In the Strangest Year Ever, We’re Very Thankful and Wish You a Happy Thanksgiving

In the Strangest Year Ever, We’re Very Thankful and Wish You a Happy Thanksgiving

As everyone steps away from their (home) office to celebrate Thanksgiving, we wanted to count our blessings as we review this truly remarkable and unusual year. In addition to frontline healthcare workers, good WI-FI, food delivery services, and finally finding a mask that is comfortable, we are also thankful for the following:

1. The CARES Act Provided Millions of Americans with Mortgage Forbearances and Other Relief.

On March 27, 2020, President Trump signed the Coronavirus Economic Stabilization Act of 2020 (CARES Act). The legislation directed more than $2 trillion into fighting the COVID-19 pandemic and stimulating America’s economy for the duration of the pandemic, which is ongoing. The CARES Act has had significant impact on the mortgage industry, including a foreclosure and eviction moratorium on all federally backed mortgage loans, which is currently scheduled to expire December 31, 2020.

While we worry about what will happen when that moratorium ends, we are thankful that millions of Americans with federally backed mortgage loans could take advantage of up to 360 days of forbearances because they were in financial distress due to the pandemic. Many private lenders also offered forbearances to their customers, and a handful of states enacted state laws requiring forbearances. Did this also create confusion? Yes! But everyone’s goal was to help consumers.

The GSE also created a COVID-19 payment deferral program to resolve those forbearances – so we’re thankful for the CFPB’s Interim Final Rule creating an exception allowing servicers to offer such deferrals based upon an incomplete application.

We’re glad that many Americans benefited from the CARES Act’s credit reporting requirements, but we still wish the CFPB’s FAQ were clearer about post-accommodation reporting (FAQ10, we’re looking at you).

We are especially grateful for our bank and mortgage clients and proud of the way the industry has risen to the occasion to help borrowers in these difficult times. Bradley hosted a weekly COVID-19 Compliance Roundtable over the course of 2020, which spanned 27 weeks and included over 70 separate companies. It has been a wonderful opportunity to collaborate with our friends and clients and to stay in touch while social distancing. If you’d like to join our Roundtable, please contact us at COVID-FS@bradley.com.

2. We’re Thankful for Clarity, Guidance, and a Few Tools from the CFPB to Help Debt Collectors.

It may still be 2020, but one thing that isn’t entirely terrible is the CFPB’s new Debt Collection Rule. Sure, it’s not perfect, but we can all be thankful for some of the helpful tools and guidance provided by the CFPB in its October final rule. For instance, while we all wish the agency had expanded the use of limited content messages to email and text messages, debt collectors can be grateful for the ability to leave certain voicemails without worrying too much about the FDCPA’s third-party disclosure prohibitions. And while we didn’t get a much-needed bright-line rule for call frequency, the CFPB’s rebuttable presumption that seven phone calls in a seven-day period is not harassment is, like boxed stuffing, fair-to-middling. In addition, the CFPB’s guidance on electronic communications also helps clear up some of the ambiguity that comes with applying a 1977 statute to modern technology. Don’t get too excited though – the rule’s time, place, and medium restrictions, while clearing up some issues related to mobile phone communications, could pose some significant challenges for organizations coming into compliance. It is 2020 after all.

3. Remote Online Notarization (RON) Finally Became Widespread Due to the Pandemic.

We are grateful for practical improvements in 2020! Many states (finally) authorized remote e-notarization allowing our clients to close new loans and continue other business operations in 2020. In the earliest days of the COVID-19 pandemic, mortgage loan originators were naturally concerned about how new loans could be originated and closed without in-person closings. Thankfully, practical alternatives were available and were approved nationwide. The American Land Title Association reports that “48 states and the District of Columbia have either passed a RON law or issued an executive order” directed at the ability to utilize remote notaries to notarize documents.  

4. Borrowers in Chapter 13 Bankruptcy Can Get Extra Help When Impacted by COVID-19.

We’re thankful that Americans already struggling with their finances can get another two years to complete their bankruptcy plan. The CARES Act amended 11 U.S.C. § 1329 to allow for a Chapter 13 plan confirmed before March 27, 2020, to be modified to extend payments up to seven years if the debtor is experiencing a material financial hardship due to COVID-19. While not clearly stated under the CARES Act, bankruptcy judges have recently found that the debtor need not be current on their plan payments as of March 27 to take advantage of the plan modifications.

5. We Will Not Run Out of Privacy Guidance to Read Over the Winter.

2020 has been a cornucopia of privacy regulation. The California Consumer Privacy Act (CCPA) (finally) gave us final regulations, and the California Privacy Rights Act (CPRA) passed as well. We received updated guidance on adtech from the likes of Facebook and got the first peek at a “global privacy control,” as well as a bunch of new litigation. Not to mention that the CJEU effectively eliminated the privacy shield as a viable cross-border data transfer mechanism to the U.S.! We are grateful for having more than enough emerging privacy issues to get us through those long winter nights.

6. We’re Thankful That the End of the LIBOR Transition Is in Sight.

In a few short years, we’ve moved from “Can LIBOR be fixed?” to “What on earth will we replace it with?” to final timelines and transition plans. The risk of disruption was similar to the risk of that awkward Thanksgiving political argument: high. But thanks to strong leadership in the financial services industry, GSEs, and central banks, the markets that rely on stable sources of liquidity and coupon rates have a framework, deadline, and plan for transition to a new benchmark rate at the end of 2021.

7. We’re Thankful the Student Loan Industry Is Far from Boring!

This Thanksgiving, federal student loan borrowers (and many private student borrowers) can be thankful that the CARES Act and executive orders provide for the deferral of required payments through December 31, 2020. However, the deferral period is coming to an end (at some point) and student loan borrowers will have to resume payments. Yet, with the new administration coming aboard, proposed legislation in the House to allow bankruptcy discharges for student loans, and new student servicing laws in several states, 2021 promises to be an active year in the student loan arena – especially if the Biden administration seeks to cancel some amount of federally held debt.

