Alston & Bird Consumer Finance Blog

Mortgage Servicing

CFPB Proposes Nonbank Registry to Focus on Compliance “Recidivism”

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A&B ABstract:

On December 12, 2022, the Consumer Financial Protection Bureau (CFPB) announced a proposed rule to require certain non-banks to register with the agency when they become subject to a public written order or judgment imposing obligations based on violations of certain consumer protection laws. The CFPB also proposes to maintain a public online registry of those nonbanks subject to agency or court orders, to “limit the harms from repeat offenders.” We provide below a description of the CFPB’s proposed rule, along with the potential implications for the financial services industry.

Background on Proposed Rule

Earlier this year, CFPB Director Rohit Chopra presented remarks at the University of Pennsylvania, where he asserted that “[c]orporate recidivism has become normalized and calculated as the cost of doing business; the result is a rinse-repeat cycle that dilutes legal standards and undermines the promise of the financial sector and the entire market system.” To address this problem, Director Chopra suggested establishing “dedicated units in our supervision and enforcement divisions to enhance the detection of repeat offenses and corporate recidivists and to better hold them accountable.” With respect to accountability for “serial offenders of federal law,” Director Chopra warned that the CFPB would be focusing on “remedies that are more structural in nature,” including “limits on the activities or functions” of the entity.

Subsequently, in November 2022, and leading up to the proposed rule, the CFPB announced, as part of its Supervisory Highlights, that it would be establishing a Repeat Offender Unit as part of its supervision program. The Repeat Offender Unit would be focused on: reviewing and monitoring the activities of “repeat offenders;” identifying the root cause of recurring violations; pursuing and recommending solutions and remedies that hold entities accountable for failing to consistently comply with Federal consumer financial law; and designing a model for order review and monitoring that reduces the occurrences of repeat offenders. The Bureau asserts that its authority for these efforts, along with any proposed rulemaking, is derived from the Consumer Financial Protection Act’s mandate that the Bureau “monitor for risks to consumers in the offering or provision of consumer financial products or services” and “gather information from time to time regarding the organization, business conduct, markets, and activities of covered persons and service providers.” See 12 U.S.C. § 5512(c)(1), (4).

Proposed Requirements

The CFPB’s proposed rule would require certain nonbanks covered person entities (with exclusions for insured depository institutions, insured credit unions, related persons, States, certain other entities, and natural persons) to register with the Bureau upon becoming subject to a public written order or judgment imposing obligations based on violations of certain consumer protections laws. Such entities would be required to register in a system established by the Bureau, provide basic identifying information about the company and the order (including a copy of the order), and periodically update the registry for accuracy and completeness. For purposes of the proposed rule, “covered person” would have the same meaning as in 12 U.S.C. § 5481(6). Further, “service providers” would be deemed covered persons to the extent that they engage in the offering or provision of their own consumer financial product or services or where they act as service providers to covered person affiliates.

In addition, certain larger participant nonbanks subject to the Bureau’s supervisory authority would be required to designate a senior executive, who is responsible for and knowledgeable of the nonbank’s efforts to comply with the orders identified in the registry, to attest regarding compliance with covered orders and submit an annual written statement attesting to the steps taken to oversee the activities subject to the applicable order for the preceding calendar year, and whether the executive knows of any violations of, or other instances of noncompliance with, the covered order.

Further, the CFPB is considering whether to release, via its publicly available website, the above registry information for non-banks.

Implications for Non-Banks

While the CFPB’s proposed enforcement order registry would provide greater transparency about a lender’s regulatory track record to the various federal and state regulators and the general public, it remains to be seen how the information maintained in this registry might be used against lenders. At a minimum, however, the proposed rule raises the following significant implications for non-banks:

