CFPB Releases Small Business Lender Compliance Cost Survey to Aid in Dodd-Frank 1071 Rulemaking

CFPB Releases Small Business Lender Compliance Cost Survey to Aid in Dodd-Frank 1071 RulemakingRecently, the CFPB released an online survey designed to collect information from “institutions engaged in small business financing” regarding one-time costs of compliance with Dodd-Frank 1071. Section 1071 of the Dodd-Frank Act, which we have discussed in detail on this blog, creates robust reporting requirements for lenders engaged in lending to women-owned, minority-owned, and small businesses that are similar to requirements created by the Home Mortgage Disclosure Act (HMDA). The CFPB has made several recent statements that shed light on its rulemaking timeline. This survey, which expires on October 1, 2020, provides yet another indication that the CFPB is pressing ahead with its implementation of Rule 1071, and any institution engaged in financing small businesses should consider submitting a survey response.

The CFPB’s survey “is part of an overall effort in the consideration of costs and benefits in the implementation of Section 1071 of the Dodd-Frank Act.” Importantly, the CFPB notes that this will be the main opportunity for industry stakeholders to give the CFPB information about cost-of-compliance with Section 1071 as it engages in policy decisions related to enforcement of 1071.

Interestingly, the CFPB’s survey collects information related to several issues that have already proven to be controversial. For instance, how the CFPB will define “small business” for the purpose of Rule 1071 compliance is an open question, and the issue received considerable time during the November 2019 Dodd-Frank 1071 Symposium. The survey delves into this issue by asking respondents how their institutions define “small business” – either by using the Community Reinvestment Acts or the Small Business Administration’s definitions, or through an in-house definition based on the borrower’s revenue, loan amount, number of employees, NAICS code, or some other metric.

Another interesting aspect of the survey appears at the very beginning, where the CFPB asks respondents to self-identify. Specifically, the survey contains an option for “[i]nstitution[s] focused on offering Merchant Cash Advances.” However, a merchant cash advance is, by its very nature, not a loan. As such, it is doubtful whether merchant cash advance companies would be subject to the requirements of Dodd-Frank 1071. Nevertheless, this has not prevented commenters from urging the CFPB to extend the reach of Section 1071 to merchant cash advance and factoring companies.

In general, the survey asks a broad range of questions in an apparent effort to understand (1) what types of data potential Section 1071 reporters are currently collecting, and (2) how much money it will cost potential reporters to come into compliance with the final version of the rule. While all interested parties will have an opportunity to provide commentary to the CFPB during the formal notice and comment period in the coming months, this survey gives stakeholders an early opportunity to let the CFPB know how costly Section 1071 compliance will be for their respective institutions. Moreover, this should also serve as an important prompt for institutions to begin having internal discussions about developing data collection policies and procedures for business lending. We will continue to monitor the CFPB for developments on the implementation of Dodd-Frank 1071.

Bad News for Sixth Circuit Creditors as Court Adopts Expansive Definition of Autodialer with Supreme Court Review Pending

Bad News for Sixth Circuit Creditors as Court Adopts Expansive Definition of Autodialer with Supreme Court Review PendingThe Sixth Circuit has weighed in on an issue with the power to change the course of TCPA litigation nationwide: What constitutes an automatic telephone dialing system, more commonly known as an autodialer? Since the FCC’s 2015 order, which stated that any device with the potential ability to generate a list of numbers was an autodialer, was struck down by the D.C. Circuit as overly broad, the interpretation of “autodialer” has been left to the courts, with two competing interpretations emerging. The first approach, adopted by the Second Circuit and the Ninth Circuit, broadly interprets “autodialer” to be any equipment capable of storing and subsequently dialing a list of stored numbers. The second, much narrower interpretation, adopted by the Third, Seventh, and Eleventh Circuits, requires that the autodialer system itself actually have the ability to randomly or sequentially generate the telephone numbers it calls.

