A United States Magistrate Judge for the United States District Court, Western District of New York, today issued his report and recommendation on the defendants’ motion to dismiss in Petersen et al. v. Chase Card Funding, LLC et al., No. 1:19-cv-00741 (W.D.N.Y. June 6, 2019). The Magistrate Judge recommended dismissal of both the plaintiff’s usury and unjust enrichment claims on preemption grounds, stating that “the preemption analysis boils down to this: does the application of New York’s usury statutes to these defendants ‘prevent’ or ‘significantly interfere’ with Chase USA’s power to sell or assign the receivables generated by its credit card accounts?” The Magistrate Judge answered this question in the affirmative, reasoning that “since applying New York’s usury statutes to defendants would prevent Chase USA’s ability to sell or assign the receivables from its credit card accounts, they are preempted.”

The Magistrate Judge relied on Supreme Court and Second Circuit precedent as to what constitutes a “sale” and an “assignment” citing case law holding that “[i]t is essential that . . . the seller’s right of property must pass to the purchaser” MacDonald v. Commissioner of Internal Revenue, 76 F.2d 513, 514 (2d Cir. 1935) (emphasis added by Magistrate Judge). The Magistrate Judge concluded that “[i]f Chase USA can receive interest exceeding state usury limits but defendants cannot, then Chase USA’s right of property in the receivables has not passed to them, and there has been no sale.” The Magistrate Judge similarly analyzed Chase USA’s right to assign the receivables.

The lawsuit had been filed against Chase Card Funding LLC and Chase Issuance Trust, special purpose entities in the JPMorgan Chase Bank sponsored credit card securitization program, and Wilmington Trust Company, as trustee of Chase Issuance Trust. The putative class action was brought by several New York residents with credit card accounts originated by JPMorgan Chase Bank (which is not named as a defendant), who allege that JPMorgan Chase Bank securitized their credit card receivables in Chase Issuance Trust. The complaint contends that the defendants are required to comply with New York state’s usury law under the United States Court of Appeals for the Second Circuit decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (June 27, 2016) because they are non-bank entities that are not entitled to the benefits of federal preemption.¹

The plaintiffs will have until February 5, 2020 to file any objections to the Magistrate Judge’s report and recommendation (unless otherwise ordered by the district judge).

¹ As reported in the Chase Issuance Trust, Form 10-D, filed July 16, 2019.

According to the Mortgage Bankers Association, the Consumer Financial Protection Bureau intends to revise its Qualified Mortgage definition by moving away from a debt-to-income ratio threshold, and instead adopting a different test, such as one based on the loan’s pricing. The CFPB also apparently indicated it may extend, for a short time, the temporary QM status for loans eligible for purchase by Fannie Mae or Freddie Mac (the “Patch”).

The MBA reports that CFPB Director Kathy Kraninger informed Congress of the agency’s plans for its highly-anticipated QM rulemaking, expected this spring (by late May, but perhaps earlier). In July of last year, the CFPB issued an advance notice of proposed rulemaking to begin addressing the Patch expiration (scheduled for January 2021). For the past five years, the Patch has resulted in a significant presence by the government-controlled enterprises in connection with higher-DTI loans (i.e., those over 43%). The CFPB has insisted it would allow for a “smooth and orderly transition” to the Patch expiration, to give the industry time to respond. According to the recent report, the CFPB will in fact seek to extend the Patch for “a short period.”

The CFPB indicated that a brief Patch extension also is warranted because of other changes the agency intends to make to the general QM definition. Most agree that the general QM, and its reliance on a DTI threshold and the tight income standards in Appendix Q, has unduly restricted affordable credit to worthy borrowers. The CFPB apparently told Congress it intends to move away from its DTI threshold, which could also mean the demise of Appendix Q.

The CFPB may instead adopt a pricing threshold to distinguish QMs from non-QMs going forward. The CFPB otherwise distinguishes loans with an annual percentage rate that exceeds the average prime offer rate by 150 basis points. The CFPB could decide to use that threshold to define QMs in the future.

CFPB also may be considering a common-sense, results-oriented approach – by providing that loans that do, in fact, experience timely payments would be deemed to comply with the ability-to-repay requirement.

While we cannot be certain about the CFPB’s next move until the agency finalizes a rule, the changes described above would afford QM protection to higher-DTI/lower-cost loans that lack certain product features, likely opening those loans to the private capital markets. By changing the QM marketplace, the changes also would, of course, affect the size and nature of the non-QM market. As we previously noted, those changes also could affect the types of loans exempt from credit risk retention in securitizations (QRMs).

The agencies responsible for the securitization credit risk retention regulations and qualified residential mortgages (“QRMs”) are asking for public input as part of their periodic review of those requirements. Comments on the review are due by February 3, 2020.

