Alston & Bird Consumer Finance Blog

UDAAP

CFPB’s War on Mortgage Fees Continues

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What Happened?

Immediately following President Biden’s State of the Union Address announcing plans to lower homebuyer and refinancing costs, the CFPB issued a blog post seeking public input on how mortgage closing costs impact consumers. The CFPB also announced that it will work to monitor closing costs and, “as necessary, issue rules and guidance to improve competition, choice and affordability.” Significantly, the CFPB also signaled that it will continue to use its supervision and enforcement tools for companies that fail to comply with the law.

Why Is It Important?

The CFPB is putting companies on notice that the Bureau will be taking a close look at the total loans costs for originating a residential mortgage loan, including origination fees, appraisal fees, credit report fees, title insurance, discount points, and other fees. In particular, the CFPB is paying “significant attention to the recent rise in discount points,” and seems concerned with the lack of competition in connection with certain fees, such as lender’s title insurance and credit reports. The CFPB also has expressed concerns with how companies may charge lender credits and fees that are financed into the loan amount (through higher interest rates or mortgage insurance payments).

While the CFPB’s blog post does not identify any specific laws, it does provide some clues. First, the Bureau is concerned that some closing costs are high and increasing due to lack of competition. According to the Bureau, “[b]orrowers are required to pay for many of the costs associated with closing a home loan but cannot pick the provider and do not benefit from the service.” Taking unreasonable advantage of the inability of a consumer to protect their interests in selecting or using a consumer financial product or service could be construed as abusive under the Dodd-Frank Act’s UDAAP statute.

Because certain fees are fixed and don’t fluctuate with the loan size or interest rate, the Bureau is concerned that such fees could disproportionately impact borrowers with smaller loans, such as low-income borrowers, first-time borrowers, or Black or Hispanic borrowers.  This could present a fair lending problem under the Equal Credit Opportunity Act. Indeed, the CFPB already has announced that, pursuant to its authority to prevent unfair, deceptive, and abusive acts or practices (“UDAAPs”), the Bureau will begin examining institutions for alleged discriminatory conduct that the Bureau deems to be unfair.

Of course, Congress passed the Dodd-Frank Act to address many of the above concerns, and the TRID Rule already attempts to ensure that consumers are provided with greater and more timely information on the nature and costs of the residential real estate settlement process and are protected from unnecessarily high settlement charges.

What Do I Need to Do?

The CFPB is sending a strong message to the industry that closing fees will be receiving scrutiny from the CFPB.  And knowing that the CFPB has been on a hiring spree in its enforcement division, now is a good time to take a close look at the fees being charged from both a UDAAP and fair lending perspective.  The team at Alston & Bird has deep knowledge on mortgage fees and is happy to assist with such a review.

A Friendly Reminder of the Importance of Robust Consumer Complaint Handling Processes

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What Happened?

On February 27, 2024, the California Department of Financial Protection and Innovation (the Department) entered into a public consent order with a company that provides consumer financial services to California residents. The consent order alleges that between January 2020 and September 2022, the Department received complaints from consumers raising concerns about their accounts and customer service interactions with the company, which the Department forwarded to the company for investigation and response. The Department also investigated the company’s handling of those consumer complaints.

The Department found that the company’s complaint handling was deficient in that “occasional mistakes” that occurred in the Company’s responsiveness to consumer complaints were substantial enough to have violated the California Consumer Financial Protection Law (CCFPL). The Department alleged that as between the company and the consumer, the company was in the better position to accurately evaluate the available information in most cases and to respond to consumers’ complaints in a timely manner and while the number of mistakes during the Department’s investigation period was relatively small in comparison to the overall number of consumer complaints received, the Department concluded that the mistakes were important to the affected consumers.

To resolve these allegations, the company agreed to (1) desist and refrain from violating the CCFPL through its complaint handling processes, (2) pay a penalty of $ 2.5 million, (3) enhance existing customer service procedures or processes, (4) establish, implement, enhance, and maintain testing policies, procedures, and standards reasonably designed to, at a minimum, ensure compliance with the law, and (5) report to the Department annually for two years on these standards. These standards require the company to:

  • Ensure customer service support 24 hours a day, seven days a week;
  • Ensure sufficient customer service support staffing;
  • Ensure sufficient customer service support training; and
  • Investigate and implement policies and procedures to maintain the accurate, prompt and proper handling of consumer complaints.

