Uncertainties Surround Rising Agricultural Debt and Default Rates in the U.S.

By Kaylee Beauchamp on November 20, 2019 Posted in Commercial Lending

Uncertainties Surround Rising Agricultural Debt and Default Rates in the U.S. The United States and China reached the first phase of a trade deal on October 11th, postponing the next round of tariffs that President Trump planned to impose on Chinese goods the following week. Under the trade deal, which is still being negotiated, China agreed to buy billions of dollars’ worth of American agricultural products annually. China’s agreement to purchase U.S. agricultural products was likely at the center of negotiations for this trade deal because there has been a decline in U.S. farm revenues over the past few years. The decrease in farm revenues is troubling for many reasons, one of which is that, in this year alone, farmers are expected to hold over $400 billion in debt.

Of the over $370 billion in total farm debt in 2018, the USDA’s Farm Service Agency (FSA) provided roughly 2.6% of that debt through direct loans and 4% to 5% in loan guarantees. The Farm Credit System (FCS), a federal government-sponsored enterprise, provided 41% of the total 2018 farm debt. Commercial banks were lenders of 42% of the total agriculture loan debt in 2018. During the first quarter of 2019, agriculture loans held by FDIC-insured institutions totaled $184 billion — with community banks holding 69% ($127 billion) of total agriculture loans. At the beginning of this year, the U.S. saw the delinquency rate for FSA loans reach its highest level since 2011 — this was also true for farm loans held by community banks. Indeed, in 2019, FDIC-insured banks have seen a rise to 2.39% of agricultural loans that are at least 30-days past due, which is the highest delinquency rate since 2012.

Farming has always been an unpredictable and risky business, especially since farmers are beholden to Mother Nature, fluctuating consumer demands, and foreign trade policies. In light of these common adversities, farmers and financial institutions are closely watching these factors to determine if this new year may continue to see farm revenue decline, debt held by farmers grow, and default rates for farm loans increase.

5th Circuit Joins the Growing Crowd Holding that Private Student Loans May be Dischargeable in Bankruptcy

By Keith S. Anderson and Alexandra Dugan on November 4, 2019 Posted in Bankruptcy, Student Loan Servicing

Student Loan Servicers' Fight over Federal Preemption of State Regulation of May End Up in the Supreme Court The Fifth Circuit’s recent decision in Crocker v. Navient Solutions is a stark reminder to for-profit student lenders and servicers that bankruptcy caselaw continues to evolve relating to discharge. In Crocker, the Fifth Circuit joined the trend of cases holding that private student loans are dischargeable in bankruptcy. More specifically, the court affirmed a bankruptcy decision by the Southern District of Texas that private educational loans are not statutorily excepted from discharge, absent undue hardship (in other words, it held that such loans can be discharged like other debt).

The case involved two individual chapter 7 bankruptcy filings in different jurisdictions. The first filing involved a debtor who obtained a $15,000 loan from Navient Solutions, a for-profit public corporation lender not part of any governmental loan program. The second filing was by a debtor who had obtained an $11,000 loan from Navient to attend technical school. In both cases, the bankruptcy courts issued standard discharge orders and closed the cases. After the discharges, Navient continued collection efforts on the loans, which prompted one of the debtors to file an adversary proceeding, later filing an amended complaint joining the second debtor as an additional plaintiff and seeking to certify a nationwide class, which had the potential to exponentially increase both the number of plaintiffs in the case as well as Navient’s potential liability. The bankruptcy court denied Navient’s motion for summary judgment, determining that the particular category of loans was not exempt from discharge under 11 U.S.C. § 523(a)(8). Two issues were addressed on appeal: 1) whether the bankruptcy court had jurisdiction to enforce the discharge injunction from another court (ultimately concluding it did not), and 2) whether these loans are within the category of loans that are non-dischargeable under the Bankruptcy Code.

