FHA Clarifies That DACA Classified Residents Are Permitted to Apply for FHA-Insured Mortgages

FHA Clarifies That DACA Classified Residents Are Permitted to Apply for FHA-Insured MortgagesOn January 20, 2021, the U.S. Department of Housing and Urban Development (HUD) released guidance clarifying its definition of the term “lawful residency.” Under the updated guidance, HUD makes clear that individuals classified under the Deferred Action for Childhood Arrivals (DACA) program with the U.S. Citizenship and Immigration Service (USCIS) and are legally permitted to work in the U.S. are eligible to apply for mortgages by the Federal Housing Authority (FHA). The announcement came via the publication of FHA Info #21-04 and is effective as of January 19, 2021. HUD indicated that the FHA Single Family Housing Handbook will be amended to reflect this new guidance in the next update to the handbook.

For all borrowers applying for an FHA-insured mortgage, including DACA residents, other FHA requirements remain in effect, including:

  • The property will be the borrower’s principal residence;
  • The borrower has a valid Social Security number, except for those meeting limited exemptions;
  • The borrower is eligible to work in the U.S., as evidenced by the Employment Authorization Document issued by the USCIS; and
  • The borrower satisfies the same requirements, terms, and conditions of those for U.S. citizens.

Lenders that previously read HUD’s use of the phrase “lawful residency” to not include DACA residents should immediately update their policies to comply with HUD’s clarified position. HUD’s policy priorities under the Biden administration are still developing; however, we anticipate that this newly updated guidance will be enforced by the new administration.

CFPB Publishes Supervisory Highlights Special Edition Focusing on COVID-19 Prioritized Assessments; Mortgage Servicing Issues Are Front and Center

CFPB Publishes Supervisory Highlights Special Edition Focusing on COVID-19 Prioritized Assessments; Mortgage Servicing Issues Are Front and CenterOn January 21, 2021, the Consumer Financial Protection Bureau (CFPB) released the 23rd issue of its Supervisory Highlights report, a special edition focusing entirely on the COVID-19 Prioritized Assessments that have been going on since the summer. The report provides general observations on the Prioritized Assessments and then moves into the areas of risk across nine product lines that were identified by the CFPB in the course of its work.

While we always stress the importance of tracking and analyzing the issues highlighted by the CFPB in every Supervisory Highlights report, this time it is particularly important. As the nation transitions to the Biden administration and we undergo a change in leadership at the CFPB, the priorities and strategies employed by the agency regarding consumer financial protection are likely to change as well. Entities that are subject to the CFPB’s supervisory and enforcement authority should take time to understand where there may be risk and promptly address it moving forward.

In the area of mortgage servicing, the CFPB highlighted six potential areas of risk:

  • Providing incomplete or inaccurate information to consumers about forbearance;
  • Sending collections and default notices, assessing late fees, and initiating foreclosures for borrowers enrolled in forbearance;
  • Cancelling or providing inaccurate information about borrowers’ preauthorized electronic funds transfers;
  • Failing to timely process forbearance requests;
  • Enrolling borrowers in automatic or unwanted forbearances; and
  • Loss mitigation process deficiencies.

Other areas of the Supervisory Highlights report, such as Consumer Reporting and Furnishing, are likely also relevant to the mortgage servicing industry and should be analyzed accordingly.

Most of the issues that are described are similar to, and consistent with, themes that Allison Brown from the CFPB discussed during the Bradley-hosted webinar that she joined in October. For example, Brown emphasized that, during reviews of COVID-19 practices, the CFPB would be looking to validate that servicers conveyed information to borrowers about forbearance and other loss mitigation options that was accurate when it was provided. The CFPB is also very concerned about borrowers being told that they will have to repay forborne amounts in a lump sum at the end of the forbearance period. Finally, as we previously discussed, loss mitigation procedural requirements are likely to be implicated when borrowers need assistance due to a COVID-19 hardship and must be adhered to.

We believe a couple of the issues highlighted by the CFPB are particularly noteworthy in our opinion. For instance, the CFPB notes that some servicers sent collection notices while borrowers were on a CARES Act forbearance and that such notices present risks of direct financial harm and significant confusion for those borrowers. This is an issue that the mortgage servicing industry has been grappling with since the pandemic started, and additional guidance from the CFPB may still be needed. While it is likely prudent to suppress routine collection notices, questions linger regarding other notices required by applicable law. For example, certain states require that various notices must be sent by a particular date of delinquency. The CFPB’s mortgage servicing rules even require that an early intervention notice be sent by the 45th day of delinquency, and those notices are likely to contain the CFPB’s model clause indicating that the longer a borrower waits, or the further the borrower falls behind on payments, the harder it will be to find a solution. Finally, when a borrower is more than 45 days delinquent, the CFPB’s periodic billing statement requirements in Regulation Z mandate that each monthly statement contain “[a] notification of possible risks, such as foreclosure, and expenses, that may be incurred if the delinquency is not cured.” While the sentiment expressed by the CFPB here – that collection notices could be inconsistent and confusing for a borrower in forbearance – makes sense, there are additional nuances that have to be fleshed out, particularly regarding notices that are required by applicable law and that contain language that could lead to the same confusion that the CFPB is concerned about.

