The CFPB (Yes, the CFPB!) Offers New Compliance Tools for Innovation

The CFPB (Yes, the CFPB!) Offers New Compliance Tools for InnovationCompanies that offer innovative consumer financial products and services have new tools to help them stay in compliance with federal consumer financial laws. In a refreshing twist from prior policy, the Consumer Financial Protection Bureau (CFPB) announced last week that it had revamped its No-Action Letter Policy and released a Compliance Assistance Sandbox and a Trial Disclosure Program to help companies remain in regulatory compliance.

The Bureau Revises Its No-Action Letter Policy

In 2016, the CFPB introduced its first No-Action Letter Policy that would allow companies to seek a no-action letter from the CFPB if the company was unsure of whether a product or service complied with consumer financial laws. Unfortunately, the requirements for obtaining a no-action letter were too difficult and the relief offered was too limited. Indeed, during the past three years, only one company has successfully obtained a no-action letter from the CFPB.

Accordingly, the CFPB recognized the policy’s shortcomings and revised the policy to encourage more companies to apply, and receive, no-action letters. In its new No-Action Letter Policy, the CFPB made the following changes:

  • Expanded the scope of the policy. The 2016 policy was limited to only emerging products and services and was not available for well-established or hypothetical products. The old policy also included a strong bias against granting no-action letters for issues related to prohibitions on unfair, deceptive, or abusive acts or practices (commonly referred to as UDAAP). The new policy removes these restrictions and opens the policy to all products and regulatory issues.
  • Removed unduly burdensome and duplicative requirements. The CFPB removed several requirements to streamline the application process. For example, the previous policy required an applicant to provide a discussion of the consumer risk that its product posed in comparison to competing products. The CFPB found this requirement overly burdensome — especially since applicants do not readily have information regarding a competitor’s products — and eliminated this and other requirements.
  • Eliminated the need to show “substantial” benefits or uncertainty. Previously, the CFPB would only grant a no-action letter request if the product could provide “substantial” consumer benefits and was subject to “substantial” regulatory uncertainty. Now applicants need only show that there is a “potential” consumer benefit and that there is regulatory uncertainty or ambiguity.
  • Provided greater assurances. Under the old policy, CFPB staff issued the no-action letter, which could be modified or revoked at any time for any reason. Under the new policy, CFPB leadership will issue the letter with the “any time/any reason” language removed, and the CFPB will follow specific procedures if it is considering modifying or terminating a no-action letter.
  • No retroactive liability. As long as the no-action letter recipient substantially complies in good faith with the terms of the letter, the recipient will not face retroactive liability if the CFPB modifies or terminates the no-action letter.
  • Provided greater relief. The old policy stated that no-action letters would only last for a limited amount of time and would come with the expectation that no-action letter recipients will share data with the CFPB. The new policy removes both these limitations.
  • Decision within 60 days. The old policy made no commitment as to when, or whether, the CFPB would respond to a no-action letter application. The new policy specifies a 60-day timeframe for the CFPB to evaluate applications.
  • Included an alternative application process. If a trade organization wants to obtain a no-action letter on behalf of companies providing the consumer financial services, the trade organization may obtain a provisional “template” no-action letter. This letter may then be converted into a final no-action letter once the companies submit information to the CFPB about the product for which they are seeking the no-action letter.

The Compliance Assistance Sandbox

In addition to the new No-Action Letter Policy, the CFPB released a new Compliance Assistance Sandbox policy. The policy offers companies “the binding assurance that specific aspects of a product or service are compliant with specified legal provisions.” The features of the sandbox include:

  • Safe harbor for a specific consumer financial law. A company may apply to the CFPB for a statement that the proposed product or service is compliant with an identified federal consumer financial law.
  • No exemptions. Although the CFPB originally contemplated including exemptions from statutory and regulatory burdens, the sandbox as finalized only provides “approvals with respect to products, services, and practices that are compliant with identified statutory and regulatory provisions.” The CFPB intends to create an exemption framework under a new proposed legislative rule.
  • No-action letter joint application. Although the sandbox is not as robust as proposed, since an application for a no-action letter and the sandbox can be made jointly, the process for jointly requesting sandbox approval is relatively minimal.