8. We’re Even Thankful for Recent Flood Guidance.

In June, nine long years after the last interagency Q&As, the OCC, FDIC, NUCA, Fed, and FCA released proposed Flood Q&As. Thankfully, the agencies put in extra work in the kitchen overhauling the organization of the Q&As into subject matter categories and also added new questions and answers addressing force placement of flood insurance, escrow of flood insurance premiums, and the detached structure exemption to the mandatory flood insurance purchase requirement. In November, HUD published a proposed revision to its Single Family Handbook that would allow lenders to accept certain private flood insurance policies on FHA-insured loans. We are always grateful for the opportunity to discuss the Q&As and proposed FHA rule changes with trade groups and flood insurance stakeholders across the industry in 2021, and we promise not to drone on like that one peculiar uncle.

9. The Consumer Lending Industry Is Very Thankful for Needed Regulatory Guidance in 2020.

This year the small dollar and unsecured consumer lending industry, including both banks and non-depository banks, saw some much-needed guidance from federal regulators. In a joint statement issued by the OCC, CFPB, Federal Reserve, FDIC, and NCUA, the federal financial institution regulatory agencies published a joint statement on March 26, 2020, “to specifically encourage financial institutions to offer responsible small-dollar loans to both consumers and small businesses.” The CFPB also issued guidance on COVID-19-related issues and compliance obligations for financial institutions, issued two sets of FAQs to address the new proposed Payday Lending Rule and rescinded part of the proposed rule, offered a common-sense approach to the definition of “abusive” under UDAAP, and issued several No Action Letters signaling a solid attempt at working with the industry on innovative ideas. The OCC, with the help of acting Comptroller of the Currency Brian Brooks, has been phenomenal in its forward thinking attempt to bring the traditional banking industry into the modern day fintech era by defining key terms that have tied many banking institutions and related partners up in unnecessary litigation, including the Madden Fix (aka Valid When Made and True Lender). Most recently, the OCC last week proposed a rule to ensure fair access to banking services provided by banks providing some much-needed relief from the prior administration’s Operation Chokepoint. Clear regulatory guidance helps our clients and the industry avoid pitfalls and establish solid compliance programs, a win-win for both sides. Overall there is much to be thankful for!

10. We Are Thankful for You!

Of all the things we are grateful for this year, we are especially thankful for you – our friends and clients. While we’ve missed seeing and connecting with you in person over the last several months, we look forward to more joyful days ahead. From the Bradley family to yours, we wish you a safe and healthy holiday season!

Pre-Pandemic Chapter 13 Defaults Received CARES Act Modification Protection in the Middle District of Alabama

Pre-Pandemic Chapter 13 Defaults Received CARES Act Modification Protection in the Middle District of AlabamaIn a notable decision interpreting the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Bankruptcy Court for the Middle District of Alabama held that Chapter 13 debtors behind on their payments before March 2020 may seek modification of their plan if they suffered from COVID-19 related financial distress.

In In re Fowler, No. 16-31791; In re Lewis, No. 19-32243, 2020 WL 6701366 (Bankr. M.D. Ala. Nov. 13, 2020), Bankruptcy Judge William R. Sawyer held that there are only two hurdles to receive modification protections under the CARES Act: (1) The plan was decided before March 27, 2020, and (2) the debtor is “experiencing or has experienced a material financial hardship due, directly or indirectly, to COVID-19.” The opinion therefore provides a basis for borrowers to argue that the CARES Act is available not only to those who were current on their plans when the pandemic hit but also those who were in default before the pandemic.

Background

The case involved two Chapter 13 filings where individuals were in default on their payments before the coronavirus pandemic hit. The first concerned Consoella Randolph Fowler, who filed a Chapter 13 Petition for Relief in 2016 and had her Chapter 13 plan confirmed in September 2016. Nonetheless, in September 2019, a motion to dismiss her case was filed due to her missed payments. The hearing was continued to monitor Fowler’s payment progress. In August 2020, Fowler moved for modification protection under the CARES Act, requesting a lower payment amount and frequency of payments, as well as an extension in the length of her plan. The modification request did not seek to reduce the amount of money owed. Fowler was on a fixed income but argued that she had increased expenses after the pandemic due to the need to take care of sick family members. But for Fowler’s default, she would have completed her plan before the CARES Act was enacted.

The second matter involved Anbrial Alexis Lewis, who filed a Chapter 13 Petition for Relief in 2019 and had her plan confirmed in December 2019. However, in June 2020 the trustee filed a motion to dismiss her case due to missed payments. Lewis responded that her lapse in payments was due to her reduction in hours resulting from the COVID-19 pandemic. In August 2020, Lewis moved to modify her plan under the CARES Act, requesting a lower payment and an extension in the length of her plan. The requested modification did not reduce the amount of money owed.

In both cases, the trustee objected to the plan modification, in part, due to the debtor’s pre-pandemic defaults.

Analysis

The court found that both cases were afforded modification rights under the CARES Act because the borrowers both had established plans before March 2020 and were suffering material financial hardships due to the pandemic. Fowler’s financial hardship was indirect, but nevertheless present. Her fixed income did not alter the analysis. On the other hand, Lewis’ financial hardship was direct. Although the trustees objected to the plan modifications based on the debtor’s pre-pandemic defaults, the court found this to be imposing a third requirement to modification under the CARES Act that doesn’t exist. In reaching this conclusion, Judge Sawyer stated “[i]f Congress intended to limit § 1329(d) modification to debtors who were current on their plan payments prior to the enactment of the CARES Act, it certainly could have done so, but the plain language of the CARES Act does not contain such a restriction.”