Why is it Important?

The CCFPL was enacted in September 2020 and grants the Department expanded authority over persons engaged in offering or providing a consumer financial product or service in California and their affiliated service providers. Notably, under the CCFPL, it is unlawful for a “covered person” or “service provider,” to do any of the following:

  • Engage, have engaged, or propose to engage in any unlawful, unfair, deceptive, or abusive act or practice (UDAAP) with respect to consumer financial products or services.
  • Offer or provide to a consumer any financial product or service not in conformity with any consumer financial law or otherwise commit any act or omission in violation of a consumer financial law.
  • Fail or refuse, as required by a consumer financial law or any rule or order issued by the Department thereunder, to do any of the following:
    • Permit the Department access to or copying of records.
    • Establish or maintain records.
    • Make reports or provide information to the Department.

The CCFPL defines a “covered person” to mean, to the extent not preempted by federal law, any of the following:

  • Any person that engages in offering or providing a consumer financial product or service to a resident of California.
  • Any affiliate of a person described above if the affiliate acts as a service provider to the person.
  • Any service provider to the extent that the person engages in the offering or provision of its own consumer financial product or service.

A “servicer provider” includes any person that provides a material service to a covered person in connection with the offering or provision by that covered person of a consumer financial product or service, including a person that either:

  • Participates in designing, operating, or maintaining the consumer financial product or service.
  • Processes transactions relating to the consumer financial product or service, other than unknowingly or incidentally transmitting or processing financial data in a manner that the data is undifferentiated from other types of data of the same form as the person transmits or processes.

The term “service provider” does not include a person solely by virtue of that person offering or providing to a covered person either a support service of a type provided to businesses generally or a similar ministerial service, or time or space for an advertisement for a consumer financial product or service through print, newspaper, or electronic media.

Notwithstanding the broad definition of “covered person,” the CCFPL contains numerous exemptions, including for banks; licensed escrow agents; licensees under the California Financing Law; licensed broker-dealers or investment advisers; licensees under the Residential Mortgage Lending Act; licensed check sellers, bill payers, or proraters; and licensed money transmitters, among others.

The Department is authorized to impose civil money penalties for any violation of the CCFPL, rule or final order, or condition imposed in writing by the Department in an amount not to exceed the greater of $5,000 for each day during which a violation or failure to pay continues, or $2,500 for each act or omission. Reckless violations are subject to increased penalties not to exceed the greater of $25,000 for each day during which the violation continues, or $10,000 for each act or omission. For knowing violations, the Department is authorized to assess penalties not to exceed the lesser of one percent of the person’s total assets, $1 million for each day during which the violation continues, or $25,000 for each act or omission.

What Do You Need to Do?

It is always important to take consumer complaints seriously and to respond timely and accurately. Now is the time to review your company’s complaint management procedures to make sure they are robust. It is always important to mine your consumer complaints so that you can learn from them and correct errors timely to ensure mistakes don’t recur, and the Department’s latest settlement is a reminder that companies subject to the CCFPL also have a legal obligation to do so.

CFPB’s Proposed Insufficient Fund Fee Rule – Narrow in Scope with Potential for Greater Impact

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What Happened?

On January 24, 2024, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a proposed rule that would prohibit covered financial institutions from imposing a nonsufficient funds (NSF) fee when consumers initiate transactions that are instantaneously or near instantaneously declined (the Proposed Rule). According to the CFPB, such fees are not based on the transaction amount or processing cost and take unreasonable advantage of a consumer’s lack of understanding of the material risk, costs or conditions of the product or service. In the Preamble to the Proposed Rule, the CFPB recognizes that “currently covered financial institutions rarely charge NSF fees on covered transactions” and, thus, the “CFPB is proposing this rule primarily as a preventive measure.” With that said, the Proposed Rule is significant in that the Bureau also clarifies its approach to assessing abusive practices.

Why is it Important?

Background

In January 2022, the CFPB launched an initiative to reduce certain fees charged by banks and other companies under its jurisdiction, by issuing a Request for Information (Fee RFI) seeking public comment regarding fees that are not “subject to competitive processes that ensure fair pricing.” The CFPB continues to focus on these so-called “junk fees,” which the Bureau described in its Fee RFI, in part, as “fees that far exceed the marginal cost of the service they purport to cover, implying that companies are not just shifting costs to consumers, but rather, taking advantage of a captive relationship with the consumers to drive excess profits.” The Bureau’s attention is now on NSF fees.