Trial Disclosure Program

Finally, the CFPB is permitting experimentation with consumer disclosures through its “Revised Policy to Encourage Trial Disclosure Programs.” The CFPB hopes to encourage more trial disclosure programs than were conducted under the 2013 policy. Under this program, companies are given permission to utilize novel disclosures for a limited period. The finalized program includes:

  • Trial disclosures deemed compliant or exempt. The CFPB deems a program recipient to be in compliance with, or exempt from, identified federal disclosure requirements. Furthermore, as a result of such a determination, there is no predicate for a private suit or federal or state enforcement action based on the recipient’s permitted use of the trial disclosures within the scope of the program with respect to the identified federal disclosure requirements.
  • Coordination with other regulators. Recognizing that a disclosure graced by the CFPB may still face scrutiny under regulations other than those of the identified federal disclosure requirements, the CFPB intends to coordinate with federal and state regulators to secure a commitment not to initiate enforcement actions under other regulatory regimes with respect to the use of the trial disclosures.
  • Similar, but not joint, application process. Although the process for requesting a trial disclosure is similar to the applications for the other two policies, the CFPB does not seem to allow for a trial disclosure application to be included as part of an application for either a no-action letter or a Compliance Assistance Sandbox approval.

This news is refreshing. Companies that may have been reluctant to develop new products or new ways of providing products to their customers due to regulatory uncertainty now have a way to obtain certainty from the CFPB. The issuance of these three policies together shows that current CFPB leadership is open to innovation and is actively encouraging companies to apply for relief. If a company was hesitant under the older policies to apply, now might be the time to do it.

Lessons from the CFPB’s First Remittance Transfer Rule Consent Order

In 2010, Congress amended the Electronic Funds Transfer Act (EFTA) by creating “a comprehensive system of consumer protections for money sent by U.S. consumers to individuals and businesses in foreign countries.” In 2013, the CFPB issued the Remittance Transfer Rule to implement the EFTA’s new requirements and updated its EFTA exam procedures to incorporate the new rule. While the CFPB identified potential Remittance Rule Violations in several supervisory highlights (see Winter 2016 Supervisory Highlights, Summer 2017 Supervisory Highlights, and Winter 2019 Supervisory Highlights), it had not taken any Remittance Transfer Rule enforcement actions until last month when it entered into a consent order with Maxitransfers Corporation.

The CFPB alleged that Maxitransfers, a provider of international remittance transfers located in Irving, Texas, engaged in an unfair, deceptive, or abusive act or practice (UDAAP) and violated the Remittance Transfer Rule. Specifically, the CFPB alleged the following:

  • Maxitransfers’ disclosures stated that Maxitransfers would not be responsible for errors made by payment agents, when in fact the Remittance Transfer Rule specifies that a remittance transfer provider is liable for the errors of its payment agents;
  • Maxitransfers failed to maintain appropriate policies and procedures regarding the Remittance Transfer Rule’s error resolution requirements;
  • Maxitransfers failed to appropriately investigate and respond to alleged errors;
  • Maxitransfers failed to use appropriate terminology in its remittance disclosures; and
  • Maxitransfers failed to treat its international bill-pay services as remittances.

The CFPB required Maxitransfers to pay a $500,000 civil money penalty and alter the practices that resulted in the alleged violations.

The CFPB had previously identified several of the practices that formed the basis of the consent order as problematic in prior supervisory highlights. Remittance service providers should take this opportunity to review the Remittance Transfer Rule, consent order and past supervisory highlights to ensure they are EFTA compliant.

Upcoming Webinar

WebinarIf you would like to learn more about the remittance transfer rules or the Maxitransfers consent order, we encourage you to join us for our “Remittance Transfer Rules: Lessons from the CFPB’s Recent Action Against Maxitransfers” Webinar, which is scheduled for Tuesday, September 24, 2019, from 11:30 a.m. to 12:30 p.m. CST. Webinar login information will be provided one day prior to the event. Register for the webinar today.

Secretary Carson Focused on Improving Access to Manufactured Housing

Secretary Carson Focused on Improving Access to Manufactured HousingDuring testimony before the United States Senate, Department of Housing and Urban Development (HUD) Secretary Ben Carson stated his belief that manufactured housing plays a “vital role in meeting the nation’s affordable housing needs,” and supported removing barriers that may prevent some consumers from obtaining manufactured housing. Secretary Carson’s comments, which provided a detailed look into HUD’s vision for reforming the country’s housing finance system, were made on September 10, 2019, before the Senate Committee on Banking, Housing, and Urban Affairs. The plan, which consists of four pillars, was previously submitted to President Trump on September 5, 2019.

Reforms that directly involve manufactured housing are contemplated as a part of Pillar II, which is titled “Protect American Taxpayers.” Most notably, the secretary committed to engaging with state, local, and tribal partners to reduce “overly burdensome regulations that artificially raise the cost of housing development [and] that directly lead to the undersupply of affordable housing.” He also recognized that manufactured housing is in a unique position to help address the affordable housing shortage because it can be a “more affordable alternative to traditional site-built housing without compromising building safety and quality.”

HUD will also ensure that its own regulations do not unnecessarily impede the adoption of new building, construction, and design developments. In that regard, a formal framework will be put in place to encourage innovation. From an administrative standpoint, Secretary Carson explained that HUD will elevate the Office of Manufactured Housing Programs and an assistant secretary will be appointed to lead the office in its new role.

