constitution.  Given that this was a purely legal issue, the plaintiffs requested – and the Court agreed – that the matter should be decided on summary judgment briefing without need for discovery.

The Court’s Decision

In his decision, Judge Barker acknowledged that eviction moratoriums may be lawful as part of state laws managing eviction procedures generally and under states’ broad “police powers” to promote “the lives, health, morals, comfort and general welfare” of their citizens.  He contrasted such state-level actions to this federal moratorium, which he described as a significant expansion of federal power, stating (slip op. at 2):

The federal government cannot say that it has ever before invoked its power over interstate commerce to impose a residential eviction moratorium. It did not do so during the deadly Spanish Flu pandemic.  Nor did it invoke such a power during the exigencies of the Great Depression. The federal government has not claimed such a power at any point during our Nation’s history until last year.

The court also analyzed Congress’s power under the Commerce Clause to regulate interstate commerce, as well as other constitutional provisions, and concluded that the moratorium exceeds the federal government’s authority.  In large part, this is because Judge Barker determined that the decision to evict a tenant is not an “economic” act within Congress’s power to regulate.

Importantly, the court did not enter an injunction against enforcement of the moratorium, but left open that possibility if the federal government does not abide by the declaratory judgment.  In the meantime, the government has already announced that it will appeal the decision to the U.S. Court of Appeals for the Fifth Circuit.

Takeaways

This decision contrasts with those of other courts in Louisiana (Chambless Enters. v. Redfield) and Georgia (Brown v. Azar) that struck down other constitutional challenges to the CDC moratorium.  One might also argue that Judge Barker improperly disregarded several grounds cited in support of the CDC moratorium — for example, that a massive wave of evictions could drive up infections and further destabilize the economy.  Given the conflicting precedents, and the public health circumstances of the COVID-19 pandemic, there appears to be a reasonable likelihood that the decision will be struck down even by the relatively conservative Fifth Circuit.

Further, because Judge Barker did not issue an injunction, and because the declaratory judgment was limited to the plaintiffs, the decision does not extend nationwide.  As the Department of Justice noted in announcing its appeal, “[t]he decision . . . does not extend beyond the particular plaintiffs . . . and it does not prohibit the application of the CDC’s eviction moratorium to other parties. For other landlords who rent to covered persons, the CDC’s eviction moratorium remains in effect.”  Absent a broad injunction, the decision has very limited effect.  Nonetheless, the ultimate outcome of Terkel v. CDC could have important implications for other courts considering the scope of government action in response to the COVID-19 pandemic, particularly if it is upheld on appeal or ultimately heard by the U.S. Supreme Court.