Five years ago, in response to the Dodd-Frank Act, an interagency final rule provided that a securitizer of asset-backed securities (“ABS”) must retain not less than five percent of the credit risk of the assets collateralizing the securities. Sponsors of securitizations that issue ABS interests must retain either an eligible horizontal residual interest, vertical interest, or a combination of both. The Act and the rule establish several exemptions from that requirement, including for ABS collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages,” as defined in the rule.

The Act provides that the definition of QRM can be no broader than the definition of a “qualified mortgage” (“QM”), as that term is defined under the Truth in Lending Act (“TILA”) and applicable regulations. QMs are a set of residential mortgage loans deemed to comply with the requirement for creditors to determine a borrower’s ability to repay. The Office of the Comptroller of the Currency (“OCC”), Federal Reserve Board, Federal Deposit Insurance Corporation (“FDIC”), Securities and Exchange Commission (“SEC”), Federal Housing Finance Agency (“FHFA”), and Department of Housing and Urban Development (“HUD”) decided to define a QRM in full alignment with the definition of a QM. The agencies concluded that alignment was necessary to protect investors, enhance financial stability, preserve access to affordable credit, and facilitate compliance. Their rule also includes an exemption from risk retention for certain types of community-focused residential mortgages that are not eligible for QRM status but that also are exempt from the TILA ability-to-pay rules under the TILA. The credit risk retention requirements became effective for securitization transactions collateralized by residential mortgages in 2015, and for other transactions in 2016.

The agencies of the credit risk retention regulations committed to reviewing those regulations and the definition of QRM periodically, and in coordination with the CFPB’s statutorily mandated assessment of QM. Continue Reading Agencies to Review QRM / Securitization Credit Risk Retention Rule

On December 12, 2019, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) together proposed extensive updates to their rules implementing the Community Reinvestment Act (“CRA”).  The CRA requires insured depository institutions to participate in investment, lending, and service activities that help meet the credit needs of their assessment area, particularly low- and moderate-income communities and small businesses and farms.  The last major revisions to the CRA regulations were made in 1995.

The proposed rules would significantly alter how the FDIC and OCC implement the CRA.  Currently, the agencies require banks to direct their CRA activities within the bank’s “assessment areas,” which are determined based on a bank’s physical locations, including its corporate office, branches, and ATMs.  The proposal would redefine assessment areas to include additional areas where the bank collects a substantial portion of its deposits. Thus, a bank might have both facility-based assessment areas and deposit-based assessment areas.  In addition, the proposed rules would allow banks to receive CRA credit for certain activities outside of their assessment areas. By clarifying and expanding when banks can receive credit beyond the immediate areas surrounding bank branches, the proposed rule would relieve pressure in certain saturated markets where banks are already meeting community needs.

The proposed rules would increase the size thresholds for a small loan to a business and a small loan to a farm to loans of $2 million or less to a business or farm and would include a provision for adjusting these loan limits for inflation going forward. These increased thresholds would, in part, account for inflation since the current thresholds were established in 1995.

One of the proposal’s primary objectives is transparency.  Under the proposed rules, the FDIC and OCC would establish a more transparent methodology for calculating each bank’s CRA rating.  The agencies would publish the equations used by examiners, as well as benchmarks required to receive particular ratings. In terms of scoring, proposed new performance standards would assess both units (i.e., number of qualifying activities) and dollars (the quantified value of the bank’s qualifying activities). The proposal also would require the agencies to publish and maintain a publicly available list of examples of qualifying CRA activities and to introduce a process through which banks can seek the agency’s determination as to whether an activity is a qualifying activity before projects are underwritten.

Although the Board of Governors of the Federal Reserve System (the “Fed”) likewise has authority to issue regulations to implement CRA (and has done so jointly with the FDIC and OCC in the past), the Fed so far has declined to participate in this proposal.  Reportedly, the Fed disagreed with the proposal’s emphasis on dollars invested due to a concern that it incentivizes banks to invest in wealthier markets.  At a press conference last Wednesday, Fed Chair Jerome Powell indicated that the Fed still hopes to reach agreement with the other agencies in order to avoid the inevitable confusion that would result from having two separate regulatory regimes applicable to insured depository institutions.

Mayer Brown is reviewing the proposal and will update this post with a more in-depth summary.  Once the proposed rules are published in the Federal Register, they will be open for public comment for 60 days.  Due to the substantial changes being proposed, we are expecting a large number of comment letters from banks, community groups and other stakeholders. This type of response could result in a longer comment period.

Along with other federal agencies, the Consumer Financial Protection Bureau recently released its Fall 2019 regulatory agenda, announcing its intentions over the next several months to address the GSE QM Patch, HMDA, payday/small dollar loans, debt collection practices, PACE financing, business lending data, and remittances. Over the longer-term, the CFPB indicated it may even address feedback on the Loan Originator Compensation Rule under the Truth in Lending Act.