In a surprise decision last week, the Sixth Circuit (in a 2-1 split) sided with the Second and Ninth Circuits in Allan v. Pennsylvania Higher Education Assistance Agency. The statutory definition of an autodialer is as follows: “[E]quipment which has the capacity – (A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” As a matter of statutory interpretation, the majority held that an autodialer is any system that can create and store a list of numbers and then dial those numbers from the list. The specific autodialer at issue in Allan was the Avaya Proactive Contact dialer, which is a popular dialing system among creditors that lacks the ability to randomly or sequentially generate random lists of numbers. In other words, the Avaya system would be considered an autodialer in the Second, Sixth, and Ninth Circuits, but not in the Third, Seventh, and Eleventh Circuits.

The majority addressed the concerns of the Court of Appeals for the D.C. Circuit (that the FCC’s order was overly broad because it made any device with the potential to store and dial from a list of numbers an autodialer) by explaining that autodialers must actually be used to store and dial numbers, as opposed to just hypothetically having that capacity.

Interestingly, the Allan majority relied heavily on the fact that the TCPA contains various exceptions, one of which is the prior consent of the called party. If there is prior consent, the majority reasoned, the calling party would have this person’s number stored somewhere, as opposed to randomly generating numbers. Stated differently, the existence of the exception implies that the TCPA applies to devices autodialing sets of stored numbers; if the stored numbers were randomly generated, prior consent would be an impossibility.

Allan is hardly the end of the road on this issue. For starters, the parties in Allan may still seek en banc review by August 12. But more importantly, the Supreme Court granted a certiorari petition on July 9 to presumably resolve the circuit split and decide this issue once and for all. Nonetheless, that may prove to be little comfort to debt collectors in the Sixth Circuit, as a decision is not expected on the pending Supreme Court case until next spring. In the meantime, creditors operating nationwide should continually review their policies, procedures, and litigation strategy on a regional basis to effectively navigate the TCPA minefield.

State Attorneys General Challenge OCC Madden Fix

State Attorneys General Challenge OCC Madden FixLast Wednesday, the attorneys general of Illinois, California, and New York filed a lawsuit in the United States District Court for the Northern District of California challenging the Office of the Comptroller of the Currency’s proposed “Madden Fix.” This proposed rule, which we have discussed in detail, is designed to resolve some of the legal uncertainty introduced in 2015 by the Second Circuit Court of Appeals’ decision in Madden v. Midland Funding by confirming the “valid when made” doctrine. Although not unexpected as Illinois, California, and New York joined 19 other states in filing a comment opposing the OCC’s proposal, this lawsuit represents the first major challenge of a rule that is expected to bring long-awaited certainty to the secondary credit market, bank-partnership, and fintech spaces.

The OCC’s proposed rule, like its counterpart issued by the FDIC (which is not a subject of the pending lawsuit), is relatively simple. The proposal amends 12 C.F.R. 7.4001 and 12 C.F.R. 160.110 to state that “[i]nterest on a loan that is permissible [under either 12 U.S.C. § 85 or 12 U.S.C. § 1463(g)(1)] shall not be affected by the sale, assignment, or transfer of the loan.” The AGs’ legal complaint challenges this amendment on both procedural and substantive grounds.

First, the complaint alleges that the OCC neglected to comply with procedures required by the Administrative Procedures Act, as well as procedures relating to the preemption of state law under Title X of the Dodd-Frank Act. Second, the complaint asserts that the OCC lacks authority to issue the rule under the National Bank Act (NBA) because the rule allegedly purports to govern the terms and conditions of loans held by non-banks. Finally, the AGs challenge the proposed rule as generally arbitrary and capricious. Notably, the AGs’ complaint contains a broad-side attack against the valid when made doctrine itself, contending that the doctrine lacks both the historical bona fides and practical benefits asserted by its defenders.

Of course, we anticipate that the OCC will contest these characterizations, especially given the existence of case law stretching back to the early 19th century that lays the groundwork for the valid when made doctrine. Moreover, existing research suggests the Madden decision negatively affected access to credit within the states comprising the Second Circuit (Connecticut, New York, and Vermont). Additionally, the AGs’ argument that the OCC lacks authority to confirm the valid when made doctrine is undermined by the NBA’s express grant of authority allowing nationally chartered banks to enter contracts, sell loan contracts, and “exercise . . . all such incidental powers necessary to carry on the business of banking.” Taken together, there is fertile ground for the OCC to mount a robust defense of this lawsuit.