Takeaway

Even if a Chapter 13 debtor was in default before the COVID-19 pandemic, the CARES Act modification protections may still apply. This could allow debtors to modify their plans and extend them for up to seven years from the due date of their first payment under the original plan.

FHA Posts Proposed Rule Permitting Acceptance of Private Flood Insurance

FHA Posts Proposed Rule Permitting Acceptance of Private Flood InsuranceOn November 10, 2020, the U.S. Department of Housing and Urban Development (HUD)  released a proposed amendment to Federal Housing Administration (FHA) regulations that would allow lenders to accept private flood insurance policies on FHA-insured properties located in Special Flood Hazard Areas. HUD will accept comments for 60 days following the date the proposed rule, Acceptance of Private Flood Insurance for Federal Housing Administration (FHA)-Insured Mortgages (Docket No. FR-6084-P-01), is published in the Federal Register.

The proposed rule would allow borrowers the option of purchasing private flood insurance on FHA-insured mortgages for properties located in Special Flood Hazard Areas by amending FHA regulations at 24 CFR sections 201, 203, and 206 as follows:

  • 24 CFR § 204.16a would be amended to include the definition of “private flood insurance” from the Biggert-Waters Flood Insurance Reform Act.
  • 24 CFR § 203.15a would be amended to include a “compliance aid” provision allowing mortgagees to accept private policies, without further review, where the policy contains the language: “This policy meets the definition of private flood insurance contained in 24 CFR 203.16a(e) for FHA-insured mortgages.”
  • HUD also proposes to amend 24 CFR § 201.28(a) (Property Improvement and Manufactured Home Loans), § 203.343(b) (Single Family Mortgage Insurance), § 206.45(c) (Home Equity Conversion Mortgage Insurance), and § 206.134(b) (Home Equity Conversion Mortgage Insurance) to permit borrowers to obtain private flood insurance.

The proposed rule announcement provides an explanation of the history of the Flood Disaster Protection Act of 1973 (the FDPA), as amended by the National Flood Insurance Reform Act of 1994, and the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters). HUD’s authorization that lenders may accept private flood insurance policies comes nearly two years after the Board of Governors of the Federal Reserve System, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (the interagency regulators) issued a final rule in February 2019 implementing the portion of Biggert-Waters mandating acceptance of private flood insurance. While the interagency regulators’ final rule requires federally regulated lenders to accept private flood insurance went into effect on July 1, 2019, FHA’s existing rules do not permit private flood insurance to satisfy the mandatory purchase requirement of the FDPA.

Importantly, HUD advised in the proposed rule that it “will not permit Mortgagees to exercise their discretion to accept flood insurance policies, provided by private insurers or mutual aid societies, that do not meet the definition and requirements for a private flood insurance policy as laid out in this rule.” As a result, HUD cautioned that “[d]ue to the differences between HUD and the Federal regulators’ rules, compliance with the Federal regulators’ Final Rule should not be interpreted as compliance with HUD’s requirements.” Given this significant and explicit distinction by HUD, federally regulated lenders that originate FHA-insured loans should be mindful that their policies and procedures are designed to ensure compliance with both the interagency regulators’ Final Rule and HUD’s eventual final rule on the topic of acceptance of private flood insurance.

Certain “Nunc Pro Tunc” Relief May Still be Available in Bankruptcy

Certain “Nunc Pro Tunc” Relief May Still be Available in BankruptcyTranslating to “now for then,” nunc pro tunc orders grant backdated relief. Such orders are common in bankruptcy cases. For instance, bankruptcy courts often enter orders retroactively approving retention of professionals, and in certain cases even granting retroactive relief from the automatic stay.

In February 2020, the Supreme Court held in Roman Catholic Archdiocese of San Juan v. Acevedo Feliciano that nunc pro tunc orders cannot be used to retroactively change what has transpired in a case. Nonetheless, two recent cases have held that certain nunc pro tunc relief is still available in bankruptcy.

The End of Nunc Pro Tunc?

In Acevedo, employees of the Catholic Church of Puerto Rico schools sued the Archdiocese in local court after it had terminated their pension plan. The Puerto Rico Supreme Court ultimately affirmed the trial court’s ruling, ordering the Archdiocese to re-fund the pension plan.

Before the trial court had entered its initial ruling, the Archdiocese removed the case to federal court in connection with a bankruptcy case filed by the Catholic school’s pension trust. The bankruptcy case was dismissed in March 2018, which divested the federal court of jurisdiction over the removed lawsuit. However, the federal court failed to remand the lawsuit back to the local court until August 2018. In the meantime, local court entered the order requiring the Archdiocese to re-fund the pension plan in March 2018. Despite its tardiness, the August 2018 remand order provided that the suit was remanded nunc pro tunc to March 2018, when the bankruptcy case had been dismissed.

Because the trial court’s order had been entered before the case had been remanded, the order was void for lack of jurisdiction. The Supreme Court held that the remand order’s nunc pro tunc relief was insufficient to cure this jurisdictional defect, reasoning that nunc pro tunc orders cannot be used to change a case’s record or confer jurisdiction where none existed.

Can Bankruptcy Courts Still Grant Nunc Pro Tunc Stay Relief?

The automatic stay of section 362 of the Bankruptcy Code generally enjoins creditors from seeking to recover their claims once a debtor files for bankruptcy. This includes staying lawsuits and foreclosures. Most courts view actions taken in violation of the stay as void or at least voidable.  Consequently, bankruptcy courts have occasionally granted creditors nunc pro tunc stay relief for their actions that would otherwise violate the stay.

