Alston & Bird Consumer Finance Blog

Mortgage Servicing

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.

GSEs to Require Mortgage Servicers to Obtain and Maintain Fair Lending Data

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A&B Abstract:

On August 10, 2022, the Federal Housing Finance Agency (“FHFA”) announced that Fannie Mae and Freddie Mac (the “GSEs”) will require mortgage servicers to obtain and maintain fair lending data on their loans, beginning March 1, 2023. That same day, Fannie Mae and Freddie Mac (the “GSEs”) each issued guidance implementing the FHFA announcement.

FHFA and GSEs’ Announcements

In its announcement, the FHFA indicated that Fannie Mae and Freddie Mac will require mortgage servicers to obtain and maintain fair lending data, to include borrower age, race, ethnicity, gender, and preferred language (“Fair Lending Data”), and to ensure that this data transfers with servicing throughout the mortgage term. The announcement follows FHFA’s May 2022 announcement that Fannie Mae and Freddie Mac will require mortgage lenders to collect borrowers’ language preference data as part of the loan application process via a Supplemental Consumer Information Form (SCIF). Shortly after the FHFA announcement, Fannie Mae and Freddie Mac each announced that their respective guides had been updated to require servicers to maintain  Fair Lending Data in a “queryable” format for each mortgage loan, if obtained during the origination process, for loans originated on or after Mach 1, 2023. Additionally, in instances of post-delivery servicing transfers, the transferor servicer must deliver to the transferee servicer the Fair Lending Data in a queryable format for each mortgage loan, if obtained during the origination process, for mortgage loans originated on or after March 1, 2023.  In the event of a future transfer of ownership or assumption of the mortgage loan, servicers are authorized, but not required, to update the Fair Lending Data elements.

Of course, many mortgage servicers currently do not receive complete and accurate borrower demographic data from originating lenders in a readily accessible format for all loans in their servicing portfolio. And servicers may have different resources, capabilities, roles (master servicers vs. subservicer), and electronic systems, which may present additional limitations. For example, Home Mortgage Disclosure Act (“HMDA”) data currently may not transfer to a transferee servicer as part of a servicing transfer. The Fair Lending Data elements generally reflect data that is collected for HMDA-purposes. Therefore, mortgage lenders and servicers will need to ensure that the Fair Lending Data is transferred to the transferee servicer such that the data remains queryable post-transfer. Finally, even where a servicer has access to robust HMDA data, it is unlikely that all the fair lending data elements noted in the FHFA and GSE announcements would be available. For example, mortgage loan originators subject to the data collection requirements of HMDA are required to collect information regarding a consumer’s sex, but not their gender. In this case, it is unclear how much, if any, information a mortgage servicer will ultimately have regarding a consumer’s gender.

Takeaway

Ultimately, even if a servicer is able to obtain and maintain the required Fair Lending Data elements, it remains to be seen what servicers will be expected to do with that information. Depending on the quality and completeness of the data, the servicer may engage in statistical analysis in order to monitor for fairness in servicing outcomes, such as approval rates, foreclosure rates, and processing timelines for loss mitigation evaluations, as well as fee assessment/waiver rates for all serviced loans. Yet this monitoring can only be done if the various parties – originating lender, master servicer, and subservicer – work together to ensure that all necessary data is complete and travels with the servicing of the loan. Thus, mortgage lenders/servicers should begin evaluating their systems to ensure the required Fair Lending Data can be obtained and maintained in a queryable format. Moreover, mortgage lenders/servicers should reevaluate their servicing transfer protocols to ensure Fair Lending Data is transferred and onboarded seamlessly such that the data remains queryable. Finally, it will be interesting to see whether the federal agencies (i.e., HUD, VA, USDA) follow in the GSEs’ footsteps and impose similar fair lending data requirements.

Connecticut and Maryland Adopt Model Mortgage Servicer Prudential Standards

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A&B Abstract:

On May 24, 2022, Connecticut enacted legislation that, among other things, adds financial condition and corporate governance requirements for certain licensed mortgage servicers (the “CT Standards”). In similar fashion, the Maryland Commissioner of Financial Regulation (the “Commissioner”) issued a notice of final action on March 25, 2022 adopting similar standards by regulation (the “MD Standards”).  In both instances, the CT and MD Standards are intended to implement the Model State Regulatory Prudential Standards for Nonbank Mortgage Servicers (the “Model Standards”) drafted and released by the Conference of State Bank Supervisors (“CSBS”) last July.

