Mayer Brown has launched a cross-office, multidisciplinary Residential Finance Market Stress Task Force (the “Task Force”) to advise market participants navigating the current market stress. As one of a discrete group of law firms with significant expertise in residential finance transactional, restructuring, capital markets, regulatory, government enforcement and litigation practices, the team offers particular insight on a range of issues — from rescue financings to address liquidity issues to lender liability and related M&A transactions and from regulator oversight to civil and administrative claims.

“The residential mortgage market is anything but static,” said Mayer Brown Chair Jon Van Gorp, who has advised on novel mortgage finance issues throughout his career. “Dynamic factors constantly reshape the mortgage industry, including the rise of financial innovation, the expanded role of non-bank mortgage companies and, of course, the impact of market forces, both positive and negative. Our new Task Force is uniquely suited to advise clients on the latest changes and how to navigate the new headwinds of market stress from all angles.”

The Task Force is comprised of more than a dozen lawyers across the firm’s US offices, including capabilities pulled from its Banking & Finance, Capital Markets, Financial Services Regulatory & Enforcement, M&A and Restructuring practices, and litigation to provide a coordinated approach to special situations in the residential finance market.

“The residential finance industry has whiplash from the past two years,” said Lauren Pryor, leader of Mayer Brown Residential Finance Market Stress Task Force, partner in the firm’s Financial Services Regulatory & Enforcement practice and co-head of the Financial Institutions M&A group. “We went from a frozen market in March 2020 to the highest volumes and profits in 50 years — and now to drastically reduced volumes, compressed margins, decreased inventory and rising interest rates. Market participants need to be prepared to move quickly and decisively in the current environment.”

“We’ve been down this road before, particularly following the subprime implosion, and we’ve learned that legal problems can’t be simply segmented into discrete disciplines and instead require an integrated, holistic approach to problem solving; the different disciplines are inextricably tied together,” added Laurence Platt, partner in Mayer Brown’s Financial Services Regulatory & Enforcement practice.

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Pay close attention to New Jersey Bill A793, the Community Wealth Preservation Act, which the New Jersey legislature passed at the end of June and sent to the Governor for consideration.  While I’m not steeped in the intricacies of state foreclosure laws, it appears the Act would cap a holder’s bid at foreclosure sale to 50% of the outstanding indebtedness and permit family members of the borrower to bid higher.  Sure seems unenforceable to me!

Apparently time flies when you’re Director Chopra of the Consumer Financial Protection Bureau (“CFPB”). On June 17, Director Chopra issued a blog post titled “Rethinking the Approach to Regulations,” indicating that the agency will move toward “simpler and clearer rules” that are easy to understand and enforce. As part of that effort, the agency will review certain rules that it either inherited or “pursued in its first decade of existence.” Among those rules is the CFPB’s Qualified Mortgage (“QM”) Rules.

The passage of time has admittedly been fuzzy since the pandemic. However, the CFPB has by all accounts undertaken a recent (and seemingly deep) review of the QM Rule. Beginning with a request for information in 2017, and ending with final rules in 2021, the CFPB issued a total of 12 Federal Register notices and rules, addressing everything from general QMs, temporary QMs (the “GSE Patch”), and seasoned QMs. In fact, the general QM definition is still in transition – switching to the new APR-based QM will not be mandatory until October. For an agency that is barely a decade old, the assertion that rules the agency pursued way back in its “first decade” are stale seems inapplicable to the QM Rule.

Nonetheless, Director Chopra indicated that the agency will, with regard to the QM Rule, “explore ways to spur streamlined modification and refinancing in the mortgage market.” That brings to mind the current QM status applicable to “non-standard” mortgage loans that are refinanced into standard loans. That non-standard refinancing QM, which dates back to the “first decade” (i.e., 2014) is very narrow. It allows a lender to achieve QM status by refinancing an adjustable rate, interest-only, or negative amortization loan into a loan without those features, but only if the lender is the current holder or servicer of the existing loan, the monthly payments for the new mortgage will be materially lower, and the consumer has generally made timely payments on the existing loan. The lender must consider whether the refinancing will prevent a default. In that vein, the new loan can only achieve this QM status if the existing non-standard loan was originated before January 10, 2014, and if the lender receives the consumer’s application for the new loan within two months after the existing loan has recast. (Otherwise the loan must meet a different QM definition or comply with the ability-to-repay requirements for non-QMs.) Perhaps the CFPB intends to consider ways to create a more usable QM status for streamlined refinancings in this decade. (Of course, even if the CFPB creates a new streamlined-refi QM, lenders would still need to consider whether state ability-to-repay requirements apply.)

