New Mortgage Licensing Requirements Come to the West

During this pandemic, both Idaho and South Dakota have been busy adding new mortgage licensing requirements. As discussed below, these new licensing requirements will materially impact mortgage lenders and servicers doing business in these states.

Idaho

Earlier in 2020, Idaho passed H0401, which amended the definition of “mortgage lender” to include mortgage companies that engage in mortgage servicing. Additionally, the legislation excluded commercial construction lending from applicable licensing requirements. To the relief of many in the mortgage industry, the legislation also removed the control person position of “qualified individual” from the mortgage licensing requirements. Many will remember that the Idaho qualified individual needed to: (a) have three years of experience in the mortgage industry, (b) had to provide proof of this experience with an appropriate resume, and (c) be a licensed Idaho mortgage loan originator (MLO).

This legislation became effective on July 1, 2020. As now in effect, the definition section of the statute includes the following, “Borrower does not include an organization that, as part of a regular business of constructing and rehabilitating dwelling, makes application for a residential mortgage loan to finance the constitution or rehabilitation for a dwelling.” Idaho Code § 26-31-102. Accordingly, the commercial lending licensing requirement no longer exists.

Additionally, the statutory definition of “mortgage lending activities” has been updated to include the following language “for compensation or gain or in the expectation of compensation or gain, either directly or indirectly, accepting or offering to accept applications for residential mortgage loans or assisting or offering to assist in the preparation of an application for a residential mortgage loan, or servicing a residential mortgage loan on behalf of any person.” Idaho Code § 26-31-201 (emphasis added). It also adds the definition of “servicing,” which means “collecting payments of principal, interest, or any other payment obligations required pursuant to the residential mortgage loan.” Id. By amending these definitions and updating the license requirement on the NMLS Resource Center, Idaho now firmly treats mortgage servicing as a licensable activity.

Although the statute appears to impose additional burdens on the mortgage servicing industry by requiring the companies that only service loans to be licensed in Idaho – the good news is that all qualified individual requirements have been removed from the statue. This will help many startup companies that wish to become licensed in Idaho, where the qualified individual requirements previously were too difficult to meet with new mortgage personnel.

The Idaho Department of Finance’s website does not currently provide information as to when all mortgage servicing companies must be licensed to conduct business in Idaho. However, we believe that it would be in the mortgage servicing companies’ best practices to submit an application for licensure within the first 30 days of the requirement, meaning by July 31, 2020.

South Dakota

After years of being a mortgage industry darling by having “company only licensing,” on July 1, 2020, South Dakota added a branch license requirement to the Mortgage Lender License via an update to the NMLS Resource Center. This was a big surprise to many mortgage companies, as most MLOs are not able to work from a licensed location during the COVID-19 pandemic; additionally, the mortgage business is moving away from the idea of a licensed branch location for originating loans and meeting with potential borrowers. The new branch license will be required for any location other than the corporate location that originates, sells, or services South Dakota mortgages. Additionally, the branch manager of any branch location must be a South Dakota mortgage loan originator.

Although this is a dramatic change for mortgage companies that have relied on South Dakota’s “no branch licensing policy,” the positive is that mortgage companies have until December 31, 2021, to license all branch locations engaging in South Dakota mortgage business. Hopefully, by December 2021, the pandemic will be over, and the mortgage industry can get back to “normal.”

Bradley will continue to monitor the branch licensing situations for all states to see if the MLO working from a licensed branch location is still a viable business model after months of almost all personnel working from home and all origination, servicing, and other mortgage business being conducted exclusively by virtual means.

CFPB Rescinds Small Dollar Rule Ability to Repay Provisions However Payment Provisions Remain

By Jennifer L. Galloway, Michael Gordon, Preston H. Neel and S. David Smith on July 9, 2020 Posted in Banking, CFPB, Compliance, Federal Agencies, Installment Lending, Short-Term Loans, Small-Dollar Lending, Unsecured Lending

CFPB Rescinds Small Dollar Rule Ability to Repay Provisions However Payment Provisions Remain On July 7, 2020, the Consumer Financial Protection Bureau (CFPB) issued its final rule in regard to so-called small dollar loans. The biggest change from the CFPB’s original iteration of the rule, the 2017 Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule (“small dollar rule”) is the bureau’s decision to rescind the ability to repay and underwriting provisions. The bureau also rescinded certain definitions, exemptions, record keeping, and reporting requirements related to those provisions. However, the final rule does not rescind or alter the payment provisions in the small dollar rule, and the CFPB indicated that it would be moving forward with those provisions. In fact, the bureau released a ratification of the payment provisions in light of the Supreme Court’s recent decision in Seila Law. The final rule does not address the uncertainty surrounding the August 19, 2019 compliance date, which is currently stayed by the Texas federal district court hearing the lawsuit filed by two trade groups challenging the small dollar rule.

