Mortgage Loan Servicing

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On August 2nd, Oregon Governor Katherine Brown signed legislation that provides for the licensing of residential mortgage loan servicers, Senate Bill 98 (“S 98”), the Oregon Mortgage Loan Servicer Practices Act (the “Servicer Act”).  S 98 provides for a dedicated mortgage loan servicer license, separate from the license as a mortgage banker or mortgage broker obtained under the Oregon Mortgage Lender Law.  With the enactment of the Servicer Act, Oregon joins the majority of states that license residential  mortgage loan servicers.  (A number of states still do not license residential mortgage loan servicers, including New Jersey, and Pennsylvania which is considering a mortgage loan servicer licensing law.) Although the Oregon Servicer Act was effective upon the Governor’s signature, the legislation expressly provides that the Servicer Act will become operative on January 1, 2018, and that it will apply “to service transactions for residential mortgage loans that occur on or after [the] operative date.” Continue Reading Oregon Licenses Residential Mortgage Loan Servicers

Pay-by-phone fees continue to attract the Consumer Financial Protection Bureau’s attention. Compliance Bulletin 2017-01, issued on July 27, 2017, indicates that the following acts or practices may constitute unfair, deceptive, or abusive acts or practices (“UDAAP”) or contribute to the risk of committing UDAAPs:

  1. Failing to disclose the prices of all available phone pay fees when different payment options carry materially different fees;
  2. Misrepresenting the available options or that a fee is required to pay by phone;
  3. Failing to disclose that a phone pay fee would be added to a consumer’s payment, which could create the misimpression that there is no service fee; and
  4. Lack of employee monitoring or service provider oversight, which may lead to misrepresentations or failure to disclose available options and fees.

The Bureau has previously raised concerns about phone pay fees. In a 2014 enforcement action, the Bureau and the Federal Trade Commission alleged that a mortgage servicer engaged in deceptive acts or practices by misrepresenting that the only payment method consumers could use to make timely payments was a particular method that required a convenience fee. In 2015, the Bureau took action against a bank for allegedly misrepresenting that a phone pay fee was a processing fee rather than a fee to enable the payment to post on the same day. The bank also allegedly failed to disclose other no-cost payment options. This week’s Bulletin 2017-01 suggests that companies should disclose such fees in writing to consumers, as opposed to relying solely on phone representatives to  explain the fees to consumers.

Bulletin 2017-01 also reiterates that certain practices in connection with phone pay fees may conflict with the Fair Debt Collection Practices Act (“FDCPA”). For example, Bureau examiners have found alleged violations of the FDCPA where the underlying consumer debt contract did not expressly permit the charging of phone pay fees and where the applicable state law was silent on the fees’ permissibility. The Bureau indicated last year that it may propose rules under the FDCPA to clarify that debt collectors may charge convenience fees only where state law expressly permits them or the consumer expressly agreed to them in the contract that created the underlying debt.

The Bulletin recommends that companies review their phone pay fee practices, including reviewing applicable state and federal laws, underlying debt contracts, service provider procedures, other consumer-facing materials, consumer complaints, and employee incentive plans for potential risks.

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.

On the theory that Fannie Mae and Freddie Mac cannot remain in conservatorship forever, on April 20, 2017, the Mortgage Bankers Association (MBA) issued a proposal for reform of Fannie Mae and Freddie Mac, titled “GSE Reform: Creating a Sustainable, More Vibrant, Secondary Mortgage Market” (accessible at the MBA’s GSE Reform web page). While the ultimate fate of any GSE reform effort in the current political environment is uncertain, there is at least a consensus that the Congress and the Trump administration should undertake such an effort, and each has promised to do so.  The MBA’s proposal is intended to provide a voice for the mortgage banking industry in that process.

The proposal includes a mixture of changes to the GSE system as it exists today, and maintenance of existing processes and structures the MBA believes work well. It proposes a replacement or conversion of the GSEs with “Guarantors,” which would guaranty mortgage backed securities (MBS).  The Guarantors would be structured as “private utilities”, meaning that they would be privately owned, but established through a government charter for the primary or exclusive purpose of providing the MBS guaranty, and heavily regulated.  Think of a privately owned electric company, that is granted the right to participate in the electricity market, on the condition that it complies with various regulatory requirements and oversight, including rate approvals.  The proposal even quotes from a paper regarding investor-owned electrical utilities.  The expectation, as stated in the proposal, is that the Guarantors would be “low-volatility companies that would pay steady dividends over time, not growth companies that aggressively seek to expand market share or generate above-market returns.”  Guarantors’ MBS guaranty would then be supplemented with an explicit government guaranty of the MBS, which would only be used if a Guarantor failed, and would only be used to support the MBS, not the Guarantors and their private investors.

The following is an outline of key elements of the MBA’s proposal, divided into elements reflecting changes to the current system, and those reflecting continuation of the current system in a similar form. Continue Reading MBA Issues Proposal on GSE Reform

The 2017 Maryland legislative session ended at midnight last Monday, April 10. Here is a look at legislation affecting financial services businesses that the Governor is expected to sign into law.