Nevertheless, this lawsuit means that there will be continued legal uncertainty surrounding the fintech industry, the bank partnership model of lending, and the general assignment of loans within the state in the Second Circuit. Fortunately, there are practices available to reduce the risk posed by Madden and its effective “cousin:” the True Lender doctrine. Banks, fintechs, and other interested parties should continue to structure deals and partnerships in ways that reduce the risk of a challenge under Madden. We will continue to monitor this litigation for developments and will keep a lookout for additional relevant litigation.

The Rapidly Changing Fair Housing Landscape: HUD Rescinds Obama-Era AFFH Fair Housing Rule

The Rapidly Changing Fair Housing Landscape: HUD Rescinds Obama-Era AFFH Fair Housing RuleThe Trump administration recently announced that it has rescinded Affirmatively Furthering Fair Housing (AFFH), an Obama-era regulation intended to ensure compliance with the Fair Housing Act (FHA). AFFH requires cities and towns to analyze local housing data for discriminatory patterns and submit plans to address those issues in order to continue receiving federal funding. This rescission represents a major rollback of a fair housing enforcement mechanism.

This rescission is not altogether unexpected: HUD effectively suspended the rule in January 2018, when it issued a notice delaying the requirement that municipalities submit proposed plans until after October 31, 2020. The AFFH will be replaced with the “Preserving Community and Neighborhood Choice” rule, which defines fair housing much more broadly as “affordable, safe, decent, free of unlawful discrimination, and accessible under civil rights laws.” Most importantly, the new rule would allow municipalities the ability to self-certify compliance.

The rollback of the AFFH, and its replacement, is part of the current administration’s efforts to ease regulatory burdens on certain stakeholders. For instance, and as we have previously discussed, HUD has proposed a rule that may make it more difficult for litigants to make a prima facie case of disparate impact housing discrimination. Despite opposition from consumer and some industry members, it appears that HUD is moving forward with a final rule implementing this change.

Despite this trend, the fact remains that we are in an election year, and there’s a chance that a new administration will take office in January 2021. And while it would take time and effort for a Joe Biden-era HUD to reverse some of these trends through formal rulemaking, there are already indications that political will exists to do so. For instance, Rep. Alexandria Ocasio-Cortez has introduced amendments to a pending appropriations bill restricting the use of federal funds to support HUD’s implementation of the new proposed rules, which would effectively nullify them.

Given the current election-year uncertainty, it remains to be seen whether the new disparate rule will go into effect, and if so, how long it will last. In the meantime, lenders and other stakeholders should continue to monitor the rapidly evolving fair housing and fair lending landscape to ensure compliance with federal regulations and to anticipate upcoming changes. We will also continue to monitor the space and provide timely updates.

Small Dollar Rule Stay Requested to Be Lifted in Recent Joint Status Report

Small Dollar Rule Stay Requested to Be Lifted in Recent Joint Status ReportWith the Supreme Court’s recent decision in Seila Law and Director Kathleen Kraninger’s ratification of the payment provisions of the Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule (the “Small Dollar Rule”), the CFSA and the CFPB have submitted a joint status report in the stayed case pending in the Western District of Texas. While both the CFSA and the CFPB requested to lift the litigation stay in the status report, they fundamentally disagree on how the case should proceed, on the stay related to the compliance date of the payment provisions of the Small Dollar Rule, the substantive impact of Seila Law, and the ratification of the Small Dollar Rule.

As background on the case, in April 2018, the CFSA filed an action against the CFPB related to the Small Dollar Rule, seeking primarily to set aside the Small Dollar Rule based on the unconstitutional structure of the CFPB. After the CFPB announced that it planned to engage in rulemaking to alter the Small Dollar Rule, the court stayed the case and requested that the parties provide periodic updates. Additionally, in a subsequent order, the court delayed the compliance date for the Small Dollar Rule previously set for August 19, 2019, and the stays have remained in place to date.

