What constitutes a “reasonable” ability-to-repay determination when making a mortgage loan? Since the CFPB’s Ability-to-Repay rules became effective in 2014, the clearest answer to that question is that making a qualified mortgage (“QM”) complies (or is presumed to comply) with those rules. However, mortgage lenders serving the non-QM market have few specifications for how they must meet that “reasonable” standard. A recent complaint the CFPB filed against a mortgage lender, alleging that the lender failed that standard, does not add much clarity – only that the agency believes the determination should not be based on “unreasonable,” “implausible,” or “unrealistic” analyses.

On January 6, 2025, the CFPB sued a company that offers manufactured home financing. The agency alleges that the company failed to comply with its obligations under the Truth in Lending Act and Regulation Z to make reasonable ability-to-repay determinations when offering those mortgage loans.

The CFPB’s Ability-to-Repay rules provide that mortgage lenders may either make QMs (which have relatively strict underwriting and pricing parameters), or lenders may opt for more underwriting flexibility so long as they consider the borrower’s debt-to-income ratio (“DTI”) or residual income, credit history, and other enumerated factors. Beyond that, the requirements for non-QM lending expressly do not mandate specific underwriting standards – they “do not specify how much income is needed to support a particular level of debt or how credit history should be weighed against other factors.”

In the CFPB’s recent lawsuit, the agency accuses a lender of using a residual income model based in some instances on an estimated amount of monthly expenses, and that the estimated expense model was unreasonable. The agency also asserts that the lender did not appropriately consider the borrowers’ lack of assets, the degree to which the borrowers had debts in collection, or the borrowers’ family size. The agency’s complaint also appears to indicate that rates of delinquencies and defaults were evidence that the lender’s ability-to-repay determinations were unreasonable, and that the lender “ignored clear and obvious red flags.”

While the CFPB implies that the lender should have known that certain borrowers could not reasonably repay their loans, and that the lender’s underwriting principles were therefore inadequate, the CFPB has offered little firm guidance on boundaries for non-QMs. In 2016, the CFPB objected to the use of internet-based income estimates, even though the lenders were primarily relying on the borrowers’ assets, and not their income, to determine repayment ability. In 2017, the CFPB objected to lenders’ consideration of the size of the borrowers’ down payment as an asset for purposes of the required repayment determination. Then, in the course of the agency’s reconsideration of its Ability-to-Repay rules and its QM parameters, the agency addressed reliance on bank statements, commenting that reliance on unidentified deposits into a consumer’s account, without confirmation that the funds constitute income, does not comply with the regulation’s verification requirements. Beyond those admonishments, however, the CFPB has not provided specific guidance for complying with the Ability-to-Repay rules for non-QMs.

As the CFPB raced toward today’s change in administration, the recent lawsuit against the manufactured home lender could fall into the regulation-by-enforcement critique. Based solely on the complaint, we know only that the CFPB found that unreasonable analyses may not lead to reasonable ability-to-repay determinations. Of course, the new administration will decide whether or not to continue pursuing the action.

The US Consumer Financial Protection Bureau is giving no-action letters a second chance. On January 8, 2025, the CFPB issued a policy statement setting forth new procedures for companies to request supervisory and enforcement relief through no-action letters. The policy statement was issued at the same time as a related policy statement setting forth procedures for companies to seek approvals under the CFPB’s Compliance Assistance Sandbox, which would permit companies to rely on certain statutory safe harbor provisions. Both policy statements reestablish programs that had been established in 2019 and rescinded in 2022, following what the CFPB determined were potential abuses and other challenges in connection with the programs. The new policy statements incorporate updates that the CFPB indicates are intended to address those issues and to otherwise improve the effectiveness of the related programs.

For more information, see this Mayer Brown Legal Update.

On January 10, 2025, the Maryland Office of Financial Regulation (“OFR”) issued formal guidance asserting that assignees of residential mortgage loans—including certain “passive trusts” that acquire or obtain assignments of residential mortgage loans in Maryland—must become licensed in Maryland prior to April 10, 2025 unless the assignee is expressly exempt under Maryland law. The guidance, which expands on an April 2024 court ruling that an existing assignee of a home equity line of credit was required to obtain a license as a prerequisite to having legal authority to bring a foreclosure action in Maryland court, raises significant questions regarding how the OFR will apply this new licensing requirement, how assignees of residential mortgage loans will respond to the new guidance, and whether and to what extent this guidance will impact the secondary market for Maryland residential mortgage loans.

