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The Consumer Financial Protection Bureau issued a proposed rule that would raise the threshold temporarily for institutions that will be required to collect and report data on home equity lines of credit (HELOCs).

Financial institutions that must collect and report data under the Home Mortgage Disclosure Act (HMDA) will start to feel the brunt of the CFPB’s HMDA overhaul relatively soon. Beginning January 1, 2018, new thresholds for determining which institutions must collect and report HMDA data (including the extensive set of new data elements) are set to become effective. As it stands, those institutions will include those that, in addition to other criteria, originated at least 25 closed-end mortgage loans or 100 open-end lines of credit in each of the two preceding calendar years. Accordingly, in connection with HELOCs, if the institution did not originate 100 open-end lines of credit in both of those past two years, the Bureau will not require the institution to collect and report data on those loans.

As indicated in the Bureau’s recent proposed rule, it has learned that the 100-HELOC threshold may be too low, and may impose significant costs on relatively small HELOC lenders. The Bureau indicated that the number of open-end loan originations is continuing to rise, so the threshold may capture more institutions than previously estimated. Further, while the Bureau previously thought that the start-up costs of implementing new technology for capturing and reporting data on HELOCs are sometimes not quite as overwhelming for small institutions (since they may not be as burdened by legacy systems), the Bureau now believes it may have underestimated those costs. HMDA reporting on HELOCs has historically been voluntary – many lenders originate those loans through separate business units using separate systems, and have not needed to consolidate those processes or otherwise collect that data until now. Accordingly, the Bureau is proposing to relieve those institutions that originate fewer than 500 open-end lines of credit in either of the preceding two years from having to collect and report data on those loans.

This higher threshold applies both to whether an institution is a reporting “financial institution,” and with regard to the types of transactions a reporting “financial institution” must report.

The proposed rule would raise the HELOC threshold to 500 open-end lines of credit just for two years, until January 1, 2020, at which time the threshold will revert back to 100 such loans. The agency will use that time to reassess whether it should adjust the threshold permanently.

Comments on the proposed rule are due in just two weeks (by July 31, 2017) – arguably indicating that the Bureau does not expect much opposition to this proposal. The Bureau reportedly hopes to finalize this rule along with the technical corrections it proposed in April 2017.

UPDATE June 8:
The House of Representative approved the Financial CHOICE Act, with a vote largely on party lines of 233 to 186.  While the Senate Banking Committee is and has been considering financial reform proposals, it is unlikely that the Financial CHOICE Act as passed by the House will progress in the Senate.

UPDATE June 7:
As expected, House Rules Committee approved a rule on June 6 allowing 90 minutes of general debate that will permit the Republicans to offer 6 amends. Floor consideration expected to start this afternoon or first thing tomorrow morning.

The House Rules Committee has scheduled a meeting on the CHOICE Act for 5:00 PM Tuesday, June 6, to consider the amendments that have been submitted as well as a rule for floor consideration. It is expected that the Committee will issue a rule to bring the bill to the House floor on Wednesday, and that rule is likely to provide for debate and floor consideration of amendments.

There is some speculation that Democratic members may withdraw their amendments in a show of opposition to the bill, similar to their decision last Congress not to participate in the Committee mark-up.  We understand that the Majority Whip, Rep. McCarthy (R-CA), has placed the bill on the calendar for Wednesday, June 7th, subject to the Rules Committee completing its work. Depending on the final number of amendments to be considered (if any), and the time provided for debate, it is possible that the bill could pass as early as Wednesday evening.

*John Mirvish is not admitted to practice law in the District of Columbia.

Flood insurance reform continues to generate interest from Congress, particularly in the context of the National Flood Insurance Program (NFIP) reauthorization debate. (The program will expire September 30, 2017, absent reauthorization or a continuing resolution.)