  • Supervision and examination considerations. The CFPB intends to use the information in the registry to coordinate its “risk-based supervisory prioritization,” for those non-bank markets covered by the Bureau’s supervision and examination authority under CFPA section 1024(a). Thus, entities with a local, state, or federal prior enforcement order may be subject to more targeted supervision.
  • Investigation and enforcement presumptions. The CFPB intends to use the information in the registry in connection with its investigation and potential enforcement activities, which presents various risks, including:
    • Increased civil money penalties. Specifically, the CFPB believes that the information contained in the proposed registry can assist the agency in determining the civil penalties that may be assessed for a future violation of federal consumer financial law, given that federal law permits the CFPB to consider the entity’s “history of previous violations.” Indeed, it is possible that the CFPB may use evidence of prior enforcement against an entity, brought by itself or another agency, to establish that the entity acted knowingly or recklessly in violating federal consumer financial law, perhaps even where the prior enforcement order involved a different consumer-related issue.
    • Presumption of consumer harm. Further, the CFPB believes there is a “heightened likelihood” that entities that are subject to public orders relating to consumer financial products and services may pose risks to consumers in the markets for those products and services, since entities that have previously been subject to enforcement actions “present an increased risk of committing violations of laws.” Thus, there may be a presumption of consumer harm against an entity where a prior enforcement order exists. Yet this approach by the CFPB likely will overstate the actual harm to consumers, as most consent orders do not contain an admission by the entity of any liability or wrongdoing.
  • Increased reputational risk. Given that the CFPB maintains Memoranda of Understanding with federal parties (such as the Federal Trade Commission and the U.S. Department of Justice), as well as with at least 20 state attorneys general offices, it appears that the information reported to the registry already would be available to such agencies. However, the registry will permit all agencies, as well as the general public, a readily accessible, one-stop shop to an entity’s entire enforcement track record, which may present significant reputational risk to that entity, as well as a potentially increased risk of class action lawsuits and other consumer claims.
  • Facilitating of private enforcement. The CFPB believes that the proposed registry may “facilitate private enforcement of the Federal consumer financial laws by consumers, to the extent those laws provide private rights of action, where consumers have been harmed by a registered nonbank.” In other words, the “information that would be published under the proposal might be useful in helping consumers understand the identity of a company that has offered or provided a particular consumer financial product or service, and in determining whether to file suit or otherwise make choices regarding how to assert their legal rights.”

Takeaway:

Given the significant implications raised by the CFPB’s proposed rule, non-bank financial institutions should consider submitting comments, which are due 60 days after publication in the Federal Register. In particular, the CFPB seeks comment on “its preliminary conclusion that collecting and registering public agency and court orders imposing obligations based upon violations of consumer law would assist with monitoring for risks to consumers in the offering or provision of consumer financial products and services.” The CFPB also seeks comment on “whether the types of orders described in the proposal, and the types of information that would be collected about those orders and covered nonbanks under the proposal, would provide useful information to the Bureau,” as well as “any other risks that might be identified through collecting the information described in the proposal.” Finally, the Bureau seeks comment on whether it should consider collecting any other information in order to identify risks to consumers associated with orders.

Assumptions on the Rise: Are You Ready for Mortgage Assumptions?

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A&B ABstract:

Mortgage assumptions – where a buyer assumes the existing mortgage loan of a seller – have fluctuated in popularity since the 1980s. However, inflation and the high interest rate environment, coupled with an observable shift to a buyer’s market, are raising the prospect that assumable mortgages – especially those with historically low interest rates – are likely to become a selling point for potential sellers. Statements by the real estate broker industry, U.S. Department of Housing and Urban Development (HUD), and former Ginnie Mae officials, to name a few, corroborate this hunch. Ultimately, given these rumblings, it appears that lenders, and more so mortgage servicers, will need to prepare for a potential increase in mortgage assumption volume. Below are several key considerations with respect to mortgage assumptions.

Servicer Capabilities

Servicers generally will need to diligently evaluate the assuming buyer’s creditworthiness. In certain cases, servicers may need to offer and service home equity lines of credit (HELOCs) and second liens to support the cost difference between the amount of the loan to be assumed and the cost of the property. Further, as servicers will likely have to evaluate the assuming consumer’s credit eligibility in connection with the processing of most mortgage assumptions, such activities may give rise to additional state mortgage lender and/or loan originator licensing obligations. While the federal SAFE Mortgage Licensing Act and its implementing Regulation G and H generally do not consider mortgage loan origination activity to encompass a servicer’s activities in connection with the processing of a loan modification, when the borrower is reasonably likely to default, there is no such exemption for mortgage assumptions. Moreover, states that license mortgage loan origination activities may vary as to whether a license is required to process an assumption.