On July 24, 2020, the parties filed a joint status report, which detailed important updates potentially impacting the case – namely, the Seila Law decision and the revised Small Dollar Rule. In the joint status report, both parties agree to lift the stay of the litigation, however, the CFPB takes the position that the “ratification cures any constitutional defect with the 2017 Payday Rule.” As such, the CFPB indicates that it plans to proceed with filing a motion to also lift the stay related to the compliance date for the payment provisions of the Small Dollar Rule. The CFSA disagrees that the ratification cured the constitutional defects in the rulemaking process and plans to oppose the lifting of the stay on the compliance date due to the irreparable injury that it will cause. Finally, the CFPB and the CFSA both indicate that the matter can be resolved on cross-motions for summary judgment but did not agree on the briefing schedule for the motions.

Takeaways

As indicated by the proposed order submitted by the parties, they are only seeking to lift the stay to proceed with the case. With respect to the stay of the compliance date, the CFPB intends to address it separately in a motion to lift the stay. While there is no way to tell how the court will rule regarding the compliance date, the court will likely focus on when the case can ultimately be resolved, especially in light of both parties agreeing that the case can be resolved on cross-motions for summary judgment. However, just as important is the fact that the CFPB under Director Kraninger clearly intends to push forward with implementation of the payment provisions of the Small Dollar Rule as quickly as possible. Accordingly, for those that the Small Dollar Rule impacts, it would be wise to start preparing for the rule to go into effect.

OCC Proposes Clarification to True Lender Doctrine

OCC Proposes Clarification to True Lender DoctrineEarlier this week, the OCC released a proposed rule designed to address the “true lender” doctrine, a legal test utilized by courts and regulators to determine whether a bank or its non-bank partner is the actual lender in a credit transaction. This doctrine has led to uncertainty in the fintech and bank-partnership spaces, in large measure because of the lack of uniformity between jurisdictions and the subjective nature of the tests used to determine the true lender. As currently written, the proposed rule substantially simplifies the test: A national bank — rather than its non-bank partner — is the lender if either (1) it is named in the loan agreement or (2) funds the loan. The OCC’s proposed rule, which comes on the heels of the OCC and FDIC’s recent Madden fix rules, represents a continuation of the agency’s push to issue rules that encourage innovation in ways that increase access to credit.

True lender doctrine issues arise when banks and non-bank entities enter partnerships to offer loan products. Under the typical iteration of this model, the non-bank partner may market loans, identify potential borrowers, and collect applications while the bank will underwrite and originate the loan. The bank will then assign a majority stake in the loan to either the bank partner or a third party. There are substantial benefits to this model, including the ability to reach a more-diverse, often unbanked clientele, the ability to avoid some states’ licensing requirements, and the ability to benefit from the uniformity of interest rate preemption under the National Banking Act (NBA).

Banks’ ability to import their home-state usury law through NBA interest rate exportation has drawn scrutiny from multiple quarters, including Congress. Moreover, regulators and private litigants in several states have filed complaints in their respective state courts arguing that a bank’s non-bank partner violated state usury laws. For instance, in Meade v. Marlette Funding, LLC, the administrator of Colorado’s Uniform Consumer Credit Code (UCCC) alleged that Marlette Funding used its relationship with a New Jersey chartered bank to skirt Colorado usury laws. Specifically, the administrator argued that Marlette, rather than the bank, was the “true lender” because, among other things, it chose the loan recipients, raised capital to make the loans, and was required to indemnify its bank partner. More problematically still, there is a growing body of diverse, and sometimes inconsistent case law regarding the true lender doctrine. According to the OCC’s Notice of Proposed Rulemaking (NPRM), the current standards “increase the subjectivity in determining who is the true lender and undermine banks’ ability to partner with third parties to lend across jurisdictions on a nationwide basis.”

Against this backdrop, the OCC’s proposed rule is designed to provide a uniform standard to determine whether a bank or the bank’s partner is the “true lender” in a particular credit transaction. Specifically, the OCC proposes two separate tests to determine the identity of the true lender. First, if the bank is named on the loan agreement as of the date of the loan’s origination, then the bank is the true lender because “the bank has elected to subject itself to the panoply of applicable Federal laws and regulations … governing lending by banks.” Second, a bank that funds the loan as of the date of origination is also deemed the true lender because “it has a predominant economic interest in the loan …” Moreover, under the proposed rule, the determination of the true lender does not change even if the bank transfers the loan.

