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Kris D. Kully

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Although the Fifth Circuit Court of Appeals vacated the Federal Trade Commission’s (“FTC”) Combating Auto Retail Scams Trade Regulation Rule (“CARS Rule”) on January 27, 2025, the FTC and state attorneys general continue to target the auto sales and lending industries through enforcement actions and legislation. Among those efforts, the California legislature is considering its…

In an unprecedented move, the Consumer Financial Protection Bureau’s (“CFPB” or “Bureau”) Acting Director is seeking to vacate the Bureau’s settlement with Townstone Financial (“Townstone” or the “Company”), which was entered by the US District Court for the Northern District of Illinois on November 7, 2024. In a press release, Acting Director Vought stated that the CFPB “abused its power, used radical ‘equity’ arguments to tag Townstone as a racist with zero evidence . . . to further the goal of DEI in lending via their regulation by enforcement tactics.”Continue Reading CFPB Seeks to Vacate Townstone Redlining Settlement

There were positive developments last week in connection with the recently announced licensing requirements for assignees of residential mortgage loans and installment loans in Maryland — a proposed legislative fix, an extended enforcement deadline, and a clarifying exception from the requirement.

As we discussed in our Legal Update last month, the Maryland Office of Financial Regulation (OFR) asserted 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 reflected the OFR’s understanding of an April 2024 decision by the Appellate Court of Maryland in Estate of Brown v. Ward that any assignee of any residential mortgage loan is required to obtain a Mortgage Lender license, and an Installment Loan license is required if the mortgage loans are made subject to the Credit Grantor provisions, regardless of whether the loans are open- or closed-end extensions of credit.

That guidance has caused significant turmoil in the Maryland residential mortgage markets, with significant practical concerns about requiring passive trusts to obtain a license and with certain industry participants suspending the purchase of Maryland mortgage loans.

To address these concerns, the OFR worked with industry participants to develop proposed legislation, the Maryland Secondary Market Stability Act of 2025 — two identical bills, Senate Bill 1026 and House Bill 1516, introduced on February 17, 2025.Continue Reading Update on Maryland Licensing for Loan Assignees

On January 27, 2025, the Fifth Circuit Court of Appeals held that the Federal Trade Commission’s rule to curb certain practices in the automobile dealer industry was invalid on procedural grounds because the agency did not issue an advance notice of proposed rulemaking.

On January 4, 2024, the Federal Trade Commission (“FTC”) published a final “Combating Auto Retail Scams Trade Regulation Rule,” or “CARS Rule.” The rule was scheduled to become effective on July 30, 2024. The FTC issued that rule after publishing a proposed rule for public comment in July 2022 and after a series of public roundtables with input from industry participants, consumers, and others.

The final rule provides that certain acts or practices of motor vehicle dealers are prohibited as unfair or deceptive, including misrepresentations about the costs or terms of purchasing, financing, or leasing a vehicle or of any add-on product or service (such as extended warranties, service and maintenance plans, payment programs, guaranteed automobile or asset protection (“GAP”) agreements, emergency road service, VIN etching and other theft protection devices, or undercoating). The final rule also would prohibit misrepresentations regarding many other aspects of purchasing or financing a vehicle, or the circumstances under which a vehicle may be repossessed.

The final rule also provides that it is a prohibited unfair or deceptive act or practice not to disclose in advertisements or consumer communications a vehicle’s full cash offering price (excluding only government charges), or not to disclose that an add-on product or service is voluntary (if true). When making any representations about the amount of monthly payments for vehicle financing, the final rule provides that the dealer must disclose the total amount the consumer will pay after making all payments, including the amount of any down payment or trade-in.

As to add-on products or services, the final rule provides that it is a prohibited unfair or deceptive act or practice for a dealer to charge for any such product or service that provides no benefit to the consumer, including certain nitrogen-filled tire-related products or services; products or services that are merely duplicative of otherwise applicable warranty coverage; or any item without the consumer’s express, informed consent.

The auto dealer and finance industries quickly objected to the rule, arguing in part that the FTC did not adequately consider the costs of the rule and that the rule is arbitrary and capricious. The FTC then determined that it was in the interests of justice to stay the rule’s effective date to allow for judicial review.

The Fifth Circuit did not address the validity of the rule’s substantive provisions, or the FTC’s authority to declare those or other practices as unfair or deceptive. However, the court held that the final rule is invalid because the FTC did not issue an advance notice of proposed rulemaking (“ANPRM”) prior to issuing its proposed rule.Continue Reading Fifth Circuit Vacates the FTC’s CARS Shopping Rule

On January 15, 2025, the Consumer Financial Protection Bureau took three coordinated actions related to home equity contracts or investment transactions. Although none of the CFPB’s actions are binding, and may not reflect the new administration’s views, the CFPB seeks to educate consumers and hints at ways that regulators could address those those transactions moving…

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…

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

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