 Investor Restrictions

Even if a buyer is deemed creditworthy to assume the seller’s mortgage payments, the agency or investor backing the seller’s mortgage loan must approve the assumption. Most government-backed mortgage loans, such as those guaranteed or insured by the Federal Housing Administration (FHA), U.S. Department of Veteran Affairs (VA), and U.S. Department of Agriculture (USDA) are assumable, provided specific requirements are met.  On the other hand, conventional mortgages (i.e., loans meeting the requirements for purchase by Fannie Mae and Freddie Mac (the “GSEs”)) may be more difficult to assume.

It is important to note that the requirements for processing and/or approving an assumption vary from agency to agency and among the GSEs. By way of example:

  • FHA loans are assumable if the buyer meets certain credit requirements, according to FHA guidelines. Buyers who assume FHA mortgages pay off the remaining balance at the current rate, and the lender releases the seller from the loan.
  • VA mortgage assumption guidelines are similar to FHA, with some notable differences. The VA or the VA-approved lender must evaluate the creditworthiness of the buyer, who generally must also pay a VA funding fee of 0.5% of the loan balance as of the transfer date. Unlike new loans, buyers can’t finance the funding fee when assuming a loan, it must be paid in cash at the time of transfer. Moreover, the only way the seller can have their VA entitlement restored would be to have the home assumed by a fellow eligible active-duty service member, reservist, veteran, or eligible surviving spouse.
  • USDA permits loan assumptions but operates differently from FHA-insured or VA-guaranteed loans. For example, according to USDA guidelines, when most buyers assume a USDA loan, the lender will generally issue new terms, which may include a new rate.
  • Fannie Mae and Freddie Mac may permit an assumption under certain circumstances. For example, Fannie Mae may permit the assumption of certain first-lien adjustable-rate mortgage (ARMs) loans that have not been converted to a fixed-rate-mortgage loan.

Due-on-Sale Clauses

Many conventional mortgages today contain “due-on-sale” clauses that authorize a lender, at its option, to declare due and payable sums secured by the lender’s security interest if all or any part of the property, or an interest therein, securing the loan is sold or transferred without the lender’s prior written consent. However, the Garn-St. Germain Depository Institutions Act prohibits a lender from exercising its option pursuant to a due-on-sale clause in connection with certain exempt transfers or dispositions, including, among others: (1) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; (2) a transfer to a relative resulting from the death of a borrower; (3) a transfer where the spouse or children of the borrower become an owner of the property; and (4) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property. 12 U.S.C. § 1701j–3(d).

Fees

Whether an assumption fee can be charged, and the amount of such fee, will depend on many factors including application of the Garn-St. Germain Act, the CFPB mortgage servicing rules, investor and agency guidelines, and state laws. Further, the Fair Debt Collection Practices Act (FDCPA) may impact whether a servicer may assess and collect an assumption fee. While most states neither expressly permit nor prohibit assumption fees, several other states, such as Idaho and Michigan, explicitly recognize and permit assumption fees in limited cases (e.g., only where the fee is included in the purchase contract or other agreement). Other states may regulate the amount of an assumption fee. For example, Colorado law limits assumption fees to one-half of 1% of the outstanding principal mortgage amount.