Maryland’s existing licensing laws do not expressly require a license to purchase closed and funded residential mortgage loans. In April 2024, a decision by the Appellate Court of Maryland, Maryland’s intermediate appeals court, held that the licensing requirement under Maryland’s Credit Grantor provisions that applies to persons who “make” certain open-end home equity lines of credit loans with interest rates and charges exceeding Maryland’s statutory usury limit must be read in a manner that applies to subsequent assignees of such a loan.  The Appellate Court held in Estate of Brown v. Ward that those provisions require assignees of home equity lines of credit made pursuant to the Credit Grantor provisions to hold (1) a Maryland mortgage lender license, and (2) a Maryland Installment Loan license in order to have the legal right to initiate a foreclosure action on the loan, unless the assignee is exempt from licensing. Even though the express statutory language in the Credit Grantor provisions limits the scope of the licensing requirement to a person “making” loans, which arguably is limited to the originating lender that closes and funds the loan, the Appellate Court concluded that because Maryland case law observes “the principle that an assignee ‘succeeds to the same rights and obligations under the loan agreement as its assignor[,]’” an assignee of a loan made subject to the Credit Grantor provisions is subject to any licensing requirements that applied to the originating lender. Thus, the court held that an assignee (including the statutory trust at issue) was required to obtain both an Installment Loan license and a Mortgage Lender license in order to have legal authority to bring a foreclosure action on a loan made subject to the Credit Grantor provisions.

The Ward decision was limited to home equity lines of credit that were specifically made pursuant to the Credit Grantor provisions and did not address whether a statutory trust, or any other assignee, would be required to obtain a license to acquire a loan that was not made pursuant to the Credit Grantor provisions (although the court did express skepticism about the reasoning of certain federal court decisions that held that out-of-state statutory trusts were not subject to licensing requirements under Maryland’s Mortgage Lender Law). Since the parties did not appear to raise that argument, the Ward decision also did not address whether the court’s conclusion would have been different if the national bank that acted as trustee for the trust in Ward—and which, as a national bank, is exempt from licensing under Maryland law—was the party that acquired and held the loans in its capacity as trustee for the trust. 

On January 10, the OFR issued guidance to “clarify” its position on the application of Maryland’s licensing laws to assignees of residential mortgage loans in light of Ward. Despite previously taking the position that a license was not required to purchase closed and funded residential mortgage loans (and issuing regulations consistent with that position), the OFR’s new guidance adopts the court’s reasoning in Ward that an assignee “succeeds to the same rights and obligations as the assignor,” including licensing requirements that applied to the originating lender. The guidance expands the holding in Ward and asserts that any assignee of residential mortgage loans, including “mortgage trusts,” are required to obtain a license under the Maryland Mortgage Lender Law to “acquire or obtain assignments of any mortgage loans,” regardless of lien position. The Mortgage Lender Law exempts, among other entities, federally-chartered banks, Maryland state banks, and insurance companies that are authorized to do business in Maryland, although state banks that are chartered by a state other than Maryland are only exempt if the bank maintains a branch in Maryland. 

Continue Reading Maryland Guidance Applies Licensing Requirements to Assignees of Residential Mortgage Loans

Maryland regulations governing “shared appreciation agreements” become effective November 25, 2024.  After the Maryland Commissioner of Financial Regulation proposed regulations governing required disclosures for shared appreciation agreements in July 2024, the regulations were finalized on October 30, 2024, with no substantive revisions.

As a reminder, a “shared appreciation agreement” is defined for purposes of Maryland’s Credit Grantor mortgage laws as “a writing evidencing a transaction or any option, future, or any other derivative between a person and a consumer where the consumer receives money or any other item of value in exchange for an interest or future interest in a dwelling or residential real estate, or a future obligation to repay a sum on the occurrence of an event such as: (1) the transfer of ownership; (2) a repayment maturity date; (3) the death of the consumer; or (4) any other event contemplated by the writing.”

Below is a summary of the final regulations governing shared appreciation agreements. 

Continue Reading New Disclosure and Other Requirements for Shared Appreciation Agreements Take Effect in Maryland

On October 22, 2024, the Consumer Financial Protection Bureau (CFPB) marked a significant milestone in the shift towards open banking in the United States with the finalization of its rulemaking on Personal Financial Data Rights. As we discussed in our Legal Update on the October 2023 proposed rule, the final rule provides the long-awaited implementation of Section 1033 of the Dodd-Frank Act, enacted in 2010, and establishes a comprehensive regulatory framework to provide consumers—and their authorized third parties—with rights to receive structured, consistent and timely access to consumers’ personal financial data held by financial institutions and other financial services providers.