Notwithstanding the Supreme Court’s holding in Acevedo, the Ninth Circuit BAP recently held in Merriman v. Fattorini that a court may still grant retroactive relief from the automatic stay. In Merriman, a creditor brought a wrongful death suit in state court against a Chapter 13 debtor and others. Upon learning of the debtor’s pending bankruptcy case, the creditor filed a motion to annul the automatic stay. The bankruptcy court granted the creditor’s motion, finding cause to retroactively lift the stay due to the creditor’s lack of knowledge of the bankruptcy case and the judicial economy of allowing the wrongful death case to be litigated in one forum.

The Ninth Circuit BAP affirmed the bankruptcy court’s ruling. The Ninth Circuit BAP noted that the wrongful death suit included only state law claims, and the debtor failed to identify any prejudice he would incur if the wrongful death suit proceeded in state court. Further, the Ninth Circuit BAP agreed that judicial economy would be served by permitting the wrongful death suit to be tried against the debtor and his co-defendants in one forum. Finally, the Ninth Circuit BAP stated that, if retroactive relief were not granted, the wrongful death claim could be barred by the statute of limitations.

In so ruling, the Ninth Circuit BAP distinguished Merriman from Acevedo, stating that Acevedo holds that “nunc pro tunc orders may not create jurisdiction where none exists,” but does not apply to a “bankruptcy court’s power to annul the automatic stay under § 362(d).” The Ninth Circuit BAP reasoned that the power granted to bankruptcy courts by Congress under section 362 to terminate, annul, modify, or condition the stay is distinct from the situation in Acevedo, where a court attempted to create jurisdiction where none had existed.

Another common scenario where nunc pro tunc orders are at issue in bankruptcy is when estate professionals seek approval of their employment. Following the Merriman decision, the Bankruptcy Court for the Eastern District of California held in In re Miller that — even if Acevedo prevents the court from approving professionals’ employment nunc pro tunc — the court could nonetheless “exercise[e] … its equitable discretion to compensate the professionals … for pre-employment services.” More specifically, Acevedo does not prohibit all retroactive relief. Rather, “Acevedo curtails only the inherent authority of federal courts to grant retroactive relief by nunc pro tunc orders which purport to create facts or rewrite history to support the retroactive relief granted.”

Notably, some bankruptcy courts are applying Acevedo and holding that allowing nunc pro tunc relief is not available. In particular, the Bankruptcy Court for the Eastern District of New York’s recent decision in In re Telles denied a request for nunc pro tunc relief from the automatic stay.

In In re Telles, a lender initiated a foreclosure action against a party that was not in bankruptcy. The debtor in bankruptcy resided at the property but held no interest in it at the time the foreclosure was commenced. The state court entered a judgment of foreclosure and scheduled a foreclosure sale. Two days before the sale was to occur, the non-debtor property owner deeded a 10% interest in the property to the debtor, and the debtor filed for Chapter 13 bankruptcy relief. Due to the bankruptcy, the foreclosure sale was canceled. The debtor’s first bankruptcy case was dismissed, and a second foreclosure sale was scheduled. Two days before the second foreclosure sale was to occur, the debtor filed for bankruptcy a second time.

While preparing for the second foreclosure sale, the mortgagee conducted a PACER search for the non-debtor property owner but inadvertently failed to conduct a similar search for the debtor. In doing such, the mortgagee was unaware of the debtor’s second bankruptcy filing, and the second foreclosure proceeded in January 2020. The lender was the successful bidder at the sale.

The lender subsequently filed a motion in the bankruptcy court seeking stay relief nunc pro tunc to the date of the foreclosure sale. Although pre-Acevedo case law would have supported the mortgagee’s motion, the bankruptcy court held that Acevedo changed the landscape for nunc pro tunc relief by definitively finding that such relief cannot be applied to cure jurisdictional defects. Finding that if it were to grant the mortgagee’s motion, its “ruling would be squarely at odds with Acevedo,” the bankruptcy court denied the lender’s motion and found that the foreclosure sale was void.

What’s Next?

As bankruptcy courts continue to interpret and apply Acevedo, it is possible more courts will find workarounds to allow for nunc pro tunc orders and backdated relief. Creditors and practitioners should keep an eye out for further rulings regarding nunc pro tunc relief from the automatic stay.

CFPB Issues Advanced Notice of Proposed Rulemaking on Section 1033 for Consumer-Authorized Access to Financial Data

CFPB Issues Advanced Notice of Proposed Rulemaking on Section 1033 for Consumer-Authorized Access to Financial DataOn October 22, 2020, the CFPB issued an advance notice of proposed rulemaking (ANPR) soliciting comments on implementation of Section 1033 of the Dodd-Frank Act. As outlined in the ANPR, Section 1033 will require consumer financial service providers to give consumers access to financial account data in a usable electronic format. This data includes information relating to any transaction, series of transactions, or to charges and usage data on the account.

The CFPB first issued a related Request for Information in 2016. At that time, the CFPB sought information to assist it in developing practices and procedures that “enable consumers to realize the benefits associated with safe access to their financial records, assess necessary consumer protections and safeguards, and spur innovation.” In 2017, the CFPB issued a Stakeholder Insights Report and Consumer Protection Principles, providing guidance on nine Consumer Protection Principles.

In February 2020, the CFPB hosted a symposium where participants raised concerns about balancing rights described in Section 1033 with maintaining necessary security measures that may result in prohibiting access to authorized third parties. Additionally, participants discussed how implementation of Section 1033 might affect compliance with other federal laws, including GLBA, FCRA, and EFTA and Regulation E.

In issuing the ANPR, the CFPB is concerned with consumer financial data held by providers of consumer financial products and services. The ANPR requests comments on nine topics:

  • Costs and benefits of consumer data access
  • Competitive incentives
  • Standard-setting
  • Access scope
  • Consumer control and privacy
  • Other legal requirements
  • Data security
  • Data accuracy
  • Other information

Comments must be submitted within 90 days after publication of the ANPR in the Federal Register. The CFPB is encouraging stakeholders to submit comments early and electronically due to delays caused by the COVID-19 pandemic.