Secretary Carson’s comments and continued support for manufactured housing is encouraging for the industry. That said, we will wait to see how these reforms are implemented and whether they have the intended effect. Regardless, the promotion of manufactured housing as an affordable alternative to site-built homes is always helpful and welcomed.

National Credit Union Administration Encourages Banking Hemp Businesses — With Some Caveats

National Credit Union Administration Encourages Banking Hemp Businesses — With Some CaveatsIn December 2018, Congress gave the hemp industry a significant boost by passing the 2018 Farm Bill, which legalized the cultivation and sale of hemp (i.e., cannabis with a THC content of less than .3%).  The 2018 Farm Bill tasked the United States Department of Agriculture (USDA) with formulating the regulations to govern this burgeoning industry, the first draft of which has yet to be published. However, while the federal government has legalized the hemp industry, financial services companies have proceeded with caution, in some instances making it difficult for hemp-related businesses to procure banking and other financial services.

Last week, credit unions received a gentle reminder from their primary regulator, the National Credit Union Administration (NCUA). The NCUA’s interim guidance seeks to encourage credit unions to get the ball rolling on banking hemp while remaining mindful of the complexities and risks involved. The four-page regulatory alert can be boiled down to a few simple points: be aware of the myriad state and federal regulations involved, know your customer, and stay abreast of ongoing regulatory developments in this evolving industry.

1. Verify licensure under the 2014 Farm Bill.

The bulk of the NCUA’s guidance focuses on maintaining due diligence procedures and complying with the Bank Secrecy Act and anti-money laundering requirements to file Suspicious Activity Reports (SARs) for any activity that could be indicative of money laundering, or illegal or suspicious activity. Credit unions are not required to file a SAR for activity associated with a legally operating hemp business, however, which means the first step is to confirm that the hemp business is indeed operating legally. Until the regulations for the 2018 Farm Bill are released by the USDA, hemp businesses must be registered, licensed, and operating under the research and development pilot programs outlined in the 2014 Farm Bill.

2. Know your customer.

The burdensome “know-your-customer” guidelines will likely sound familiar for those with prior AML/BSA compliance experience. The NCUA guidelines indicate that a SAR should be filed when the activity of a hemp business is deemed “unusual for that business” or when a credit union has reason to believe “an account owner is involved in illicit activity.” As with other industries involving a greater risk of money laundering, this requirement imposes a more significant burden on credit unions to closely monitor their hemp-related business customers because, in order to recognize what is unusual, a credit union must first know what is commonplace.

To that end, credit unions should familiarize themselves with the business of each hemp-related business customer to identify irregular financial and growth patterns and more easily identify suspicious financial activity.  Although the NCUA does not provide any suggestions for specific policies or procedures, a comprehensive approach would involve, among other safeguards, maintaining a list of vendors with whom their customers plan to conduct business, thereby allowing credit unions to flag transactions with unfamiliar vendors. Other red flags might include rapid money movement, significant or sporadic interstate cash flow, increases in revenue that are disproportionate to industry competitors or the market itself, and financial statements or tax returns that are inconsistent with the actual account activity.

3. Monitor Regulatory Developments

 The NCUA guidance emphasizes the importance of compliance with both federal regulations and the patchwork of individual state and tribal regulations. For now, hemp-related businesses are still required to operate as part of the 2014 Farm Bill pilot program, as well as current and forthcoming regulations from state health departments and the U.S. Food and Drug Administration. Although the NCUA’s regulatory update is sparse on the particulars, credit unions can take certain steps to minimize the risk of compliance violations, such as implementing policies and procedures designed to regularly monitor for developments at both the state and federal levels and documenting all compliance efforts, especially with regards to AML/BSA compliance.

In a nutshell, the NCUA seeks to encourage lending to hemp businesses while simultaneously stressing the importance of compliance with the state and federal regulations implicated by banking the cannabis industry, which remain in a state of constant flux. The NCUA will issue additional guidance once the USDA’s regulations are finalized, but until then, this regulatory update is meant to spur credit unions to provide much-needed financial services to those currently operating lawfully in this capital-restricted industry. To that end, credit unions and other financial institutions seeking to navigate the complex regulatory environment should seek counsel to confirm compliance with applicable state and federal law.