The CSBS Model Standards

As mentioned in our prior blog post, the CSBS initially proposed standards for mortgage servicers in 2020. In July 2021, after substantial revision to the proposed standards, the CSBS adopted the Model Standards to provide states with uniform financial condition and corporate governance requirements for nonbank mortgage servicer regulation while preserving local accountability to consumers and to “provide a roadmap to uniform and consistent supervision of nonbank mortgage servicers nationwide.”

The Model Standards cover two major categories that comprise prudential standards: financial condition and corporate governance. The financial condition component consists of capital and liquidity requirements. Corporate governance components include separate categories for establishment of a board of directors (or “similar body”); internal audit; external audit; and risk management.

The Model Standards apply to nonbank mortgage servicers with portfolios of 2,000 or more 1 – 4-unit residential mortgage loans serviced or subserviced for others and operating in two or more states as of the most recent calendar year end, reported in the Nationwide Multistate Licensing System (“NMLS”) Mortgage Call Report. For purposes of determining coverage under the Model Standards, “residential mortgage loans serviced” excludes whole loans owned and loans being “interim” serviced prior to sale. Additionally, the financial condition requirements in the Model Standards do not apply to servicers solely owning and/or conducting reverse mortgage servicing or the reverse mortgage portfolio administered by forward mortgage servicers that may otherwise be covered under the standards. The capital and liquidity requirements also have limited application to entities that only perform subservicing for others. Moreover, the whole loan portion of portfolios are not included in the calculation of the capital and liquidity requirements.

While CSBS drafted the Model Standards, they are implemented only through individual state legislation or other rulemaking.

Connecticut’s and Maryland’s Implementation of the Model Standards

The CT and MD Standards both track the Model Standards in many respects, including the following:

  • Covered servicers are required to satisfy the Federal Housing Finance Agency’s (“FHFA”) Eligibility Requirements for Enterprise Single-Family Seller/Servicers for minimum capital ratio, net worth and liquidity, whether or not the mortgage servicer is approved for servicing by the government sponsored enterprises (i.e., Fannie Mae and/or Freddie Mac) (the “GSEs”), as well maintain policies and procedures implementing such requirements; these requirements do not apply to servicers solely owning and/or conducting reverse mortgage loan servicing, or the reverse mortgage loan portfolio administered by covered institution that may otherwise be covered under the standards, and do not include the whole loan portion of servicers’ portfolios.
  • With respect to corporate governance, covered servicers are required to establish and maintain a board of directors responsible for oversight of the servicer; however, for covered servicers that are not approved to service loans by one of the GSEs, or Ginnie Mae, or where a federal agency has granted approval for a board alternative, a covered servicer may establish a similar body constituted to exercise oversight and fulfill the board of directors’ responsibilities.
  • A covered mortgage servicer’s board of directors, or approved board alternative, must (1) establish a written corporate governance framework, including appropriate internal controls designed to monitor corporate governance and assess compliance with the corporate governance framework, (2) monitor and ensure institutional compliance with certain established rules, and (3) establish internal audit requirements that are appropriate for the size, complexity and risk profile of the servicer, with appropriate independence to provide a reliable evaluation of the servicer’s internal control structure, risk management and governance.
  • Covered mortgage servicers must receive an annual external audit, which must include audited financial statements and audit reports, conducted by an independent accountant, and which must include: (1) annual financial statements, (2) internal control assessments, (3) computation of tangible net worth, (4) validation of MSR valuation and reserve methodology, (5) verification of adequate fidelity and errors and omissions insurance, and (6) testing of controls related to risk management activities, including compliance and stress testing, as applicable.
  • Covered mortgage servicers must establish a risk management program under the oversight of the board of directors, or the approved board alternative, that addresses the following risks: credit, liquidity, operational, market, compliance, legal, and reputation.
  • Covered mortgage servicers must conduct an annual risk assessment, concluding with a formal report to the board of directors, which must include evidence of risk management activities throughout the year including findings of issues and the response to address those findings.

Notwithstanding the foregoing, the CT Standards appear to deviate from the Model Standards in a few notable ways. First, with respect to coverage, the CT Standards differ from the Model Standards, in that the CT Standards can apply to a servicer who only services Connecticut residential mortgage loans, whereas the Model Standards do not apply unless the servicer operates “in two or more states as of the most recent calendar year end, reported in the [NMLS] Mortgage Call Report.” Additionally, the capital and liquidity requirements under the Model Standards have limited application to entities that only perform subservicing for others, including limiting the definition of “servicing liquidity or liquidity” to entities who own servicing rights. The comments to the Model Standards explain that “[f]inancial condition requirements for subservicers are limited under the FHFA eligibility requirements due to the lack of owned servicing. For example, net worth add-on and liquidity requirements apply only to UPB of servicing owned, thereby limiting the financial requirements for subservicers, and servicers who own MSRs and also subservice for others. However, the base capital and operating liquidity requirements … apply to subservicers.” On the other hand, the capital and liquidity requirements under the CT Standards explicitly do not apply to an entity that solely “performs subservicing for others with no responsibility to advance moneys not yet received in connection with such subservicing activities.”