General Federal Consumer Financial Compliance

Assumption transactions also raise compliance considerations under federal consumer financial laws. Under TILA and Regulation Z, an assumption occurs if the transaction meets the following elements: (1) includes the creditor’s express acceptance of the new consumer as a primary obligor; (2) includes the creditor’s express acceptance in a written agreement; and (3) is a “residential mortgage transaction” as to the new consumer. 12 C.F.R. § 1026.20(b). A “residential mortgage transaction” is a transaction: (a) in which a security interest is created or retained in the new consumer’s principal dwelling; and (b) which finances the acquisition or initial construction of the new consumer’s principal dwelling. 12 C.F.R. 1026.2(a)(24). If the transaction is an assumption under Regulation Z (12 C.F.R. § 1026.20(b)), then, as noted by the CFPB in its TILA-RESPA Factsheet, creditors must provide a Loan Estimate and Closing Disclosure, unless the transaction is otherwise exempt. Moreover, the assumption transaction may also trigger requirements under Regulation Z’s loan originator compensation and ability-to-repay rules.

With respect to RESPA and Regulation X, however, assumptions are exempt unless the mortgage instruments require lender approval for the assumption and the lender approves the assumption. Specifically, Regulation X expressly exempts from its coverage any “assumption in which the lender does not have the right expressly to approve a subsequent person as the borrower on an existing federally related mortgage loan.” 12 C.F.R. § 1024.5(b)(5). By way of example, the Fannie/Freddie Uniform Security Instrument provides that:

Subject to the provisions of Section 18, any Successor in Interest of Borrower who assumes Borrower’s obligations under this Security Instrument in writing, and is approved by Lender, shall obtain all of Borrower’s rights and obligations under this Security Instrument.  Borrower shall not be released from Borrower’s obligations and liability under this Security Instrument unless Lender agrees to such release in writing.  The covenants and agreements of this Security Instrument shall bind (except as provided in Section 20) and benefit successors of Lender.

Finally, with respect to the CFPB’s Mortgage Servicing Rules, if a successor in interest assumes a mortgage loan obligation under state law or is otherwise liable on the mortgage loan obligation, the protections that the consumer enjoys under Regulation X go beyond the protections that apply to a confirmed successor in interest. 12 C.F.R. § 1024.30(d).

Takeaway

The processing of mortgage assumptions involves many of the same regulatory considerations as originating a new loan. However, because of varying requirements under agency and investor guidelines, there are several unique aspects to processing assumptions, which may pose challenges for servicers that do not regularly engage in mortgage origination. The economic climate appears to be ripe for an uptick in mortgage loan assumption activity. Accordingly, servicers should ensure their compliance management systems are prepared to manage the associated compliance risks.

HELOCs On the Rise: Is Your Servicing CMS Ready?

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A&B ABstract:

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has moved to clarify its regulatory authority at a time when the economic climate is ripe for a resurgence in HELOC lending. In an amicus brief filed by the CFPB on November 30, 2022 (the “Amicus Brief”), the Bureau acknowledged that its Mortgage Servicing Rules, which, in 2013, amended Regulation X, RESPA’s implementing regulation, and Regulation Z, TILA’s implementing regulation, do not apply to home equity lines of credit (“HELOCs”).  This is consistent with the Bureau’s guidance in the preamble to the CFPB Mortgage Servicing Rules under RESPA, wherein the Bureau recognized that HELOCs have a different risk profile, and are serviced differently, than first-lien mortgage loans, and that many of the rules under Regulation X would be “irrelevant to HELOCs” and “would substantially overlap” with the longstanding protections under TILA and Regulation Z that apply to HELOCs.

During this past refinance boom, consumers refinanced mortgage loans at record rates. Moreover, according to a recent report by the Federal Reserve, consumers are sitting on nearly 30 trillion dollars in home equity.  HELOCs allow consumers the opportunity to extract equity from their homes without losing the low interest rate on their first-lien loan. Generally, a HELOC is a revolving line of credit that is secured by a subordinate mortgage on the borrower’s residence that typically has a draw period of 5 or 10 years.  At the end of the draw period, the outstanding loan payment converts to a repayment period of 5 to 25 years with interest and principal payments required that fully amortize the balance.

Issues to Consider in Servicing HELOCs

Servicing HELOCs raise unique issues given the open-end nature of the loan, the typical second lien position, and the different regulatory requirements.  HELOC servicers will need to ensure their compliance management systems (“CMS”) are robust enough to account for a potential uptick in HELOC lending. Among many other issues, servicers will want to ensure their operations comply with several regulatory requirements, including:

Offsets: In the Amicus Brief, the CFPB argues that HELOCs accessible by a credit card are subject to the provisions of TILA and Regulation Z that prohibit card issuers from using deposit account funds to offset indebtedness arising out of a credit card transaction.