The 594-page final rule is intended to allow consumers to access and share data held by banks, credit unions, credit card issuers, digital wallets, payment apps and other financial service providers, with the goal of improving customer choice and increasing competition, while strengthening consumer protections by imposing limitations on authorized third parties’ collection, use and retention of consumers’ data. Financial institutions subject to the final rule could face a variety of compliance, operational and technical challenges as they build out the infrastructure necessary to comply with the final rule. For the largest financial institutions, which include depository institutions with total assets in excess of $250 billion and non-depository institutions that generated at least $10 billion in total receipts in either calendar year 2023 or calendar year 2024, compliance is required by April 1, 2026, with compliance by smaller covered institutions required in phases beginning April 1, 2027, through April 1, 2030.

Continue Reading CFPB Issues Long-Awaited Open Banking Rule; Lawsuit Immediately Filed

For the most recent edition of Supervisory Highlights, the Consumer Financial Protection Bureau focused on examiners’ findings in the auto finance sector. Several of these practices were identified by the CFPB in prior Supervisory Highlights. Many of the CFPB’s concerns relate to trends in the marketing, sales, financing, and refunds related to add-on products like optional vehicle- or payment-protection, and to consumers’ difficulty in cancelling those products or receiving refunds. The Federal Trade Commission and state regulators also have prioritized these areas, and several states have recently passed legislation addressing add-on products (including refunds, cancellation and notification). In several of the findings, the CFPB noted that the failures related to inadequate oversight of service providers, reflecting another recurring theme in CFPB’s compliance management expectations.

The CFPB has framed many of these targeted practices as unfair, deceptive or abusive acts or practices (“UDAAP”), which is consistent with certain of the agency’s recent consent orders or suits related to auto servicing practices.

In response to the findings, the CFPB generally demanded ceasing the allegedly noncompliant practices, developing policies and procedures to ensure compliance going forward, and in some cases refunding amounts to consumers.

Motor vehicle dealers, auto finance companies, servicers and secondary market purchasers of auto loans should take note of these highlighted practices when evaluating their policies and procedures.

Continue Reading CFPB Supervisory Highlights Target Certain Auto Lending and Servicing Practices

In response to the significant ambiguities raised by New Hampshire’s recent amendments to its Motor Vehicle Retail Installment Sales Act — not to mention their immediate effectiveness and draconian liability provisions — the state’s Banking Department has issued several nuggets of guidance.

Recently, the Department sought to address the pressing question of whether persons involved in various financing transactions and securitizations involving motor vehicle retail installment contracts must now obtain a license. As of August 26, 2024, the Department’s web site states that securitization trusts that are established for the purpose of pooling retail installment contracts and reconstituting them into securities are not required to obtain a sales finance company license in the state. While the Department stated further that the licensing requirement will typically be fulfilled by the servicer or other entity responsible for servicing the contracts in the securitization trust, it did not expressly address the licensing obligations applicable in other types of financing transactions or to other types of special purpose entities. We expect that a similar licensing exemption would apply to those transactions and entities, because the servicer would need to be licensed or an exempt entity.

Continue Reading New Hampshire Banking Department Clarifies Licensing for Motor Vehicle Financing

On August 2, 2024, New Hampshire enacted legislation that significantly revises its Motor Vehicle Retail Installment Sales Act, effective July 1, 2024.

Unfortunately, that effective date is not a typographical error. The New Hampshire Banking Department apparently tried during the legislative process to extend the effective date until January 1, 2025, but that extension did not make it into the enacted bill. While the bill was enacted with an effective date of July 1, 2024, the Department attempts at least to provide assurances that the bill became effective upon signing, and not retroactively. Still, the effective date of the amendments is just one of the topics requiring clarification.

Continue Reading New Hampshire Significantly Amends its Motor Vehicle Retail Installment and Sales Finance Company Act

Members of Mayer Brown’s Financial Services team summarize the main takeaways of the CFPB’s proposal to amend the Regulation X mortgage servicing rules, focusing on the proposal to amend the requirements for mortgage servicers to assist borrowers in default who seek payment assistance, the proposed amendments to foreclosure safeguards during that process, and the CFPB’s proposal regarding providing certain communications in languages other than English. Listen here.

On July 18, 2024, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued a proposed interpretive rule (the “Proposed Rule”) purporting to clarify the application of the Truth in Lending Act (“TILA”) and Regulation Z to earned wage access (“EWA”) programs.  Unlike other interpretive rules issued by the Bureau, including the interpretive rule on the application of certain TILA and Regulation Z “credit card” provisions to buy now, pay later products, the Proposed Rule is styled as a proposal and request for comment that will not become effective until after the CFPB considers comments and issues a final interpretive rule.  In this blog post, we discuss the important features of the Proposed Rule.

Continue Reading A New Play in EWA?  CFPB Issues Proposed Interpretive Rule On Earned Wage Access