The payment provisions contain several payment withdrawal protections aimed at protecting consumers from repeated collection attempts that can potentially lead to a pattern of insufficient funds fees or closure of the consumer’s bank account. The payment provisions require lenders to provide consumers with three new written notices related to payments and new methods for obtaining consent after two consecutive failed payment transfers from a consumer’s account. Lenders that offer covered loan products that are subject to the small dollar rule would be well-served to revisit the numerous notice form and timing requirements related to each notice, i.e., the first payment (first payment withdrawal notice), unusual withdrawals (payments differing in amount, timing, payment channel, or initiated as a second presentment following a returned transfer) (unusual withdrawal notice), and when the lender has two consecutive failed attempts at collecting payment on a consumer’s account (consumer rights notice). Additionally, special attention should be given to the definition of a ‘covered loan’ and the exemptions and exclusions under the Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule as it covers more loan products than its title states. Finally, there are two methods for obtaining additional payment transfers after two consecutive failed payment transfers and delivery of consumer right notice: new specific authorization and single immediate transfer.

The CFPB has promulgated permissible notice forms and gives examples and scenarios to assist lenders with compliance in its updated Small Entity Compliance Guide. The CFPB also recently provided FAQs for the small dollar rule. Of equal importance, lenders cannot take any action with the intent of evading the requirements of payment withdrawal restrictions. From this point forward, lenders should prepare to comply with the payment provisions because the Texas federal court could lift the stay at any time.

If You Thought the TCPA Was on Its Way Out, Think Again: The Supreme Court Expands Its Prohibitions Instead

By Alex McFall and Benjamin William Perry on July 8, 2020 Posted in Debt Collection, Supreme Court, TCPA

If You Thought the TCPA Was on Its Way Out, Think Again: The Supreme Court Expands Its Prohibitions Instead One of the most aggressive attacks on the Telephone Consumer Protection Act (TCPA) recently made its way to the United States Supreme Court in Barr v. American Association of Political Consultants. With Chief Justice John Roberts questioning why “the whole statute shouldn’t fall” during oral argument, hopes were high that the TCPA might finally be dismantled. Yesterday’s opinion dashed those hopes. While the TCPA challengers technically won, Barr is a loss for all opponents of the TCPA. Instead of striking down the TCPA, the Supreme Court expanded the TCPA’s restrictions to include prohibitions on autodialed calls to collect government debt.

By way of background, 24 years after the TCPA was passed, Congress created an exception to the TCPA, which allowed robocalls to be placed to cellular telephones, so long as the calls were made for the purpose of collecting a debt owed to the government. The American Association of Political Consultants (AAPC), along with three other organizations, filed a lawsuit seeking to have the exception declared unconstitutional on the ground that it treated speech associated with the collection of a government debt different than other speech and therefore violated the First Amendment. The AAPC and related organizations reasoned that they would be more efficient if they could make robocalls to individuals to solicit donations, conduct polls, etc. The trial court held that the exception, although content-based, survived strict scrutiny because it served a compelling government interest. On appeal, the United States Court of Appeals for the Fourth Circuit agreed that the exception was content-based but held it could not survive strict scrutiny.

The Supreme Court agreed with the Fourth Circuit but, instead of striking down the entire TCPA as unconstitutional, severed the government debt exception from the remainder of the TCPA. The result? A statute found to be unconstitutional (with the government debt exception) was tweaked to remove the only exception and now emerges broader than it was before Barr. The Court recognized that the decision whether to sever the unequal exception or strike down the unequal statute was “complex,” but ultimately elected to expand the TCPA’s restrictions. The Court’s reasoning not only broadened the scope of the TCPA, but confirmed that the government can impose broad and significant restrictions on speech (such as the TCPA) so long as those restrictions are applicable to everyone. Equally troubling, the Court seems to have adopted a position that creditors have long known is misguided – that the TCPA actually serves the purpose Congress intended, which is to prevent robocalls and protect the privacy of consumers.

It remains to be seen whether the Barr decision will be applied retroactively, but in the meantime, all private lenders or debt collectors who previously placed robocalls to consumers’ cellular telephones for the purpose of collecting a debt that is either owned or guaranteed by the federal governments – including certain student loans, residential mortgage loans (e.g., VA and FHA loans), farm loans, etc. – must now scramble to create policies and procedures to ensure compliance with the TCPA. For the rest of the financial services industry, Barr’s message is clear: The TCPA isn’t going anywhere anytime soon.