Takeaways

Financial institutions could face significant costs implementing new technology that conforms to these proposed regulations. Commentary continues to focus on multiple topics, including whether application programming interfaced based access (APIs) should replace credential-based access and screen scraping, what type of disclosures and informed consent are required, and who is liable for unauthorized access and Reg E error disputes. As the CFPB moves forward with its rulemaking, financial institutions should take this time to review current policies and procedures in place for granting consumers access to financial information and accessing information as a third party.

Federal District Court Stays Effective Date and Enjoins Enforcement of HUD’s Final Rule on the Fair Housing Act’s Disparate Impact Standard

Federal District Court Stays Effective Date and Enjoins Enforcement of HUD’s Final Rule on the Fair Housing Act’s Disparate Impact StandardOn October 24, 2020, the U.S. Department of Housing and Urban Development’s (HUD) final rule on the implementation of the Fair Housing Act’s disparate impact standard was scheduled to become effective. That effective date was short lived: on October 25, 2020, the U.S. District Court for the District of Massachusetts entered a preliminary injunction staying HUD’s final rule on the disparate impact standard (the “2020 Final Rule”) and enjoining the rule’s enforcement. The court’s order stays and postpones the 2020 Final Rule’s effective date pending entry of final judgment on an Administrative Procedure Act (APA) violation claim brought by the plaintiffs in the case, the Massachusetts Fair Housing Center and Housing Works, Inc.

The Fair Housing Act (FHA) prohibits discrimination in many housing-related activities on the basis of race, color, religion, sex, disability, familial status, and national origin. For at least the past four decades, HUD and federal courts have read the FHA to prohibit “disparate impact” discrimination, which is conduct that, while not motivated by discriminatory intent, has a discriminatory effect. In 2013, HUD codified its long held view that the FHA bans disparate impact discrimination by issuing a rule entitled Implementation of the Fair Housing Act’s Discriminatory Effects Standard. That rule established a three-part, burden-shifting test to determine whether a housing practice that results in discrimination violates the FHA.

However, in 2015, the U.S. Supreme Court decided Texas Department of Housing and Community Affairs v. Inclusive Communities, in which a non-profit organization claimed that policies of the Texas Department of Housing and Community Affairs regarding the distribution of low-income housing development tax credits resulted in discrimination against African Americans in violation of both 42 U.S.C. § 1983 and the FHA. In Inclusive Communities, the Supreme Court did not rely upon HUD’s 2013 disparate impact burden-shifting test. Rather, the Supreme Court undertook its own analysis, resulting in standards that differed from HUD’s 2013 rule. Several years after Inclusive Communities, in September 2020, HUD issued the 2020 Final Rule. Through the 2020 Final Rule, HUD aimed to adopt the disparate impact analysis applied in Inclusive Communities. The 2020 Final Rule created a new burden-shifting framework for disparate impact claims, which is a framework that generally reduces the burden on parties defending against disparate impact claims.

The plaintiffs in the case before the Massachusetts federal district court argue that the 2020 Final Rule is contrary to law for multiple reasons. Specifically, plaintiffs argue that (1) the rule undermines one of the FHA’s core purposes of eradicating discriminatory housing practices; (2) HUD’s justification for the 2020 Final Rule is arbitrary and capricious under the APA; and (3) HUD violated notice and comment rulemaking requirements by replacing the “algorithmic model” defense used with the 2013 disparate impact rule with a new “outcome prediction” defense without giving the public notice of, or any opportunity to comment on, the new outcome prediction defense.

For purposes of the motion for preliminary injunction, the federal court only considered the plaintiffs’ argument that HUD’s justification for the 2020 Final Rule is arbitrary and capricious under the APA. In response, HUD argued that the 2020 Final Rule isn’t arbitrary and capricious because the rule merely brings HUD’s disparate impact regulations in alignment with the Supreme Court’s holding in Inclusive Communities. HUD also argued that the 2020 Final Rule was needed to bring greater clarity regarding the disparate impact standard.

The district court disagreed with both of HUD’s arguments. The court, citing language within the 2020 Final Rule regarding new pleading requirements, stated that the 2020 Final Rule requires that plaintiffs sufficiently plead facts to support “that the challenged policy is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.” The court disagreed that the 2020 Final Rule brought HUD’s disparate impact regulations in line with Inclusive Communities by noting that the language “such as a practical business, profit, policy consideration” is not in any judicial decision. The court also disagreed that the 2020 Final Rule provided clarity to the public regarding the disparate impact standard – stating that HUD’s explanation for greater clarity “appear[ed] arbitrary and capricious” and agreed with the plaintiffs that “the 2020 Rule, with its new and undefined terminology, altered burden-shifting framework, and perplexing defenses accomplish the opposite of clarity.”

In the end, the court granted the motion, finding that the plaintiffs had shown a substantial likelihood of success on the merits of their claim that the 2020 Final Rule is arbitrary and capricious and therefore violates the APA. Additionally, the court found that plaintiffs proved that there is a significant risk of irreparable harm if the injunction was not entered and that the balance of harms and public interest supported entering the preliminary injunction rather than allowing the rule to go into effect. Unless lifted by the court earlier, HUD will remain enjoined from enacting and enforcing the 2020 Final Rule until after the court has entered a final judgement on the plaintiffs’ claims.