CFPB Settles with Freedom Debt Relief

CFPB Settles with Freedom Debt ReliefOn July 9, 2019, the United States District Court for the Northern District of California entered a stipulated final judgment and order in case number 17-cv-06484, Consumer Financial Protection Bureau v. Freedom Debt Relief, LLC, et al. Under the stipulated judgment, Freedom Debt Relief, LLC (Freedom Debt Relief is not related to Freedom Mortgage Company) is enjoined from engaging in deceptive conduct and charging fees for non-settlement resolutions with consumers regarding debts that the company agreed to negotiate. Freedom Debt Relief is also required to provide certain disclosures regarding negotiations with creditors and consumers’ entitlement to settlement funds upon withdrawing from the debt-relief program. The company is required to pay $20 million to the Consumer Financial Protection Bureau (CFPB) for restitution and submit a comprehensive redress and compliance plan to the CFPB identifying affected consumers and otherwise complying with the stipulated judgment. Finally, Freedom Debt Relief is required to pay a $5 million civil money penalty, of which $439,500 is to be paid to the FDIC according to a different consent order.

On November 8, 2017, the CFPB filed an action against Freedom Debt Relief and Andrew Housser, the company’s co-founder and co-CEO. The CFPB filed its first amended complaint on June 1, 2018. According to the complaint, Freedom Debt Relief provided consumer debt relief through a debt settlement program in which consumers deposited funds into an FDIC-insured bank, and the company negotiated with consumers’ creditors to settle their debts. The CFPB alleged that Freedom Debt Relief failed to provide consumers with notice that, if consumers withdrew from the debt settlement programs, they would receive their deposits back, less any fees incurred. Notably, Freedom Debt Relief purportedly misrepresented those fees charged to consumers. Additionally, although the corporation allegedly knew certain creditors would not negotiate consumers’ debts, it nonetheless represented to consumers that all creditors would negotiate. Further, Freedom Debt Relief purportedly encouraged consumers to misrepresent its involvement in their accounts when consumers negotiated directly with creditors.

In the first amended complaint, the CFPB pled five counts for relief for alleged violations of the Consumer Financial Protection Act of 2010 (CFPA) and the Telemarketing Sales Rule (TSR). Specifically, the CFPB alleged counts sounding in violations of the CFPA for (i) deceiving consumers regarding creditors’ willingness to negotiate with freedom; (ii) deceiving consumers regarding charges; (iii) abusively requiring consumers to negotiate on their own; as well as violations of the CFPA and TSR for (iv) failure to clearly and conspicuously disclose consumers’ rights to funds; and (v) charging fees in the absence of a settlement.  Without admitting or denying the CFPB’s allegations, other than those facts necessary to establish the court’s jurisdiction, Freedom Debt Relief and Andrew Housser agreed to a stipulated final judgment on July 9, 2019.

Take Away:

Settlements with the CFPB have historically tended to include injunctions against defendants’ continued wrongful activity and monitoring or reporting to ensure compliance. While Freedom Debt Relief’s stipulated judgment provides for similar relief, it also includes a hefty $20 million fine for restitution, as well as a $5 million civil penalty. Looking forward, we can likely expect future settlements under Director Kathy Kraninger to include similar provisions.

Don’t Let A Natural Disaster Cause Financial Disaster

Don’t Let A Natural Disaster Cause Financial DisasterIn light of the potential for future national disasters such as Hurricane Dorian and all the damage that they can cause, the Consumer Financial Protection Bureau (CFPB) has provided advice on measures to take to secure your financial situation. In recent years we have seen catastrophic damage caused by hurricanes, tornadoes, flooding and landslides, which can be extremely costly and stressful. Of course, as with any natural disaster, your most urgent needs should be addressed first and foremost. However, after that, there should be great consideration given to the financial obligations that you may incur. Further, the CFPB provided some warnings related to scams that unfortunately tend to pop up at times of disaster. This blog post, similar to a post we have written previously, will provide an overview of some of the ways to ensure that your financial situation stays intact following a natural disaster.

Once you begin to think about your financial obligations, particularly if you have had damage to your home or any other property following a natural disaster, the CFPB has provided five steps you can take to keep your financial obligations in check:

  1. Contact your insurance company.  If you have had damage to any of your property and you have insurance coverage, then reaching out to your insurance company or broker is crucial to start the claims process. Unfortunately, many of those affected by flooding from natural disasters do not have flood insurance. It is necessary to obtain a copy of your policy to review what types of coverage you have or request a copy of your policy from your insurance company. Further, take plenty of pictures and/or video of all the damaged property in order to preserve the damage at the outset.
  2. Register for assistance. You can always register for assistance with the Federal Emergency Management Agency (FEMA) or online with the Disaster Assistance Improvement Program (DAIP).
  3. Contact your mortgage servicer. Many people may not know who their mortgage servicer is. If you do not, you can always contact the Mortgage Electronic Registration System (MERS) to find out the company that services your mortgage. Once you contact your mortgage lender and explain your situation, it will not completely eliminate your responsibility to pay the mortgage; however, your lender may be able to provide forbearance or an extension in which to make those payments.
  4. Contact your credit card companies and other lenders. The key to this step is contacting those companies before your next payments are due to explain why your income has been interrupted and that you may not be able to pay your loans and/or credit cards on time.
  5. Contact your utility companies. If you are unable to remain living in your home, ask your utility companies to suspend services for the time being. Keep in mind that if you are planning to move back into your home at some point, you may want to keep air flowing in order to prevent mildew and mold from growing or spreading.