Another noteworthy mortgage servicing issue in the CFPB’s Supervisory Highlights relates to the practice of automatically enrolling borrowers in forbearance. Servicers were under considerable pressure at the start of the pandemic to implement the practice that the CFPB now finds problematic. The New York attorney general sent letters to 35 mortgage servicers in April recommending that, for all mortgage loans serviced, the servicers “[p]lace accounts in a 90-day forbearance automatically and where necessary retroactively.” As a result, this is an issue that may have been caused or exacerbated by guidance from government regulators.

In sum, the CFPB’s COVID-19 issue of Supervisory Highlights is particularly important in the present environment. In 2021, the CFPB will transition to new leadership, and we expect a more aggressive posture, particularly as it relates to issues with a nexus to the COVID-19 crisis. Scrutiny of mortgage servicers will likely be a high priority for the new CFPB leadership. The Supervisory Highlights report lays out numerous areas of potential concern that the industry must work to address. As always, we will continue to discuss the issues raised by the CFPB on this blog and on our weekly compliance roundtables.

Continued Payments by the VA Won’t Stop Qui Tam When It Comes to Purported Fraud on Veterans

Continued Payments by the VA Won’t Stop Qui Tam When It Comes to Purported Fraud on Veterans In the latest instance of courts interpreting the Supreme Court’s landmark False Claims Act ruling in Universal Health Services, Inc. v. Escobar, the Eleventh Circuit recently departed from the trend of giving great weight in the analysis of whether a violation was material to the fact that the government continued payment, finding that other efforts by the government to redress noncompliance may prevent judgment in a defendant’s favor.

As a prerequisite to obtain a Veteran’s Administration (VA) loan guaranty, lenders are required to certify compliance with various VA regulations, including limitations on the fees charged to veterans. In United States ex rel. Bibby v. Mortgage Investors Corporation, former mortgage brokers who specialized in originating VA mortgage loans brought suit against a mortgage lender under the False Claims Act, 31 U.S.C. § 3729 et seq., alleging that the defendant charged veterans unallowable fees and lied to the VA about it.

Relators notified the VA of the alleged fraud in 2006, and the VA’s own audit samples pointed out the potential noncompliance. As a result, between 2009 and 2011, the VA issued post-audit deficiency letters directing the defendant to review VA policies and make adjustments to its loan origination process to ensure future compliance. Between 2010 and 2011, the VA also implemented more frequent and rigorous audits focused on rooting out improper fees and charges. However, the VA did not revoke payment on guarantees of loans with purportedly fraudulent fees.

Citing the Supreme Court’s emphasis in Escobar that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material,” the United States District Court for the Northern District of Georgia granted the defendant summary judgment.

The Eleventh Circuit reversed. Despite agreeing that, under the standard promulgated by sister courts, the VA had knowledge of the purposed violations based on the deficiency letters, the Eleventh Circuit minimized the import of evidence of continued payment because the VA was obligated by law to pay the mortgage guarantees. The Eleventh Circuit “divorce[d] [its] analysis from a strict focus on the government’s payment decision,” emphasizing instead that “the significance of continued payment may vary depending on the circumstances.” In this case, because 38 U.S.C. § 3721 requires the VA to pay holders in due course (who in this case were assignees without involvement in the original charging of fees), the Eleventh Circuit concluded that continued payment should carry little weight in the analysis, and that the Court should consider the VA’s other actions, such as issuing a circular to lenders and implementing more frequent audits of this issue. Finding that there was sufficient evidence on the record to create a genuine dispute of fact with regard to materiality, the Eleventh Circuit reversed the summary judgment decision.

Defendants should pay attention to this relator-friendly ruling when assessing the likelihood of success on motions practice in the ever-changing world of Escobar — continued payment by the government may not always be a winning argument, depending on the facts of the case. The fact that the government submitted an amicus brief in support of the relators’ appeal is also noteworthy as an indication that the meaning of Escobar is far from settled.

Supreme Court Holds Mere Retention of Bankruptcy Debtor’s Property Is Not a Violation of the Automatic Stay but More Questions Remain

Supreme Court Holds Mere Retention of Bankruptcy Debtor’s Property Is Not a Violation of the Automatic Stay but More Questions RemainFor the past few years, the federal circuit courts have struggled with the issue of whether a creditor retaining possession of bankruptcy estate property violates the automatic stay. For example, is a creditor required to automatically turn over a vehicle as soon as the bankruptcy petition is filed, or can the creditor retain possession of the vehicle while awaiting an order of the bankruptcy court adjudicating turnover in an adversary proceeding? As we previously wrote, the majority of circuits, including the Seventh Circuit in City of Chicago v. Robbin L. Fulton, held that the automatic stay requires a creditor to immediately release an impounded vehicle when the vehicle owner files for bankruptcy.