In addition to the case brought in the U.S. District Court of Massachusetts, there have been at least two other similar challenges brought in recent weeks. On October 22, 2020, housing advocacy organizations brought cases in federal district courts in both Connecticut and California. As of the drafting of this article, preliminary injunctions have not been issued in either case. For a more thorough analysis of the 2020 Final Rule, see Bradley’s earlier coverage of the details of the rule. As with any major rule promulgated by a federal agency, legal challenges are usually inevitable. For the 2020 Final Rule, the likelihood of its ultimate fate is not only tied to the decisions of federal courts, but – perhaps more importantly – to the final outcome of the 2020 presidential election. We will continue to monitor the space for any updates on this litigation or HUD’s final rule.

CFPB Issues Final Debt Collection Rule; Bradley to Host Initial Webinar on November 5

CFPB Issues Final Debt Collection Rule; Bradley to Host Initial Webinar on November 5On October 30, 2020, the Consumer Financial Protection Bureau (CFPB) finalized its long-awaited debt collection rule. The 653-page final rule addresses consumer communication, consumer disclosures, record retention, requirements related to the sale or transfer of debts, and communications with a deceased debtor’s estate. The rule will become effective one year after publication in the Federal Register. While this rule is a significant step, the CFPB indicated that it is not yet done with its debt collection related rulemaking and intends to issue a “disclosure-focused” rule in December 2020. The disclosure-focused rule will clarify certain disclosure obligations, consumer reporting obligations, and the collection of time-barred debt.

Bradley is currently reviewing the final rule and plans to discuss various aspects of the rule in a series of upcoming blog posts and webinars. Bradley attorneys will host the first of these webinars titled “Introduction to the CFPB’s Debt Collection Final Rule” on November 5 from 1-2 p.m. EST.

CFPB’s Escrow Interpretation Is Causing Confusion Amongst Servicers and Is Likely to Harm Consumers

CFPB’s Escrow Interpretation Is Causing Confusion Amongst Servicers and Is Likely to Harm ConsumersIn a surprising move to many, the Consumer Financial Protection Bureau (CFPB) recently put the mortgage servicing industry on notice that including certain options for repayment of a shortage in an escrow account statement may violate Regulation X. Specifically, the CFPB explained in its recent edition of the Supervisory Highlights report that one or more servicers violated Regulation X by including a lump sum repayment option — not a lump sum repayment requirement — in the escrow account statement when a borrower has a shortage that is greater than or equal to one month’s escrow payment.

Many servicers that we have spoken with over the past few weeks have questioned the CFPB’s legal interpretation of Regulation X in this context. Moreover, those same servicers have expressed concern that the CFPB’s interpretation will result in borrower confusion and potentially remove a repayment option that many borrowers have long preferred. For the reasons discussed below, we agree on both counts.

The Law

When a servicer conducts an escrow analysis and the result is a shortage that is greater than or equal to one month’s escrow account payment, section 1024.17(f)(3)(ii) of Regulation X says that “the servicer has two possible courses of action.” The servicer may either (1) do nothing and allow the shortage to exist, or (2) “require the borrower to repay the shortage in equal monthly payments over at least a 12-month period.” Separately, 1024.17(i)(1) requires that an escrow statement include “[a]n explanation of how any shortage or deficiency is to be paid by the borrower.” Notably, Regulation X provides no prohibition on the actions of borrowers, who remain free to repay a shortage at any cadence that does not exceed a servicer’s requirements.

In its Supervisory Highlights report, the CFPB explained that these “enumerated repayment options” in Regulation X “are exclusive.” Therefore, according to the CFPB, servicers that include both a lump sum repayment option and the required repayment period of 12 (or more) months were deemed by the CFPB to have violated Regulation X because the first option, lump sum repayment, is not specifically permissible under Regulation X. As a result, “the servicers violated regulatory requirements by sending disclosures that provided borrowers with repayment options that they cannot require under Regulation X.” Essentially, the CFPB equated including a repayment option to a repayment requirement and found a violation of Regulation X.

Analysis of the CFPB’s Interpretation of the Law

The CFPB’s interpretation of Regulation X and its rationale for finding violations may initially seem reasonable. After all, the law does say that “the servicer has two possible courses of action,” neither of which contemplates lump sum repayment by the borrower. However, many servicers have expressed frustration with the CFPB’s interpretation of Regulation X and believe that it is simply wrong and even potentially harmful to consumers. We’ll explain why.

It ought to be widely agreed that the framework established in Regulation X makes clear that a mortgage servicer cannot require lump sum repayment of a shortage that is greater than or equal to one month’s escrow account payment. The purpose of such requirement is obvious: Regulation X seeks to ensure servicers do not require remittance of a potentially large, unexpected payment immediately. To avert such payments, and the needless defaults that could follow, servicers must allow borrowers to repay shortages in equal installments over at least 12 months. This requirement, however, only provides limits on what a servicer can do — not on what a borrower is permitted to do. Regulation X does not place limits on how or when a borrower may choose to repay a shortage (though borrowers must comply with a servicer’s valid requirements), and we see no reason to limit a borrower’s options.

In the Supervisory Highlights, however, the CFPB appears to create such limits. By calling the “enumerated repayment options” the “exclusive” options for repayment of shortages, the CFPB seems to suggest that a borrower may not legally choose to repay a shortage in a lump sum repayment, even if the borrower prefers to do so — and servicers report that many borrowers do, in fact, prefer lump sum repayment. Alternatively, the CFPB’s guidance can be interpreted to suggest that a servicer may not be permitted to accept a lump sum escrow shortage repayment if a borrower were to initiate it. Such a position could not have been the CFPB’s intent. If a borrower prefers to pay over six months, three months, or even all at once in a lump sum, we can think of no good reason why that borrower’s choice should not be acceptable and compliant with Regulation X. If a servicer requires that the borrower pay over at least a 12-month period, the borrower should have the freedom of choosing a quicker option. Therefore, it is critical that the CFPB, the industry, and the legal system view Regulation X as imposing limits on servicers and not borrowers.