Update on Texas Foreclosures Given Statewide Rise in COVID-19 Cases

By S. David Smith, Gabriella E. Alonso, Melissa Gutierrez and David C. Miller on July 7, 2020 Posted in COVID-19 (Coronavirus), Foreclosure, Texas

Update on Texas Foreclosures Given Statewide Rise in COVID-19 Cases As we previously reported in April, Texas’s initial approach to foreclosures in light of the coronavirus was “ad hoc” and the decision whether to halt foreclosures was left to the various counties in which the sales were conducted. Since that time, the state has begun reopening but has seen a rise in the number of daily coronavirus cases that worries state and local officials, especially in Texas’s largest metropolitan areas.

In response to this rise, Gov. Greg Abbott issued Executive Order 29 and a Proclamation Amending Executive Order 28 reinstating health and safety limitations in the state of Texas. By way of these orders, public gatherings of more than 10 persons are now, with some exceptions, prohibited throughout the state. This prohibition would seemingly affect foreclosure sales, which typically draw large crowds that can number in the hundreds. Absent consent of the local county judge or mayor, however, these sales would arguably violate Gov. Abbott’s July 2, 2020 Executive Order and Proclamation. Because neither of Gov. Abbott’s orders specifically addresses foreclosure, the decision to continue with or suspend foreclosure Tuesday apparently devolves to local government.

Local governments in Harris and Travis counties expressly canceled July foreclosure sales. Other large counties such as Dallas and Fort Bend counties simply have no foreclosure listings for the month of July. Tarrant, Bexar, Collin, Hidalgo, El Paso and Denton counties have not issued any guidance on the matter but still have July foreclosure listings posted.

The decision to deal with foreclosures in light of COVID-19 in Texas remains with local government, although that may not have been the original intent of Gov. Abbott’s most recent executive order. Among the top 10 most populated counties, there appears to be a 50-50 split between those proceeding with foreclosure Tuesday and those that have suspended July foreclosures. This split among counties injects further uncertainty into creditors’ ability to protect their rights. Because Texas has not issued any statewide orders governing foreclosure proceedings, creditors should continue to proceed with caution.

CFPB Plans to Publish Final Debt Collection Rules in October

By Lee Gilley, Jonathan R. Kolodziej and J. Riley Key on July 6, 2020 Posted in CFPB, Debt Collection, FDCPA

CFPB Plans to Publish Final Debt Collection Rules in October On Thursday, July 2, the Consumer Financial Protection Bureau (CFPB) announced that it plans to publish final debt collection rules in October 2020. The final rules will be the first rules clarifying the nearly 40-year-old Fair Debt Collection Practices Act (FDCPA) and are expected to address a variety of topics including:

Communications with borrowers;
Guidance on what constitutes harassment or abuse, false or misleading representations, and unfair practices; and
Disclosures (including time-barred debt disclosures).

In the proposed rule that was published in May 2019, the CFPB proposed a one-year implementation before the debt collection rules would become effective. If they incorporate the same implementation period in the final rule so that it becomes effective one year after publication in the Federal Register, it likely could become effective as early as October or November 2021.

As we have previously discussed, the CFPB’s debt collection rulemaking process, which started in 2013, has evolved over time. However, we expect that the bureau, after its seven-year-long rulemaking process, will largely stick with the proposed debt collection rules that it published in May 2019 and the supplemental proposal regarding time-barred debt disclosures that it issued earlier this year. If you wish to obtain additional information about the debt collection rules, please take a look at our previous writings and stay tuned for additional posts in the lead up to the October 2020 release.

Hemp Banking – FinCEN Issues New Guidance Regarding AML/BSA Obligations

By J. Hunter Robinson, Whitt Steineker and James W. Wright Jr. on July 2, 2020 Posted in Anti-Money Laundering, Banking, Cannabis, Compliance, FinCEN

This article was written in collaboration with Jake Fanella and Jessica Caballero at VeriLeaf. VeriLeaf is a modern RegTech platform that optimizes the onboarding, review and ongoing compliance required for high-risk banking markets. VeriLeaf leverages state-specific requirements and the financial institution’s compliance program to streamline qualification, risk assessment, and onboarding of high-risk businesses in markets like CBD/hemp, money services, cannabis, and alcohol. More information can be found here.

On June 29, the Financial Crimes Enforcement Network (FinCEN) issued guidance (the “June guidance”) to “address questions related to Bank Secrecy Act/Anti-Money Laundering (BSA/AML) regulatory requirements” for providing banking services to hemp businesses. By its terms, the June guidance is “intended to enhance the availability of financial services for” hemp businesses – something that has been sorely lacking since hemp (i.e., cannabis containing less than 0.3% THC) was legalized at the federal level under the Agriculture Improvement Act of 2018 (the “2018 Farm Bill,” which we analyzed here).