Disclosures: Long before the CFPB Mortgage Servicing Rules, TILA and Regulation Z contained disclosures applicable to HELOCs. As a result, the provisions of the CFPB Mortgage Servicing Rules under Regulation Z governing periodic billing statements, adjustable-rate mortgage (ARM) interest rate adjustment notices, and payment crediting provisions do not apply to HELOCs as these provisions are specifically limited to closed-end consumer credit transactions. However, the payoff statement requirements under Regulation Z are applicable both to HELOCs and closed-end consumer credit transactions secured by a dwelling. In addition to certain account-opening disclosures, a HELOC creditor (or its servicer) must make certain subsequent disclosures to the borrower, either annually (e.g., an annual statement) or upon the occurrence of a specific trigger event, such as the addition of a credit access device, a change in terms or change in billing cycle, or a notice to restrict credit. It is also worth noting that Regulation Z’s mortgage transfer notice (commonly referred to as the Section 404 notice) applicable when a loan is transferred, sold or assigned to a third party, applies to HELOCs. In contrast, RESPA’s servicing transfer notice does not apply to HELOCs.

Periodic Statements: TILA and Regulation Z contain a different set of periodic statement requirements, predating the CFPB Mortgage Servicing Rules, which are applicable to HELOCs. Under TILA, a servicer must comply with the open-end periodic statement requirements. That is true even if the HELOC has an open-end draw period followed by a closed-end repayment period, during which no further draws are permitted. Such statements can be complex given that principal repayment and interest accrual vary based on draws; there will be a conversion to scheduled amortization after the draw period ends; and balloon payments may be required at maturity, resulting in the need for servicing system adjustments.

Billing Error Resolution: Instead of having to comply with the Regulation X requirements for notices of error, HELOCs are subject to Regulation Z’s billing error resolution requirements.

Crediting of Payments: A creditor may credit a payment to the consumer’s account, including a HELOC, as of the date of receipt, except when a delay in crediting does not result in a finance or other charge, or except as otherwise provided in 12 C.F.R. § 1026.10(a).

Restrictions on Servicing Fees: Regulation Z restricts certain new servicing fees that may be imposed, where such fees are not provided for in the contract, because the credit may not, by contract or otherwise, change any term except as provided in 12 C.F.R § 1026.40.  With the CFPB’s increased focus on fees, this provision may be an area of focus for the Bureau and state regulators.

Restriction on Changing the APR: The creditor may not, by contract or otherwise, change the APR of a HELOC unless such change is based on an index that is not under the creditor’s control and such index is available to the general public.  However, this requirement does not prohibit rate changes which are specifically set forth in the agreement, such as stepped-rate plans or preferred-rate provisions.

Terminating, Suspending or Reducing a Line of Credit: TILA and Regulation Z restrict the ability of the creditor to prohibit additional extensions of credit or reduce the credit limit applicable to an agreement under those circumstances set forth in 12 C.F.R § 1026.40.  Similarly, TILA and Regulation Z impose restrictions on when the creditor may terminate and accelerate the loan balance.

Rescission: Similar to closed-end loans, the consumer will have a right of rescission on a HELOC; however, the right extends beyond just the initial account opening. During the servicing of a HELOC, the consumer has a right of rescission whenever (i) credit is extended under the plan, or (ii) the credit limit is increased. But there is no right of rescission when credit extensions are made in accordance with the existing credit limit under the plan. If rescission applies, the notice and procedural requirements set forth in TILA and Regulation Z must be followed.

Default: Loss mitigation and default recovery actions may be limited by the firstien loan. That’s because default or acceleration of the first-lien loan immediately triggers loss mitigation and default recovery to protect the second-lien loan.  The protection of the second-lien loan may involve advancing monthly payments on the first-lien loan.  Foreclosure pursued against the first-lien loan will trigger second lien to participate and monitor for protection and recovery. Even though not applicable to HELOCs, some servicers may consider complying with loss mitigation provisions as guidelines or best practices.