The Proposed Rule

The Proposed Rule may be narrow in scope, but much broader in potential impact. It would prohibit a “financial institution” from charging an NSF fee to a consumer who attempts to withdraw, debit, pay, or transfer funds from their “account” that is declined instantaneously or near instantaneously by the “financial institution.” For purposes of the Proposed Rule, the term “account” and “financial institution” are defined consistent with Regulation E. Thus, a financial institution includes a bank, savings association, credit union, or any other person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services. An account is defined equally broad to include: (i) checking, savings, or other consumer asset account held by a financial institution (directly or indirectly), including certain club accounts, established primarily for personal, family or household purposes, and (ii) a prepaid account. An account would not include, among others, escrow accounts for real estate taxes or insurance or an occasional or incidental credit balance in a credit plan. It is also worth noting that, according to the CFPB, checks and ACH transactions are not covered by the rule unless they evolve in a way to be cleared instantaneously.

While the scope of the Proposed Rule is narrow, the Bureau’s interpretation of abusiveness as articulated in the Proposed Rule is not. By way of background, Section 1031 of the Consumer Financial Protection Act (CFPA) prohibits unfair, deceptive, or abusive acts or practices (UDAAPs) under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The Proposed Rule finds that charging an NSF fee in instantaneously or near instantaneously declined transactions violates the “lack of understanding” prong of the abusiveness standard. Under the CFPB’s Policy Statement on Abusive Acts or Practices, the “lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service” concerns gaps in understanding affecting consumer decision making.

The Proposed Rule attempts to fine tune the “lack of understanding” analysis by distinguishing prior comments the Bureau made in its 2020 Payday Lending Rule, by clarifying that:

  • “[L]ack of understanding under the abusiveness standard of UDAAP is not synonymous with reasonable avoidability under the unfairness standard.”
  • Magnitude and risk of harm are distinct and should have no bearing on a “lack of understanding” analysis.
  • A consumer’s lack of understanding should not be characterized as general or specific as such framework is unhelpful in determining whether consumers understand the material risks, costs or conditions of a financial product or service.

Under the Proposed Rule, the Bureau has preliminarily determined that the charging of such fee is abusive under Section 1031(d) of the CFPA as it would take “unreasonable advantage of consumers’ lack [of] understanding of the material risks, costs, or conditions associated with their deposit accounts” and that “covered financial institutions that charge NSF fees on covered transactions would be benefiting from negative consumer outcomes that result from…a consumer’s lack of understanding.”

The Bureau summarily dismissed that such risks could be mitigated, as disclosure would be too costly, too unfeasible, and unlikely to eliminate the risk. Rather, “[d]rawing on its experience and expertise regarding consumer behavior, the CFPB believes that if a transaction entails material risks or costs and consumers derive minimum or no benefit from the transaction, it is generally reasonable to conclude that consumers who nonetheless went ahead with the transaction did not understand the material risks, costs or the conditions to those risks or costs.”

In other words, the CFPB appears to believe that no consumer would initiate a transaction knowing that they have insufficient funds and that a fee could be charged if their transaction is declined, despite the fact that (1) the vast majority of consumers have readily available access to their bank account balances, (2) such fees are generally disclosed to consumers, and (3) consumers contractually agree to pay such fees.

What Do You Need to Do?

While the Proposed Rule has limited application, the Bureau’s interpretation of the abusiveness standard could have far broader implications, as the Bureau could deem as abusive any fee which it determines provides little to no consumer benefit. For example, it is unclear what would stop the Bureau from prohibiting other fees as abusive, based on a determination that such fees provide little to no consumer benefit and that financial institutions are “benefiting from negative consumer outcomes that result from…a consumer’s lack of understanding,” given that the Bureau’s rationale appears to give little regard to consumer disclosures or contract law.

Therefore, given the potential downstream implications of the CFPB’s broad interpretation of abusiveness, companies subject to the CFPB’s jurisdiction should carefully review the Proposed Rule and consider submitting a comment letter, even if the Proposed Rule itself would not directly apply to the company. The Proposed Rule’s comment period expires on March 25, 2024.

 

CFPB Touts 2023 Greatest Hits and Casts a Line for Enforcement Hires

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What Happened?