  • Qualified Mortgages. As we have previously described, the CFPB must in short order address the scheduled expiration of the temporary Qualified Mortgage status for loans eligible for purchase by Fannie Mae or Freddie Mac (often referred to as the “Patch”). The Patch is set to expire on January 10, 2021, leaving little time to complete notice-and-comment rulemaking, particularly on such a complex and arguably controversial issue. The CFPB has indicated that it will not extend the Patch, but will seek an orderly transition (as opposed to a hard stop). The CFPB asked for initial public input over the summer, and announced that it intends to issue some type of statement or proposal in December 2019.
  • Home Mortgage Disclosure Act. The CFPB intends to pursue several rulemakings to address which institutions must report home mortgage data, what data they must report, and what data the agency will make public. First, the CFPB announced previously that it was reconsidering various aspects of the 2015 major fortification/revamping of HMDA reporting (some – but not all – of which was mandated by the Dodd Frank Act). The CFPB announced its intention to address in one final rule (targeted for next month) its proposed two-year extension of the temporary threshold for collecting and reporting data on open-end lines of credit, and the partial exemption provisions for certain depository institutions that Congress recently enacted. The CFPB intends to issue a separate rule in March 2020 to address the proposed changes to the permanent thresholds for collecting and reporting data on open-end lines of credit and closed-end mortgage loans.

Continue Reading CFPB Announces its Fall 2019 Regulatory Agenda

On October 28, 2019, the U.S. Department of Housing and Urban Development announced: (1) proposed revisions to lenders’ loan-level lender certifications in Federal Housing Administration (FHA)-insured mortgage transactions; (2) issuance of a revised Defect Taxonomy; (3) execution of a Memorandum of Understanding (MOU) with the U.S. Department of Justice regarding False Claims Act (FCA) actions against lenders for alleged violations of FHA requirements; and (4) approval of a new FHA annual lender certification.

With these continuing efforts to clarify FHA penalties and remedies, and to align them with the severity of the deficiencies, HUD is beckoning back to FHA those depository institutions and other lenders that retreated in recent years.

Read more in Mayer Brown’s Legal Update.

Last week — roughly 8 1/2 years after the CFPB published a letter to financial institutions promising to develop rules “expeditiously” — the CFPB held an information-gathering symposium on Section 1071 of the Dodd-Frank Act. Section 1071 amended the Equal Credit Opportunity Act to require that financial institutions collect and report information concerning credit applications made by women- or minority-owned businesses and by small businesses.

As we previously noted, once Section 1071 is implemented, institutions will be required to collect information regarding the race, sex, and ethnicity of the principal owners of small businesses and women- and minority-owned businesses. Collection of this information is designed to “facilitate enforcement of fair lending laws,” among other things. Applicants can refuse to provide required information, but the financial institution must retain the required demographic information that it collects and submit it to the CFPB. Section 1071 mandates that, where feasible, a financial institution’s underwriters, officers, employees, or affiliates involved in making credit determinations should not have access to this demographic information, and applicants must receive notice if those individuals do receive access to demographic information.

While the CFPB is responsible for drafting rules to implement Section 1071, it had not previously taken significant steps to meet that obligation other than reporting on some preliminary research it conducted in 2017. The CFPB had moved the Section 1071 rulemaking to “long-term” status. However, in its Spring 2019 rulemaking agenda, the CFPB indicated that it expected to resume pre-rulemaking activities related to Section 1071. Continue Reading CFPB Holds Symposium on Dodd-Frank Section 1071; Outlines Plan in Court Documents

Last week, the CFPB announced that it will hold a symposium on Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) on November 6, 2019. This will be the third in a series of symposia held by the CFPB. Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (“ECOA”) to require financial institutions to collect, report, and make public information about credit applications made by women- and minority-owned businesses and small businesses. The CFPB is responsible for drafting rules to implement Section 1071, but, other than issuing a Request for Information in 2017, has not yet taken significant steps to meet this statutory requirement. The stated purpose of the symposium is to hear various perspectives on the small business lending marketplace and CFPB’s implementation of Section 1071. The CFPB had moved the Section 1071 rulemaking to long-term status, but indicated in its Spring 2019 rulemaking agenda that it expected to resume pre-rulemaking activities. With this symposium, the CFPB appears to be (re)starting those activities.