ECOA and FCRA: Terminating, suspending, or reducing the credit limit on a HELOC based on declining property values could raise redlining risk, which is a form of illegal disparate treatment in which a lender provides unequal access to credit or unequal terms of credit because of a prohibited characteristic of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located. Thus, lenders and servicers should have policies and procedures in place to ensure that actions to reduce, terminate or suspend HELOCs are carried out in a non-discriminatory manner.  Relatedly, the CFPB’s authority under the Dodd-Frank Act to prohibit unfair, deceptive or abusive acts or practices will similarly prohibit certain conduct in connection with the servicing of HELOCs that the CFPB may consider to be harmful to consumers.  It is also important to remember that ECOA requires that a creditor notify an applicant of action taken within 30 days after taking adverse action on an existing account, where the adverse action includes a termination of an account, an unfavorable change in the terms of an account, or a refusal to increase the amount of credit available to an applicant who has made an application for an increase.  Similar to ECOA, FCRA also requires the servicer to provide the consumer with an adverse action notice in certain circumstances.

State Law Considerations: And let’s not forget state law issues. While most of the CFPB’s Mortgage Servicing Rules do not apply to HELOCs, many state provisions may cover HELOCs.  As most HELOCs are subordinate-lien loans, second lien licensing law obligations arise. Also, sourcing, processing and funding draw requests could implicate loan originator and/or money transmitter licensing obligations. Also, at least one state prohibits a licensee from servicing a usurious loan.  For HELOCs, the issue is not only the initial rate but also the adjusted rate (assuming it is an ARM).  There may also be state-specific disclosure obligations, as well as restrictions on product terms (such as balloon payments or lien releases), fees, or credit line access devices, to name a few.

Takeaway

The servicing of HELOCs involve many of the same aspects as servicing first-lien residential mortgage loans.  However, because of the open-end credit line features and the typical second-lien position, there are several unique aspects to servicing HELOCs.  And, because there are no industry standard HELOC agreements, the terms of the HELOC (e.g., the length of draw and amortization periods, interest-only payment features, balloon, credit access, etc.) can vary greatly.  The economic climate is poised for a resurgence in home equity lending.  Now is the time to ensure your CMS is up to the task.

 

CFPB Publishes Fall 2022 Supervisory Highlights

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A&B ABstract:

On November 16, 2022, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released its Fall 2022 Supervisory Highlights (Issue 28) (the “Supervisory Highlights”), which, among other things, announces the creation of a Repeat Offender Unit and highlights supervisory observations from examinations conducted by the Bureau in the first half of 2022.  Below we discuss some of the key takeaways from the Supervisory Highlights.

The Supervisory Highlights

CFPB’s New Repeat Offender Unit

The CFPB announced the creation a Repeat Offender Unit (“ROU”) to focus its supervision on repeat offenders with the intent to recommend specific corrective actions to stop recidivist behavior. The ROU intends to engage in closer scrutiny of repeat offenders’ compliance with certain orders, along with the following activities:

  • Reviewing and monitoring the activities of repeat offenders;
  • Identifying the root cause of recurring violations;
  • Pursuing and recommending solutions and remedies that hold entities accountable for failing to consistently comply with federal consumer financial law; and
  • Designing a model for review of orders and monitoring that reduces the occurrences of repeat offenders.

The creation of the ROU is not surprising given Director Chopra’s prior statements signaling that the Bureau would focus its efforts on reining in corporate recidivism in the financial services industry. For example, in March 2022, Director Chopra delivered a speech to the University of Pennsylvania Law School, entitled Reining in Repeat Offenders, in which the Director noted that “[a]t the CFPB, we have plans to establish dedicated units in our supervision and enforcement divisions to enhance the detection of repeat offenses and corporate recidivists and to better hold them accountable…[and that] for serial offenders of federal law, the CFPB will be looking at remedies that are more structural in nature, with lower enforcement and monitoring costs…[including] seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

Supervisory Observations

The Supervisory Highlights identifies numerous supervisory observations pertaining to consumer reporting, debt collection, mortgage origination, mortgage servicing, and payday lending, among other topics. We discuss several of the Bureau’s notable observations below.