On January 14, 2021, the Supreme Court issued its unanimous opinion in Chicago. The opinion was written by Justice Alito and joined by five other justices. Justice Sotomayor filed a concurring opinion, and Justice Barrett did not participate in the decision. The Supreme Court held that the mere retention of estate property after a bankruptcy filing does not violate § 362(a)(3) of the Bankruptcy Code. § 362(a)(3) prohibits “affirmative acts that would disturb the status quo” at the time of the bankruptcy filing.

Justice Alito focused on the language in the pertinent statutes addressing the automatic stay and turnover. He said that if the Supreme Court adopted the debtors’ interpretation that the automatic stay prevented the mere retention of already-possessed estate property, such interpretation would turn the automatic stay provision of § 362(a)(3) into a blanket turnover provision, making the turnover provisions largely superfluous. Justice Alito also observed that when Congress amended the Bankruptcy Code to add the phrase “or to exercise control over property of the estate” to the automatic stay provisions, no mention or cross-reference to the turnover provisions was made. Thus, it is unlikely that Congress intended such wordsmithing to the automatic stay provision to result in significant changes to the separate turnover provision.

The Supreme Court also determined that following the respondents’ reasoning could result in an “odd construction” of § 362(a)(3) because turnover of certain property is exempt if the property at issue is of inconsequential value. If creditors were required to immediately turn over all estate property, as the respondents suggested, Justice Alito said that this mandate would be at odds with the exceptions in the turnover provisions in the Bankruptcy Code.

Questions Remain Unanswered

While the majority opinion brings some much-needed clarity to the § 362(a)(3) retention issue, other important issues remain unresolved. In particular, questions remain both about: (1) how the other provisions of § 362(a) impact the turnover issue, and (2) how the turnover obligation in § 542 works in similar cases. Both the majority and Justice Sotomayor in her concurrence focused on the issues that still are open and that likely will continue to generate disagreements among the lower federal courts. Indeed, one of the consolidated cases (Shannon) that was appealed to the Seventh Circuit in Chicago also involved a violation of § 362(a)(4) (which prohibits any act to create, perfect, or enforce any lien against property of the estate) and § 362(a)(6) (which prohibits any act to collect, assess, or recover a prepetition claim) because the city did not have a secured claim. These claims were not the subject of the appeal before the Seventh Circuit or the Supreme Court. Another example is a case cited by the concurrence where a university’s refusal to provide a transcript to a student-debtor was deemed to constitute a violation of § 362(a)(6). This case and the Shannon case involve unsecured claims, a key distinction from the other cases on appeal before the Supreme Court. The secured status of a creditor allows it to retain collateral pursuant to its possessory rights under state law.

Although both the majority and concurrence leave open the scope of other provisions of § 362(a) (including § (a)(6)), it is likely that the Supreme Court’s holding would govern a substantially similar claim under § 362(a)(6).  “An act to collect, assess, or recover a claim against the debtor” is functionally equivalent, at least in the context of a secured creditor with a possessory interest under state law, to the language in § 362(a)(3).  If anything, the language of § (a)(3) (“any act to…exercise control over property of the estate”) is arguably less passive than the language in § (a)(6).

As the concurrence notes, bankruptcy courts still may turn to other provisions of the Bankruptcy Code to facilitate return of property to debtors. Citing one of the amicus briefs filed in the case, Justice Sotomayor emphasized that loss of a debtor’s automobile often deprives the debtor of “reliable transportation to and from work.” This can prevent them from earning any income, ultimately resulting in a cascading series of significant adverse effects, including preventing the borrower from paying other creditors. To address these issues, a debtor may seek return of their vehicle under § 542, provided the debtor can demonstrate adequate protection of the creditor’s interest (generally payments and possibly sufficient insurance).

That being said, Justice Sotomayor’s concurrence also noted practical challenges that arise when a debtor must rely upon a turnover proceeding to recover property, such as the length and cost of such proceedings. The ABI Commission on Consumer Bankruptcy’s Report and Recommendations (April 2019) previously identified this hurdle and, in response, recommended that parties seeking only turnover rather than sanctions for violating the stay could pursue these actions via motion rather than adversary proceedings.

We can certainly expect further developments in this area, and we’ll continue to report on those developments in this blog.

What Does CA AB 3088 Mean for Mortgage Servicers? PART II

What Does CA AB 3088 Mean for Mortgage Servicers? PART IILast year, our blog, What Does CA AB 3088 Mean for Mortgage Servicers?, examined some new and notable obligations California imposes on mortgage servicers, including requirements to provide forbearance denial notices. In that blog, we promised the publication of a Part II that further expanded upon CA AB 3088. In this Part II, we discuss some of the ways in which CA AB 3088 significantly expands servicers’ obligations under the California Homeowners’ Bill of Rights, and we also discuss some fairly significant tension between CA AB 3088 and Regulation X of the CFPB Mortgage Servicing Rules.