The Fifth Circuit agreed with the bankruptcy court that private educational loans are subject to discharge. Section 11 U.S.C. § 523(a)(8)(A)(ii) of the Bankruptcy Code provides:

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for –

(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received by an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual. (emphasis added)

The court began its analysis by noting that exceptions to discharge should be interpreted narrowly in favor of the debtor. The relevant statutory section ((A)(ii)) did not include the word “loan” in contrast to section (A)(i). Contrary to Navient’s assertions, the language in the relevant section “obligation to repay funds received by an educational benefit” should not be construed to apply to private student loans. Instead, the term “educational benefit” is more akin to the other terms in section (A)(ii), scholarship and stipend, which “signify granting, not borrowing.” The court further found that if section (A)(ii) included repaying private student loans as an “educational benefit,” section (A)(i) would be redundant and contrary to the canon against surplusage. Absent the narrower reading, “Congress could have just exempted from discharge any ‘obligation to repay funds received as an educational benefit’ and left it at that.” Finally, the court discussed the statutory history of section 523(a)(8) and concluded that the 2005 bankruptcy amendments did not make all private student loans non-dischargeable.

One issue the court felt it had to explain was the potential inconsistency of its conclusion with its recent statement in Thomas v. Dept. of Ed. that “Section 523(a)(8) as it stands today excepts virtually all student loans from discharge” unless undue hardship is shown. To harmonize Thomas and Crocker, the court reasoned that Crocker addressed a type of loan that, unlike the loan in Thomas, was not governed by Section 523(a)(8). The basis of the distinction between the two loans was, according to the court, that “an educational benefit” is limited to conditional payments with similarities to scholarships and stipends. In other words, in contrast to the Thomas debt, the Crocker debt, despite being obtained to pay expenses of education, did not qualify as “an obligation to repay funds received as an educational benefit, scholarship, or stipend” because repayment was unconditional. Therefore, in the court’s opinion, the Crocker debt was not subject to Section 523(a)(8) and therefore was dischargeable without creating any conflict between Thomas and Crocker.

Private student lenders should continue to monitor the increasing caselaw and developments regarding debtor’s ability to discharge certain private student loans (see e.g., Nypaver v. Nypaver, 581 B.R. 431 (W.D. Pa. 2018); McDaniel v. Navient Sols., LLC, 590 B.R. 537 (Bankr. D. Colo. 2018).

The Split Widens: Third Circuit Joins Minority View Regarding Whether Secured Creditor Has Affirmative Obligation to Return Collateral to Debtor Upon Bankruptcy Filing

By Elizabeth R. Brusa and Alexandra Dugan on October 31, 2019 Posted in Automobile Finance, Bankruptcy, Litigation Developments, Secured Creditors, Secured Debts

The Split Widens: Third Circuit Joins Minority View Regarding Whether Secured Creditor Has Affirmative Obligation to Return Collateral to Debtor Upon Bankruptcy Filing The circuit courts continue to wrestle over the duties imposed by the Bankruptcy Code’s automatic stay on creditors concerning turnover of a debtor’s impounded vehicle. Is a creditor required to automatically turn over the vehicle as soon as the bankruptcy petition is filed, or can it retain possession while awaiting an order of the bankruptcy court adjudicating turnover in an adversary proceeding? As we previously wrote, five circuits, including the Seventh Circuit in City of Chicago v. Robbin L. Fulton, have held that the automatic stay requires a creditor to immediately release an impounded vehicle when the owner files for bankruptcy.

On the other side of the split, the Tenth and D.C. Circuits have rejected this argument, and they have now been joined by the Third Circuit. On October 28, 2019, the Third Circuit in In re Denby-Petersen, held that a creditor in possession of collateral that was repossessed before a bankruptcy filing does not violate the automatic stay by retaining the collateral post-bankruptcy petition. Following her bankruptcy, the debtor demanded that the creditor release her Chevrolet Corvette, which had been repossessed pre-petition. The creditor refused to turn over the vehicle, and the debtor subsequently filed a motion demanding turnover. The bankruptcy court ordered turnover of the vehicle but denied awarding sanctions to the debtor. The Third Circuit agreed with the bankruptcy court’s decision. The court found that a post-petition affirmative act to exercise control over property of the estate is required to find a violation of the automatic stay. Under the facts, mere passive retention of the car post-bankruptcy filing did not constitute such a violation. Additionally, the court rejected the debtor’s argument that the Bankruptcy Code’s turnover provision was “self-effectuating” (i.e., automatic). The court articulated the following framework: (1) debtor files adversary proceeding in bankruptcy case requesting turnover, (2) bankruptcy court determines whether property is subject to turnover under applicable law, and (3) assuming it is subject to turnover, the court will issue an order compelling creditor to turn over property to the debtor.