Once Section 1071 is implemented, institutions will be required to collect information regarding the race, sex, and ethnicity of the principal owners of small businesses and women- and minority-owned businesses. Applicants have the right to refuse to provide required information. Financial institutions must retain required demographic information and submit it to the CFPB. Continue Reading Ladies and Gentlemen, (Re)start Your Engines — CFPB Symposium on Women/Minority/Small Businesses Credit Data

It’s been 100 years since the time of jazz clubs, speakeasies and flappers. A time when new inventions such as radios, movies, telephones and automobiles introduced a new modern lifestyle. One hundred years later, technology has significantly evolved, and no doubt our jazz age ancestors would think the internet is the cat’s pajamas.

With that in mind, renewal season is quickly approaching and the Consumer Financial Services practice group at Mayer Brown understands you’d like to ring in the New Year partying like it’s 1920. Don’t worry old sport, we’ve got the goods to get you started on a quick and efficient renewal process to prepare for 2020.

  1. Review your Company and Individual records – Make sure your records are current and accurate, and that you have resolved any posted deficiencies prior to filing for a license renewal in a state.  States may challenge a licensee’s attestation and eligibility for renewal if there are inaccuracies in the record, or open deficiency items. Renewal season starts November 1st, but the sooner you update your records, the more time you will have to work with regulators to resolve their questions outside of your renewal timeline.
  2. Review expiration dates – Criminal Background Checks (“CBC”) through the Nationwide Mortgage Licensing System (“NMLS”) were introduced in 2016 and expire after three years. Work with control persons to re-attest to their records and submit new electronic fingerprints as soon as you can. CBCs require MU2 attestation, an MU1 filing prior to submission of the renewal request, and actions on behalf of the Control Persons (which may necessitate a visit to an outside vendor) to complete the process.
  3. Review renewal checklists – Prepare any documentation required to be submitted outside of NMLS. In many states, submitting the renewal request online does not complete your renewal filing – you must also provide the documentation outlined in the renewal checklist by a specific due date for renewal approval. See the Renewal Page of the NMLS Resource Center.
  4. Check in with Qualified Individuals and Branch Managers – Make sure they complete any continuing education requirements in a timely manner. Failure to complete the continuing education or to submit an individual renewal request could delay or preclude renewal of the company’s main and/or branch license. As it may take up to seven days for a course provider to report continuing education course completions to NMLS, plan accordingly. Again, while renewals are not available to be filed until November 1st, continuing education can be completed early. See the NMLS for additional information.
  5. Watch Due Dates – While many states will indicate licensees have until December 31st to file renewals, reading the fine print may reveal that there is an earlier submission deadline to ensure the state has sufficient time to process your renewal before license expiration. Also, note the states in which your license must be approved before December 31st in order to continue activities past the new year. In several states, if your renewal is not approved by December 31st, you are not permitted to continue to engage in licensable activities on January 1st. See downloadable NMLS Company and Individual renewal charts and checklists.
  6. Monitor deficiency items and respond quickly – With several hundred renewal requests to be processed in a short period of time, state regulators will not be sending out frequent reminders about outstanding deficiency items. Log onto NMLS daily to review new deficiencies, or manage your notification settings in NMLS to ensure you receive an email when a new deficiency items is posted.
  7. Use a credit card – Submit NMLS renewal fees using a credit card to reduce the likelihood of a delayed ACH transaction.
  8. For those of you who are also pursuing Transitional Authority for Qualified Mortgage Loan Originators – The Transitional Authority for qualified mortgage loan originators to originate loans in a state in which a license application is pending goes into effect on November 24, 2019. However regulators in some states have publicly indicated that because their Mortgage Licensing Act has not been amended to provide for Transitional Authority, they will not allow mortgage loan originators seeking Transitional Authority to originate loans in their state until the individual is licensed in their state. Companies should make sure that a state recognizes Transitional Authority before allowing a mortgage loan originator to originate loans in a state in which a person is not licensed as a mortgage loan originator, and only has a license application pending.
  9. File Early – File on November 1st. Make sure your NMLS record is up-to-date and you’ve prepared all necessary documentation for renewal, and submit your renewal request as early as possible. The sooner you file a complete renewal application, the faster your renewals are approved.

We trust these tips will make your renewal process a little easier, leaving you more time to dance the Charleston. Of course, should you need help in getting through the licensing process, overcoming a deficiency, or learning the Charleston, please give us a call at Mayer Brown. Our team is the bee’s knees, and has handled hundreds of renewal questions. We would be happy to spill the beans to help you complete your filings.

On August 19, the U.S. Department of Housing and Urban Development (HUD) published a proposed rule for the purpose of aligning HUD’s 2013 Disparate Impact Rule with the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities. HUD sought comments from relevant stakeholders and the public on the proposed rule.

Mayer Brown partners Tori Shinohara and Melanie Brody helped prepare a comment letter on behalf of the American Financial Services Association (AFSA). AFSA’s comment letter, which was submitted on October 18, can be found here.