Expansion of Homeowners’ Bill of Rights (HBOR)

As many of you know, historically, HBOR’s provisions only applied to “first lien mortgages or deeds of trust that are secured by owner occupied residential real property containing no more than four dwelling units.” Cal. Civ. Code § 2924.15 (emphasis added). CA AB 3088, however, amends § 2924.15 to expand the HBOR to also apply to any first lien mortgages or deeds of trust that are:

  • Secured by residential real property;
  • Occupied by a tenant as the tenant’s principal residence; and
  • Contain no more than four dwelling units.

In addition, where the property is occupied by a tenant, HBOR, as amended by CA AB 3088, only applies if the:

  • Property owner is an individual who owns, or individuals who collectively own, no more than three residential real properties, each of which do not contain more than four dwelling units;
  • The property is occupied by a tenant pursuant to a lease entered into before, and in effect before, March 4, 2020, and “in good faith and for valuable consideration that reflects the fair market value in the open market between informed and willing parties;” and
  • The tenant is unable to pay rent due to a reduction in income as a result of COVID-19.

This expanded scope applies to the most pertinent HBOR provisions, including requirements related to borrower contact (phone calls/letters), loss mitigation, and the penalties available for failure to comply with HBOR’s myriad requirements. Importantly, these amendments remain in effect until January 1, 2023, even if the pandemic ends sooner.

California’s efforts are clear: The state is attempting to provide relief for small landlords, and their tenants, who are experiencing a reduction of income as a result of COVID-19. Practically speaking, however, servicers who seek to limit HBOR to this expanded scope face some obstacles – including gathering information related to the reason a tenant has reduced income (such as what kind of documentation does a servicer have to accept here, or what if a tenant won’t cooperate with the landlord and provide the documentation the servicer requires?). In addition, servicers are going to have very little information as to how a lease was entered into or the fair market rental value of a property when the lease was entered into (e.g., how is fair market value of the lease determined, or on what source should servicers rely?). Moreover, HBOR is silent on some key questions – namely, how to treat mixed-use properties and whether or not a lease must be written.

Ultimately, we have seen that, at least at the outset, many servicers have had to simply expand the scope of HBOR to any property occupied by a tenant, which can greatly increase the scope of loans where servicers are making calls/sending letters and complying with certain loss mitigation requirements. Bradley will continuously monitor these amendments (and how courts interpret these new provisions) and the impact they may have on a servicer’s operations. As the pandemic comes to an end, hopefully later this year, servicers may want to review their practices to determine if there are ways to tailor their processes to only those loans specifically covered by HBOR.

Tension with CFPB Mortgage Servicing Rules

While CA AB 3088 may seem simple on its face, there is some tension between the California bill and Regulation X of the CFPB mortgage servicing rules, which creates complexities and operational challenges that mortgage servicers must evaluate and overcome.

For example, when a forbearance request is denied, a servicer’s denial letter must cite the defect in the borrower’s request, “including an incomplete application or missing information, that is curable.” Any such written denial letter must also provide the borrower 21 days to cure the identified defect. While most in the industry, including the CFPB, are unlikely to view such correspondence as a denial of a forbearance request, the California bill arguably suggests otherwise because of this specific content requirement in a forbearance denial notice. As a result, the most conservative interpretation of the law is to treat a servicer’s request for additional information to complete an application as a forbearance denial notice and subject to all of the content requirements described in CA AB 3088. The problem, however, is that a servicer’s request for additional information to complete a loss mitigation application is already governed by Regulation X of the CFPB mortgage servicing rules, and there are specific content requirements in Regulation X that simply do not line up well with the California bill. In an incomplete loss mitigation application acknowledgement letter required by Regulation X, a servicer must provide the borrower with a “reasonable date” by which the borrower should submit the missing information/documentation and, pursuant to Regulation X, the “reasonable date” will very rarely be 21 days, the amount of time California gives a borrower to cure any identified defect. Indeed, in some cases the “reasonable date” in the CFPB acknowledgement letter will be less than 21 days and, in some cases, the “reasonable date” will be more than 21 days; regardless, the Regulation X-mandated timelines will very often not line up with the California bill’s timelines. And this is just one example; there are other areas of tension between Regulation X of the CFPB mortgage servicing rules and the California bill, including, but not limited to, issues related to the time in which a borrower has to appeal a loss mitigation determination by the servicer and the time in which a servicer must respond to a borrower’s submission of a complete loss mitigation application.

In short, servicers will face the difficult decision of whether to (1) send one set of letters that satisfy Regulation X and send a completely separate set of letters intended to satisfy California’s bill or (2) try and create letters that satisfy both Regulation X of the CFPB’s mortgage servicing rules and California’s bill. Unfortunately, no matter the option a servicer chooses, the correspondence is likely to cause significant confusion for borrowers.

Servicers must continue to be vigilant as they work through these new requirements and identify their impact on their processes and relationship with other laws. As with many things during this unprecedented time, there will be an opportunity, hopefully soon, to reassess processes that were implemented as quickly as possible to identify areas of improvement or potential conflicts that require resolution with other laws and/or requirements.