Broadly speaking, the BSA requires that a financial institution establish an effective “AML Compliance Program,” comply with customer due diligence (CDD) and customer identification program (CIP) obligations, report certain currency transactions, and file a “Suspicious Activity Report” (SAR) when it detects a “known or suspected violation of Federal law or a suspicious transaction related to a money laundering activity or a violation of the [BSA].” In guidance issued on December 3, 2019 (the “December guidance,” which we analyzed here), FinCEN and other federal regulators clarified that financial institutions are not required to file a SAR regarding a hemp customer “solely because” the customer grows or cultivates hemp. The June guidance builds on the December guidance by (1) clarifying a financial institution’s CDD and CIP obligations with respect to its hemp customers, and (2) providing examples of “suspicious activity” that may prompt a financial institution to file a SAR regarding one of its hemp customers.

Customer Due Diligence and Customer Identification Programs

The BSA generally requires that a financial institution incorporate interwoven CIP and CDD procedures into its AML Compliance Program to assist in determining a customer’s true identity, understanding the types of activities in which the customer is likely to engage, and identifying and reporting potential suspicious activities based on the use of the customer’s account. An AML Compliance Program must also include “[a]ppropriate risk-based procedures for conducting ongoing customer due diligence.” This ongoing CDD must include the development of a “customer risk profile” and “monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information,” including “information regarding the beneficial owners of legal entity customers.”

The June guidance makes clear that financial institutions should tailor the customer risk profiles of and CDD for their hemp clients to reflect the unique aspects of the hemp industry. For example, when performing CDD on a hemp customer, a financial institution should verify the customer is complying with the licensing requirements of the jurisdiction in which it is operating. The June guidance states that an institution can “confirm [a] hemp grower’s compliance … by either obtaining (1) a written attestation by the hemp grower that they are validly licensed, or (2) a copy of such license.” Whether additional information is required “will depend on the financial institution’s assessment of the level of risk posed by” the customer. The June guidance provides the following examples of additional information a financial institution could seek: (1) crop inspection or testing reports; (2) license renewals; (3) updated attestations from the hemp customer; or (4) the customer’s correspondence with the applicable state, tribal, or federal licensing authority.

Suspicious Activity Reporting

Suspicious activity monitoring and reporting are essential components of a financial institution’s BSA/AML compliance obligations and are intricately related to the institution’s CDD program. A financial institution must file a SAR if it knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; (ii) is designed to evade BSA regulations; or (iii) lacks a business or apparent lawful purpose “or is not the sort in which the particular customer would normally be expected to engage.”

Like the December guidance, FinCEN’s June guidance states that “financial institutions are not required to file a [SAR] on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.” Here, “solely” is the operative word – financial institutions still must utilize their customer risk profiles and ongoing CDD to determine whether their hemp customers are engaged in “suspicious activity” that warrants a SAR. The June guidance lists examples of such suspicious activity:

“A customer appears to be engaged in hemp production in a state or jurisdiction in which hemp production remains illegal.”
“A customer appears to be using a state-licensed hemp business as a front or pretext to launder money derived from other criminal activity or derived from marijuana-related activity that may not be permitted under applicable law.”
“A customer engaged in hemp production seeks to conceal or disguise involvement in marijuana-related business activity.”
“The customer is unable or unwilling to certify or provide sufficient information to demonstrate that it is duly licensed and operating consistent with applicable law, or the financial institution becomes aware that the customer continues to operate (i) after a license revocation, or (ii) inconsistently with applicable law.”

The June guidance also speaks to a financial institution’s SAR obligations with respect to a customer involved with both federally legal hemp and federally illegal marijuana. If the customer’s hemp and marijuana proceeds are commingled in the same account, the institution must file a marijuana-specific SAR based on “FinCEN’s 2014 Marijuana Guidance,” which we analyzed here. But if the hemp and marijuana proceeds are kept in separate accounts or are separately identifiable, “then the 2014 Marijuana Guidance, including specific SAR filing, applies only to the marijuana-related part of the business.”

Takeaways

Many financial institutions have remained hesitant to provide services to the hemp industry in the 18+ months since the 2018 Farm Bill, due in large part to the perceived burden of incorporating hemp-specific procedures into their AML Compliance Programs. The June guidance may alleviate that burden to an extent by providing additional clarity regarding an institution’s BSA/AML obligations when banking hemp. With many banks remaining on the sidelines, the rewards for those willing to serve the hemp industry could far exceed the costs.

