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

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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.

Fannie Mae and Freddie Mac Sunset the QM Patch

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The qualified mortgage (QM) rules have become a world of contradictions. In a client advisory, our Financial Services & Products Group investigates how the residential mortgage markets can thread the needle between new rulings from Fannie Mae and Freddie Mac and recent rulings from the Consumer Financial Protection Bureau.

An Open Letter from Richard Hays, Chairman and Managing Partner, Alston & Bird

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As Alston & Bird is pausing today for a “Day of Learning and Reflection” in observation of Juneteenth, Chairman and Managing Partner Richard Hays posted an open letter regarding recent events, and how Alston & Bird can spur lasting and meaningful change in both the firm and the communities we serve:

“As a firm with its roots in Atlanta, the cradle of the civil rights movement, we have a long history of involvement in the advancement of civil and human rights and liberties for all. We especially have a focus on supporting and promoting justice, equality, and inclusion. We are committed to do more, to be leaders through action and endurance, and to act by example, not rhetoric.”

 

Attorneys General Urge FHFA and HUD to Take Additional Measures to Protect Borrowers Affected by COVID-19

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A&B Abstract:

On April 23, 2020, the attorneys general of 33 states, the District of Columbia and Puerto Rico (the “Attorneys General”) sent two letters, one to the Federal Housing Finance Agency (“FHFA”) and the other to the U.S. Department of Housing and Urban Development (“HUD” and collectively with FHFA, the “Agencies”), respectively, noting that the “national response must recognize the unique challenges presented by the unprecedented number of homeowners who are affected by COVID-19, including the fact that all of these homeowners need relief at the same time..[and that] [m]eeting this challenge will require straightforward and consistent guidance that can be quickly operationalized.”  As a result, the Attorneys General urged the Agencies to make changes to their respective guidelines addressing COVID-19-related mortgage and foreclosure relief.

Revision of Forbearance Programs

The Attorneys General acknowledged that forbearance plans are a critical first response to borrowers affected by the COVID-19 pandemic.  However, the Attorneys General expressed concern that both the mortgage servicing industry and homeowners will become overwhelmed if changes are not made.   The Attorneys General recommended or encouraged that:

  • the Agencies “issue simple, self-executing guidance that servicers can easily implement to meet demand while providing an immediate, responsive resolution to borrowers.” The Attorneys General specifically expressed concern about HUD guidelines requiring an individualized evaluation for every borrower who receives a CARES Act forbearance, as well as guidelines issued by both of the Agencies requiring an individualized evaluation for borrowers coming out of forbearance, due to “grave doubts about servicers’ abilities to effectively manage the unprecedented number of borrowers who will be emerging from forbearance plans related to COVID-19 if individualized evaluations are required for each borrower.”
  • the Agencies amend their forbearance programs so that the obligation to repay forborne payments is automatically placed at the end of the loan term in the form of additional monthly payments that will follow the current term of the loan.  The Attorneys General noted that “there can be no reasonable expectation that a borrower who has experience a loss of employment or a reduction in income will be able to repay the forborne payments in a lump sum at the end of the forbearance period.” FHFA subsequently clarified its repayment requirements for its forbearance program on April 27, 2020.
  • the Agencies issue guidance allowing these post-forbearance agreements to occur without requiring borrowers to execute any additional documents, such as a loan modification agreement or a promissory note for the forborne payments, or at least waiving or easing those requirements until the pandemic abates.
  • FHFA to clarify that a borrower may receive a forbearance based on the borrower’s verbal attestation of a hardship related to COVID-19, and to encourage servicers to proactively notify borrowers of their right to verbally request a forbearance.

Expanded Eligibility for Disaster Relief-Related Modifications and Loss Mitigation Programs

The Attorneys General urged the Agencies to expand their eligibility standards for post-forbearance loss mitigation programs to enable a greater number of borrowers to qualify.  The Attorneys General urged HUD to reconsider its decision to remove the Disaster Loan Modification option for borrowers affected by COVID-19.  Further, the Attorneys General requested that the Agencies revise their respective loan modification eligibility criteria to ensure these programs have the same reach as the forbearance program mandated by the CARES Act, as the Agencies’ current guidelines impose several delinquency-related eligibility requirements.  For example:

  • Under current Fannie Mae and Freddie Mac guidelines, borrowers affected by COVID-19 are eligible for any one of three modification programs. Currently, however, a borrower is only eligible for such programs if the borrower was current or less than 31 days delinquent as of March 13, 2020. Additional delinquency-related eligibility criteria apply for the Cap and Extend Modification and Flex Modification programs.
  • Under current HUD guidelines, a borrower is only eligible for the COVID-19 Partial Claim if the borrower was current or less than 30 days delinquent as of March 1, 2020 and the partial claim amount does not exceed 30 percent of the unpaid balance. If a borrower is ineligible for the COVID-19 Partial Claim, then the borrower will be reviewed for HUD’s FHA-HAMP program. The Attorneys General noted that the FHA-HAMP program has additional seasoning requirements, such as requiring the borrower to have made at least 4 payments and the loan to have aged at least 12 months.

The Attorneys General urged the Agencies to waive the delinquency status requirements of these modification programs and noted that post-forbearance modification programs should be commensurate with the forbearance plans required by the CARES Act, as the CARES Act requires forbearance for any borrower experiencing a COVID-19 financial hardship regardless of delinquency status.  Moreover, the CARES Act authorizes forbearances of up to 360 days, so many borrowers receiving CARES Act forbearances will be more than 360 days delinquent by the end of the forbearance period.