In addition to increased certainty regarding the identity of the true lender, the proposed rule may also provide banks with regulatory clarity. For example, if the bank is the true lender, then the bank is responsible for ensuring that loans are made “in a safe and sound manner and in accordance with applicable laws and regulations, even if the loan is made in the context of a third party partnership and even if the bank’s partner is the customer-facing entity.”

Taken together, the OCC’s proposed rule is a positive step that should encourage innovation in the lending space, and increase access to credit and uniformity across different markets. On the other hand, the proposed rule would apply only to nationally chartered banks governed by the OCC, so there is still work to be done. The OCC is accepting comments on the proposed rule until September 3, 2020. We will continue to monitor this rulemaking for any developments.

Eleventh Circuit Holds Plaintiffs Must Have Incurred Concrete Injury for Article III Standing to Sue under FDCPA

Eleventh Circuit Holds Plaintiffs Must Have Incurred Concrete Injury for Article III Standing to Sue under FDCPAUnder the Fair Debt Collection Practices Act (FDCPA), debt collectors are prohibited from using “false, deceptive, or misleading representation[s]” in connection with collecting debts. If a debt collector violates the FDCPA, the debt collector may be liable in the amount of the actual damages incurred by a debtor resulting from the FDCPA violation. Further, additional statutory damages may be imposed against debt collectors for FDCPA violations.

In Trichell v. Midland Credit Management, Inc. the Eleventh Circuit recently considered two cases involving the issue of whether consumers have standing to sue a debt collector under the FDCPA where the debt collector’s correspondence was allegedly misleading, but the consumers were not actually misled.

The Lower Court Cases

In the first case, the debt collector, Midland Credit, sent three letters to plaintiff John Trichell regarding repayment plans for Trichell’s debt. The letters included the following disclaimer: “The law limits how long you can be sued on a debt and how long a debt can appear on your credit report. Due to the age of this debt, we will not sue you for it or report payment or non-payment of it to a credit bureau.” Notwithstanding this disclaimer, Trichell sued Midland under the FDCPA, asserting that the collection letters were misleading by suggesting Midland could sue Trichell for the stale debt or report its nonpayment to credit bureaus.

In the second case, Midland sent plaintiff Keith Cooper a similar letter regarding repayment of Cooper’s credit card debt. The letter sent to Cooper included a disclaimer identical to the one in the letters sent to Trichell. Cooper also sued Midland under the FDCPA, asserting that the letter was misleading because it did not include a warning that, if Cooper made a partial payment on the stale debt, such payment could constitute a new promise to pay and would reset the statute of limitations.

The district courts dismissed both Trichell’s and Cooper’s cases against Midland for failure to state a claim.

The Eleventh Circuit Appeal

In taking up appeals of both cases against Midland, the Eleventh Circuit in Trichell v. Midland examined the issue of whether Trichell and Cooper enjoyed Article III standing to sue. Article III courts have jurisdiction over cases or controversies where standing is comprised of (i) an injury in fact suffered by the plaintiff, (ii) where the defendant caused such injury, and (iii) a decision in favor of the plaintiff will redress the injury. An injury in fact is comprised of an attack on a legally protected interest that is actual and concrete, rather than merely speculative or hypothetical. Further, even if a statute, such as the FDCPA, provides a statutory basis to sue, injury in fact must nonetheless be established for Article III standing to exist.

In their respective complaints, Trichell and Cooper failed to plead any concrete injuries they incurred as a result of the letters sent by Midland, such as payments made in response to the letters or wasted time or money in determining whether to make such payments. Rather, Trichell and Cooper asserted that the letters created a risk that unsophisticated borrowers might make payments on stale debt after receiving such letters.

Joining the Seventh and D.C. Circuits, the Eleventh Circuit held that such risk did not constitute an injury in fact because Trichell and Cooper themselves were not harmed by the letters. The Eleventh Circuit further noted that any risk the letters could have caused Trichell and Cooper had dissipated by the time they filed suit against Midland.

Trichell and Cooper also asserted that the FDCPA creates a right under which consumers must receive truthful information from debt collectors. Trichell and Cooper argued that any violation of that right constitutes an injury in fact. Rejecting this argument, the Eleventh Circuit held that, because Trichell and Cooper merely received the misleading letters but suffered no injury as a result, Trichell’s and Cooper’s alleged informational injuries were insufficient to confer Article III standing.