The MD Standards, on the other hand, largely adopt the Model Standards. However, with respect to internal audit requirements, the MD Standards contain additional guidance, specifying that “[u]nless impracticable given the size of the licensee, internal audit functions shall be performed by employees of the licensee who report to the licensee’s owners or board of directors and who are not otherwise supervised by the persons who directly manage the activities being reviewed.” That said, it is worth noting that in an accompanying notice to servicers and lenders, the Maryland Commissioner of Financial Regulation clarified that the purpose of the MD Standards is “aligning Maryland regulations with nationwide model standards and creating uniform standards regarding safety and soundness, financial responsibility, and corporate governance for certain mortgage service providers.”

Takeaway

Connecticut and Maryland are the first two states to adopt implementing laws or regulations following the CSBS’s adoption of the Model Standards. Connecticut-licensed mortgage servicers subject to the CT Standards must comply by October 1, 2022, the section’s effective date. The MD Standards took effect on June 27, 2022. Servicers subject to the CT and/or MD Standards should review the standards and ensure their business satisfies the applicable requirements. As with any model law, the Model Standards require states to adopt implementing laws or regulations. Accordingly, we expect to see additional states begin to adopt similar measures.

Maryland Regulator Puts Lenders and Servicers on Notice Regarding the Assessment of So-Called “Convenience Fees”

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A&B Abstract:

On May 12, 2022, the Maryland Office of the Commissioner of Financial Regulation (the “OCFR”) issued an Industry Advisory (the “Advisory”) “put[ting] [the] industry on notice” of the recent decision issued by the 4th Circuit Court of Appeals in Ashly Alexander, et. al. v. Carrington Mortgage Services, LLC.  The Advisory directs lenders and servicers to review their practices in charging consumer borrowers loan payment fees (referred to herein as “convenience fees”) both to ensure on-going compliance with the law and to determine whether any improper fees have previously been assessed so that they can undertake appropriate reimbursements to affected borrowers.

The Carrington Decision

In Carrington, the 4th Circuit Court of Appeals held that the Maryland Consumer Debt Collection Act (“MCDCA”) incorporates §§ 804 through 812 of federal Fair Debt Collection Practices Act (“FDCPA”), including the FDCPA’s prohibition on “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” under § 808(1). Because Maryland law does not expressly permit or authorize the assessment of convenience fees, the court held that such fees must be expressly authorized by the loan documents in order to be permitted under § 808(1).

The Carrington court further clarified that the FDCPA’s substantive provisions apply to any person who meets the broad definition of a “collector” under the MCDCA, even if such person would not be considered a “debt collector” under the FDCPA. Notably, the FCDPA contains important exclusions from the definition of “debt collector”, such as when a person is collecting a debt that was obtained prior to default, or if the person collecting the debt was the original creditor.  On the other hand, as amended effective October 1, 2018, the MCDCA defines a “collector” broadly to include all persons collecting or attempting to collect an alleged debt arising out of a consumer transaction and does not provide for similar exclusions.  We discussed the Carrington decision in greater detail in a prior blog post.

The Advisory

The Advisory reminds Maryland “collectors” of the Carrington court’s ruling, that collecting fees on any form of loan payment violates the MCDCA if the fees are not set forth in the loan documents. As a result, Maryland lenders and servicers are cautioned “that any fee charged, whether for convenience or to recoup actual costs incurred by lenders and servicers for loan payments made through credit cards, debit cards, the automated clearing house (ACH), [or other payment methods], must be specifically authorized by the applicable loan documents.” The Advisory makes clear that “[i]f such a fee is not provided for in the applicable loan documents, it would be deemed illegal.” Further, attempts to circumvent this fee restriction by directing consumers to a payment platform associated with the lender or servicer that collects a loan payment fee or requiring consumers to amend their loan documents for the purposes of inserting such fees could also violate Maryland law.”

The Advisory anticipates that some lenders or servicers may discontinue offering certain payment options as a result of the Carrington decision. However, the Commissioner expressly requests that such lenders or servicers promptly notify their customers of such change and encourages lenders and servicers “to work with consumers to minimize the impact any change in payment options could have, including where possible, continuing such payment options without fees, especially when consumers are attempting to pay their obligations in a timely manner.”