Eviction and Foreclosure Moratoriums

Finally, the Attorneys General urged the Agencies to “instruct servicers that they also must suspend all foreclosures and evictions currently in process and cannot move forward to complete any step in the judicial or non-judicial foreclosure or eviction process while the moratorium is in place,” to address differences in various states’ foreclosure and eviction processes.

Currently, the CARES Act states that servicers of federally backed mortgages may not initiate any judicial or non-judicial foreclosures process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale until at least May 17, 2020. The Attorneys General asserted that advancing any step of the eviction or foreclosure process during a forbearance related to COVID-19 will only lead to borrower confusion and harm.

Takeaway

As the COVID-19 pandemic continues to affect homeowners and the mortgage servicing industry, there will likely be continued political pressure on the Agencies to further revise servicer loss mitigation guidelines. Servicers will need to be vigilant to stay on top of the rapidly evolving market conditions and regulatory environment.

 

Delaware Governor Issues Order Restricting Residential Foreclosures and Evictions

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A&B Abstract:

On March 24, 2020, Delaware Governor, John Carney, issued a Sixth Modification (the “Order”) to the Declaration of a State of Emergency (the “State of Emergency”) initially issued on March 12, 2020. The Order addresses a number of issues that impact residential mortgage loan servicers, including restrictions on residential foreclosures and evictions and certain fees or charges.

Restrictions on Late Fees and Excess Interest for Missed Payments

The Order provides that with respect to any missed payment on a residential mortgage occurring during the State of Emergency, no late fee or excess interest may be charged or accrue on the account for such residential mortgage during the State of Emergency.  One could interpret this language to mean that while no late fees or additional interest may be charged or accrued with respect to a missed payment, regularly scheduled interest due on the missed payment may be charged.  While not free from doubt, arguably this provision applies only to owner-occupied 1- to 4-family primary residential property, as this provision immediately follows the below restriction on the commencement of a foreclosure action, which is so limited.

 Foreclosure Restrictions

The Order imposes restrictions on a mortgage servicer’s ability to initiate or complete a foreclosure action or sale and to charge certain fees or interest.  Specifically, until the State of Emergency is terminated and the public health emergency is rescinded, the provisions of the Delaware Code relating to residential mortgage foreclosures, including Subchapter XI, Chapter 49 of Title 10, are modified in the following respects:

  • A servicer may not commence a residential mortgage foreclosure action with respect to any owner-occupied 1- to 4-family primary residential property that is subject to a mortgage; the Order excludes from this restriction any mortgage that is held by the seller of the subject property who does not hold more than five such mortgages;
  • For any residential mortgage foreclosure action initiated prior to the declaration of the State of Emergency, all deadlines in that action, including those related to the Automatic Residential Mortgage Foreclosure Mediation Program established pursuant to § 5062C of Title 10 of the Delaware Code, are extended until 31 days following the termination of the State of Emergency and the rescission of the public health emergency and no late fees or interest may be charged to or accrued on the balance due on the mortgage that is the subject of the residential mortgage foreclosure action during this time period;
  • No residential property that is the subject of a residential mortgage foreclosure action, for which a judgment of foreclosure was issued prior to the declaration of the State of Emergency, may proceed to sheriff’s sale until 31 days following the termination of the State of Emergency and the rescission of the public health emergency; and
  • No residential property that was the subject of a residential mortgage foreclosure action, and which was sold at sheriff’s sale, may be subject to action of ejectment or writ of possession until 31 days following the termination of the State of Emergency and the rescission of the public health emergency.

Except as otherwise provided above, nothing in the Order is intended to relieve any individual of the obligation to make mortgage payments or to comply with any other obligation that an individual may have under a residential mortgage.  Note that Delaware is a judicial foreclosure state requiring a notice of intent to foreclose be sent to the borrower 45 days prior to the commencing foreclosure.  One could read the Order as prohibiting a servicer from sending such notices during the State of Emergency.

Restrictions on Evictions

Similarly, with respect to evictions, the Order provides that, until the State of Emergency is terminated and the public health emergency is rescinded, the provisions of Chapter 57, Title 25 of the Delaware Code (governing summary possession of residential rental units) are modified in the following respects:

  • No action for summary possession may be brought with respect to any residential rental unit located within Delaware;
  • With respect to any past due balance for a residential rental unit, no late fee or interest may be charged or accrue on the account for the residential rental unit during the State of Emergency;
  • For any action for summary possession for a residential rental unit located within Delaware, commenced prior to the declaration of the State of Emergency, all deadlines in that action are extended until at least 31 days after the termination of the State of Emergency and the rescission of the public health emergency;
  • No late fee or interest may be charged or accrue on the balance due on the account for the residential rental unit that is the subject of the action for summary possession during this time period; and
  • For any residential rental unit that was the subject of an action for summary possession, for which a final judgment was issued prior to the declaration of the State of Emergency, no writ of possession may be executed until the seventh day following the termination of the State of Emergency and the rescission of the public health emergency.

The foregoing restrictions do not apply to actions for summary possession based upon a claim that continued tenancy will cause or is threatened to cause irreparable harm to person or property.  Moreover, except as modified above, all other provisions of the Landlord Tenant Code (Chapters 51-59 of Title 25 of the Delaware Code) remain in effect in accordance with their terms and nothing in the Order is to be construed as relieving any individual of the obligation to pay rent or to comply with any other obligation that an individual may have under their tenancy.

Takeaway

As discussed above, the Order imposes a number of restrictions that impact a residential mortgage loan servicer’s ability to initiate or complete foreclosure actions and eviction proceedings as well as limitation on certain fees and charges.  Accordingly, mortgage servicers should carefully review the Order to determine their obligations with respect to impacted borrowers.