CFPB also has provided good information on scams to be aware of. To avoid being a victim of a scam following a natural disaster, it is imperative to ask questions to make sure that the goods or services offered are legitimate.

Five things that should cause alarm:

  1. People who want you to pay upfront fees for any type of services, including obtaining loans.
  2. Contractors selling repairs door to door. Again, when a contractor asks to receive upfront payments or offers huge discounts, that should be a red flag. My practice is always to contact the Better Business Bureau to find out if the contractor is legitimate.
  3. Any person posing as a government employee, insurance adjuster, law enforcement official or a bank employee. Even if those people are in uniforms and have badges, never give out any of your personal information until you confirm whether that person is legitimate. For instance, government employees will never ask for payment or financial information from you.
  4. Be cautious of fake charities, particularly any that ask for donations over the phone. If you want to contribute following a natural disaster, it is always good to do your research and/or contact your local Red Cross or United Way for the best way to contribute.
  5. Be wary of any “limited time offers.” If someone is trying to pressure you to make a decision quickly or to sign anything without having time to read over it thoroughly, it should raise a red flag. Contact an attorney to help you review any type of documents or contracts. Many cities provide free legal services during times such as these. You can reach out to your local bar association to find out if these types of services are available in your area.

Further, following past natural disasters such as hurricanes, several mortgage backers have offered forbearance to borrowers in the affected areas. In recent years, Freddie Mac, Fannie Mae and the Federal Housing Administration have all offered forbearance for at least 90 days to borrowers in affected areas. These entities have also extended some cases for up to a year, depending on severity. That means borrowers did not have to make their monthly payments, and no penalty fees will be charged. (Note that interest still accrued during that time.) It is likely other mortgage providers have done the same as well. I would suggest that anyone affected by a natural disaster reach out to their provider to find out if a forbearance is being offered and how to take advantage of it.  Be sure to contact your specific servicer to ensure you follow the proper protocol to obtain a forbearance.

The Federal Emergency Management Agency’s (FEMA) website,, provides helpful tips and checklists to prepare for an emergency.  It also provides links to several other helpful websites.

Finally, the CFPB has provided a checklist that you can review in order to make sure that your financial records are secure. Here is the link to that checklist. You can also contact the CFPB directly by calling (855) 411-2372.

The Small Business Reorganization Act – A New Subchapter for Small Businesses

CFPB Issues Policy Guidance on Early Implementation of the 2016 Mortgage Servicing AmendmentsSince the 2005 amendments to the Bankruptcy Code, small business debtors have continued to struggle to reorganize effectively under Chapter 11 of the Bankruptcy Code. On Friday, August 23, 2019, President Trump signed the Small Business Reorganization Act of 2019 into law in an effort to address some of these issues.

The act aims to make small business bankruptcies faster and less expensive by creating a new subchapter of Chapter 11 of the Bankruptcy Code specific to small businesses. At this time, the act only applies to business debtors with secured and unsecured debts, subject to certain qualifications, less than $2,725,625. The act includes the following provisions:

  • Appointment of a Trustee. The act provides that a standing trustee will serve as the trustee for the small business’s bankruptcy estate. Similar to Chapter 12 family farmer and fisherman bankruptcies, the act provides that the trustee shall facilitate the small business debtor’s reorganization and monitor the debtor’s consummation of its plan of reorganization.
  • Streamlining the Reorganization Process. The act streamlines small business reorganizations and removes procedural burdens and costs associated with typical corporate reorganizations. Notably, only the debtor can propose a plan of reorganization. Small business debtors do not have to obtain approval of a separate disclosure statement or solicit votes to confirm a plan. Unless the court orders otherwise, there are no unsecured creditors’ committees. The act further requires that the court hold a status conference within 60 days of the petition date and that the debtor file its plan within 90 days of the petition date.
  • Elimination of the New Value Rule. The act removes the requirement that equity holders of the small business debtor provide “new value” to retain their equity interest in the debtor without paying creditors in full. For plan confirmation, the act instead only requires that the plan does not discriminate unfairly, is fair and equitable, and, similar to Chapter 13, provides that all of the debtor’s projected disposable income will be applied to payments under the plan or the value of property to be distributed under the plan is not less than the projected disposable income of the debtor.
  • Modification of Certain Residential Mortgages. Notably, the act also removes the categorical prohibition against individual small business debtor’s modifying their residential mortgages. The act now allows a small business debtor to modify a mortgage secured by a residence if the underlying loan was not used to acquire the residence and was primarily used in connection with the small business of the debtor. Otherwise, secured lenders have the same protections as in other Chapter 11 cases.
  • Delayed Payment of Administrative Expense Claims. The act removes the requirement that the debtor pay administrative expense claims – including those claims incurred by the debtor for post-petition goods and services – on the effective date of the plan. Unlike a typical Chapter 11, a small business debtor may now stretch payment of administrative expense claims out over the term of the plan.
  • Discharge Limitations. The court must grant the debtor a discharge after completion of all payments due within the first three years of the plan, or such longer period as the court may fix (not to exceed five years). The discharge relieves the debtor of personal liability for all debts provided under the plan except any debt: (1) on which the last payment is due after the first three years of the plan, or such other time as fixed by the court (not to exceed five years); or (2) that is otherwise non-dischargeable. All exceptions to discharge in Section 523(a) of the Bankruptcy Code apply to the small business debtor. This is a departure from a typical corporate Chapter 11 which has limited exceptions to discharge set forth in section 1141.