Consumer Reporting

With respect to credit reporting, the CFPB found violations of the Fair Credit Reporting Act and/or Regulation V involving the following issues:

  • Certain nationwide consumer reporting agencies failed to provide reports to the CFPB regarding consumer complaints received from consumers that the Bureau transmits to the credit reporting agency if those complaints are about “incomplete or inaccurate information” that a consumer “appears to have disputed” with the agency;
  • Some furnishers, including third-party debt collection furnishers, continue to: (1) inaccurately report information despite actual knowledge of errors; (2) fail to correct and update furnished information after determining such information is not complete or accurate; and (3) fail to establish and follow reasonable procedures to report the appropriate date of first delinquency on applicable accounts; and
  • Some furnishers also continue to fail to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of furnished information, such as by verifying random samples of furnished information, and fail to conduct reasonable investigations of direct disputes by neglecting to review relevant information and documentation.

Debt Collection

In recent examination activity, the CFPB has identified certain violations of the Fair Debt Collection Practices Act, such as:

  • Examiners found that certain larger participant debt collectors engaged in conduct intended to harass, oppress, or abuse consumers during telephone calls by continuing to engage in conversation even after consumers stated that the communication was causing them to feel annoyed, harassed, or abused.
  • Examiners found that debt collectors engaged in improper communication with third parties about a consumer’s debt when communicating with a person who had a similar or identical name to the consumer.

Mortgage Origination

Regarding mortgage origination, the CFPB found violations of Regulation Z and deceptive acts or practices prohibited by the Consumer Financial Protection Act (“CFPA”), such as:

  • Examiners found that certain entities improperly reduced loan origination compensation based on a term of a transaction by failing to use actual costs and fee amounts that were accurate and known to loan originators at the time initial disclosures were provided to consumers. Subsequently at closing, consumers were provided a lender credit when the actual costs of certain fees exceeded the applicable tolerance thresholds, which led entities to reduce loan originator compensation after loan consummation by the amount provided in order to cure the tolerance violation. Notably, the Bureau found that in each instance, the settlement service had been performed and the loan originator knew the actual costs of those services. The loan originators, however, entered a cost that was completely unrelated to the actual charges that the loan originator knew had been incurred, resulting in information being entered that was not consistent with the best information reasonably available. Thus, examiners found that the unforeseen increase exception permitted by Regulation Z did not apply to these situations.
  • Examiners also identified a waiver provision in a loan security agreement, which was used by certain entities in one state, that was determined to be deceptive in violation of the CFPA. The waiver provided that borrowers who signed the agreement waived their right to initiate or participate in a class action. The language was found to be misleading because a reasonable consumer could understand the provision to waive their right to bring a class action on any claim, including federal claims, in federal court, which is expressly prohibited by Regulation Z.

Mortgage Servicing

The Bureau indicated that its mortgage servicing examinations focused on servicers’ actions as consumers experienced financial distress related to COVID-19. Mortgage servicing findings by the CFPB included the following:

  • Servicers engaged in abusive acts or practices by charging sizable phone payments fees when consumers were unaware of the fees’ existence and, if disclosures were provided, providing general disclosures indicating that consumers “may” incur a fee did not sufficiently inform consumers of the material costs;
  • Servicers engaged in unfair acts or practices by:
    • charging consumers fees during a CARES Act forbearance plan, in violation of the CARES Act’s prohibition on the imposition of “fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract”; and
    • failing to timely honor requests for forbearance from consumers;
  • Servicers engaged in deceptive acts or practices by misrepresenting that certain payment amounts were sufficient for consumers to accept a deferral offer at the end of their forbearance period, when in fact, they were not due to updated escrow payments; and
  • Servicers violated Regulation X by failing to maintain policies and procedures reasonably designed to:
    • inform consumers of all available loss mitigation options, which resulted in some consumers not receiving information about options, such as deferral, when exiting forbearances; and
    • properly evaluate consumers for all available loss mitigation options, resulting in improper denial of deferral options.