Oregon Passes Mandatory Forbearance Law

By Christy W. Hancock and R. Aaron Chastain on July 2, 2020 Posted in COVID-19 (Coronavirus), Mortgage Releases, Mortgage Servicing, Oregon, State Law Developments

Oregon Passes Mandatory Forbearance Law On June 30, 2020, Oregon joined D.C., Massachusetts, and New York in passing state-specific COVID-19 mortgage assistance programs into law. This new law further confuses the patchwork quilt of compliance issues for mortgage lenders and servicers. Oregon also became the first state to create an express cause of action allowing borrowers to enforce the state law.

The new law mandates that Oregon-regulated banking organizations and mortgage servicers take several steps to assist borrowers suffering hardships related to COVID-19. Key elements of the new law are below.

Forbearances

The law is keyed to the Oregon “emergency period,” which currently spans from March 8, 2020, to September 30, 2020. The governor may extend this time period via an executive order as well.
During the emergency period, a lender may not treat a residential mortgage borrower as in default if the borrower has “notified” the lender that he or she will not be able to make the monthly mortgage payment. No specific information is provided about how such notice shall be given, but the notice needs only be given once during the emergency period and needs only to include an attestation that the failure to pay is a result of loss of income related to the COVID-19 pandemic. This single notification rule may cause problems for servicers who contact their customers frequently to confirm their financial situation while in a forbearance.
Commercial property borrowers, or those with residential property with more than four dwelling units, may also request forbearance during the emergency period. Their notification must include financial statements or other evidence that demonstrates a loss of income related to the COVID-19 pandemic. Such borrowers must also disclose any funds they received from the Paycheck Protection Program.
The language of the statute implies that a borrower can ask for forbearance for any previously missed payments back to March 8, 2020.
A borrower must be allowed to later defer the forborne payments to the “scheduled or anticipated date on which full performance of the obligation is due,” (which should mean maturity, sale, or refinance of the loan) if the parties cannot otherwise agree to modify, defer, or otherwise “mitigate” the loan under several identified portions of Oregon statute Chapter 86, which all relate to loss mitigation and foreclosure.
Unlike the similar law in D.C., Oregon has not made clear whether loans in foreclosure before the emergency period are excluded from the ability to obtain a forbearance. For now, Oregon joins New York and Massachusetts in having that as an open question.
The law requires that servicers provide written notice by mail to all borrowers of their rights to accommodation under the new law. Such notice must be sent no later than 60 days after the law’s effective date (i.e., by August 29, 2020).
The new law is the first we have seen that expressly gives a borrower the right to bring an action for any violation of the law. A borrower is permitted to bring an action in Oregon circuit court to recover their actual damages, court costs, and attorneys’ fees if they suffer an ascertainable loss of money or property due to a lender’s noncompliance with the law.
Notably, Oregon does not carve out government-backed loans that are already subject to the CARES Act. Therefore, Oregon borrowers with GSE-backed loans may claim the right to deferral of their forborne payments, even if they do not qualify for the GSE Deferral Programs. They may also file a legal action seeking to establish their forbearance rights under the state statute even if their rights are governed by the GSE programs.

Foreclosure

The new law imposes a continued moratorium on foreclosure by advertisement and sale, judicial foreclosure, and forfeiture proceedings until the end of the emergency period. During that time, lenders may not foreclose on a trust deed, bring a judicial foreclosure action, or enforce a forfeiture remedy.
Any trustee’s sale or execution of sale that goes forward during the moratorium is rendered void.
For pending foreclosures, a court may not enter a judgment of foreclosure and sale or issue a writ of execution regarding any property. If the foreclosure proceeding was brought during the emergency period (i.e., after March 8), then it must be dismissed without prejudice. If a lender initiated a foreclosure before the effective date of the new law, then all statutory waiting periods are tolled for the duration of the emergency period.

Constitutional Observations

As we noted in our earlier post, state laws requiring forbearances and other borrower relief raise constitutional concerns under the Contracts Clause. Oregon’s Legislature apparently anticipated a Contracts Clause challenge, and included language in the new law specifically asserting that the provisions of the new law “do not undermine a contractual bargain, interfere with a party’s reasonable expectations or prevent a party from safeguarding or reinstating the party’s rights.” The new law even includes an alternative assertion which to implement the significant and legitimate public purpose of responding to the declaration of a state of emergency ….”

Those legislative assertions would be relevant to a Contracts Clause challenge, but they are not dispositive. By mandating forbearance for all mortgage loans and requiring a lender to allow borrowers to add the balance to the end of the mortgage term, Oregon is altering key financial terms of private mortgage contracts. To our knowledge, no state had ever claimed that power before the COVID-19 pandemic. Ultimately, a court will have to decide whether those measures are constitutional.