The benefits of Chapter 11 reorganization have been elusive to small business debtors given their size and limited financial resources. The act attempts to remedy many of these obstacles to successful small business reorganizations. If the act proves to be beneficial to small business debtors, there may be a legislative push to increase the debt limitations and provide even more businesses access to the new subchapter.

The act takes effect in February 2020. Small business and consumer lenders should be prepared to protect their interests in this new subchapter of the Bankruptcy Code. Bradley attorneys are experienced in all aspects of bankruptcy, and will continue to monitor the development of the law and bankruptcy practice under the act.

FHA Rule Reduces Barriers to Reverse Mortgages for Condominium Owners

FHA Rule Reduces Barriers to Reverse Mortgages for Condominium OwnersAfter a nearly three-year delay, the U.S. Department of Housing and Urban Development (HUD) has finally released an update to its FHA condominium rules. The new rules, which take effect October 15, 2019, allow for FHA insurance approval on individual condominium units and ease burdensome FHA-insured reverse mortgage application requirements on condos, expanding access to the product for the many senior citizens living in condominium projects.

In 2008, FHA eliminated approval on individual condominium units, and HUD required a condominium owner to receive FHA approval on the entire condominium project to allow a HECM on the owner’s single unit. This process was time-consuming and expensive, causing many condominium owners to not pursue a reverse mortgage and, if a condominium owner did decide to seek a reverse mortgage, many condominium associations refused to go through the FHA approval process. Under the new “individual unit approval” rule, these burdensome requirements are reduced, and FHA estimates that it will qualify an additional 20,000 to 60,000 condominium units per year for FHA-insured financing, some of which will be HECMs.

Under the new rules, a condominium owner may be eligible for FHA individual unit approval if the condominium unit is in a building where no more than 10% of the units are FHA-insured or, if in a building with fewer than 10 total units, no more than two units hold FHA insurance. HUD also adjusted the owner-occupancy rules, now only requiring that 50% be owner-occupied. In addition to these changes, the rule also expands financing for mixed-use projects, permitting condominium projects to have up to 35% of the total floor area to be dedicated to commercial space.

The reverse mortgage industry has been advocating for the new condominium rules for several years. The new rules will allow seniors who own condominium units to more easily access equity in their homes. In addition to the benefits the updated condominium rules provide to forward mortgages, HUD Secretary Ben Carson highlighted that the reverse mortgage portion of the rule change will assist seniors “who are hoping to live independently and to age in place.” In conjunction with the released final rule, HUD also released an updated version of the FHA Single Family Policy Handbook, reflecting the new condominium rules. If your reverse mortgage company intends to increase business in the condominium market, be sure to update your company’s policies and procedures by October 15, 2019, to meet HUD’s new rules.

The Family Farmer Relief Act of 2019: Will the Increased Debt Limit Lead to an Uptick in Chapter 12 Filings?

The Family Farmer Relief Act of 2019: Will the Increased Debt Limit Lead to an Uptick in Chapter 12 Filings?The United States Senate passed the “Family Farmer Relief Act of 2019” (H.R. 2336), which substantially increases the debt limit for agricultural producers seeking to file for relief under Chapter 12 of the United States Bankruptcy Code. The bipartisan legislation, which passed the U.S. House of Representatives in June and is expected to be signed into law by President Trump, raises the debt limit for Chapter 12 bankruptcy filings from approximately $4.3 million to $10 million.