Bankruptcy Court Upholds Foreclosure Sale That Occurred Between Bankruptcy Case Dismissal and Subsequent Reinstatement

Bankruptcy Court Upholds Foreclosure Sale That Occurred Between Bankruptcy Case Dismissal and Subsequent ReinstatementFrequently, borrowers file for bankruptcy at the 11th hour to halt foreclosure sales. Once a petition for bankruptcy relief has been filed, secured creditors must cease their collection efforts to avoid violating the automatic stay. However, the automatic stay terminates upon a debtor’s dismissal and closure of the bankruptcy case. A Pennsylvania bankruptcy court recently ruled that if a foreclosure sale occurs between the time when a bankruptcy case is dismissed and when it is reinstated, the foreclosure sale is not void and does not violate the automatic stay.

In In re Parker, the debtor filed a petition for bankruptcy relief to prevent a foreclosure sale of her residence. Notably, the debtor failed to file any of the required documents at the time she filed her bare-bones petition. This was the debtor’s fourth bankruptcy filing, and as such, she was familiar with the necessary documents that must be completed and filed in Chapter 13 cases.

The debtor timely filed some, but not all, of the missing documents, and the bankruptcy court thus entered an order dismissing her case. Under section 362(c)(2)(B) of the Bankruptcy Code, at the time a case is dismissed the automatic stay is terminated.

After the automatic stay was terminated, the debtor’s residence was sold in foreclosure to Laurel Valley Development, LLC. Slightly more than a week after the foreclosure sale, the debtor filed a motion for reconsideration of the dismissal. Laurel was not served with notice of the motion, and the court was not advised that the residence had been sold. Ultimately, the court granted the debtor’s motion and reinstated the bankruptcy case.

About three months after the foreclosure sale, Laurel received a sheriff’s deed giving them title to the property. Approximately five months later, Laurel obtained a judgment to eject the debtor from the sold property. However, the sheriff refused to proceed with the ejectment due to the reinstated bankruptcy case. Accordingly, Laurel filed a motion for stay relief to proceed with the ejectment action.

The debtor defended against Laurel’s motion for stay relief, arguing that the order vacating the bankruptcy case’s dismissal resulted in reinstating the automatic stay retroactively to the date the bankruptcy case was filed. If this was true, then the foreclosure sale would be deemed void. The bankruptcy court rejected the debtor’s position.

Ruling similarly as a multitude of other courts, the bankruptcy court determined that vacating an order dismissing a Chapter 13 bankruptcy case does not result in imposing the automatic stay retroactive to the date the case was first filed. Accordingly, the automatic stay was not in place when the foreclosure sale occurred, and the sale is thus valid.


This case highlights the benefits of actively monitoring the proceedings of borrowers who file for bankruptcy. Chapter 13 cases are often dismissed and shortly thereafter reinstated due to debtors’ failures to file required documents or falling behind on monthly payments. These periods between bankruptcy case dismissals and reinstatements afford creditors extra opportunities to enforce their mortgages. However, because these windows quickly close, creditors that are not actively monitoring bankruptcy proceedings may miss any such opportunities. Creditors should be mindful to not pursue enforcement actions after bankruptcy cases are reinstated to avoid violations of the automatic stay.

FTC’s Comment on ECOA and Regulation B Signals Continued Focus on Small Business Lending

FTC’s Comment on ECOA and Regulation B Signals Continued Focus on Small Business LendingLast year, the CFPB issued a notice and request for information on the Equal Credit Opportunity Act (ECOA) and Regulation B. Specifically, the CFPB sought “comments and information to identify opportunities to prevent credit discrimination, encourage responsible innovation, promote fair, equitable, and nondiscriminatory access to credit, address potential regulatory uncertainty, and develop viable solutions to regulatory compliance challenges under” the ECOA and Regulation B. Ten topics were identified for comment: disparate impact, limited English proficiency, special purpose credit programs, affirmative advertising to disadvantaged groups, small business lending, sexual orientation and gender identity discrimination, scope of federal preemption of state law, public assistance income, artificial intelligence and machine learning, and ECOA adverse action notices. The FTC recently released a comment from its staff related to two of those topics: disparate impact and small business lending.

Disparate Impact

The CFPB’s request for information related to disparate impact focused on whether it should provide additional clarity related to the disparate impact analysis under ECOA and Regulation B. In its comment, the FTC provided a brief history related to Regulation B’s incorporation of disparate impact and discussed how courts have addressed disparate impact claims. In particular, the FTC noted that to overcome a claim for disparate impact, a defendant must demonstrate “a legitimate business need for the policy that cannot be met with a less discriminatory alternative.”

Because the FTC and other federal law enforcement agencies have pursued claims under this approach, the FTC raised the concern that “a single approach to disparate impact analysis that covers diverse sets of present and future facts and circumstances of discrimination may be difficult and could risk being both over and under inclusive.” As such, the FTC asked that the CFPB include a reminder to regulated entities that any commentary is “intended to provide examples of how the agency might approach a fair lending matter, that approaches may vary according to the facts and circumstances of each situation, and that such information is not intended to bless any violations of ECOA and Regulation B.”