What’s Next?

Earlier this year, the Supreme Court denied a petition for certiorari filed in Davis v. Tyson, which dealt with the same issue arising out of the Tenth Circuit. However, the Supreme Court now has another opportunity to resolve this entrenched circuit split. The City of Chicago filed a petition of certiorari in City of Chicago v. Fulton on September 17, 2019. We’ll continue to report on developments in this area.

HUD and DOJ Release Memorandum on the Application and Enforcement of FHA Violations Involving the False Claims Act

By F. Wendell Allen, James W. Wright Jr. and Austin Holland on October 29, 2019 Posted in Affordable Housing, Banking, Compliance, False Claims Act, FHA, HUD, Investigations / Enforcement, Mortgage Loan Originators, Mortgage Servicing, Reverse Mortgage

HUD and DOJ Release Memorandum on the Application and Enforcement of FHA Violations Involving the False Claims Act In an effort to provide clarity and certainty to Federal Housing Administration (FHA) approved lenders, the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Justice (DOJ) jointly issued a memorandum of understanding (MOU) on October 28, 2019, describing broad guidelines about how HUD and DOJ will coordinate using the False Claims Act (FCA) to enforce alleged violations of FHA requirements. More specifically, the interagency MOU describes coordination efforts between the departments in civil FCA litigation.

The MOU reflects but one component of a broader initiative by HUD to encourage the re-entry of depositories and other well-capitalized financial institutions into the FHA lending space. HUD’s press release announcing the MOU noted that depository institutions represented approximately 14% of all FHA originations today, down from 45% in 2010. The MOU emphasizes that the FHA is a program in which all responsible lenders should participate, and states that the MOU “is intended to address concerns that uncertain and unanticipated FCA liabilities for regulatory defects led to many well-capitalized lenders, including many banks and credit unions statutorily required to help meet the credit needs of the communities in which they do business, to largely withdraw from FHA lending.

The MOU identifies two other initiatives HUD has recently undertaken to encourage the return of depositories to the FHA lending space by providing greater certainty about the enforcement of alleged violations of FHA requirements. First, HUD has streamlined its annual lender certification requirements by removing a representation made under penalty of perjury that the lender complied with all HUD regulations and requirements, a representation that arguably gave rise to independent FCA liability if the lender had violated any FHA requirement. Second, HUD evaluates lender performance through its Quality Assessment Methodology (commonly referred to as the “Defect Taxonomy”). HUD uses the data reported in the Defect Taxonomy to identify loan defects and then to categorize those defects into four tiers based on the defects’ severity. HUD is revising its guidance to better tie the Defect Taxonomy to applicable HUD remedies and violations.

As detailed in the MOU, HUD expects that FHA requirement violations will primarily be enforced through HUD administrative proceedings. In cases where the Defect Taxonomy identifies potential violations of FHA requirements with FCA implications, HUD will refer those matters to the Mortgagee Review Board (MRB), which has administrative authority to, among other things, exact civil money penalties and suspend or terminate an FHA lender’s approval. The MRB will then complete its own review of the referred violations and will refer those matters to the DOJ when the following conditions exist:

A Tier 1 Defect Taxonomy or equivalent violation exists in at least 15 loans or equivalent violations exist in loans with an unpaid principal balance or claims of $2 million or more; and
Aggravating factors warranting pursuit of FCA litigation, such as evidence that the violations are systemic or widespread.

In general, the MOU describes that HUD intends to refer FCA litigation to DOJ “only
where such action is the most appropriate method to protect the interests of FHA’s mortgage insurance programs, would deter fraud against the United States, and would generally serve the best interests of the United States.” In the cases where the MRB approves the referral of alleged FCA violations to the DOJ, HUD’s General Counsel will do so in writing. In cases where the MRB declines to refer potential FCA violations to the DOJ, the MRB may still exercise its discretion to pursue administrative actions or work with the DOJ to file a Program Fraud Civil Remedies Act complaint.