Since the issuance of the Supervisory Highlights report, the CFPB has informally indicated that borrowers should be allowed to repay escrow shortages in a lump sum and that servicers are required to accept a lump sum repayment. Thankfully, this means that the “enumerated repayment options” are not actually “exclusive.” The CFPB reiterated its position, however, that servicers cannot inform borrowers of this option on the escrow statement, though servicers may inform borrowers of the lump sum repayment option in another manner. Such a position, however, is form without substance, serves no purpose, and prevents no harm. Worse, it begets more issues, questions, and uncertainty. Are servicers now required to provide this information to borrowers if they are required to accept such payments? And if so, how can servicers safely do that without unintentionally violating another of a myriad of federal and state debt collection laws? And, are servicers even prepared to rely on informal guidance from the CFPB moving forward? If they do not rely on such informal guidance, are servicers setting themselves up for more violations by not informing borrowers of a lump sum repayment option or by accepting such payments?

In addition to uncertainty for servicers, the CFPB’s position will likely also cause borrowers harm, because they are less likely to be informed of one of their options for repayment of a shortage. In our view, escrow account statements should include all information borrowers need to make the best financial decisions for themselves, based on their own personal situation. Now, however, servicers may not inform borrowers of all options, and arguably one of their rights, in the very place such information is most helpful — the statement where borrowers are informed of the shortage and requirements for repayment. Additionally, servicers may be hesitant to create a new mailing to provide borrowers with such information, fearing additional costs and additional regulatory risk. Servicers are well aware that a large portion of mailings may go unread by borrowers inundated with mail and notices — adding another mailing will increase costs and risks while only slightly increasing the chance borrowers will obtain this pertinent information. As a result, servicers may be resigned to wait for borrowers to proactively inquire about whether a lump sum repayment is an option, and many borrowers are unlikely to do so, even if they would prefer such an option.

In arguing that servicers should be allowed to include a lump sum repayment option on its escrow account statements, we do offer a word of caution. Any such language must clearly recognize the lump sum repayment as only being an option. Servicers must avoid having escrow statements that in any way suggest the lump sum repayment is a requirement or seek to coerce a borrower to choose to pay a shortage in a lump sum.

As a reminder, servicers are only required to include “[a]n explanation of how any shortage or deficiency is to be paid by the borrower.” If a servicer were to note on the escrow statement that it is choosing to require that the borrower repay a shortage by making equal payments over a 12-month period, but also note that the borrower always has the option of paying the shortage quicker and explains how that can be done, that would seem to satisfy the actual content requirement for escrow statements. Ultimately, since Regulation X does not contain a clear prohibition on including information regarding a borrower’s right to prepay an escrow shortage, in our opinion the law ought to be interpreted such that servicers must tell the borrower how it will require repayment of any shortage, but that a servicer can also explain that borrowers do have other options that they can initiate and choose.

Finally, the CFPB has noted that its interpretation of Regulation X is consistent with one of the purposes of the Real Estate Settlement Procedures Act (RESPA), which was to result “in a reduction in the amounts home buyers are required to place in escrow accounts established to ensure the payment of real estate taxes and insurance.” However, it does not seem that the CFPB’s interpretation actually achieves this goal. Rather, a borrower will actually pay the same amount into an escrow account regardless of whether the borrower pays a shortage amount in a lump sum or if it is spread out over 12 or more months. The only difference is the time in which that amount is paid. Additionally, at least in states where interest must be paid on escrow balances, reducing the frequency in which borrowers pay escrow shortages quicker than what may be required by the servicer will actually result in borrowers potentially losing out on interest that could have been earned.

Conclusion

The mortgage servicing industry was rightfully taken aback by the CFPB’s interpretation of what cannot be included on an escrow statement under Regulation X. This interpretation, which was first presented in its recent Supervisory Highlights report, represents a drastic shift from what was long considered to be acceptable throughout the industry. In our opinion, the CFPB’s position is likely to cause substantial confusion amongst both the servicing industry and consumers, and will remove an escrow shortage repayment option that many consumers prefer and have long availed themselves of.

It is our hope that the CFPB will promptly take action to provide both the industry and consumers much needed relief from the damage that its interpretation has already caused and is likely to cause in the future if left unchecked. While completely changing course and adopting a different, more reasonable interpretation is preferable, providing the industry with much needed clarification and flexibility and otherwise building upon its current interpretation could also provide meaningful relief. Regardless, it seems the CFPB still ought to be able to provide assistance in a way that helps all interested parties.

OCC Releases Final True Lender Rule

OCC Releases Final True Lender RuleOn October 27, 2020, the OCC released its final True Lender Rule. As discussed earlier on this blog, the OCC’s rule is designed to clarify the “true lender” doctrine, a legal test utilized by courts and regulators to determine whether a bank or its non-bank partner is the actual lender in a credit transaction. The true lender doctrine has caused uncertainty for banks, fintech companies, and other entities involved in the bank partnership model. The OCC’s final rule, which applies to national banks and federal savings associations, will provide some much-needed certainty in the space, and is a welcome first step in what will likely be a longer process of regulatory agencies accounting for modern lending practices.

The final rule tracks the OCC’s proposed rule, with one small clarification. After publication of the proposed rule, some commenters noted that the rule, as written, could cause problems in instances where more than one bank could be considered the “true lender.” For instance, if at origination one bank was the lender on the loan agreement and another bank funded the loan, under the language of the OCC’s proposed rule, both institutions could be considered the “true lender.” The OCC responded to this issue by drafting a new provision stating that if, on the date of origination, one bank is named as the lender in the loan agreement and another bank funds the loan, the bank named in the loan agreement is the “true lender.” Under the OCC’s reasoning, this approach allows customers to more easily identify the party responsible for the loan through reference to the loan documents themselves. Thus, under the rule, a national bank or federal savings association is considered the “true lender,” as opposed to its non-bank partner, if it is either (1) named in the loan agreement or (2) funds the loan, and if two different banks are involved in the credit transaction, the tie goes to the bank named on the loan agreement.