Supreme Court Holds That Part of CFPB’s Structure Is Unconstitutional

By Jennifer L. Galloway, Brian R. Epling and Christopher K. Friedman on June 29, 2020 Posted in Banking, CFPB, Consumer Protection Act, Dodd-Frank Compliance, Federal Agencies, Supreme Court

Supreme Court Holds That Part of CFPB’s Structure Is Unconstitutional This morning, the United States Supreme Court issued its decision in Seila Law v. CFPB. Authoring the opinion for a five-justice majority, Chief Justice John Roberts wrote that the Consumer Financial Protection Bureau’s (CFPB) single-director configuration, in which the CFPB’s director can only be removed for a specific list of reasons, was unconstitutional. However, the Supreme Court also found the removal provision severable from other parts of Dodd-Frank. This means that the CFPB survives, and that the CFPB director is now removable at will. Although this decision might be described as a victory for the financial services industry – it subjects the CFPB’s director to removal by the incumbent president – it did not go as far as some would have wished because the CFPB itself will survive. Moreover, this decision cuts both ways: Less business-friendly administrations may now elect to remove a CFPB director who takes a more reasonable approach to supervision and enforcement.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, created the CFPB to serve as an independent agency for the purpose of enforcing consumer protection laws in the financial services space. As part of the CFPB’s statutory structure, the bureau is led by a single director who serves for a five-year term and who may be removed only for inefficiency, malfeasance, or neglect of duty. Although this structure purports to safeguard the independence of the agency, it also vests an extraordinary amount of executive power in a single individual who can exercise that power with little to no oversight.

The structure of the CFPB was challenged relatively soon after Dodd-Frank’s enactment. However, many of these early challenges fell short for various reasons, including lack of standing. The Seila Law case, though, did not suffer from the same type of standing defects that plagued earlier efforts. Specifically, in 2017, the CFPB issued a civil investigative demand (CID) to Seila Law to determine whether it had engaged in unlawful debt collection practices. Seila Law elected to challenge the CFPB’s authority to issue the request, and ultimately filed a lawsuit in the U.S. District Court for the Central District of California. The district court rejected Seila Law’s arguments and ordered compliance with the CID, and the Ninth Circuit Court of Appeals affirmed the district court’s decision.

Seila Law successfully petitioned for certiorari in June 2019. Notably, the solicitor general elected not to defend the Ninth Circuit’s decision. Rather, the Trump administration agreed with Seila Law that the CFPB’s structure was unconstitutional. The administration also contended that the provision stating that the CFPB director was removable for cause was severable from the remainder of the statute, meaning that the CFPB could survive a holding that the removal provisions were unconstitutional.

Chief Justice Roberts, writing for the majority, agreed with the administration’s position. First, the Supreme Court considered whether the New Deal-era case of Humphrey’s Executor v. United States, which considered and affirmed the constitutionality of the FTC, counseled that the CFPB’s structure should be upheld. Ultimately, Chief Justice Roberts wrote that the FTC directorate, which consists of several members serving staggered terms and is bipartisan, was fundamentally different from the single-director CFPB. Likewise, the Supreme Court held that the decision in Morrison v. Olson, which approved the independent counsel statute, did not apply because the independent counsel has narrow authority to launch criminal investigations and prosecutions of government officials, unlike the broad investigative and prosecutorial authority vested in the CFPB director.

Ultimately, the Supreme Court determined that the provisions of the CFPB relating to the removal of the director were not rooted in constitutional history or tradition and were therefore not compatible with the structure of the Constitution. Critically, though, Chief Justice Roberts, as well as Justices Alito and Kavanaugh, held that the provisions related to removal of the director could be severed from the Dodd-Frank provisions that created the CFPB. According to Chief Justice Roberts, Congress, in 12 U.S.C. § 5302, made it clear that “if any provision of [Dodd-Frank is] held to be unconstitutional . . . the remainder of this Act [should] not be affected.” Put differently, Chief Justice Roberts stated that “Congress would prefer that we use a scalpel rather than a bulldozer in curing the constitutional defect we identify today.” Justice Thomas, joined by Justice Gorsuch, concurred in part, but wrote separately to explain that he would not reach the severability question and, instead, would have denied the CFPB’s petition to enforce the CID. Justice Kagan, joined by Justices Ginsburg, Breyer, and Sotomayor, concurred with the opinion as it relates to severability, but dissented to the remainder of the decision.

Takeaways

Other than the remand of the decision to determine the effect of the decision on the specific CID issued to Selia Law, the immediate effect of this decision is not clear. We do not anticipate that the decision will have any discernable effect on any current CFPB enforcement actions or outstanding CIDs, however, we will be watching to see what happens on remand. Moreover, CFPB Director Kathy Kraninger will almost certainly remain in office in the near future. However, in the event of a change in presidential administration next year, this decision means that Director Kraninger could be removed before the end of her five-year term. Finally, there are several decisions pending in lower courts that may be affected by today’s decision. We will continue to monitor those cases and will report on any interesting developments.