Finally, the DOJ will confer with HUD when any party other than HUD — including qui tam relators, HUD’s Office of Inspector General, or litigation directly initiated by DOJ or a U.S. Attorney’s Office — refers a potential FCA violation to DOJ. In these cases, DOJ and HUD will work together during the investigation, litigation, and settlement phases of the matter. This includes DOJ’s consideration of HUD’s support or opposition to DOJ’s pursuit of the FCA litigation. For allegations reported to DOJ by a qui tam relator, DOJ will consider any recommended dismissal by HUD if HUD believes the alleged conduct does not rise to HUD’s FCA evaluation standards, the alleged conduct does not materially violate FHA requirements, or the FCA litigation would potentially interfere with HUD’s policies or the FHA program.

The MOU between HUD and DOJ provides needed clarity about when an approved FHA lender faces FCA liability. HUD provided this additional interagency guidance in hopes of creating a more predictable regulatory environment for lenders engaged in or considering FHA lending. Any FHA lender who self-identifies or is alleged to have committed violations of FHA requirements should seek experienced counsel to consider its FCA liability in light of the MOU.

NCUA’s Appraisal Threshold Increase to $1 Million for Commercial Real Estate Loans Set to Go into Effect

By Grant A. Premo on October 18, 2019 Posted in Credit Unions, NCUA

NCUA’s Appraisal Threshold Increase to $1 Million for Commercial Real Estate Loans Set to Go into Effect The National Credit Union Administration’s (NCUA) new appraisal threshold rule for commercial real estate loans will go into effect on October 22, 2019. Under the NCUA’s new appraisal rule, credit unions will not be required to obtain an appraisal for commercial real estate transactions less than $1 million. The new rule sharply increases the appraisal threshold, which the NCUA previously set at $250,000.

As a basis for the increase, the NCUA noted that the appraisal rule had not been updated since 2001. Since that time, the rising values of commercial properties have resulted in a higher proportion of commercial real estate transactions requiring an appraisal, leading to increased burden in time and cost for credit unions. The NCUA, however, stressed that the appraisal rule balances safety and soundness concerns with necessary reductions in regulatory burdens to address credit unions’ rising costs.

In conjunction with raising the transaction amount threshold, the new appraisal rule also eliminates the prior rule’s categorical exemption from the appraisal requirement altogether for commercial transactions that are partially or fully guaranteed by a U.S. government agency or a sponsored agency. In addressing this change, the NCUA noted that most U.S. government guaranty and insurance programs currently require appraisals so the elimination of the exemption should not materially increase the burden on credit unions.

The new rule also requires credit unions to use their own judgment, “consistent with safe and sound lending practices,” to determine whether a full appraisal by a state-certified appraiser should be obtained for a given transaction that falls below the $1 million threshold. Even if a transaction falls below the $1 million threshold and a full appraisal is not obtained, written estimates of value from an independent third party are still required in many cases. The new rule strengthens the independence requirement for written estimates, requiring the person giving the written estimate to be unbiased and independent of the loan production and collection process.

Credit unions and credit union trade organizations praised the new rule for its potential to reduce regulatory burdens, reduce member costs, and increase access to credit. The NCUA noted in the text to the new appraisal rule that banks, however, submitted comments criticizing the rule for creating an “imbalance in the commercial real estate market between credit unions and banks.” Banks are subject to a $500,000 threshold for general commercial real estate transactions, under regulations issued by the OCC, Federal Reserve, and FDIC.

The new appraisal rule may give credit unions an advantage to continue to increase their presence in the business lending market. Credit unions, however, should be careful to create adequate policies and procedures to address situations where safety and soundness concerns require an appraisal for transactions that fall below the $1 million threshold. A recent report on fraud in small and mid-size business lending revealed that fraud in small business lending impacts credit unions at twice the rate of larger banks.