Small Business Lending

The CFPB also asked for comments on what “way(s) might it support efforts to meet the credit needs of small businesses, particularly those that are minority-owned and women-owned?” In response, the FTC noted its recent enforcement actions related to alleged “deceptively advertised financing products and unfair billing and collection practices.” The FTC specifically highlighted several recent enforcement actions, including against a company marketing fuel payment cards and a company allegedly falsely claiming an affiliation with the Small Business Administration, and warning letters it sent to companies related to SBA loans.

The FTC primarily focused its small business financing comment on merchant cash advance (MCA) products. While the FTC acknowledged that MCA providers indicate that a merchant cash advance is not a loan, but rather, the purchase of a merchant’s future receipts, it warned that actual implementation of a MCA purchase and sale agreement could be recharacterized as a loan, depending on the course of dealing between the MCA company and the merchant. The FTC also suggested that “many MCA arrangements come with other hallmarks of traditional credit, including personal guarantees of payment.”

Based on the FTC’s analysis of small business lending, it recommended that the CFPB “remind” lenders that ECOA and Regulation B applies to offering credit to small businesses, and that it applies based on the circumstances of the transaction, not necessarily on the characterization of the transaction. The FTC also indicated that the CFPB’s upcoming rulemaking related to Dodd Frank Section 1071 will assist with enforcement. Finally, the FTC recommended that the CFPB encourage small businesses to report complaints and refer those complaints to the FTC and state agencies for potential enforcement actions.


The substance of the FTC’s comment on ECOA and Regulation B indicates that it remains focused on small business lending. In particular, the FTC continues to address its concerns with MCAs and alleged practices of MCA providers. Indeed, even though the FTC referenced cases involving nonprofits when discussing how the facts and circumstances will dictate whether a transaction is covered by ECOA and Regulation B, it is not difficult to conclude that the FTC might also file an enforcement action against an MCA provider under the ECOA and Regulation B under a theory that the MCA constitutes an offer of credit. Therefore, this is an important reminder for MCA providers to ensure not only that their MCA purchase and sale agreements comply with various state authority governing such agreements, but that their marketing and collection practices conform to state law (e.g., New York and Florida).

Florida Court Affirms That Merchant Cash Advance Product Not Subject to Usury Statute

Florida Court Affirms That Merchant Cash Advance Product Not Subject to Usury StatuteThis month, a Florida appellate court held that a merchant cash advance (MCA) purchase and sale agreement was not a “disguised loan” and, therefore, was not subject to Florida’s criminal usury statute. MCA purchase and sale agreements, which offer merchants a fast and efficient way to obtain funding for their operations, are not loans. Rather, these agreements constitute the purchase of a merchant’s future receipts by the MCA company. However, some merchants have claimed that MCAs are “disguised loans” subject to their respective states’ usury law. While several states have well-developed case law differentiating loans from the purchase and sale of receivables, Florida suffers from a relative lack of authority on the issue. Fortunately, in Craton Entertainment, LLC v. Merchant Capital Group, LLC, Florida’s Third District Court of Appeal issued a reasoned opinion holding that an MCA purchase and sale agreement was not a loan, and therefore not subject to Florida’s criminal usury statute. This decision provides good precedent for MCAs facing recharacterization claims in Florida and welcome guidance for MCA companies doing business with Florida merchants.

In 2016, Merchant Capital sued Craton over the default of an MCA transaction. Craton responded with a 12-count counterclaim. In a nutshell, Craton contended that the purchase and sale agreement was a disguised loan, and that Merchant Capital violated Florida’s criminal usury statute. The parties filed competing motions for summary judgment on their respective claims and counterclaims. Ultimately, the trial court ruled in favor of Merchant Capital, holding that the underlying transaction was the sale of future receivables subject to a reconciliation provision, not a loan subject to Florida’s usury laws.

Craton appealed to Florida’s Third District Court of Appeal, arguing that the trial court erred by holding that the purchase and sale agreement was not a loan. Specifically, Craton claimed that the agreement contained all of the characteristics of a loan. For instance, Craton cited the common practice of subjecting the business to a credit check, the lack of a provision in the agreement allowing “forgiveness” or “voiding” of the “debt,” the security interest Merchant Capital took in Craton’s assets, and the personal guarantee signed by Craton’s owner.

In response, Merchant Capital argued that the plain language of the agreement stated that the parties contemplated a buy-sell agreement. Perhaps more importantly, the agreement itself did not bear the hallmark of a loan: the absolute right by the party advancing the funds to demand repayment. Instead, Merchant Capital’s ability to obtain any funds from Craton was expressly conditioned on Craton’s ability to earn revenue. Moreover, and contrary to Craton’s assertions during the litigation, the owner’s personal guarantee did not guarantee repayment. Rather, Craton’s owner guaranteed Craton’s performance under the purchase and sale agreement. Merchant Capital also referenced the reconciliation provision, which was designed to calibrate draws from Craton’s bank accounts based on the ebbs and flows of Craton’s business.