In December we discussed a proposed rule to implement the statutory definition of “private flood insurance.” That proposal was related to the Biggert-Waters Flood Insurance Reform Act’s requirement that the agencies issue a rule directing lending institutions to accept such insurance, with the goal of stimulating the private flood insurance market.  In March, Senators Heller (R-NV) and Tester (D-MT), and Reps. Ross (R-FL) and Castor (D-FL),** reintroduced legislation to further define “private flood insurance,” seeking to clarify the issue, and the Senate Committee on Banking, Housing, and Urban Affairs recently held hearings on the Senate version of that legislation. Continue Reading Redefining Private Flood Insurance*

On May 15, the Supreme Court held that a debt collector does not violate the Fair Debt Collections Practices Act (FDCPA) by knowingly attempting to collect a debt in bankruptcy proceedings after the statute of limitations for collecting that debt has expired. As explained in Mayer Brown’s Decision Alerts, the FDCPA generally prohibits a debt collector from using false, deceptive, or misleading representations or means in collecting debts. In the opinion for the Court, Justice Breyer looked to state law to determine whether the creditor had a right to payment. Under Alabama law, a creditor has the right to payment of a debt even after the limitations period has expired. Accordingly, a creditor may legitimately claim the existence of a debt even if the debt is no longer enforceable in a collection action. Likewise, the streamlined rules of bankruptcy proceedings mean that it is not obviously “unfair” for a creditor to inject an additional claim into the proceedings, even if it would be unfair for a creditor to file a standalone civil action to collect a time-barred debt.

In addition, the Court also held that the Federal Arbitration Act (FAA) preempts any state law that discriminates against arbitration on its face, and any rule that disfavors contracts with features of an arbitration agreement. Mayer Brown, which represented the petitioner before the Court, explained the case in its Decision Alerts.  The FAA requires courts to place arbitration provisions on an equal footing with other contract terms. However, the Kentucky Supreme Court had refused to enforce two arbitration provisions executed by individuals holding powers of attorney, because the power-of-attorney documents did not specifically mention arbitration or the ability to waive the principals’ right to trial by jury. The Supreme Court held that Kentucky’s rule violates the FAA by singling out arbitration agreements for disfavored treatment, explaining that “the waiver of the right to go to court and receive a jury trial” is a “primary characteristic of an arbitration agreement.” The Court explained that the FAA “cares not only about the ‘enforce[ment]’ of arbitration agreements, but also about their initial ‘valid[ity]’—that is, about what it takes to enter into them.”  The Court also pointed out that a contrary interpretation would make it “trivially easy” for courts hostile to arbitration to undermine the FAA—“indeed, to wholly defeat it.”

For more docket reports and decision alerts, go to Mayer Brown’s appellate.net.

Once again, the Consumer Financial Protection Bureau (“CFPB”) is providing compliance tips through its Supervisory Highlights for lenders making non-Qualified Mortgages (“non-QMs”). In its latest set of Highlights, the CFPB addresses how a lender must consider a borrower’s assets in underwriting those loans, and clarifies that a borrower’s down payment cannot be treated as an asset for that purpose, apparently even if that policy has been shown to be predictive of strong loan performance.

The Dodd-Frank Act and the CFPB’s Ability to Repay Rule generally require a lender making a closed-end residential mortgage loan to determine that the borrower will be able to repay the loan according to its terms. A lender may choose to follow the Rule’s safe harbor by making loans within the QM parameters. Alternatively, a lender may opt for more underwriting flexibility (and somewhat less compliance certainty). When making a non-QM, a lender must consider eight mandated underwriting factors and verify the borrower’s income or assets on which it relies using reasonably reliable third-party records. As one of those eight factors, the lender must base its determination on current or reasonably expected income from employment or other sources, assets other than the dwelling that secures the covered transaction, or both. Continue Reading CFPB Prohibits Considering Down Payments for Non-QMs

Several of Mayer Brown’s Consumer Financial Services partners will be featured at the upcoming Legal Issues and Regulatory Compliance Conference in Miami, sponsored by the Mortgage Bankers Association.