While the June 17th blog post also mentioned spurring “streamlined modifications,” such transactions (which do not entail the satisfaction and replacement of the existing obligation) are not subject to the federal ability-to-repay/QM requirements. It is unclear what the agency’s proposals will be for spurring such modifications through the QM Rule.

Director Chopra also mentioned “assessing aspects of the ‘seasoning’ provisions.” So-called “seasoned QMs” are a recent (i.e., second decade) category. Seasoned QM status applies (or, more accurately, will apply) to a narrow set of loans that experience strong payment performance for 36 months. In very general terms (the specific parameters are quite detailed), a first-lien, fixed-rate, fully-amortizing loan that the lender has either held in portfolio or has transferred only once (and has not securitized), and on which the borrower has been able to make timely payments (which generally include payments in accordance with pandemic/disaster-related accommodations) for 36 months will achieve safe harbor QM status. While this seasoned QM status could be valuable in curing certain calculation deficiencies, a lender still must have considered and verified the borrower’s income, assets, and debt obligations, and met other QM-related requirements at the time of origination.

In spite of the Director’s assertion that “many of these rules have now been tested in the marketplace for many years and are in need of a fresh look,” the seasoned QM status has only been available for loans for which an application was received on or after March 1, 2021. The universe of loans that could season into QM status after 36 months is thus not yet fully determined, so once again the Director’s assertions – that the seasoned QM rule has been tested for many years – seem inapplicable here. While the CFPB hoped the seasoned QM would encourage innovation and broaden the credit box, the agency warned us that it was “considering whether to initiate a rulemaking to revisit” that category.

The blog post does not specify the nature of the agency’s review process, or whether it will include notice-and-comment rulemaking. It merely states that the agency aims for “simple bright lines” that protect consumers, promote compliance, and foster consistent interpretation and enforcement among agencies. The CFPB insists that it will continue to communicate clearly and that it welcomes public input. As it re-rethinks the QM Rule, even before that Rule is fully rolled out, clarity and public input will be welcome.

After an almost two-year regulatory process, the California Department of Financial Protection and Innovation (DFPI) adopted final administrative regulations to implement the state’s 2018 commercial financing disclosure law. Most importantly, the final rules come with a long-awaited effective date: December 9, 2022. The effective date honors prior DFPI statements that a six-month window for compliance would be afforded to covered providers of business-purpose financing.

Read more in Mayer Brown’s Legal Update.

In a ruling with important implications for the Consumer Financial Protection Bureau (Bureau or CFPB), the Ninth Circuit has revived the CFPB’s claims for substantial civil penalties and restitution in a lawsuit that was first filed some seven years ago. In a May 23, 2022 opinion, the court reversed and remanded a district court decision that had limited the civil penalties awarded to the Bureau and that had declined to award any restitution.

The case involved an enforcement action brought by the CFPB against CashCall and its founder, sole owner and CEO. As we’ve previously discussed, here and here, the CFPB alleged that servicing and collecting on loans that are void or uncollectable under state law because of state licensing or usury statutes constitutes a federal deception violation. The district court granted summary judgment to the CFPB on the merits of its claims, finding that collecting on such loans constituted deceptive conduct because it created the “‘net impression’ that the loans were enforceable.” In reaching this conclusion, the district court had also held that although the loans were made by a separate entity (Western Sky Financial), CashCall, which purchased the loans days after they were made, was the “true lender” on the loans because “the entire monetary burden and risk of the loan program was placed on CashCall, such that CashCall, and not Western Sky, had the predominant economic interest.”

Having determined liability on summary judgment, the district court held a bench trial to determine the remedy. That’s where the CFPB’s success had largely ended. The district court, relying on the fact that the defendants had sought legal advice and that at the time there was no case law clearly establishing their lending model improper, denied the CFPB’s request to impose civil penalties based on recklessness, and instead imposed civil penalties based on the lowest tier of civil penalties. The district court also denied the CFPB’s request for restitution because the agency “did not show that Defendants intended to defraud consumers or that consumers did not receive the benefit of their bargain.” Both CashCall and the CFPB appealed.