Ultimately, the Third District Court of Appeal affirmed the trial court’s judgment, holding that the purchase and sale agreement was not a loan. Even better, the court’s one-page order provided a basis for its decision by citing several favorable Florida decisions. As such, this decision provides good legal precedent for MCA companies litigating similar claims. Notably, the court cited case law for the proposition that an MCA agreement is not a loan where the “repayment obligation is not absolute, but rather contingent on or dependent upon the success of the underlying venture.” The court also cites authority recognizing that a transaction is not a loan where “a portion of the investment is at speculative risk.”


The Merchant Capital decision is very good news for MCA companies doing business with Florida merchants. The underlying lawsuit involved several commonly litigated issues in the MCA space, and the court unambiguously came down on the side of the MCA company. This case also illustrates the importance of a carefully structured purchase and sale agreement. Keep in mind, however, that a well-crafted agreement alone will not fully protect MCA companies from successful recharacterization claims. Courts in states other than Florida have recharacterized MCA purchase and sale agreements as loans based on the parties’ course of dealing, advertising, and other factors. While helpful, the Merchant Capital decision does not address practices outside of the agreement that could pose a recharacterization risk. Companies should invest time and resources to perform internal and external audits of all business processes, including marketing, websites and social media, and internal policies and procedures to monitor for compliance with the various state laws differentiating loans from MCAs.

CFPB Approves Synchrony’s “Dual-Feature Credit Card”

CFPB Approves Synchrony’s “Dual-Feature Credit Card”On December 30, 2020, the CFPB approved Synchrony Bank’s application to offer a “dual-feature credit card” (DFCC) under the CFPB’s Compliance Assistance Sandbox (CAS) policy. According to Synchrony’s application, the DFCC allows consumers to graduate from a secured-use credit card to an unsecured feature after at least one year and if the customer satisfies certain eligibility criteria.

The CAS policy, which was finalized in September 2019, has the “primary purpose” of “provid[ing] a mechanism through which the Bureau may more effectively carry out its statutory purpose and objectives by better enabling compliance in the face of regulatory uncertainty.” The CFPB’s approval of an application under the CAS policy “enable[es] compliance in the face of regulatory uncertainty.” Since September 2019, the CFPB has approved one other application under the CAS policy for Payativ, Inc., involving what it described as an “Earned Wage Access” (EWA) program. Specifically, Payativ sought and received a determination that the EWA program did not involve the extension of “credit” as defined by section 1026.(2)(a)(14) of Regulation Z.

As indicated by the CFPB’s approval order for Synchrony, secured credit cards offer consumers with lower credit scores access to credit and allow those consumers to help build (or rebuild) their credit profile. However, the CFPB has observed that secured credit cards are often priced like unsecured entry-level credit cards, even though they are secured. Synchrony’s DFCC will offer a “substantially lower” APR than current secured credit cards on the market. Also, while the APR will increase if the consumer graduates to the unsecured credit card, Synchrony plans to provide transparency to the consumers about the difference between secured and unsecured features of the card and will require an affirmative opt-in before the card is converted from secured to unsecured.


CFPB’s approval of Synchrony’s DFCC follows recent efforts by the CFPB’s Office of Innovation to encourage financial service entities to offer unique products and disclosures. In addition to the CAS policy, the CFPB also has No-Action Letter and Trial Disclosure Sandbox policies. Unlike the CAS policy, there have been multiple No-Action Letter applications and approvals (and extensions) over the past year. Notwithstanding the limited sample of approved applications at this point, the CFPB seems willing to allow financial services companies to obtain approval for innovative products for consumers.

Four Significant Changes to Consumer Bankruptcy Included in the Consolidated Appropriations Act, 2021

Four Significant Changes to Consumer Bankruptcy Included in the Consolidated Appropriations Act, 2021On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA 2021). Similar to the March 2020 CARES Act, several temporary changes to the Bankruptcy Code are included in Title X of the CAA 2021. Below, we examine four of the CAA 2021’s most significant changes to consumer bankruptcy laws. These changes are temporary and will sunset either on December 27, 2021, or December 27, 2022.

Section 1001 of Title X of the CAA 2021 addresses bankruptcy relief, including: a temporary revision to the definition of “property of the estate” to exclude certain federal coronavirus relief payments; temporary revisions to Section 1328 to permit a discharge notwithstanding the debtor’s failure to make all required mortgage payments under a confirmed plan; protection against discrimination in the loss mitigation process with respect to a borrower’s current or former bankruptcy status; permission to file supplemental claims related to CARES Act forbearances, modifications and deferrals; and related modifications to Chapter 13 plans based on such supplemental claims.