Navigating ADA Compliance Issues in an Online World

By Alexandra Dugan and Anne R. Yuengert on October 17, 2019 Posted in Automobile Finance, Compliance, Events, Litigation Developments, Payment Systems, Student Loan Servicing

Navigating ADA Compliance Issues in an Online World The landscape remains murky as to whether and how Title III of the Americans with Disabilities Act (ADA) applies to websites. As the financial services industry moves increasingly and inexorably from a “bricks and mortar” presence to a virtual environment, these issues are likely to only become more prominent. With differing authority from courts across the U.S. and minimal guidance from the Department of Justice and financial services regulators, financial services companies, particularly fintechs, must navigate these thorny issues to best mitigate risk and serve their customers.

A recent example is Domino’s Pizza’s petition for certiorari to the Supreme Court. The Ninth Circuit held that the ADA applied to Domino’s website and app because the ADA mandates that places of public accommodation, such as Domino’s, provide auxiliary aids and services to make visual materials available to individuals who are blind. Even though customers primarily accessed the website and app away from Domino’s physical restaurants, the court stated that the ADA applies to the services of a public accommodation, not services in a place of public accommodation. According to the Ninth Circuit, Domino’s website and mobile application “connect customers to the goods and services of Domino’s physical restaurants,” which are places of public accommodation. The court reasoned that there was a sufficient “nexus” between the website and app and its restaurants since customers could use the website and app to locate a nearby store and order pizzas for delivery or in-store pick-up. Given that nexus, the ADA applied to the website and app.

The question presented in the petition for certiorari was: “Does Title III of the ADA require a website or mobile phone application that offers goods or services to the public to satisfy discrete accessibility requirements with respect to individuals with disabilities?” Domino’s urged the Supreme Court to grant certiorari to “stem a burdensome litigation epidemic.” The recent increase in litigation relating to ADA website compliance is fueled in part by the cross- jurisdictional uncertainty. Specifically, there is a split in the federal Court of Appeals over whether Title III imposes accessibility requirements on web-only businesses with no fixed location, as well as confusion over whether Title III imposes discrete accessibility requirements on websites maintained by businesses whose brick-and-mortar locations constitute ADA-covered public accommodations.

This cert denial may cause businesses to more carefully evaluate website accessibility concerns. However, even careful evaluation may result in an uptick in litigation due to the lack of clear federal standards for accessibility of websites and mobile apps. We will continue to report developments in this area.

Upcoming Webinar

If these are areas you would like to learn more about, we encourage you to join us for our “Navigating ADA Compliance Issues in an Online World?” webinar, which is scheduled for Tuesday, October 22, from 11:30 a.m. to 12:30 p.m. CT. This webinar will provide a case law update on these issues and offer practical tips to navigate compliance.

CFPB Issues Final HMDA Rule Offering Relief to Smaller Institutions and Credit Unions

By Christopher K. Friedman and Benjamin William Perry on October 17, 2019 Posted in Banking, CFPB, Commercial Lending, Compliance, Credit Unions, Dodd-Frank Compliance, Federal Agencies

CFPB Issues Final HMDA Rule Offering Relief to Smaller Institutions and Credit Unions The Consumer Financial Protection Bureau (CFPB) issued its long-awaited final rule amending the Home Mortgage Disclosure Act (HMDA) on Thursday, October 10. These changes promise to bring some measure of relief to smaller financial institutions and credit unions. Prior to this new rule, the CFPB did not require the collection and reporting of HMDA data for institutions originating less than 500 open-ended lines of credit until January 1, 2020. The new rule provides that this temporary collection and reporting threshold will be extended to January 1, 2022.

This rule follows a May 2019 advance notice of proposed rulemaking (ANPR) in which the CFPB would, along with extending the temporary reporting threshold for open-ended loans, temporarily raise the collection and reporting threshold for closed-end mortgage loans from 25 to 50 to 100 loans for 2018 and 2019. The ANPR would then ultimately lower the threshold to 200 open-end loans after January 1, 2022. While the final rule does not include the ANPR’s provisions related to closed-end loan collection and reporting requirements, it signals the CFPB’s intent to issue a separate rule addressing this issue.

Finally, the new rule implements certain exemptions for smaller financial institutions that were issued in 2018 pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). For instance, the rule specifies that some smaller insured depository institutions and credit unions have the option of reporting exempt data so long as all data fields within an exempt data point are reported. This clarification is designed to assist smaller institutions that may find it less burdensome to report all data points rather than institute policies and procedures to separate exempt and non-exempt data points before reporting.