The debt limit increase will dramatically expand Chapter 12 bankruptcy eligibility at a time of turmoil for the U.S. agriculture industry, precipitated by years of depressed farm income, crop overproduction, increased debt loads, natural disasters, extreme weather events, and, more recently, retaliatory tariffs on many U.S. agricultural products as part of a renewed trade war. As noted by the American Farm Bureau Federation, even before passage of the Family Farmer Relief Act, Chapter 12 bankruptcy filings were up 13% over the past year, and farm loan delinquency rates were at a six-year high. Farm bankruptcies under Chapter 12 can only be expected to rise sharply now that farmers with debts as high as $10 million dollars are eligible to file for Chapter 12 relief.

A farm seeking to reorganize its operations, restructure its debt, and continue as an ongoing business may consider relief under several chapters of the Bankruptcy Code:

Chapter 13

In a Chapter 13 proceeding, the debtor commits all of his or her future disposable income to pay all or part of the debtor’s outstanding debts under the terms of a confirmed Chapter 13 plan. Certain debts, including residential mortgages, must be paid in accordance with the terms of the mortgage, either through or outside the plan (any pre-petition arrearage on the mortgage can be provided for and paid through the plan). Chapter 13 eligibility is limited to individuals (i.e., not corporations, LLCs or partnerships) with unsecured debts of less than $419,275 and secured debts of less than $1,257,850.

Chapter 11

Chapter 11 bankruptcy is most commonly used to reorganize large corporations. Chapter 11 has some provisions aimed at small business debtors, and individuals whose debts exceed the limits for Chapter 13 may be eligible to file for Chapter 11. As a practical matter, however, Chapter 11 cases are costly and complex, which frequently limits its availability to larger debtors with the means to fund a case. In Chapter 11, the debtor will typically reorganize its debts in accordance with a confirmed Chapter 11 plan, which must classify the types of claims against the estate and provide for treatment of each class. The plan must be accompanied by a detailed disclosure statement containing sufficient information for creditors to make a determination as to whether to vote to accept the plan. Creditors whose claims are “impaired” under the plan may vote on the plan.

Chapter 12

Chapter 12, which was initially enacted during the farm debt crisis of the 1980s, provides many benefits for small to medium-sized family farming operations as compared to Chapter 11 or Chapter 13. Chapter 12 is reserved for “family farmers” or “family fisherman” with “regular annual income.” A “family farmer” may be an individual (or an individual and spouse), or a corporation or partnership (with certain restrictions), so unlike the case with Chapter 13 bankruptcies, which is limited to individuals, a family farm that is structured as a corporation or partnership may be eligible for relief under Chapter 12.

Chapter 12 has numerous other benefits over both Chapter 11 and Chapter 13 for parties who are eligible. Like Chapter 13, Chapter 12 contemplates that the debtor will use future disposable income to fund a plan; however, a Chapter 12 reorganization plan can provide for payments to be made seasonally, when the farm earns most of its income. Moreover, a Chapter 12 debtor has 90 days from the petition date to file a proposed plan and need not begin making plan payments prior to plan confirmation, in contrast to Chapter 13 debtors who must propose a plan and begin making plan payments much more quickly. Therefore, Chapter 12 debtors have a longer breathing spell before they must start funding the plan.

Chapter 12 is considerably less expensive than Chapter 11 — the Chapter 11 filing fee alone is $1,717, versus $275 for a Chapter 12 case. Moreover, if the debtor does not qualify as a “small business debtor,” as defined in the Bankruptcy Code, an official committee of unsecured creditors will be appointed in a Chapter 11 case, with the costs of the committee’s professionals (in addition to its own professionals) to be borne by the debtor. The unsecured creditors’ committee has broad authority to investigate the assets, liabilities, financial condition and transactions of the debtor, which can substantially increase the costs of the case, even if the scope of such investigation is limited.

A typical business reorganization will often include the sale of underperforming or unneeded assets. Asset sales in Chapter 12 have many advantages for the debtor over those in over Chapter 11. In order to sell assets “free and clear” of liens, claims, and encumbrances in Chapter 11, the debtor must satisfy the stringent requirements of section 363(f), which can be hotly contested by stakeholders. The Chapter 12 debtor, on the other hand, may sell any property free and clear of liens under section 1206 so long as the property is “farmland or farming equipment.” With narrower statutory grounds for objecting to an asset sale in Chapter 12, the process is typically less contentious and less expensive. Also, asset sales in Chapter 12 have significant tax advantages over those in Chapter 11. Any tax liability for capital gains generated by a sale in Chapter 11 is treated as a priority claim that must be paid in full at plan confirmation. By contrast, in Chapter 12, any tax arising from the sale of property used in the debtor’s farming operation is treated as an unsecured claim of the debtor that may be discharged in bankruptcy. This allows the debtor to retain the upside from the sale of farming assets.