Payday Lending

Regarding payday lending, examiners found that some lenders failed to maintain records of call recordings that were necessary to demonstrate compliance with certain conduct provisions in consent orders, e.g., prohibiting certain misrepresentations. The consent order provisions required creation and retention of all documents and records necessary to demonstrate full compliance with all provisions of the consent orders. The Bureau determined that the failure to maintain the call recordings violated the consent orders and federal consumer financial law.

Although this finding was specific to payday lenders, it may have broader implications for entities subject to an active CFPB consent order, as the provision relied upon by the Bureau in making its finding is routinely found in CFPB orders.

Takeaway

The compliance issues noted in the Supervisory Highlights emphasize the importance of maintaining a strong and continually updated compliance management system. Entities should review the Bureau’s supervisory observations against their current policies, procedures, and processes to ensure consistency with the Bureau’s compliance expectations, and to determine whether enhancements and/or proactive consumer remediation may be appropriate. Finally, entities subject to active CFPB consent orders should pay particular attention to whether their current policies, procedures, and processes are sufficient to ensure compliance with applicable law and the terms of the consent order, in order to mitigate against the risk of being deemed a repeat offender and potentially subject to increased penalties or broader structural remedies such as “seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

Alston & Bird Adds Consumer Finance Partner Aldys London in Washington, D.C.

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Alston & Bird has strengthened and expanded its capabilities for advising companies on state and federal consumer finance regulatory compliance issues with the addition of partner Aldys London in the firm’s Washington, D.C. office. Her clients include mortgage companies, consumer finance and FinTech companies, secondary market investors, real estate companies, home builders, insurance companies, banks, and other financial institutions and settlement service providers.

“It’s a pleasure to welcome Aldys, who brings deep experience and a sterling reputation for counseling consumer financial service entities as they navigate complex regulatory issues, including licensing, the intersection of state and federal regulatory compliance, and key approvals for transactions,” said Nanci Weissgold, Alston & Bird partner and co-chair of the firm’s Financial Services & Products Group. “With our shared emphasis on collaboration and excellent service, we are confident that she will successfully draw on our firm’s vast resources and expertise to benefit her clients.”

London provides advice on state licensing for mortgage lenders and related service providers, mortgage brokers, FinTech companies, lead generators, servicers, debt collectors, and investors. She is well versed in federal registration and licensing requirements imposed by the SAFE Act, as well as state laws and regulations concerning fees, disclosures, loan documentation, interest rates, privacy, advertising, data breach, and telemarketing.  Her practice also covers seeking and maintaining approvals from state and federal agencies and GSEs.  She is adept at federal laws governing real estate mortgage transactions, including preemption, privacy, fair lending and consumer protection.

In addition, London assists a variety of consumer financial services companies in obtaining regulatory approvals for complex acquisitions, mergers, and asset transfer transactions. She performs due diligence reviews for proposed acquisitions and IPOs, reviews and prepares policies and procedures, conducts regulatory compliance audits of financial institutions, and assists with structuring and developing compliance and training programs. She also assists clients with responses to regulatory audits and investigations by state and federal regulators.

“Clients rely on Aldys’ sound counsel because of her technical rigor and thorough understanding of the consumer finance market,” said Stephen Ornstein, Alston & Bird partner and co-leader of the firm’s Consumer Financial Services Team. “Her legal skills, combined with her excellent business sense and ability to develop strong relationships, make her a valuable asset to our firm and our clients.”

Alston & Bird’s Consumer Financial Services Team focuses on the regulation of consumer credit and real estate, with a broad emphasis on origination, servicing, and secondary mortgage market transactions. This team addresses the compliance challenges of major Wall Street financial institutions, federal- and state-chartered depository institutions, hedge funds, private equity funds, national mortgage lenders and servicers, mortgage insurers, due diligence companies, ancillary service providers, and others.