What’s Next?

Debt collectors should always take the necessary steps to ensure their debt collection activity does not run afoul of the FDCPA or other applicable laws. Notwithstanding the foregoing, in defending against claims asserting violations of the FDCPA, debt collectors may raise lack of Article III standing as a defense when plaintiffs fail to assert concrete injuries caused by alleged FDCPA violations. Even if plaintiffs allege concrete injuries in their complaints such that these claims are not disposed of at the motion to dismiss stage, plaintiffs still will need to establish concrete injury to prevail on the merits.

OCC, FDIC Issue Long-Awaited Valid-When-Made “Madden Fix”

OCC, FDIC Issue Long-Awaited Valid-When-Made “Madden Fix”Recently, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued final rules designed to resolve the uncertainty created by the Second Circuit Court of Appeals’ decision in Madden v. Midland Funding, 786 F.3d 246 (2d Cir. 2015). In Madden, the court called into doubt the valid-when-made doctrine, a legal concept that — for over a century — has facilitated the nationwide banking system by allowing banks to sell, assign, or transfer loans freely. Unsurprisingly, there is widespread industry support for a “Madden Fix” by Congress or the prudential bank regulators, and the OCC and FDIC rules are seen as a welcome first step.

Both the OCC and FDIC’s new rules try to preserve the valid-when-made doctrine. Under this doctrine, a loan that is valid when it is created remains valid when it is sold, even if the purchaser of the loan resides in a jurisdiction where the loan would otherwise be invalid. This rule is fundamental for the proper functioning of banks and lending institutions. First and foremost, the valid-when-made doctrine allows banks to freely sell and transfer loans to other banking institutions and investors. As such, the doctrine encourages banks to exercise healthy balance-sheet practices and increases the availability of credit.

 In 2015, though, the Second Circuit’s decision in Madden which has been discussed in a previous blog post — introduced significant uncertainty about the applicability of the valid-when-made doctrine. The most direct and obvious consequence is that Madden has made it difficult for banks to sell loans to non-bank entities in the Second Circuit states of New York, Connecticut, and Vermont. One study suggests that the decision has led to a decrease in the availability of credit in those states. Madden has also proven to be a challenging hurdle for the emerging FinTech industry and the bank-partnership model, whereby banks partner with non-bank financial technology firms to offer credit to a wide variety of consumers in all 50 states. This model depends on the securitization of loans, and the ability of national and state-chartered banks to sell their loans to non-banks.

Although no other federal circuit has adopted Madden, state regulators outside of New York, Connecticut, and Vermont have made Madden-type arguments in lawsuits filed against FinTechs and other entities engaged in bank partnerships. As a result, non-bank investors and FinTech businesses have had to grapple with Madden when developing credit products even if they are not situated or doing business in Second Circuit states.

Against this background, the OCC and FDIC have issued final rules designed to affirm the valid-when-made doctrine and reintroduce some certainty into the lending market. Specifically, the OCC’s rule, which was made final on May 29, is fairly simple. The OCC amended 12 C.F.R. 7.4001 and 12 C.F.R. 160.110 to state that “[i]nterest on a loan that is permissible [under either 12 U.S.C. § 85 or 12 U.S.C. § 1463(g)(1)] shall not be affected by the sale, assignment, or transfer of the loan.” In other words, the OCC has amended its regulations to re-state the valid-when-made doctrine. According to Brian Brooks, Acting Comptroller of the Currency, the new rule “supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the ‘Madden’ decision” and “allows secondary markets to work efficiently and to serve their essential role in the business of banking and helping banks access liquidity and alternative funding, improve financial performance ratios, and meet customer needs.”

Likewise, the FDIC’s final rule, published on June 25, adopts 12 C.F.R. part 331, containing similar language to the OCC’s final rule. The rule is based upon section 27 of the Federal Deposit Insurance Act (FDI) (12 U.S.C. § 1831d), which allows qualifying out-of-state banks to export the interest rate limit of their home states while lending in other states. The new rule confirms that, under section 27, the permissible interest on a loan is determined when the loan is made and will not be affected by the sale, assignment, or other transfer of the loan. For consistency, the FDIC intentionally patterned its final rule after the OCC’s final rule. FDIC Chairman Jelena McWilliams said in a statement, “The final rule accomplishes three important safeguards for the stability of our financial system by promoting safety and soundness, solidifying the functioning of a robust secondary market, and enabling the FDIC to fulfill its statutory mandate to minimize risk to the Deposit Insurance Fund (DIF).”