1. Courts May Grant Chapter 13 Discharges to Debtors Who Have Defaulted on Multiple Mortgage Payments.

Section 1001(b) gives courts temporary discretion to grant, after notice and a hearing, a Chapter 13 discharge even if the debtor defaulted on up to three monthly residential mortgage payments after March 13, 2020, as a result of COVID-19. Similarly, the bill gives courts temporary discretion to grant a discharge to debtors who include residential property in a “cure and maintain” plan and enter into a qualifying loan modification or forbearance. This amendment sunsets on December 27, 2021.

To obtain a Chapter 13 discharge despite defaulting on mortgage payments, the debtor needs to establish that the missed payments were directly or indirectly caused by a COVID-19-related hardship. The evidence necessary to satisfy this standard will play out in the courts. However, courts are likely to apply a flexible and lenient threshold in light of prior litigation during the pandemic.

Section 1001(b) does not appear to modify Section 1328(a)(1) of the Bankruptcy Code, which excepts from discharge any long-term mortgage debts being paid pursuant to Section 1322(b)(5) (i.e., a “maintenance and cure” plan). Therefore, creditors still will be entitled to post-discharge state law remedies such as foreclosure if valid defaults exist. However, servicers will need to ensure that accounting of any such defaults is properly and accurately documented to avoid discharge injunction violations.

2. CARES Act Relief May Not be Denied Based on a Person Having Filed for Bankruptcy Relief.

Section 1001(c) of Title X of the CAA 2021 includes a prohibition against discriminatory treatment based on a current or prior bankruptcy filing. Specifically, the bill states that an individual debtor cannot be denied CARES Act relief (e.g., a foreclosure moratorium, forbearance, or an eviction moratorium) based on past or present bankruptcy filings. This amendment sunsets on December 27, 2021.

Mortgage servicers should take extra care when denying consumers CARES Act relief to ensure that the reason for such denial cannot be construed to have been based on the consumer’s bankruptcy status. It is unclear at this time what bases for denial of CARES Act relief for prior or current debtors will be considered acceptable by courts.

3. Mortgage Servicers May File Late Supplemental Proofs of Claim for Claims That Are Modified by the CARES Act.

Third, Section 1001(d) allows mortgage servicers to file a supplemental proof of claim for payments forborne, deferred or otherwise modified under the CARES Act even though the claim bar date has passed. Notably, the CARES Act relief extends to federally backed mortgage loans. These supplemental proofs of claim must include a description of the forbearance agreement or loan modification and a copy of the forbearance agreement or loan modification (to the extent one exists) and must be filed no later than 120 days after the end of the forbearance period.

A number of practical considerations arise regarding these changes. For example, internal processes may need to be updated to ensure such supplemental claims are completed consistently and in a manner that accurately describes the CARES Act relief. Additionally, mortgage servicers should be mindful of when debtors’ CARES Act relief expires to ensure that supplemental proofs of claim are timely filed. If supplemental proofs of claim are not filed within the 120 days after the end of the forbearance period, they will likely be barred, and any amounts owed will be unrecoverable.

4. Mortgage Servicers May File a Motion to Modify a Chapter 13 Plan to Provide for Payment of Supplemental Proofs of Claim.

Finally, Section 1001(e) allows debtors, the court, the United States Trustee’s Office, or any party in interest to seek modification of a confirmed Chapter 13 plan to account for deferred payments under the CARES Act. This provision sunsets on December 27, 2021.

As such, mortgage servicers with supplemental proofs of claim regarding CARES Act relief should ensure that Chapter 13 cases are modified to allow for payment on supplemental proofs of claim before the plan period ends and the Chapter 13 case is closed. If the debtor, or another party in interest, fails to file a motion to modify the Chapter 13 plan, mortgage servicers should be prepared to file their own motions seeking modification before the plan period ends. Another issue for servicers to tackle is whether and how they may be able to recover fees for such filings.

Next Steps Mortgage Servicers Should Take in Response to the CAA 2021’s Consumer Bankruptcy Changes

Taken together, these bankruptcy-related provisions require mortgage servicers to implement operational changes to ensure they (1) do not deny CARES Act relief to borrowers because of a bankruptcy, (2) file appropriate supplemental proofs of claim for borrowers who have received a CARES Act forbearance, and (3) adjust their operations to account for changes to the Chapter 13 process, including responses to notice of final cure.

The CAA 2021’s changes to consumer bankruptcy are somewhat vague. Additionally, the practical implications of these changes are yet untested. For example, while beneficial that multiple parties have the ability to file a motion to modify the plan to account for supplemental proofs of claim, servicers will likely be reluctant to file such motions if they are not able to recover attorneys’ fees for filing and attending a hearing. Additionally, discharging cases before all payments have been made will inevitably cause borrower confusion over what amounts are properly owed post-discharge on long-term mortgage debt.

As courts interpret these new laws, we will gain a better understanding of their impact on creditors and the operational changes necessary to comply. As we await further guidance from the courts addressing these amendments, mortgage servicers should consider the updates highlighted here and downstream effects on internal processes. We’ll continue to report on these developments.