Earlier this week, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released a blog post touting its 2023 successes in safeguarding “household financial stability” through the levying of fines and filing of lawsuits. The Bureau highlighted seven enforcement cases:

  • Protecting Servicemembers from Illegal High-Interest Loans and False Advertising: In February 2023, the CFPB ordered an auto title loan lender and several affiliated entities to pay a total of $15 million in penalties and consumer redress to resolve allegations that the entities violated the Military Lending Act. That same month, the CFPB permanently banned a California-based mortgage lender from the mortgage lending industry and imposed a $1 million penalty on the lender for repeatedly violating a 2015 consent order by, among other things, allegedly continuing to send advertisements to military families that led recipients to believe the company was affiliated with the U.S. government.
  • Taking Action for Illegally Charging Junk Fees, Withholding Credit Card Rewards, and Operating Fake Bank Accounts: In July 2023, the CFPB ordered a national bank to pay a more than $190 million in penalties and consumer redress to resolve allegations that the bank double dipped on insufficient funds fees imposed on customers, withheld reward bonuses promised to credit card customers, and misappropriated sensitive personal information to open accounts without customer knowledge or authorization. The Office of the Comptroller of the Currency (“OCC”) also found that the bank’s double-dipping on insufficient funds fees was illegal and ordered the bank to pay $60 million in penalties.
  • Intentional Illegal Discrimination Against Armenian Americans: In November 2023, the CFPB ordered a national bank to pay $25.9 million in fines and consumer redress for allegedly “intentionally and illegally discriminating against credit card applicants the bank identified as Armenian American.” 
  • Taking Action to Stop Loan Churning: In August 2023, the CFPB sued a high-cost installment loan lender and several of its wholly owned, state-licensed subsidiaries, for allegedly violating the Consumer Financial Protection Act by “illegally churning loans to harvest hundreds of millions in loan costs and fees.”
  • Illegal Rental Background Check and Credit Reporting Practices: In October 2023, the CFPB and the Federal Trade Commission (“FTC”) sued a rental screening subsidiary of a national consumer credit reporting agency for allegedly violating the Fair Credit Reporting Act by failing to take steps to ensure the rental background checks that landlords use to decide who gets housing were accurate and withholding from renters the names of third parties that were providing the inaccurate information. The resulting court order required the company to pay $15 million in penalties and make significant improvements to how it reports evictions. Separately, the CFPB ordered the national consumer reporting agency to pay $8 million in consumer redress and penalties for failing to timely place or remove security freezes and locks on consumer credit reports and for falsely telling certain consumers that their requests were processed.
  • Stopping unlawful junk advance fees for credit repair services: In August 2023, the CFPB entered into a settlement with a credit repair service conglomerate that imposed a $2.7 billion judgment and banned the companies from telemarketing credit repair services for 10 years.

The CFPB touted that in 2023 it secured over $3.5 billion in total fines and compensation from financial services “lawbreakers” in 2023.  The CFPB largely attributed these cases to the creation of a “team of technologists” working on emerging technologies to “enforce the law when emerging technologies harm consumers.”

Why is this Important?

The CFPB filed 29 enforcement actions in 2023 but selected the seven highlighted above, possibly signaling that junk fees, fair lending, servicemember protections, and credit reporting, among others, remain on the Bureau’s radar. We do not expect the CFPB to issue any sort of accounting covering enforcement cases which it dropped in 2023.

Interestingly, the CFPB also used this post to recruit new “cross-disciplinary” employees (both attorneys and non-attorneys) for its Office of Enforcement and reiterated that the Bureau is “significantly expanding [its] enforcement capacity in 2024 to build on [its] achievements so far.” The roles are located in the Bureau’s Washington, D.C. headquarters and its regional offices in Atlanta, Chicago, New York and San Francisco.  The last of the associated employment information virtual sessions occurred on January 30, 2024.  Strangely, the CFPB only released this blog post the day before the last of these three sessions and it is not known how that late notice may impact application numbers.

What Do You Need to Do?

Given that the CFPB is telegraphing those issues that are top of mind for the Bureau as well as its emphasis on ramping up enforcement in 2024, now is a good time for companies to review their compliance management programs and make any necessary enhancements to policies, procedures, processes, and systems to ensure compliance with all applicable consumer financial laws and regulations. In particular, institutions should revisit their compliance monitoring programs to determine whether any updates are needed to minimize enforcement risk.

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.