Unsurprisingly, not everyone is pleased with the new rules. During the notice and comment period, the OCC and FDIC received cumulatively around 120 comments. While they received many positive comments, some commenters wrote in opposition and argued that neither the OCC nor the FDIC had the statutory authority to issue rules on the subject. With regard to the OCC’s rule, they argued specifically that 12 U.S.C. 85 and 1463(g) unambiguously apply only to the interest a bank may charge, and the OCC cannot interpret the statutes contrary to that unambiguous interpretation or the result in Madden. Similarly, opponents of the FDIC’s rule argued that section 27 of the FDI Act makes no mention of a state bank’s ability to assign loans. Therefore, according to opponents, the FDIC could not interpret section 27 to allow state banks to sell to non-banks loans that the non-banks could not otherwise originate themselves (i.e., the loans would be invalid if made by the non-banks). Finally, some commentators also questioned the need for such a rule in the first place, contending that there is no real evidence that banks are unable to sell their loans in a post-Madden world. Moreover, some critics added that rules designed to overcome Madden would encourage predatory lending. Given this level of opposition, we would not be surprised to see one or more legal challenges to the final rules.

Taken together, the OCC and FDIC rules reduce but do not eliminate the uncertainty created by Madden. Apart from the uncertainty about the OCC or FDIC’s authority, and the possibility of legal challenges, the rules themselves are quite narrow and do not address many of the pressing issues facing the FinTech and bank partnership space. For instance, the OCC and FDIC rules do not overturn the main holding in Madden that non-bank debt purchasers are not entitled to preemption and rate exportation under the National Bank Act (NBA).

Second, and as noted by several commenters, the rules do not address the true lender doctrine — a legal concept utilized by regulators and plaintiffs to argue that a non-bank entity partnering with a bank to facilitate the offering of credit is the “true lender,” and is therefore subject to licensure and usury laws. Although not directly related to Madden, the true lender doctrine is often utilized in concert with Madden arguments, and has introduced a similar level of uncertainty in the FinTech and bank-partnership space. In recent remarks, Acting Comptroller Brooks indicated that the OCC would soon be issuing a proposed rule to address the true lender issue.

Finally, a recent Colorado state court ruling issued after the OCC finalized its rule (but before the FDIC published its rule) casts further doubts upon the rule’s applicability and highlights the need for additional action to ensure the continued viability of the valid-when-made doctrine. The ruling in Martha Fulford, Administrator, Uniform Consumer Credit Code v. Marlette Funding, LLC et al., involved section 27 of the FDI Act. Colorado’s administrator for the Uniform Consumer Credit Code challenged transactions involving a New Jersey state-chartered bank originating and assigning loans in Colorado to non-bank partners. The state court found the reasoning in Madden with respect to the NBA to be persuasive and applied Madden to its own analysis of section 27 to conclude that the non-bank partners could not take advantage of the higher rates upon transfer. Acknowledging proposed interpretations by both the OCC and the FDIC to the contrary (but not acknowledging the OCC’s final rule), the court concluded that “the rule proposals are not yet law and the Court is not obligated to follow [the agencies’] proposals.”

Ultimately, Madden will not be “fixed” until Congress acts to overturn the decision through legislation or the Supreme Court opines on the matter. Either contingency appears to be a long way off, so the best we can hope for in the short-term is action by the prudential bank regulators. The OCC and FDIC have given the industry a new tool in its legal arsenal when facing Madden arguments. We will continue to monitor the space for new developments.

New Mortgage Licensing Requirements Come to the West

New Mortgage Licensing Requirements Come to the WestDuring 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

CFPB Rescinds Small Dollar Rule Ability to Repay Provisions However Payment Provisions RemainOn 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.

For more details on this CFPB update, signup here to attend a webinar presented by Jennifer Galloway, Preston Neel, Michael Gordon and Brian Epling.

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