The final rule’s supplementary information also addresses commenters’ other concerns. For instance, several commenters expressed concern regarding the breadth of the rule, and asked that the rule be amended to clarify that the funding prong not include certain lending and financing arrangements, such as warehouse lenders, indirect auto lenders through bank purchases of retail installment contracts, loan syndication, or other structured finance. The OCC ultimately did not amend the final rule to make these clarifications, but it did note that the commenters were “correct that the funding prong of the proposed rule generally does not include these types of arrangements: they do not involve a bank funding a loan at the time of origination.”

Other commenters expressed concern that the final rule not displace other regulatory regimes – in particular, certain consumer protection regulations. For instance, one commenter suggested that the final rule would alter how account information in bank partnership arrangements is reported under the Fair Credit Reporting Act. Addressing these concerns, the OCC noted that the final rule “does not affect the application of any federal consumer financial laws,” including TILA, Regulation Z, Regulation X, RESPA, HMDA, the ECOA, or the FCRA.

While the proposed rule, which goes into effect 60 days after it is published in the Federal Register, is a welcome addition, we are certain it will be met with litigation by its opponents. Indeed, in September, the attorneys general of several states submitted a comment letter to the Acting Comptroller of the Currency Brian Brooks asking that the proposed rule be rescinded. Moreover, several states have sued the FDIC and the OCC over rules designed to provide a “Madden Fix,” a related problem facing fintech companies and entities involved in bank partnership arrangements. We anticipate litigation from state agencies challenging the OCC’s true lender rule and will keep our ear to the ground for any new developments.

What Does CA AB 3088 Mean for Mortgage Servicers?

What Does CA AB 3088 Mean for Mortgage Servicers?On September 1, 2020, California passed a new law titled the “COVID-19 Small Landlord and Homeowner Relief Act of 2020.” Although the majority of the new law addresses eviction issues between landlords and tenants, it imposes notable new obligations on mortgage loan servicers as well. This two-part blog series will address those changes. Part I will first address the forbearance notice requirements and a new borrower cause of action, and Part II will address the interplay of those requirements and the California Homeowners’ Bill of Rights (HBOR).

Forbearance Denial Notices Are Required

California now requires all mortgage servicers, including subservicers, to provide written notice to certain borrowers whose forbearance requests are denied between August 30, 2020, and April 1, 2021. The borrowers eligible for such notice must meet two criteria:

  1. Have been current on their mortgage payments as of February 1, 2020, and
  2. Be experiencing a financial hardship that prevents them from making timely payments on their mortgage, either directly or indirectly, because of the COVID-19 emergency.

Eligible borrowers are entitled to notice as to the “specific reason or reasons that forbearance was not provided.” The statute does not provide any timing requirements for giving such notice, which we presume was inadvertent.

Curable Denials

The statute further provides that, for any denials that are “curable,” the notice must explain any defects in the borrower’s request (an “incomplete application or missing information” are specifically called out in the statute). If the denial is curable, the borrower must be advised that they have 21 days to cure the identified defect. Upon submission of additional materials within 21 days, the servicer must accept the receipt of the renewed request and “respond” within five business days of receipt. Whether that response must include a final decision is not provided in the statute.

Which Loans Does This Really Impact?

For government-backed loans subject to the CARES Act, the new law is practically irrelevant. The GSEs, HUD, and FHA have all been clear that no documentation is necessary for a borrower to request a forbearance; rather a borrower must only attest to a need related to COVID-19. Most importantly, servicer denials for CARES Act forbearances are virtually unheard of because the threshold is so low.

California’s new law is therefore targeted to privately held loans where the investor is not obliged to follow the CARES Act and is within its rights to request a financial package from a borrower seeking assistance. As discussed below, the new law both encourages such servicers to mimic the CARES Act for private loans while also giving them protections for enforcing their investor’s criteria that may deny forbearance requests.

CARES Safe Harbor

The new law provides that compliance with the CARES Act shall be deemed to be compliance with California’s law (see Sections 3273.10(d); 3273.11(b)). Similarly, a servicer who provides forbearance consistent with the CARES Act for a non-federally backed mortgage shall be deemed to be in compliance with the new law (see Sections 3273.10(d); 3273.11(c)).

This encouragement to mirror the CARES Act forbearances for privately held loans is tempered by California’s statement that the Legislature’s intent is for a servicer to “offer a borrower a postforbearance loss mitigation option that is consistent with the mortgage servicer’s contractual or other authority” (see Section 3273.12). This sentence is California’s sole acknowledgment that servicers may still apply their investor’s loss mitigation criteria to privately held loans, which may not include forbearances.

CARES Now Has a Cause of Action in California

The most notable mortgage-related change in the new law is the creation of a cause of action for a violation of the CARES Act, despite the fact that the CARES Act omits such a right. The state statute requires that a servicer “comply with applicable federal guidance regarding borrower options following a COVID-19 related forbearance” and then provides that “a borrower who is harmed by a material violation of this title may bring an action to obtain injunctive relief, damages, restitution, and any other remedy to redress the violation” (see Sections 3273.11(a); 3273.15(a)). A court is also permitted to award reasonable prevailing attorneys’ fees and costs to a borrower in any action based on a violation of the title in which injunctive relief against a foreclosure sale, including a temporary restraining order, is granted (see Section 3273.15(b)). A borrower may not be induced to waive her rights in this respect.

HBOR

In Part II to this blog, we will describe how California expanded the scope of loans to which the HBOR is applicable and detail how those changes may impact a servicer’s HBOR compliance.

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