FTC and NY AG Target Merchant Cash Advance Companies

By Lauren G. Raines, Brian R. Epling and Christopher K. Friedman on June 29, 2020 Posted in Commercial Lending, Federal Agencies, FTC, New York, Small-Dollar Lending, State Law Developments, UDAAP

FTC and NY AG Target Merchant Cash Advance Companies On June 10, 2020, the Federal Trade Commission and the New York Office of the Attorney General filed actions against two merchant cash advance (MCA) companies – RCG Advances and Ram Capital Funding – and individuals associated with both companies in the Southern District of New York and the Supreme Court of the State of New York County of New York. Both the FTC and New York AG assert several claims against the defendants related to the marketing, offering, and collecting of MCA. These lawsuits pose a particularly threatening challenge to the MCA industry, and provide insight into the types of claims state and federal regulators will bring against MCA companies in the future. That being said, the allegations are just that: allegations. We have not yet seen a response by the MCA companies that are defendants in this matter, and as with most litigation, the record can be more nuanced than is suggested by the initial legal complaint. Moreover, as identified below, there are open issues of pure law that may serve as fodder for future motion practice.

Marketing

The primary allegations by the FTC concerning marketing relate to misleading claims. For instance, the FTC alleges that although the defendants’ websites state that the MCA requires “no personal guaranty of collateral from business owners,” the contracts actually contain a “personal guaranty” provision. Also, the FTC alleges that defendants “buried” fees in the contracts “without any language alerting consumers that [the fees] are withdrawn upfront.” Relatedly, the FTC claims that the defendants provide consumers with “less than the total amount promised by withholding various fees ranging from several hundreds to tens of thousands of dollars prior to disbursement.”

Collection Practices

The FTC specifically targets the defendants’ alleged use of confessions of judgment. In a nutshell, a confession of judgment is a document signed by the MCA customer in which the customer accepts liability in the event that the advance is not repaid. This document allows an MCA company to obtain a judgment against the MCA customer without the need for trial or other traditional legal process. Under recent New York legislation, confessions of judgment executed by individuals living outside of New York after August 30, 2019, are unenforceable. According to the FTC, the use of confessions of judgment conflicts with the defendants’ contracts that “provide that Defendants will not hold consumers in breach if payments are remitted more slowly.” Notably, it is unclear whether the FTC’s allegations related to confessions of judgment relate at all to New York’s new law limiting the practice. Moreover, the FTC’s complaint does not state whether these confessions of judgment were executed before or after August 30, 2019, or whether they were executed by non-New York MCA customers. Finally, the FTC also claims that defendants made threatening calls to consumers related to repayment of the advances.

Recharacterization

Along with similar claims and allegations advanced by the FTC, the New York AG contends that defendants “disguise each loan as a ‘Purchase and Sale of Future Receivables,’ but in reality, . . . the transactions a[re] loans.” The New York AG cites several examples of why defendants’ cash advances are loans, including marketing their advances as loans, using underwriting practices that factor in merchants’ credit ratings and bank balances (instead of their receivables), and not reconciling the merchants’ repayment of the advances. According to the New York AG, since the merchant cash advances are actually loans, they violate New York’s civil and criminal usury laws.

Takeaways

Although the FTC’s and New York AG’s complaints do not foreclose the future of merchant cash advances as a viable financial product, the complaints do provide a glimpse into what merchant cash advance companies should expect in a regulated future for the industry. This is not necessarily a problem for an industry that has been largely unregulated. In particular, the New York AG’s complaint related to recharacterization of merchant cash advances as loans provides significant guidance for not only the drafting of the MCA agreement, but also the underwriting and marketing of the MCA. For those in the industry, it is now clear that both state and federal regulatory authorities have taken interest in MCAs and will file actions against perceived bad actors. As such, MCA companies should evaluate their agreements, marketing materials, underwriting processes, and collection techniques to avoid future enforcement actions. Additionally, MCA companies should consider creating or improving existing compliance programs in order to mitigate risk in anticipation of a more-regulated future.

Credit Reporting During the COVID-19 Outbreak: CFPB Issues FAQs for CARES Act Requirements

By Bradley, Christy W. Hancock, R. Aaron Chastain and Grant A. Premo on June 25, 2020 Posted in COVID-19 (Coronavirus), Credit Reporting Industry, Mortgage Servicing

Credit Reporting During the COVID-19 Outbreak: CFPB Issues FAQs for CARES Act Requirements The CFPB recently issued its “Consumer Reporting FAQs Related to the CARES Act and COVID-19 Pandemic,” addressing 10 credit reporting issues. While the FAQs provide some much-needed clarity for furnishers of information and credit reporting agencies, the CFPB left some significant questions unanswered.