On Sunday, May 7, Kris Kully will participate in a Compliance Essentials panel, providing an Overview of Consumer Protection Compliance (the Dodd Frank Rules). Anyone new to the conference, or new to the industry, should make a point to attend that session. Also on Sunday, Melanie Brody will bring the attendees up to date on ECOA litigation, in the Litigation Forum (TILA, RESPA, ECOA, Fair Housing Act).

On Monday, May 8, Larry Platt will head to the dais for the panel on Expedited Processes, Day One Certainty, and More, discussing advancements in origination processes that may render representations and warrants unnecessary and eMortgages a reality. Later that afternoon, Krista Cooley will participate in a panel on Dealing with False Claims Act Matters, providing suggestions for avoiding liability under the statute.

On Tuesday, May 9, Phil Schulman will discuss the status of the PHH case, as well as the Prospect Consent Orders and their effects on marketing and advertising activities. Gus Avrakotos will participate in a panel discussing State Regulatory Developments.

Finally, you won’t want to miss Wednesday’s Conference Supersession, in which Kris Kully will return to address any remaining questions.

Other Mayer Brown partners in the group, including Debra Bogo-Ernst, Holly Bunting, Eric Edwardson, Jon Jaffe, Lucia Nale, and David Tallman, also will be on hand.  See you in Miami!

The Consumer Financial Protection Bureau (“CFPB”) announced a Request for Information (“RFI”) about alternative data on February 16, 2017, seeking insights into the benefits and risks of using unconventional financial data in assessing a consumer’s creditworthiness. On the same day, the CFPB held a hearing in Charleston, West Virginia, inviting consumer groups, industry representatives, and others to comment on the use of alternative data.

The CFPB estimates that 45 million Americans have difficulty getting a loan under traditional underwriting criteria, because they do not have a sufficient credit history. According to the CFPB, the use of alternative data may support those Americans’ creditworthiness and allow them better access to financing at more affordable rates. Alternative data includes sources such as timely payment of rent, utilities, or medical bills, as well as bank deposit records, and even internet searches or social media information—data that credit bureaus do not traditionally consider. However, a consumer who lacks a credit history but who makes timely rent and utility payments may be as likely to repay a loan as another consumer with a higher credit score. Continue Reading CFPB Calls for Comment on Alternative Data

Kentucky is giving entities that merely hold the rights to service residential mortgage loans just over two months to obtain a license, unless they can provide exemption documentation.

On December 22, 2016, the Kentucky Department of Financial Institutions issued a Memorandum stating that it will require “master servicers,” as well as “subservicers,” to be licensed as mortgage companies under the Kentucky Mortgage Licensing and Regulation Act.

The Act requires a person to obtain a mortgage company license if (among other activities) it “directly or indirectly . . . services mortgage loans, or holds oneself out as being able to do so.” According to the Department’s recent Memorandum, a “master servicer” is any entity or individual that owns the right to perform servicing of a mortgage loan. The Department notes that a master servicer typically reserves the legal right to either perform the servicing itself or to do so through a subservicer. Since the Department concludes that a master servicer both holds itself out as being able to service loans and indirectly services them though a subservicer, a master servicer falls within the scope of the licensing requirement, unless an exemption applies. Continue Reading Holders of Kentucky Mortgage Servicing Rights Must Obtain a License

New regulations will impose increased inspection, reporting, and maintenance obligations on mortgagees and servicers of defaulted residential mortgage loans in New York.  You can learn more about the regulations of the New York Department of Financial Services for “zombie” properties in Mayer Brown’s latest Legal Update.  The regulations become effective today, December 20, 2016.

Flood Insurance

Federal banking agencies issued a revised proposal on November 7th to implement requirements for regulated institutions to accept private flood insurance. The Biggert-Waters Flood Insurance Reform Act (the “Act”) required those agencies to issue a rule directing their respective regulated lending institutions to accept such insurance. The purpose of the requirement is reportedly to stimulate the private flood insurance market, which in turn supports the financial solvency of the National Flood Insurance Program (“NFIP”). Continue Reading Agencies Address Acceptance of Private Flood Insurance