HB0182 – Commissioner of Financial Regulation and State Collection Agency Licensing Board – Licensees – Revisions

HB0182, or as we prefer, the “2017 NMLS Transition Bill,” is intended to transition Maryland’s Check Casher, Collection Agency, Consumer Lender, Credit Service Business, Debt Management Company, Installment Lender, and Sales Finance licenses to the Nationwide Multistate Licensing System (the “NMLS”) effective July 1, 2017.

NMLS was established originally to provide a platform for mortgage licensing. More recently, however, NMLS has been expanded to accommodate other categories of licenses. Pursuant to prior state legislation, the Commissioner transitioned all mortgage lender (which includes mortgage brokers and mortgage servicers) and mortgage loan originator licenses to NMLS in 2009-2010 and money transmitter licenses in 2012. Similar to prior transition legislation, the 2017 NMLS Transition Bill is massive and includes: (i) new and amended definitions (including “branch location” and “control person”), (ii) revisions to the term of the license, (iii) with respect to any information and disclosures provided to NMLS, provisions that continue to apply any privilege arising under federal or state law to that information, (iv) authority to share  information with certain officials without the loss of privilege or confidentiality protections provided by federal or certain State laws, and (v) authority to adopt regulations to facilitate the transition to NMLS and more.

No Fee Increase

NMLS was created by Conference of State Bank Supervisors (“CSBS”) and the American Association of Residential Mortgage Regulators and began operations in January 2008. It is owned and operated by the State Regulatory Registry L.L.C., a wholly-owned subsidiary of CSBS. Significantly, the cost to register with NMLS annually is $100 and $20 for each additional branch license/registration. The Commissioner advised that NMLS has agreed to waive the annual fees for Maryland licensees transitioning to the system this fiscal year (July 1, 2017 – June 30, 2018). Although NMLS will resume charging its annual fee for use of the system during the next fiscal year, in an effort to reduce the cost of regulation, the Commissioner proposed and the final bill includes the NMLS processing fee as part of the licensing fee without increasing the current license fee.

No State Criminal Background Check 

Applicants for Maryland mortgage lender, check casher, debt management service, and money transmitter licenses and certain other persons are required to submit fingerprints for a national and State criminal history records check (the “CHRC”) as part of the licensing process. Presently, if an individual required to submit fingerprints for a CHRC is within the Maryland borders, the individual can electronically submit fingerprints for the CHRC, but the process is particularly burdensome for those individuals or control persons who are out-of-state. Individuals who are out-of state cannot use the state’s electronic fingerprint submission process without physically entering the state and must submit fingerprints for processing on paper cards through the mail.

According to the bill’s fiscal and policy notes, the Commissioner advised that the state criminal history records check requirement is time-consuming and does not provide a significant benefit. Therefore, HB0182 not only effectively eliminates the state background check requirement at this time, but allows for the use of the NMLS process for the submission of the CHRC.

The bill would have an effective date of July 1, 2017, but stay tuned for notices from the Commissioner to confirm the precise submission dates for new applications, the transition period for current licensees, and transition instructions – specifically as it relates to licenses that are approaching renewal periods. Continue Reading Maryland Legislative Session Adjourned

With all eyes on Washington, DC, and the press abuzz with each movement and action of the newly sworn-in President Trump, Maryland quietly published in the January 20, 2017 issue of the Maryland Register a highly-anticipated request for comment and proposed revisions to its regulations governing a wide range of mortgage finance licensing and practice requirements. Specifically, Maryland seeks to amend the Mortgage Lender, Mortgage Loan Originator (“MLO”), Recordation of Security Instruments for Residential Real Property and Foreclosure Procedures for Residential Real Property regulations. Despite the quiet publication of the proposed regulations, this proposal is actually many months in the making. Over the past two years, Maryland has been communicating both internally and with industry stakeholders to bring much-needed revisions to the regulations. As such, the published proposal addresses the following changes:

  • Addition and clarification of certain definitions, including “initial application,” “mortgage servicing right,” and “transfer of servicing rights”
  • Addition of requirements related to mortgage servicing transfers, which directly affects certain persons who hold mortgage servicing rights
  • Addition of provisions related to electronic records, provision of records to the Commissioner, and loss of records
  • Establishment of data protection standards
  • Allowances to substitute compliance with certain federal laws and regulations for compliance with certain Maryland laws and regulations
  • Specification of the process for obtaining approval of a trade name
  • Alignment of the record-keeping requirements with the statutorily-mandated examination cycle
  • Clarification of the Commissioner’s requirements related to the delivery and receipt of mortgage disclosures
  • Clarification of the Commissioner’s requirements related to the supervision of MLOs
  • Clarification of  the requirement to make certain reports to the Commissioner
  • Clarification of the MLO license application approval and denial process
  • Clarification of the MLO prelicening and continuing education requirements
  • Permission for MLOs to conduct mortgage lending business at certain limited locations that are different from the location appearing on the employer’s license(s)
  • Permission to conduct loan origination activities under an expired license in a certain limited situation
  • Permission for secured party to include the NMLS unique identifier on a security instrument and a notice of intent to foreclose

The Commissioner has not scheduled a public hearing on the proposed regulations, but will accept comments through March 6, 2017.  Interested persons may send comments to Jedd Bellman, Assistant Commissioner, Office of the Commissioner of Financial Regulation, 500 N Calvert Street, Room 402, Baltimore, Maryland 21202; or call 410-230-6390, email jedd.bellman@maryland.gov, or fax 410-333-0475.