To be sure, collection and reporting requirements under HMDA have increased both the costs and risks associated with consumer and some commercial lending. According to an October 15, 2019 joint comment to the CFPB by, among others, the American Bankers Association and the Mortgage Bankers associations, since 2008 the cost of originating mortgage loans for mid-sized banks has approximately doubled from approximately $4,800 to $9,000. Likewise, most institutions responding to the ABA’s annual Real Estate Lending Survey have reported higher compliance costs as a result of increased regulations. In a May 2019 statement, CFPB Director Kathleen Kraninger suggested that she was attuned to some of these concerns, stating that the proposed changes to HMDA collection and reporting requirements were designed to “provide much needed relief to smaller community banks and credit unions while still providing federal regulators and other stakeholders with the information [the CFPB] need[s] under the Home Mortgage Disclosure Act.”

We anticipate additional changes to Regulation C that will provide relief to small to medium-sized institutions. Nevertheless, HMDA’s collection and reporting requirements will continue to be a source of significant regulatory, litigation, and reputational risk. As such, all covered institutions should have in place easy-to-use policies and procedures, as well as training programs designed to guarantee accurate collection, reporting, and analysis of HMDA data.

Regulators Release Updated Examination Procedures for Acceptance of Private Flood Insurance

By Heather Howell Wright and Austin Holland on October 8, 2019 Posted in Banking, Compliance, Flood Insurance Regulation, Insurance, Mortgage Loan Originators

Regulators Release Updated Examination Procedures for Acceptance of Private Flood Insurance The final rule promulgated by the Board of Governors of the Federal Reserve (Federal Reserve), the Farm Credit Administration, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration, and the Office of the Comptroller of the Currency (OCC) went into effect on July 1, 2019, to implement the portion of the Biggert-Waters Flood Insurance Reform Act mandating regulated lending institutions to accept private flood insurance policies.

In response to the new rule, the Federal Reserve, OCC, and FDIC have each recently released updated examination procedures used by the agencies to review their respective regulated institutions. The press releases and updated examination procedures can be found at the following sites:

As detailed previously in Bradley’s Financial Services Perspectives blog, the various federal agencies expect lenders to conduct substantive reviews of private flood insurance policies, and this expectation is reflected in the updated examination procedures. The procedures provide guidance regarding the regulators’ expectations as to how institutions will implement the private flood insurance requirements. By way of example, the Federal Reserve’s updated procedures include the following guidance on examination objective and purchase requirements.

Examination Objectives:

To determine whether an institution performs required flood determinations for loans secured by improved real estate or a mobile home affixed to a permanent foundation.
To determine if the institution complies with the private flood insurance requirements of the regulation.

Purchase Requirements:

Analysis regarding the mandatory acceptance provision, including whether the policy contains the exact compliance aid language or whether the private flood policy meets the definition of “private flood insurance” set forth in the regulation.
If a private flood policy was accepted under the discretionary acceptance process, verifying that: (1) the policy provides a sufficient amount of insurance; (2) the policy is issued by an insurer permitted under the regulation; (3) the policy covers both the mortgagor and the mortgagee as loss payees; and (4) the institution determined that the policy provides sufficient protection of the designated loan, consistent with general safety and soundness principles; and (5) the institution documented its conclusion regarding sufficiency of the protection of the loan in writing.

Even with the additional guidance provided in the newly released examination procedures, there are still many open questions regarding how the agencies will interpret various requirements of the private flood insurance rules, particularly with respect to the rejection of any private flood policy. For example, the OCC exam procedure notes, “[c]consumer complaints can be a source of information about private flood policies that the institution did not accept.”

Lenders and servicers should implement a thorough procedure to ensure a complete and efficient private flood insurance policy review process. To the extent lenders and servicers utilize vendors to perform their private flood insurance review, the exam guidelines demonstrate that regulated institutions will bear responsibility for ensuring such vendors are providing private flood insurance review in compliance with the private flood rules.