On appeal, the CFPB fared much better. The Ninth Circuit affirmed the district court’s holding that “all of the loan transactions at issue here were conducted by CashCall, not Western Sky” given that CashCall provided the money with which Western Sky made loans, purchased the loans shortly after they were made and bore all economic risks and benefits of the transaction. As a result, state laws applied, as opposed to tribal law, which CashCall had argued should apply to loans made by Western Sky. In reaching this conclusion, however, the Ninth Circuit expressly disclaimed any statement as to who the “true lender” of the loans was or any implications for more traditional bank partnerships: “To the extent that CashCall invokes cases involving banks, we note that banks present different considerations because federal law preempts certain state restrictions on the interest rates charged by banks…. We do not consider how the result here might differ if Western Sky had been a bank. And we need not employ the concept of a ‘true lender,’ let alone set out a general test for identifying a ‘true lender.’”

The Ninth Circuit went on to affirm the district court’s finding that because state law applies—and rendered the loans void or uncollectible—attempting to collect on the loans was a deceptive practice because it “[led a consumer to believe an invalid debt is actually a legally enforceable obligation.”

The Ninth Circuit then went on to address remedies, and here it reversed the district court’s rulings. First, the court held that once CashCall ceased operating its lending program in light of its counsel’s advice to do so because of a changing regulatory and litigation environment, its continued collection on outstanding loans met the recklessness factor for heightened civil money penalties. In the Ninth Circuit’s words, at that point “the danger that CashCall’s conduct violated the statute was ‘so obvious that [CashCall] must have been aware of it.’” The Ninth Circuit thus vacated the $10 million penalty the district court had imposed and remanded the case with instructions that the district court recalculate the penalty for the latter time period using the higher penalty amount applicable to reckless conduct.

Second, the Ninth Circuit reversed as clear error the district court’s holding that restitution was inappropriate because CashCall had not intended to defraud borrowers and consumers had “received the benefit of their bargain.” In so doing, the Ninth Circuit noted that knowledge or intent is not required for an award of restitution and that “whether consumers received the benefit of their bargain is not relevant” if the conduct was illegal. The court therefore remanded the matter to the district court to determine whether, and if so how much, restitution was appropriate applying the correct legal principles.

The Ninth Circuit decision represents a substantial vindication for the CFPB, both with respect to the legal theory underpinning their case (which they have used in other cases as well) and, more importantly, in terms of the remedies available to the agency. The district court’s original decision had been one a series of remedial rebukes the courts had handed the Bureau; the Ninth Circuit’s decision is likely to further embolden the agency in seeking substantial monetary relief in its enforcement actions.

On May 9, 2022, the CFPB issued an Advisory Opinion outlining its position that the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, extend beyond applicants seeking credit to include those who have received credit. The 16-page Advisory Opinion lays out the Bureau’s position that the statutory text, legislative purpose and judicial precedent support this conclusion. The Advisory Opinion points out that this has been the “longstanding position” of the Bureau and echoes arguments made last year in an interagency amicus brief filed with the Court of Appeals for the Seventh Circuit. As an interpretive rule, the Advisory Opinion is exempt from the notice-and-comment rulemaking procedures under the Administrative Procedure Act.

ECOA defines an “applicant” as any person who applies to a creditor directly for an extension, renewal or continuation of credit (or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit). Regulation B defines “applicant” more broadly as “any person who requests or who has received an extension of credit from a creditor.” The Bureau cites to ECOA’s definition of “adverse action” to support its position that the legislative intent was to cover consumers who applied for and received credit and are now existing borrowers. Specifically, ECOA defines “adverse action” as “a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested.” The Advisory Opinion also points to ECOA’s broad anti-discrimination provision, which prohibits creditors from discriminating against applicants in connection with any aspect of a credit transaction.