We will be reviewing these proposals in greater detail, so should you need assistance submitting comments or have any questions about the Maryland proposals or licensing questions generally, please let us know, as we can help.

Financial services companies that hoped for immediate regulatory relief when the Trump Administration assumed control may have to wait a bit longer, because the newly announced freeze on federal regulations does not appear to apply across the board.  “Independent regulatory agencies,” such as the Consumer Financial Protection Bureau (“CFPB”), the Federal Reserve Board, the Office of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), and the Securities and Exchange Commission (“SEC”) may be excluded from that moratorium. Continue Reading How Solid is the “Freeze”? Some Agencies May Be Excluded from White House Regulatory Moratorium

As we reported on January 11th, the December 22nd Memorandum issued by the Kentucky Department of Financial Institutions provides that the state’s Mortgage Licensing and Regulation Act requires licensing of entities holding residential mortgage loan servicing rights.  Based on the Memorandum, a license would be needed by March 1, 2017.

As a licensing obligation exists under that Act for an entity that makes, brokers, purchases, sells, or actually services residential mortgage loans, many companies operating in the state are already licensed under the Act, or rely on an exemption from licensing. However, the Memorandum raised some questions regarding the application of this licensing obligation (i) to entities that have held the servicing rights to Kentucky residential mortgage loan without being licensed, or (ii) to certain institutions exempt from the Act’s license obligations without needing to make a filing with the Department.

On January 19th, in response to our email requests for guidance, Department officials sent us a link to an “FAQ” posted on the Department’s website. The FAQ confirmed our view that the exemption for entities under section 286.8-020(1)(a)-(h) of the Act is “self-executing,” but provided that exempt entities should be prepared to provide proof of a claimed exemption.  Section 286.8-020(1)(a) of the Act provides an exemption from licensing for certain banks, bank holding companies, insurance companies, and REITs under certain conditions. That exemption also applies to the wholly-owned subsidiaries of such entities under certain conditions. Based on the FAQ’s clarification, those institutions, among others, will not need to make an up-front filing with the Department in order to be exempt.

In reply to the second question we posed, the FAQ provides that “[a]s long as an application for licensure is filed with the Kentucky Department of Financial Institutions by March 1, 2017, the Department will not seek penalties for servicing Kentucky mortgage loans prior to March 1, 2017, without a license unless consumer harm is identified” (emphasis in original).

Should you have any questions about the Act’s licensing obligations or exemptions, please let us know.

The Federal National Mortgage Association (Fannie Mae) operates under a corporate charter, which authorizes Fannie Mae “to sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal.” 12 U.S.C. § 1723a(a). On January 18, the U.S. Supreme Court held that this “sue-and-be-sued” clause does not independently grant federal courts subject-matter jurisdiction over all cases involving Fannie Mae.  Instead, the Court (in Lightfoot v. Cendant Mortgage Corporation) held that the clause merely permits Fannie Mae to participate in a suit in any state or federal court that is already endowed with subject-matter jurisdiction over the suit.

The case arose when a mortgage borrower sued Fannie Mae in state court alleging deficiencies in the refinancing, foreclosure, and sale of her home.  Fannie Mae removed the case to federal court, citing the sue-and-be-sued clause as the basis for federal jurisdiction.  The district court denied a motion to remand the case back to state court, and the U.S. Court of Appeals for the Ninth Circuit affirmed that decision.  The Supreme Court agreed to hear the case to resolve a split between the circuits.

On appeal, Justice Sotomayor, writing for a unanimous Supreme Court, explained that the Court had previously addressed the jurisdictional reach of sue-and-be-sued clauses in five other federal charters.  In those cases, the Court had stated that a clause gives rise to federal court jurisdiction if, but only if, it specifically mentions the federal courts.  Fannie Mae’s sue-and-be-sued clause specifically mentions federal courts, but also includes the phrase “any court of competent jurisdiction.”  The Court found that this qualification limited the jurisdictional reach of the clause to any court with an existing source of subject-matter jurisdiction.  Accordingly, the Court held that Fannie Mae’s sue-and-be-sued clause does not grant federal jurisdiction over any case involving Fannie Mae, but instead permits suit in any state or federal court that already has subject-matter jurisdiction.

Accordingly, under Lightfoot, Fannie Mae will no longer be able to remove a case to federal court citing only its charter’s sue-and-be-sued clause.  Instead, in order for a case involving Fannie Mae to be brought in federal court or removed to federal court, there must be an independent source of diversity or federal-question jurisdiction.

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