The NCUA Doubles Amount Credit Unions Can Offer for Payday Alternative Loans

By Brian R. Epling, Benjamin William Perry and Preston H. Neel on October 2, 2019 Posted in CFPB, Credit Unions, NCUA, Payday Lending, Small-Dollar Lending

The NCUA Doubles Amount Credit Unions Can Offer for Payday Alternative Loans At the September open meeting, the National Credit Union Administration (NCUA) voted 2-1 to approve the final rule related to expanding payday alternative loan options (PAL II). Although the NCUA made clear in the final rule that the PAL II does not replace the PAL I, the flexibility of the PAL II will create new opportunities for borrowers to refinance their payday loans or other debt obligations under the PAL II lending model. Importantly, though, credit unions may only offer one type of PAL to a borrower at any given time.

The key differences between PAL I and PAL II are as follows:

Loan Type	PAL I	PAL II
Loan Amount	$200 Minimum; $1,000 Maximum	No Minimum; $2,000 Maximum
Loan Term	1 Month Minimum; 6 Month Maximum	1 Month Minimum; 12 Month Maximum
Membership Requirement	Must be a member of Credit Union for 1 month before obtaining loan	No membership time requirement
Overdraft or Non-sufficient Funds (NSF) Fees	No Restrictions	Cannot charge overdraft or NSF fees

Based on the NCUA’s discussion of the comments that it received, one of the hottest issues was the interest rate for the PAL II. For PAL I, the maximum interest rate is 28% inclusive of finance charges. The NCUA indicated that “many commenters” requested an increase in the maximum interest rate to 36%, while consumer groups pushed for a decreased interest rate of 18%. Ultimately, the NCUA elected to keep the interest rate at 28% for PAL II, explaining that, unlike the CFPB’s rule and the Military Lending Act, the NCUA allows collection of a $20 application fee.

PAL Volume Restrictions

The NCUA also discussed the current limitation that the total amount of a credit union’s PAL I loan balances cannot exceed 20% of the credit union’s net worth. The final rule makes clear that a credit union’s combined PAL I and PAL II loan balances cannot exceed 20% of the credit union’s net worth. This limitation faced criticism from those seeking an exemption for low-income credit unions and credit unions designated as community development financial institutions where payday loans may be more pervasive in the surrounding community. The NCUA declined to consider the net worth cap since it was outside the scope of the rule-making notice, but the NCUA indicated that it would revisit those comments in the future if appropriate. Of course, in light of the OCC recently taking comments on modernizing the Community Reinvestment Act (CRA), the NCUA will likely revisit lending issues for low-income credit unions.

CFPB Small Dollar Rule Implications

Finally, in response to several commenters, the NCUA made clear the impact of the CFPB’s Small Dollar Rule on PAL II. As covered in our two-part webinar, the CFPB’s Small Dollar Rule imposes significant changes to consumer lending practices. However, because of the “regulatory landscape” related to the CFPB’s Small Dollar Rule, the NCUA has opted to adopt the PAL II rule as a separate provision of the NCUA’s general lending rule. This places a PAL II under the “safe harbor” provision of the CFPB’s Small Dollar Rule.

PAL I Remnants

The NCUA also considered other changes to the structure of the existing PAL I but rejected those changes. In particular, NCUA retained several existing requirements from PAL I, including, among others:

A member cannot take out more than one PAL at a time and cannot have more than three rolling loans in a six-month period;
A PAL cannot be “rolled over” into another PAL, but a PAL can be extended if the borrower is not charged fees or extended additional credit, and a payday loan may still be rolled over into a PAL; and
A PAL must fully amortize over the life of the loan — in other words, a PAL cannot contain a balloon payment feature.

Takeaways

The NCUA clearly wants to encourage credit unions to offer PAL options. According to the NCUA, the December 31, 2017, call report indicated that approximately 518 federal credit unions offered payday alternative loans, with 190,723 outstanding loans at that time having an aggregate balance of $132.4 million. In comparison, the CFPB has cited an analyst’s estimate that storefront and online payday loan volumes were approximately $39.5 billion in 2015.