Although the Advisory Opinion acknowledges that several district courts have interpreted “applicant” to include only consumers actively seeking credit, the Bureau states that this interpretation is “not persuasive.” Citing to courts that have read the statute more broadly to protect existing borrowers—including the only circuit court to have addressed the issue—the Bureau pointed to language in ECOA protecting people from discrimination in the “denial or termination of credit.” In the Advisory Opinion, the CFPB seemingly criticizes creditors that “fail to acknowledge” ECOA and Regulation B apply to borrowers even after origination, including the provision of adverse action notices in connection with a revocation of credit or an unfavorable change in the terms of credit.

In issuing the Advisory Opinion, Director Chopra stated that the CFPB is “ramping up its efforts to issue guidance and advisory opinions” and suggests that this opinion is intended to make clear that anti-discrimination protections do not vanish once a customer obtains a loan.

On May 2, 2022, the Consumer Financial Protection Bureau released the Spring 2022 edition of its Supervisory Highlights (“Supervisory Highlights” or “Report”).  This edition covers examinations completed between July 2021 and December 2021, and notably is the first edition that covers some examinations completed during Director Rohit Chopra’s tenure at the Bureau.

Interestingly, although the Bureau recently has emphasized fair lending and anti-discrimination concerns and the Report itself states that an important goal of the Bureau’s supervisory work “is to foster financial inclusion and racial equity,” this edition does not include any fair lending-related findings.  The Report also does not include any mortgage servicing-related findings despite the Bureau’s recent focus on servicing for borrowers impacted by the COVID-19 pandemic.

Supervisory Observations

The Supervisory Highlights identifies violations of law in nine areas: auto loan servicing, consumer reporting, credit card account management, debt collection, deposits, mortgage origination, prepaid accounts, remittances, and student loan servicing.  As is the Bureau’s common practice, the Report refers to institutions in the plural even if the related findings pertain to only a single institution.

As we point out below, many of the issues discussed in this edition of Supervisory Highlights are issues the CFPB has addressed in other recent editions of Supervisory Highlights or other recent guidance.  Supervised entities should take note of the Bureau’s continued focus on these issues.

  • Auto Loan Servicing. This edition of Supervisory Highlights discusses several violations of the prohibition on unfair, deceptive, or abusive acts or practices (“UDAAPs”) related to auto loan servicing.  Among other things, CFPB examiners identified wrongful repossessions at auto servicers.  According to the Bureau, servicers engaged in unfair acts or practices when they repossessed vehicles after consumers took action that should have prevented the repossession.  Along these lines, the CFPB released a bulletin earlier this year that focused on mitigating the harm of repossession.

In addition, according to the Report, some servicers engaged in a deceptive act or practice in connection with deferrals offered to consumers.  The deferrals at issue were likely to increase consumers’ final payment amounts, and the servicers sent consumers notices stating that their final payment “may be larger.”  In fact, consumers’ final payments often increased dramatically.  The CFPB determined that the “imprecise conditional statements” in the notices the servicers sent to consumers misled consumers about the amount of their final loan payment after the deferral.  In response to these findings, servicers updated their notices and practices.  For example, some servicers included estimated final payment amounts in the deferral notices. Continue Reading Latest CFPB Supervisory Highlights Cites Violations in Auto Servicing, Consumer Reporting, Debt Collection, and Other Areas

The California State Legislature provided commercial lenders with welcome news this week when the California Senate passed Senate Bill 577 (“SB 577”).  If it is signed by the governor, SB 577 will reinstate the de minimis exemption from the California Financing Law (“CFL”) for lenders making a single commercial loan of $5,000 or more in a 12-month period.

The CFL requires a license to make commercial loans of any dollar amount, including unsecured or real estate-secured loans.  Despite its broad scope, the CFL contains a number of exemptions.  Prior to January 1, 2022, the CFL contained a de minimis exemption, which provided that the CFL did not apply to any person who made no more than one commercial loan of $5,000 or more in a 12-month period.  However, the legislation that originally enacted the de minimis exemption contained a “sunset” provision, under which the exemption would be automatically repealed on January 1, 2022 without any further action from the legislature.  Although legislation was introduced in the California legislature’s 2021 session that, if enacted, would have extended the de minimis exemption indefinitely, the legislation ultimately was not enacted in the 2021 legislative session.  As a result, the de minimis exemption was automatically repealed as of January 1, 2022, and lenders making a single commercial loan became subject to the CFL (unless another basis for an exemption existed).  This caused a scramble by some commercial lenders that previously relied on the exemption to make loans in California to apply for a CFL license, which can be an arduous and time-intensive process.