Lenders and servicers are directed to review their records to determine whether any improper fees have previously been assessed and, if so, make appropriate reimbursements to affected borrowers. The OCFR intends to monitor the impact that the Carrington decision has on lender and servicer fee practices and lenders and servicers can expect a follow-up on this topic from the OCFR in the coming months.

Takeaway

The implications of the Carrington decision are numerous. First, lenders and servicers must immediately cease the collection of convenience fees from Maryland borrowers, unless such fees are expressly authorized by the loan documents. Lenders and servicers choosing to discontinue certain payment services as a result of the Carrington decision, must also ensure that affected consumers are promptly notified of such change.  In addition, lenders and servicers who meet the definition of a “collector” under the MCDCA must ensure compliance with §§ 804 through 812 of the federal FDCPA, regardless of whether they meet the FDCPA’s definition of a “debt collector.” Finally, while the Carrington decision was focused on the permissibility of convenience fees, we note that the court also held that “[t]he FDCPA’s far-reaching language [under § 808(1)] straightforwardly applies to the collection of ‘any amount.’” Thus, the implications of the Carrington decision go beyond convenience fees to arguably any other fee that is not expressly authorized by the loan documents or permitted by law, and we understand that Maryland regulators have informally indicated as much.  Accordingly, lenders and servicers should carefully review all fees that are, or may be, assessed to Maryland borrowers to ensure such fees are either expressly authorized by the loan documents or permitted by law.

New CFPB Chief Rohit Chopra Confirmed by Senate and Takes Immediate Action Against Big Tech Firms

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A&B Abstract:

On September 30, 2021, the Senate confirmed Rohit Chopra to serve as director of the Consumer Financial Protection Bureau (CFPB) in a 50-48 vote along party lines. He had been serving as a member of the Federal Trade Commission (FTC) where he had been a vocal critic of big tech companies and advocated for increased restitution for consumers. He previously served as the CFPB’s private education loan ombudsman under former CFPB Director Richard Cordray. Prior to that, he had worked closely with Sen. Elizabeth Warren on the CFPB’s establishment. Consistent with his past practices, Chopra’s CFPB has now ordered six Big Tech companies to turn over information regarding their payment platforms.

Expectations for Chopra’s CFPB

President-elect Biden announced Chopra as his choice to lead the CFPB before Inauguration Day, and the Biden Administration subsequently referred his nomination to the Senate in February. Chopra succeeds Kathy Kraninger, who became Director in December 2018 after having served as a senior official at the Office of Management and Budget. She led the CFPB for two years before the incoming Biden Administration demanded her resignation on January 20. It is expected that Chopra will aggressively lead the CFPB and unleash an industry crack down. The October 21, 2021 order issued to Big Tech regarding payment products appears to be the first step in that plan. Additionally, credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage servicers are among the financial institutions expected to face scrutiny from Chopra’s CFPB. Prior to the Big Tech inquiry, the CFPB, under interim leadership, had already taken initial steps to implement pandemic-era regulations and to advance the Biden administration’s priorities. It is also expected that the enforcement practices under former-Director Cordray will be revived under a Chopra-led CFPB.

After his confirmation, Chopra stated an intent to focus on safeguarding household financial stability, echoing prior statements regarding his commitment to ensuring those under foreclosure or eviction protections during the pandemic are able to regain housing security. He has also declared an intent to closely scrutinize the ways that banks use online advertising, as well as take a hard look at data-collection practices at banks. In his remarks related to the market-monitoring order issued to Big Tech, Chopra was critical of the way companies may collect data and his concern that it may be used to “profit from behavioral targeting, particularly around advertising and e-commerce.”

Just one week later, Chopra delivered remarks in his first congressional hearing as Consumer Financial Protection Bureau director. In his prepared statements before both the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs, he cited mortgage and rent payments, small business continuity, auto debt, and upcoming CARES Act forbearance expirations as problems he plans to address. He also stated an intent to closely monitor the mortgage market and scrutinize foreclosure activity. And, echoing his action from a week earlier, Chopra reiterated an intent to closely look at Big Tech and emerging payment processing trends. Chopra also noted a lack of competition in the mortgage refinance market and stated an intent to promote competition within the market.

Although appointed to a five year term, the CFPB director serves at the pleasure of the president after a landmark decision last year from the Supreme Court.

Takeaway

Industry participants, including credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage lenders and servicers can anticipate additional scrutiny in the coming months and years from the CFPB. As Chopra gets settled into his new role, we will be keenly watching where he turns his attention to next.