Further, the NCUA is already considering a third alternative – the PAL III, noting in the final rule background that “[b]efore proposing a PAL III, the PAL II [notice of proposed rule making] sought to gauge industry demand for such a product, as well as solicit comment on what features and loan structures should be included in a PAL III.” These two payday loan alternatives could increase the market for Fintech-credit union partnerships to innovate underwriting and lending moving forward, provided credit unions take steps to ensure their Fintech partners are also in compliance with federal regulations. The new rule will become effective 60 days after publication in the Federal Register.

House Financial Services Committee Meets to Discuss Improvements to FHA HECM Program

By James W. Wright Jr. and Austin Holland on October 1, 2019 Posted in Compliance, FHA, HUD, Reverse Mortgage

House Financial Services Committee Meets to Discuss Improvements to FHA HECM Program The U.S. House of Representatives Financial Services Subcommittee on Housing, Community Development, and Insurance convened a hearing on September 25, 2019, to discuss the federal Home Equity Conversion Mortgage (HECM) program, including recently proposed HECM legislation. The subcommittee hearing, titled “Protecting Seniors: A Review of the FHA’s Home Equity Conversion Mortgage Program,” included testimony from four witnesses. The witnesses were comprised of representatives from the National Consumer Law Center, the Urban Institute, the Government Accountability Office (GAO), and the National Reverse Mortgage Lenders Association (NRMLA). The hearing covered a range of topics, including discussion of proposed legislation, HECM servicing issues regarding foreclosures, and separating the HECM program from the Mutual Mortgage Insurance Fund (MMIF).

The first of two pieces of legislation discussed at the hearing included proposed legislation co-sponsored by Rep. Maxine Waters (D-CA), chairwoman of the U.S. House Committee on Financial Services, and Rep. Denny Heck (D-WA). The legislation focuses on adding borrower safeguards to the HECM program, including further protections for non-borrowing spouses. The proposed legislation also would require the Department of Housing and Urban Development (HUD) to submit an annual report to Congress identifying the amount of and reasons behind HECM foreclosures caused by defaults for failure to pay taxes and insurance premiums. The second piece of legislation, sponsored by Rep. Lacy Clay (D-MO), would conform the maximum loan limit for FHA-insured HECMs to match the area maximum loan limits for FHA-insured forward mortgages. In prepared statements, Peter Bell, president and CEO of NRMLA, testified that tying the maximum area loan limit for forward mortgages to HECMs would prevent some homeowners who have built up equity in their homes from accessing that accumulated equity.

The discussion on HECM servicing issues focused on changes to servicing practices and regulations to reduce certain foreclosure actions. Suggested changes consisted of servicing practice changes to better address defaults because of borrowers falling behind on paying property charges. The witness representing the GAO outlined that additional data collection from FHA on the reasons for foreclosure initiation could provide additional insight on how to further prevent foreclosures. The discussion of alterations to HECM servicing practices was especially timely because earlier in the week FHA announced changes to the Mortgagee Optional Election (MOE), including providing additional protections to non-borrowing spouses.

During the hearing, Rep. Joyce Beatty (D-OH) raised the topic of the financial health of the MMIF. As reported in the most recent report to Congress, the economic condition of the overall MMIF is sound, with a net worth of $34.86 billion. However, the HECM portfolio was determined to have a net worth of negative $13.6 billion. In a brief exchange, the representative from Urban Institute and Peter Bell of NRMLA both agreed that it would be appropriate to separate the HECM portfolio into its own insurance fund. According to the witnesses, separating the forward and reverse mortgage portfolios would allow each fund to be operated in a manner best suited to the type of mortgage portfolio.

Importantly, while the attendees at the hearing offered differing viewpoints on the various topics, there was wide-spread recognition by the hearing attendees of the importance of the HECM program and the value it provides to senior consumers. Additionally, various subcommittee members and witnesses recognized that important protections had been introduced into the HECM program in the wake of the 2008 recession. Perhaps because of the recognition of the improvements implemented to the HECM program, all of the testifying witnesses believed that additional improvements to the HECM program could reap benefits for borrowers. Based on the aging U.S. population, the HECM program will only continue to grow in importance for FHA. Industry members should look to continue to grow their business with the increasing HECM program eligible population while staying aware of new requirements introduced by Congress and FHA.