Below we breakdown highlights of the FAQs:

Several of the FAQs — including FAQs 1, 2 and 3 — address the CFPB’s April 1, 2020 “Statement on Supervisory and Enforcement Priorities Regarding the Fair Credit Reporting Act and Regulation V in Light of the CARES Act” (which we previously wrote about). In the April 1 statement, the CFPB announced a flexible supervisory and enforcement approach with regard to credit reporting, particularly as it relates to timeframes for dispute investigations.
In FAQ 1, the CFPB confirms its flexible approach but notes that it “expects furnishers and consumer reporting agencies to make good faith efforts to investigate disputes as quickly as possible.” The CFPB goes further in FAQ 2, noting that it is still dedicated to enforcing the Fair Credit Reporting Act (FCRA) during the COVID-19 pandemic. The CFPB explains that it “will consider the circumstances that entities face as a result of the COVID-19 pandemic and entities’ good faith efforts to comply with statutory and regulatory obligations as soon as possible” but “will . . . not hesitate to take public enforcement action when appropriate against companies or individuals that violate the FCRA or any other law under its jurisdiction.” FAQ 3 specifically addresses timeframes for responding to consumer disputes, stating that the CFPB will not give furnishers or consumer reporting agencies an “unlimited time” to respond to the disputes.

Overall, the CFPB’s comments in the FAQs point to a less forgiving approach to enforcement than the April 1 statement. While the CFPB still intends to consider individual circumstances, it clearly expects furnishers and consumer reporting agencies to be making progress in meeting the FCRA’s requirements. What might have been considered “good faith” efforts at the start of the pandemic may not be considered “good faith” three months in.

FAQ 6 addresses the reporting obligations under the CARES Act when a furnisher provides an accommodation to a consumer. The CFPB notes that, where a consumer is given an accommodation and meets the requirements of the accommodation, the consumer’s account status should remain as it was reported prior to the accommodation except where the consumer brings the account current during the accommodation. For example, if the consumer is current before the accommodation, the account should be reported as current during the accommodation; if the account was 30 days delinquent before the accommodation, the delinquency should not be advanced during the accommodation; but, if the consumer brings an account current during an accommodation, the furnisher must report the account as current.
In FAQ 7, the CFPB notes that furnishers should consider all information that is reported on an account for compliance with the CARES Act. That is, the furnisher should ensure that its reporting on all data fields (such as the account’s payment status, scheduled monthly payment, and the amount past due) is updated consistent with the CARES Act.
While FAQ 8 states that using a special comment code “is not a substitute for complying with [the CARES Act’s] requirements,” the CFPB does not address the more fundamental question of whether special comment codes noting an accommodation are permitted at all. Does a furnisher violate the CARES Act by using a special comment code to note that a consumer received an accommodation? The CFPB’s FAQs do not address this. Without further information, it seems reasonable to assume that special comment codes may be used along with reporting an account consistent with the CARES Act but cannot be used alone to achieve compliance.
In FAQ 10, the CFPB notes that the CARES Act’s protections for reporting during an accommodation still apply once the accommodation ends. Accordingly, if the consumer was current before an accommodation and met the requirements of an accommodation, the furnisher cannot report the account as delinquent based on the time period covered by the accommodation after the accommodation ends. Similarly, a furnisher cannot advance the delinquency of a consumer’s account after an accommodation ends based on amounts that went unpaid during the accommodation.

FAQ 10, however, suggests that a furnisher cannot advance a delinquency post-accommodation where a consumer received a forbearance as an accommodation and then fails to make payments after the forbearance period ends. This could lead to a borrower or consumer being in foreclosure while being reported as 30-days delinquent, creating a huge amount of potential confusion given the longer mandatory timeframes for foreclosures in most jurisdictions. For example, consider a scenario where a consumer or borrower of a non-GSE mortgage loan who is current receives a three-month forbearance, with all three payments due at the end of the three-month period as a lump sum payment. After the forbearance period ends, the consumer either fails to make the new monthly payment or fails to repay the forbearance arrearage. Should the consumer be reported as only 30-days delinquent, even though the missed payments stretch over a period of four months? Or can the furnisher consider the fact that the consumer has not made a monthly payment for four months and breached his or her obligation to repay the amount in forbearance and thus report the loan as 120 days delinquent? Application of FAQ 10 may lead to inaccurate and confusing reporting in this situation.

While the CFPB’s FAQs provide some helpful guidance, furnishers are still sure to encounter challenges complying with the CARES Act’s credit reporting obligations, especially as the COVID-19 pandemic continues to cause hardships for consumers.