SB 577 contains an urgency provision so, if enacted, it will take effect and restore the de minimis exemption immediately.  Perhaps most importantly, SB 577 does not contain a “sunset” provision, so the de minimis exemption will be indefinitely adopted as part of the CFL, and can only be repealed by a subsequent legislative action.  SB 577 is now with Governor Gavin Newsom for his signature, and we expect that the Governor will ultimately sign the bill into law.

Earlier this month, both Kentucky and Virginia enacted significant legislation related to student loan servicing. Kentucky joined the ever-growing list of states to pass legislation regulating student loan servicing activities while Virginia pared back its existing student loan servicing law.

Kentucky’s new Student Education Loan Servicing, Licensing, and Protection Act of 2022 (“KY Law”) will require student loan servicers doing business in the state to obtain a license. The KY Law also contains certain practice restrictions. For example, the KY Law prohibits student loan servicers from, among other things, misrepresenting or omitting any material information related to the following:

  • Fees or payments due;
  • Terms and conditions of the loan agreement or any modification to such agreement; or
  • Availability of a program or protection specific to military borrowers, older borrowers, borrowers working in public service, or borrowers with disabilities.

Licensees also will be required to file annual reports regarding their business activities; the content of such reports will be dictated by future regulations. The KY Law will go into effect later this summer.

On April 11, 2022, the Governor of Virginia signed identical companion bills House Bill 203 and Senate Bill 496 (the “VA Legislation”). The VA Legislation dramatically reduces the range of companies subject to Virginia’s unusually broad 2020 student loan servicer licensing law (the “VA Law”).

As we previously described, while many states have recently enacted licensing laws and registration requirements for student loan servicers (and, in some cases, private student lenders), Virginia’s law was significantly broader than the laws enacted by other states. In particular, the VA Law applied to a “qualified education loan servicer,” a term that was defined to include an entity that conducted any of the following activities:

  1. (i) Receives any scheduled periodic payments from a qualified education loan borrower or notification of such payments or (ii) applies payments to the qualified education loan borrower’s account pursuant to the terms of the qualified education loan or the contract governing the servicing;
  2. During a period when no payment is required on a qualified education loan, (i) maintains account records for the qualified education loan and (ii) communicates with the qualified education loan borrower regarding the qualified education loan, on behalf of the qualified education loan’s holder; or
  3. Interacts with a qualified education loan borrower, which includes conducting activities to help prevent default on obligations arising from qualified education loans or to facilitate any activity described in clause (i) or (ii) of [section 1 above].

The VA Legislation simply changes the connecting “or” to an “and.” As a result of this small change, a company is not a “qualified education loan servicer” under the VA Law–and therefore is not subject to licensing–unless it performs all three of the activities described above. The VA Legislation also similarly amends the VA Law’s definition of “servicing,” which essentially repeats the definition of “qualified education loan servicer” above.

The most important ramification of this change appears to be that entities that merely “interact” with student loan borrowers will no longer need to obtain a student loan servicer license in the state. The VA Law’s previous language could have been read to extend to student lenders that contact borrowers post-origination or other entities that provide post-origination career-related services to borrowers. Since it is not atypical for private student lenders to check in with borrowers after loan origination and to provide them with career-related resources, a large number of entities that do not engage in core servicing activities (e.g., payment processing) could have fallen within the scope of the original VA Law. As such, the licensing trigger for merely interacting with a student loan borrower positioned Virginia as having one of the broadest student loan servicer laws in the country. The VA Legislation significantly narrows the scope of the VA Law and aligns it more closely with similar licensing laws in other states.

The VA Legislation takes effect July 1, 2022.

On April 11, 2022, Virginia became the second US state to require providers of merchant cash advance (“MCA”) products to obtain a state regulatory license or registration—hot on the heels of Utah. With Governor Glenn Youngkin’s signing House Bill 1027 into law, companies providing “sales-based financing” in Virginia will now be required to provide up-front disclosures about financing terms, follow certain dispute-resolution procedures, and register with the Virginia State Corporation Commission by November 1, 2022.

Read more in Mayer Brown’s Legal Update.