Finally, one of the biggest advantages of Chapter 12 over Chapters 11 or 13 is that Chapter 12 debtors may modify any secured loan — including residential mortgages, nonresidential mortgages, equipment loans and vehicle loans — through a so-called “cram down.” In a cram down, the debtor pays secured creditors based on the current value of collateral rather than the amount owing on the loan. In Chapter 11 and Chapter 13 cases, a debtor cannot cram down the mortgage on the debtor’s principal residence.  Chapter 12 does not contain this restriction, so a Chapter 12 debtor may cram down his residential mortgage along with any other secured debts. This can be a powerful tool for family farmers who frequently live and farm on the same land.

Given the clear advantages of Chapter 12 over Chapters 13 and 11 for family farmers seeking to reorganize under the Bankruptcy Code, the newly expanded eligibility for Chapter 12 bankruptcy – combined with the troubled economic climate for U.S. farmers – may well lead to a proliferation of Chapter 12 filings. If the current problems facing the U.S. agricultural industry are transitory in nature, Chapter 12 may well provide small to mid-sized farmers with the relief they need to weather the temporary downturn. If, on the other hand, the downturn is symptomatic of a more fundamental reordering of the industry and its place in the global economy, then expanded eligibility for Chapter 12 may not solve the long-term problems facing smaller farming operations.

HUD Proposed Rule Demands More Disparate and More Impact to Establish Disparate Impact Liability

HUD Proposed Rule Demands More Disparate and More Impact to Establish Disparate Impact LiabilityThe United States Department of Housing and Urban Development (HUD) released a sweeping proposed rule on August 1 seeking to amend HUD’s interpretation of the Fair Housing Act’s disparate impact standard. According to HUD, the proposed rule is designed to better reflect the U.S. Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. HUD will submit the proposed rule to HUD’s congressional authorizing committees – the House Financial Services and Senate Banking Committees – for a 15-day review period. After the congressional review period, HUD will publish the proposed rule in the Federal Register where the public will have 60 days to submit comments. Comments may be submitted to HUD through or by physical mail.

The Fair Housing Act prohibits discrimination in many housing-related activities on the basis of race, color, religion, sex, disability, familial status, or national origin. For at least the past four decades, HUD and federal courts have read the Fair Housing Act to ban conduct that has a discriminatory effect even while not motivated by discriminatory intent. This theory of liability is known as “disparate impact.” In February 2013, HUD codified its long held view that the Fair Housing Act bans housing practices that disparately impact protected classes through a final rule entitled Implementation of the Fair Housing Act’s Discriminatory Effects Standard. The rule established a three-part burden-shifting test for determining when a housing practice with a discriminatory effect violates the Fair Housing Act.

In 2015, the U.S. Supreme Court decided Texas Dept. 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 Fair Housing Act. In Inclusive Communities, Justice Kennedy’s majority opinion did not rely on HUD’s disparate impact burden shifting test. Rather, the court undertook its own analysis resulting in standards that differed from the rule. While holding that the Fair Housing Act prohibited disparate impact discrimination, the decision also established several guard rails designed to “protect potential defendants against abusive disparate impact claims.” For instance, the court held that a disparate impact claim cannot be sustained solely by evidence of a statistical disparity. Rather, the court enacted a “robust causality” rule requiring that a plaintiff show that a policy or procedure actually caused the disparity.

HUD’s proposed rule seeks to align the department’s disparate impact analysis with the standards applied by the court in Inclusive Communities. Specifically, the proposed rule creates a new burden-shifting framework where a plaintiff raising a disparate impact claim under the Fair Housing Act would be required to establish, as a threshold matter, that a specific policy or practice caused the discriminatory effect, and that the policy or practice was “arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective.” If the plaintiff makes this prima facie case, then the burden shifts to the defendant to “identify a valid interest or interests which the challenged policy or practice serves…” Once the defendant makes that identification, the burden shifts back to the plaintiff to establish the following four elements:

  1. A “robust causal link between the challenged policy or practice…”
  2. That the “challenged policy or practice has an adverse effect on members of a protected class.” In other words, under the new rule, it is insufficient to allege merely that the individual plaintiff was harmed as a result of the policy.
  3. That the disparity caused by the policy or practice is “significant” or “material.”
  4. That the “complaining party’s alleged injury is directly caused by the challenged policy or practice.

In the proposed rule, HUD provides several detailed examples of particular defenses a defendant may use to rebut allegations of housing discrimination. The proposed rule also contains several clarifications related to issues such as vicarious liability, the rule’s impact on state insurance regulations, and the scope of remedies in state and federal court, among others.

The theory of disparate impact liability has always been complicated. Although HUD’s proposed rule appears to benefit defendants, the rule imposes additional layers of complexity to the burden-shifting analysis. Thus, while the proposed rule likely will come as welcome relief to businesses that have been vulnerable to disparate impact claims, it will likely not decrease the number of fair housing claims and may very well increase the cost to defend those claims.